Block 5 sections 2 3 Performance This pp

Block 5 sections 2 -3 Performance This pp will not replace the material at all 1

2 How is performance measured within organizations? n n 2. 1 Design and measurement of work While it is clearly essential for operational managers to be aware of where their responsibilities lie, the rational aim of such awareness is to improve the performance of agreed operations. q q Through work design, plans are made to ensure that organizational objectives are put into practice efficiently and effectively. Through target setting and measurement, the people doing the work and their managers gain feedback about how well the plans are being met, in order to take corrective action if needed. 2

n n n 2. 2 Managing materials and scheduling operations Managing the performance of projects Project management clearly involves a range of interpersonal and communication skills as well as technical expertise. 2. 3 Management control of organizational sub-units The accounting function will use the general ledger system to organize it into management information feeding into various financial reports for management control from sub unit to corporate levels. How organizations delegate responsibility for financial control to sub units (e. g. departments, branches, divisions, sections, business units, strategic business units, constituent institutions, projects , programs) and use financial reporting systems to hold them accountable for their performance. 3

n You will consider how this measurement can contribute to performance improvement and, sometimes, performance decline. Obviously, there are links between previous sections in this block and this one: for example, q q n n financial data is an important component of many performance measures and performance indicators; 'operations' is usually a major source of costs for any organization and is therefore a focus for financial analysis and control. Accounting and finance contribute to performance measurement on many dimensions. While they are often allied with improving efficiency, economy and effectiveness, they also have a role in assessing equity (or fairness), environmental impact, and there is even an ethical dimension. The accounting profession lays down national and international codes of practice for its members to follow (Statements of Standard Accounting Practice issued by the Accounting Standards Board in the UK, and a growing number of attempts at harmonization of national systems by the International Accounting Standards Committee (IASC)). 4

n n n Budgets revisited: Budget control reports are usually required at set intervals, for example weekly, four weekly, monthly or quarterly. They provide information on how things are going, highlighting any problems that managers should resolve in their areas of responsibility. Top manager A Senior middle manager K Basic unit manager U Basic unit manager V Senior middle Manager L Basic unit manager W Figure 2. 1 organization chart Basic unit manager X Senior middle Manager M Basic unit manager Y Basic unit manager Z 5

n n n Interactions associated with budgetary control the allocation and consumption of recourses, the selling of products, the generation of revenue etc. will be most likely to be vertical: between the manager and their subordinate staff (i. e. basic unit managers W and X), and with the top manager A. Budgeting and budgetary control, which are techniques of management control, both reflect the societal phenomenon of hierarchies (some people are more powerful and of higher rank than others) and cause hierarchical structure. As an organization is successful and grows (or when an organization is created big in the first place, as in the case of a new government department), each manager acquires a separate area to manage. More senior managers isolate responsibility for such things as a well defined group of tasks or products, a functional area (e. g. marketing), a project, a program area, a location, region, or a market. Thus new 'mini organizations' called responsibility centers emerge, headed by people with the generic title of responsibility center manager. 6

n n n The role of responsibility accounting: A typical responsibility centre comprises staff and other resources, that may be organized into a group of lower level responsibility centers. The responsibility centre manager is given a budget, and authority to act in the name of the organization within defined boundaries. The manager is made accountable for the center's performance, assessed by comparing the results of its activities with defined standards, including financial ones. Such systematic delegation of responsibility for an organization's activities, accompanied by requirement to answer upwards for results, can be described as a chain of accountability running from the person at the top of the organization to managers and staff closest to the recipients of the organization's services or products. 7

n Anthony and his co authors Govindarajan (1997)and Young (1999) distinguish five types of responsibility centre based on financial criteria, which are briefly below. 1 Discretionary expense centers – The managers is given a fixed budget to spend during a financial period (usually year or quarter) and has their performance evaluated by comparing actual spending and budget during the period, taking into account anticipated characteristics such as peak periods for purchasing materials, even distribution of paying wages etc. These centers are not expected to generate any significant amount of revenue (or income) directly. 8

2 Standard expense centre – These are expected to produce or handle products to meet the demands of the wider organization, and to do so at a standard (or 'benchmark') unit cost. The manager's performance is evaluated at regular reporting intervals by comparing actual total costs with the standard cost multiplied by the actual volume of product produced or handled. This calculation in effect means that the manager is answerable against a flexed budget. 3 Revenue centers – are given a revenue target or revenue threshold (i. e. a minimum which it is expected to exceed) for a financial period, against which the manager's performance is regularly evaluated. Some minor costs directly related to generating the revenue may be included, but most costs are 'controlled' through another manager's budget. 9

n 4 Profit centers – These are given either a profit target or a deficit limit for a financial period. The centre is expected to purchase, produce and sell either as much (or as little) as it wants or needs, as long as it makes that profit target or does not exceed that deficit limit. Profit centers can be an unhelpful name for this type of delegated responsibility, since so long as the manager exercises control in order to maintain an acceptable gap between revenues and expenses. 5 Investment centre –the manager's performance is evaluated according to the return that the centre makes on net assets, or capital, with which it has been entrusted. The financial ratio you will meet in Section 4 when you study Chapter 6 of Atrill and Mclaney – return on capital employed (ROCE), also called return on investment (ROI) is used here to measure performance at the sub organizational level. Table 2. 1 Budget control report for a profit center: page 57 10

n n n Divisional financial performance measures: Conformance to a budgeted or expected/required/standard absolute financial figure (or, in the case of investment centers, a rate of return on investment) may be only one of a series of ways in which a responsibility centre manager's performance is measured. Moreover, this financial criterion can sometimes conflict with a responsibility center's other goals and with the goals of interrelated areas of responsibility in the organization. Let's take the example of an investment centre to explore some problems with using a single, budget based measure (ROCE) return on capital employed to manage performance in isolation from the context of an organization as a whole. The manager of such a centre is encouraged, by the way their performance is judged, to concentrate on achieving good results for the division as reflected in the returns on capital employed, even if such results are not necessarily the best thing for the organization overall. 11

n n 1. 2. 3. 4. 5. 6. 7. 8. BOX 2. 2 PORTFOLIOS OF KEY PERFORMANCE MEASURES The eight key measurements developed in the USA in the early 1950 s by General Electric (GE) as follows: good key overall performance measures (not only financial). Short term profitability Market position, measured in terms of market share Productivity Product leadership, in terms of innovation and development Personnel development Employee attitudes Public responsibility Balance between long term and short term goals 12

n 1. 2. 3. 4. In 1992, when Kaplan and Norton advocated the use of a Balanced Scorecard of performance measures, they were hailed as great innovators! The Balanced Scorecard is a framework in which performance is measured from four perspectives: Financial – profitability (including the use of rates of return such as ROCE) Customers what do the customers value about your company? Internal processes what things does the company have to do well if it is going to succeed? Innovation and learning how can the company adapt so that it can continue to do things well, that customers will value, to generate future profitability? 13

n 1. 2. 3. 4. The balanced scorecard is a management process involving four main steps. Deciding the vision of the future. Determining how this vision can become a competitive advantage for the organization as seen from four perspectives: shareholders, customers, internal management processes, and ability to innovate and grow. Determining from these four perspectives the critical success factors Identifying the critical measurements for ascertaining how far along the organization is on the path to success. 14

n n n 2. 4 Making good use of marketing ‘What business are we in? ' In this section you will learn about some models that are widely used by marketing professionals to evaluate the contributions that individual products and services are making to the whole, and the ways in which the contribution of marketing can be evaluated in both its own efficiency and effectiveness and its contribution towards broader corporate objectives. 15

Table 6. 3 Factors distinguishing services p 108 Marketing Factor Explanation and examples Services are intangible An insurance policy is more than the paper it is written on; the key benefit (peace of mind) cannot be touched. Production and consumption often occur at virtually the same time A stage play is acted out at the same time as the consumer enjoys the performance. Services are perishable An airline seat is extremely perishable; once the aeroplane takes off, the seat cannot be sold. Services cannot be produced in advance and stockpiled. Services cannot be tried It is not usually possible to try out a haircut before agreeing to have it done, nor will most restaurants allow customers to eat the meal before deciding whether to order it. Services are variable, even from the same supplier Sometimes the chef has a bad day, or the waiter is in a bad mood; on the other hand, sometimes the hairdresser has a flash of inspiration that transforms the client's appearance. 16

n 1. 2. 3. In 1991, Fitzgerald et al. studied a number of different types of service business in depth in order to understand the ways in which differences between them affected customers' expectations, and in turn the choice of useful performance measures for managers. They differentiated between three broad generic service types: ‘Professional services' such as accountancy and legal practices (characterized by, for example, low daily volumes of customers but high levels of individual contact time, customized service, and a process and 'front office' orientation) ‘Service shops' such as motor dealerships (medium throughput of customers, expecting limited service customization and less attention to personal service from the 'front office', often involving a product as well as service) ‘Mass services' such as parcels delivery services (high volume, standardized service, often focused on delivering a product, using equipment and mainly non professional staff). 17

n n n 1. 2. 3. 4. Fitzgerald and colleagues went on to investigate, through case studies of successful service businesses, how these types of service developed effective performance measurement systems for their particular circumstances, including the ways in which standards and targets were set and staff were motivated, involved and rewarded. Among their conclusions they identified a range of dimensions and associated measures, in two categories, that had been shown to contribute to particularly effective performance management activities within service businesses: Results measurers: Competitive performance (e. g. relative market share and position) Financial performance (e. g. profitability, market ratios) Determinants of those results: Quality of service (e. g. reliability, responsiveness, availability) Flexibility (e. g. in terms of volume, delivery speed, specification) Resource utilization (e. g. productivity, efficiency) Innovation (e. g. performance of the innovation process). 18

n n 1. 2. Marketing planning and control Blythe concludes his discussion of marketing planning by emphasizing two points The need for clear objectives, good information and regular review of progress towards targets to ensure planning is effective The importance of being sensitive to the needs of people involved when giving feedback about performance. 19

n n n n 2. 5 'At the end of the day, it all comes down to people' Financial rewards for performance In recognizing the quality and quantity of employees' contributions to their organizations, many organizations focus attention on financial (and quasi financial) rewards such as pay and 'fringe benefits' Employee performance management Performance management uses performance measurement to influence the achievement of organizational goals. An effective appraisal system is a common way of linking individual and departmental or corporate targets and objectives, and identifying staff development needs for attaining these objectives. Performance management is an approach used by organizations to try to achieve strategic goals consistently through better formal and informal motivation, monitoring, evaluating, and rewarding of performance. 20

HRM Practices and Outcomes HRM p. 167 n 1. 2. 3. Guest proposes three HRM out comes linked to practices: quality, commitment, and flexibility. Quality outcomes are linked to practices concerned with selection, development, and quality. Commitment is linked to employee relations, promotion, and rewards. Flexibility links with structural characteristics and with formal and informal communication and teamwork. 21

Figure 7. 9 HRM and performance p. 167 Selection Socialization Training and development Quality Improvement programs Single status Job security International promotion Individualized reward systems Communication Employee involvement Team working Job design Flexible job descriptions Skills and Abi lity (Qu alit y) Effort/Motivation (Commitment) Role Structure and Perception (Flexibility) 22

3 Managing the performance of whole organizations n Simply, this section will be focusing on the uses of performance information in the process of managing the organization as a whole. We will focus on financial and operations functions. 23

n n n 1. 2. 3. 1 Organizational financial measurement and management: seeing the bigger picture: So, for most organizations to work well, it is necessary to establish an organizational structure, and incorporate budgeting, budgetary control and other tools in the processes of organizing the structure elements. But these steps are not sufficient by themselves. The organization must also be measured and managed holistically. From financial perspective, this means being concerned with three fundamental matters: Liquidity Profitability, break even or cost benefit (depending on whether the organization is for profit and non profit and self sustaining, or budget financed Financial structure. 24

n n 1. 2. 3. 4. Liquidity Short term survival of any person or organization in a cash based economy depends on being able to pay the next demand for money, either with cash, using a credit instrument such as a credit card, or a cheque that is covered by sufficient funds in the drawer's bank account. Liquidity refers to an organization being able to generate the cash that it needs to continue its operations. Thus, cash is but one aspect of liquidity, the others being: (other aspects of liquidity other than cash) Purchase of short term inputs to be used in production (giving rise to stocks of raw materials, work in progress and finished goods) and distribution. Sales of the resulting outputs (finished goods or services). Customer credit and accounts receivable. Supplier and bank credit, and accounts payable. 25

Why is cash so important? Accounting p. 116 1. 2. 3. 4. Cash is just an asset that a business needs to help it to function. People and organizations will not normally accept other than cash in settlement of their claims against the business. If a business wants to employ people it must pay them in cash. If it wants to buy a new fixed asset to exploit a business opportunity, the seller of the asset will normally insist on being paid in cash When businesses fail, it is their inability to find the cash to pay claimants that really drives them under. 26

Ch. 11 The management of working capital (accounting) n n n 1. 2. 3. n n n 1. 2. The nature and purpose of working capital Working capital is usually defined as current assets less current liabilities (creditors due within one year). The major elements of current assets are: stocks trade debtors cash (in hand at bank). The major element of current liabilities is: q trade creditors. The size and composition of working capital can vary between industries. For some types of business, the investment in working capital can be substantial. For example, A manufacturing company will invest heavily in raw material, work in progress and finished goods, and will often sell its goods on credit, thereby generating trade debtors. A retailer, on the other hand, will hold only one form of stock (finished goods), and will usually sell goods for cash. 27

n The management of working capital is an essential part of the short term planning process. It is necessary for management to decide how much of each element should be held. As we shall see later, there are costs associated with holding either too much or too little of each element. Management must be aware of these in order to manage effectively. Management must also be aware that there may be other, more profitable, uses for the funds of the business. 28

n n The ABC system of stock control Category A stocks will represent the high value items. It may be the case, however, that although the items are high in value and represent a high proportion of the total value of stocks held, they are a relatively small proportion of the total volume of stocks held. For example, 10 per cent of the physical stocks held may account for 65 per cent of the total value. For these stocks, management may decide to implement sophisticated recording procedures, exert tight control over stock movements, and have a high level of security at the stock location. Category B stocks will represent less valuable items held. Perhaps 30 per cent of the total volume of stocks may account for 25 per cent of the total value of stocks held. For these stocks, a lower level of recording and management control would be appropriate. Category C stocks will represent the least valuable items. Say 60 per cent of the volume of stocks may account for only 10 per cent of the total value of stocks held. 29

n n n Stock management models It is possible to use decision models to help manage stocks. The economic order quantity (EOQ) model is concerned with answering the question 'How much stock should be ordered? The EOQ model recognizes that the total cost of stocks is made up of the cost of holding stocks and the cost of ordering stocks. It calculates the optimum size of a purchase order by taking account of both of these cost elements. The cost of holding stocks can be substantial, and so management may try to reduce the average amount of stocks held to as low a level as possible. However, by reducing the level of stocks held, and therefore the holding costs, there will be a need to increase the number of orders during the period, and so ordering costs will rise. 30

n EOQ = 2 DC √ H n where: D = the annual demand for the item of stock C = the cost of placing an order H = the cost of holding one unit of stock for one year. n n n 31

n n n Activity 11. 4 HLA ltd sells 2000 units of Product X each year. It has been estimated that the cost of holding one unit of the product for a year is £ 4. The cost of placing an order for stock is estimated at £ 25. Calculate the economic order quantity for the product. = 158 units (to the nearest whole number) This will mean that the business will have to order Product X about 13 times each year in order to meet sales demand. 32

n n Materials requirements planning (MRP) systems A materials requirement planning (MRP) system takes as its starting point forecasts of sales demand. It then uses computer technology to help schedule the timing of deliveries of bought in parts and materials to coincide with production requirements to meet the demand. Just-in-time (JIT) stock management In recent years, some manufacturing businesses have tried to eliminate the need to hold stocks by adopting 'just in time' stock management. This method was first used in the United States defense industry during the Second World War, but in more recent times has been widely used by Japanese businesses. The essence of this approach is, as the name suggests, to have supplies delivered to a business just in time for them to be used in the production process. By adopting this approach the stockholding problem rests with suppliers rather with than the business itself. 33

n n n 1. 2. 3. 4. The management of debtors Selling goods or services on credit results in costs being incurred by a business. These costs include credit administration costs, bad debts, and opportunities forgone in using the funds for more profitable purposes. However, these costs must be weighed against the benefits of increased sales resulting from the opportunity for customers to delay payment. When a business offers to sell its goods or services on credit, it must have clear policies concerning: which customers it is prepared to offer credit to what length of credit it is prepared to offer whether discounts will be offered for prompt payment what collection policies should be adopted. 34

n n n Profitability, break-even or cost--benefit Whether organizations are for profit or non profit, they can only ensure their medium and long term survival by bringing in at least as much money as they need to cover their costs or pay their expenditures. For business organizations, this is equivalent to being economical in terms of inputs acquired, efficient in terms of transforming inputs into outputs, and competitive (and thus effective) in terms of what customers want to buy. All these add up to being profitable. For budget financed organizations (e. g. governments, charities whose services are financed by fund raising), the equivalent is convincing taxpayers or donors to part with enough money to cover the operating and capital costs of services, often on the basis of persuading them that the benefits of the services outweigh the costs, that the services are cost-effective and/or that costs of services will be contained within socially and politically acceptable limits. For self sustaining non business organizations (e. g. professional membership bodies, consumer co operatives, mutual and friendly societies), revenues covering medium and long term costs are equivalent to breaking even after taking account of maintenance and the cost of capital. 35

n n Measuring and managing ideas of profitability, breaking even and cost benefit are represented in financial performance statements (such as budget control reports). Revenues are matched against expenses to measure profits/surpluses or losses/deficits, and provide a summary analysis of their compositions. By putting data for a period alongside planned (budgeted), data for previous periods and forecasts or plans for future periods, managers can monitor and evaluate what is occurring, draw on other internal and external data, discuss options and decide on actions they should take or changes they should make. 36

n n Financial structure See page 80 82 for this topic Capital and Liabilities Current assets/inputs purchased with supplier credit and short term loans Long term Assets Short term Fixed assets purchased with current supplier credit and short term loans Long term Current assets/inputs purchased with medium and long term loans and permanent capital, including retained surplus Fixed assets purchased with medium and long term loans and permanent capital, including retained surplus Figure 3. 1 Assets and their financing 37

Ch 12 Financing the business (accounting) n n Sources of finance When considering the various sources of finance for a business, it is useful to distinguish between external sources and internal sources of finance and when considering the various external sources of finance, it is probably helpful to distinguish between long-term and short-term sources. In the sections that follow, we consider the various sources of external finance under each of the above headings. We then go on to consider the various sources of internal finance available. 38

Total finance Short term Long term Ordinary shares Preference shares Loans/ debentures leases Bank overdraft Debt factoring Invoice discounting Figure 12. 1 Major sources of external finance 39

n n 1. 2. 3. 4. n Long term sources of external finance long term sources of finance are define sources of finance that are not due for repayment within one year. Figure 12. 1 reveals that major forms of long term external finance are: ordinary shares preference shares loans leases, that is, finance leases and sale and lease back arrangements. In order to decide on the most appropriate form of external finance, we must be clear about the advantages and disadvantages of each. 40

n n n Short-term sources of finance A short term source of borrowing is one that is available for a short term period. Although there is no agreed definition of what 'short term' means, we shall define it as being up to one year. The major sources of short term borrowing are as follows. Bank overdrafts represent a very flexible form of borrowing. The size of the overdraft can (subject to bank approval) be increased or decreased according to the financing requirements of the business. It is relatively inexpensive to arrange, and interest rates are often very competitive. The rate of interest charged on an overdraft will vary, however, according to how creditworthy the custom is perceived to be by the bank. Debt factoring is a form of service that is offered by a financial institution (a factor). Many of the large factors are subsidiaries of commercial banks. Debt factoring involves the factor taking over the sales ledger of a company. Invoice discounting involves a business approaching a factor , financial institution for a loan based on a proportion of the face value credit sales outstanding. 41

n n Internal sources of financing In addition to external sources of finance, there are certain internal sources of finance that a business may use to generate funds for particular activities. These sources usually have the advantage that they are flexible. They may also be obtained quickly particularly from working capital sources and need not require the permission of other parties. The main sources of internal funds are described below, and are summarized in Figure 12. 4. Retained profit is the major source of finance for most companies. By retaining profits within the company rather than distributing them to shareholder the form of dividends, the funds of the company are increased. Total internal finance Retained profit Tighter credit controls Reduced stock levels Figure 12. 4 Major internal sources of finance Delayed payment to creditors 42

n n n Tighter credit control By exerting tighter control over trade debtors it may be possible for a business to reduce the proportion of assets held in this form and to release funds for other purposes. Reducing stock levels This is an internal source of funds that may prove attractive to a business. If a business has a proportion of its assets in the form of stock there is an opportunity cost, as the funds tied up cannot be used for more profitable opportunities. Delaying payment to creditors By delaying payment to creditors, funds are retained within the business for other purposes. This may be a cheap form of finance for a business. 43

n n n 3. 2 Managing productivity at work : Productivity is clearly concerned to whole organizations and all the functions within them. Modern HRM practices include the minimization of ‘waste’ attributable to inappropriately recruited staff, but also the achievement of planned reductions or ‘right sizing’ of their labor force. 3. 3 Measuring quality: Box 3. 1 quality: some definitions: Quality: meeting the customer requirements. Quality control: the activities and techniques employed to achieve and maintain the quality of a product, process or service. It includes a monitoring activity, but is also concerned with finding and eliminating causes of quality problems so that the requirements of the customer are continually met. 44

n n Quality assurance: broadly the prevention of quality problems through planned and systematic activities (including documentation). These will including the establishment of a good quality management system and the assessment of its adequacy, the audit of the operation of the system, and the review of the system itself. Total quality management: (TQM): an approach to improving the competitiveness, effectiveness and flexibility of a whole organization. It is essentially a way of planning, organizing and understanding each activity and depends on each individual at each level. 45

n n 3. 4 Managing quality: Organizations have moved from the traditional definition of quality control (which concentrated on preventing substandard manufactured products from leaving a factory) towards prevention of quality failures, and service quality measurement. Quality is no longer seen as just a 'operations management's problem': all the business functions have some contribution to make and some shared responsibility for the quality of an organization's products or services. 46

n n n BOX 3. 2 WHAT IS 'BENCHMARKING', AND WHY IS IT DONE? Benchmarking has been defined by Holloway (1999) as: The pursuit by organizations of enhanced performance by learning from the successful practices of others. Benchmarking is a continuous activity; key internal processes are adjusted, performance is monitored, new comparisons are made with the current best performers and further changes are explored. Where information about these key processes is obtained through a co operative partnership with specific organizations ( rather than via a third party such as an independently maintained database), there is an expectation of mutual benefit over a period of time. 47

Ch. 5 Managing productivity at work operations n n Definition and types of productivity Productivity = Output produced Input consumed Productivity measures of individual resources can then be related to the amount of output produced against the amount of input used. For instance: Staff productivity = Output produced No. of staff used 48

n 1. 2. 3. n n n Traditionally, productivity has been measured at national, industry and organizational levels. These are usually assessed as follows: National productivity. This is where the productivity of different nations are measured and compared. This is usually expressed in terms of percentage of exports by each country per annum. Industry productivity. This is where the productivity of different industrial sectors is measured. Statistical comparisons are then made of their relative performance. This information, which is often expressed in terms of output per employee per hour, is a useful way for individual companies in a particular sector to compare their performance with the industry average. Organizational productivity. This is where productivity of a partic ular organization is measured. It is usually measured in monetary terms and expressed as the ratio of the output sold to the costs of inputs (e. g. , labor, materials, equipment) used to produce that output. The total factor productivity ratio is obtained by dividing total output by the total of labor, materials, and capital inputs. Total factor productivity = Output (£ value) labor + materials + capital (all in cost terms) There also partial productivity ratios, e. g. : Labor productivity = Output (£ value) Labour hours (or costs) 49

Primary activities Support activities Inbound logistics Operations Human resource development Procurement Outbound logistics Technological development Marketing and sales Firm's infrastructure After sales services Table 5. 2 Value chain activities 50

n n Productivity in manufacturing organizations Despite some slight improvements, the manufacturing productivity in the UK, USA and even in Japan has suffered significantly in recent years. Several factors can be considered as primary causes of poor performance of manufacturing industries. International competition Over the years manufacturing organizations in some European and Scandinavian countries, Canada and Australia have suffered greatly from their lack of investment and innovation in all aspects of their business. They have been rather slow in taking advantages of 'best practices' such as CAD, computer aided manufacturing (CAM), manufacturing resources planning (MRP), business process re engineering (BPR) , just in time (JIT), etc. A closer examination of their commitment to competitiveness demon strates alarming evidence of their disappointing positions in the league table of industrialized nations. 51

n n n 1. 2. 3. 4. Japanese management techniques Approaches widely used and developed by Japanese firms in order to increase their productivity. Continuous improvement (kaizen) This approach requires that organizations in all sectors consider their operations as an integrated process with a view to continuously review, redesign and constantly improve every process in the light of changes that take place in the needs of the customer and in the actions of their competitors. For kaizen to work in an organization it must be applied at all levels. It is vital that management at top, middle and supervisory levels and the workers, participate in the control, maintenance and the continuous improvement of business processes. It is important to remember that kaizen is not a system, but an environment for total quality to succeed. It is a never ending journey based on the principle that methods and performances can always be improved. Amongst the key success factors are: quality leadership employees involvement in decision making partnership with customers and suppliers team working. 52

n n 1. 2. 3. 4. 5. 6. 7. 8. 9. Team working Japanese firms are well known for encouraging and developing team work. Group based activities such as quality control circles have been used increasingly in Japan since 1962 as a strategy to aid problem solving and to improve productivity and employee morale. Team characteristics Traditionally Japanese work teams: are customer focused understand the mission and their work objectives are well motivated co ordinate their activity in order to achieve team objectives have the necessary skills and problem solving abilities within the team to achieve their goals are well balanced; members respect their team leader and each other roles learn quickly from their mistakes set measurable milestones communicate regularly in order to review their performance 53

n n 1. 2. 3. 4. 5. 6. Team culture Japanese companies have worked very hard to promote and create a team culture within their business operations. This is successful achieved by: organizing teams around the key processes rather than the key functions. Such a policy helps in reducing conflict and power struggles between departments, which in turn results in meeting customer needs rather than detracting from them building teams using cross functional departments early recognition of the team's existence and achievements adopting team performance ratings through rewarding the whole team rather than an individual member in the team integrating people and connecting their abilities to objectives that should be achieved by the team encouraging individual and team commitment through provision of non financial rewards such as team uniforms, social event team of the month awards. 54

n n The 5 S system is a Japanese 'housekeeping' approach that has been around for a long time. It is applied by companies as an early step in implementing the total quality management concept. Table 5. 5 shows what the five Ss stands for. 55

Japanese English Meaning Seiri Organize Discard the unnecessary. This means, distinguish those items needed from those not needed and throwaway those unneeded. Seiton Neatness Put things in order. This means, keep things tidy and ready for use. Seisou Sweep Clean up/find defects. This means, to find minor defects while sweeping clean. Seiketsu Cleanliness Personal cleanliness. This means, to improve the environment around the facilities to minimize deterioration. . Shitsuk Discipline This means, obey what has been decided Table 5. 5 Definition of the 5 S system 56

n 1. 2. 3. 4. 5. 6. The reason why the 5 S system is needed at work is because there are many things people do at the workplace without thinking which can affect the organizational productivity. The 5 S are like a mirror reflecting our attitudes and behavioral patterns. Its effective implementation can lead to: prevention of waste better safety improved efficiency prevention of facilities breakdown improved quality standardization. 57

n n n 1. 2. 3. 4. n Lean production The term 'lean production' was first advocated in 1990 by the publication of the American book The Machine that Changed the World. However, the concept had long been developed in Japan in particular at the Toyota plant. Lean production is seen as a successor to mass production. Through the application of methodologies such as JIT, TQM and total productive maintenance (TPM), lean production usually requires half of the input resources as compared to mass production system. For example: less materials/parts less human effort less space less investment in tools. The Japanese have been enjoying the results of this integrated approach because of their dedicated practice of the kaizen tech niques such as team working, the 5 S system, quality circles, etc. They also succeeded in transforming supplier relationship in order to reduce waste, increase flexibility and improve quality and delivery service by involving suppliers in the design of the products and processes. 58

n n The 'five why' system As part of the lean production Japanese developed the 'five why' system. This is an investigative approach in which workers are trained to trace every fault back to its ultimate cause by asking 'why' as each level of the problem is uncovered, and then think of a solution so that it would not happen again. 59

Ch. 11 Quality management operations n n n What is quality? While seven or more definitions of quality can be found fairly easily in the literature, three definitions cover all the issues of relevance to operations. Design quality This represents the degree to which the design of the product or service meets the requirements of the market. Satisfactory design quality requires a clear understanding of the requirements of the customer, and a product or service specification that matches this. Design quality is not specifically an issue for operations, since the task of operations is to deliver to specification. If the specification is wrong, the problem rests with design. This quality is frequently described as meeting customers needs. Conformance quality This represents the degree to which the product or service delivered to the customer matches the specification. Conformance quality is clearly an operations issue since operations is responsible for producing to specification, however, 100 per cent success may be an unrealistic expectation. This is usually described as conformance to specification. 60

n n Operations quality Delivery to specification can be achieved either by getting things right first time, or by inspecting out defects. The quality of the oper ations process will be reflected in the number of defects produced, but inspection can still ensure that conformance quality is satisfac tory. Defects and inspection have an adverse effect upon costs, but it may still be more cost effective to use an inferior process followed by inspection than to invest in a process capable of perfection. This quality corresponds to the well known exhortations of right first time and zero defects. 61

n n Cost of quality Two costs associated with quality have already been identified the cost of failure to compete effectively in the market and the cost of rejects. Most authorities identify two classes of cost, each with two major components, which include these. Cost of conformance The term 'conformance' is sometimes used here to mean confor mance to customer/market requirements, rather than the narrower conformance to specification. The components are prevention and appraisal. q n 1. 2. 3. 4. 5. Prevention All costs associated with the prevention of failure and, in the wider definition, improvement of quality. These include: training of staff and customers sourcing of quality components and maintenance of supplier relations sourcing of quality plant, maintenance of plant and appropriate set up of plant redundancy in the product and the process design and redesign of product and process. 62

q n 1. 2. 3. 4. n n Appraisal All costs associated with monitoring performance and detecting failure. These include inspection testing the stock costs of holding goods for inspection or test the materials tested if the test is destructive Cost of failure Failure to meet the required level of quality will always result in a cost penalty. It is usually convenient to divide these costs according to where the failure occurs. 63

n n 1. 2. 3. 4. 5. 6. n n n 1. 2. 3. 4. 5. 6. Internal failure All costs associated with quality failures detected prior to contact with the customer fall into this category. They include: cost of scrap cost of rework cost of stock held in anticipation of, or as a result of, failure cost of idle capacity this may be held to allow for the variability caused by failure, or it may simply result from a delay in the process caused by an earlier failure damage to plant and equipment caused by processing defective materials loss of motivation no one gets job satisfaction from producing rubbish. Appraisal costs are sometimes included in the list of internal failure costs, since appraisal is only necessary when production is less than perfect. External failure The boundary between internal and external failure is not always clear cut, particularly in services, but, in general, external failure costs arise when a quality failure is apparent to the customer. The main sources are: costs of rectifying problems on site costs of handling returns from the customer costs of providing customer support costs of processing complaints compensation payments loss of goodwill, possibly the most important since it has a long term effect on future custom and profitability, but is the most difficult to quantify. 64

n n n Measuring service quality Ultimately, service quality depends on the customer's perception, so service quality measurement reduces to measuring customer satisfaction. The issues that determine customer satisfaction are many and varied, and often have as much to do with the mood of the customer as with the provision of service. This variability of custom response is one of the reasons for seeking to maximize back shop content in service design. The back shop content can be quality controlled as a product. The measurement of customer satisfaction is more appropriate to marketing than operations, so only a brief review of the more important methods is given here. q n n Satisfaction questionnaires Hotels and restaurants frequently leave these questionnaires in rooms or on tables. The completion rate is low and is probably not representative of the customer base, and the design is frequent poor. Such questionnaires are of doubtful value. A well designed questionnaire, which not only identifies satisfaction and dissatisfaction but also their causes, administered to properly selected sample can give reliable data but is quite expensive. An example of such an instrument is SERVQUAL but this involves fifty questions an therefore represents a major investment by both the service provider and the customers surveyed. 65

q n All organizations should monitor customer feedback, whether praise or complaint. If serious about quality, they should actively encourage it. Again, the problem is that the feedback will not be representative of the general run of customers. Only the really delighted customer is likely to comment on the positive side. On the negative side, it is widely accepted that a disappointed customer is likely to tell ten other people, but not the service provider. q n Focus group Panels of customers are set up and meet periodically, with a professional facilitator, to discuss issues. The issues may be raised by the panel members or by the service provider. These are more usually used to deal with identified problems or new developments than to monitor ongoing quality. q n Feedback Mystery shopper A more or less typical customer is recruited to use the service and complete reports on performance. Mystery shoppers may simply monitor performance, or may be commissioned to look at some particular issue (i. e. how the service deals with a difficult customer). The mystery shopper can give valuable information, but should not be confused with the typical customer. The act of recruitment sensitizes the individual to failure. 66

n n n 1. 2. 3. 4. 5. n Service quality While much of the foregoing is applicable equally to products and services, some of the specific characteristics of services require addi tional consideration. Product quality is usually defined as conformance to specification, and provided the specification meets or exceeds the customer needs then all is well. Even those organizations striving to maximize customer benefit are, in product terms, seeking to ensure that the customer fully realizes the benefits of the specification. Service quality is entirely in the eye of the customer. A dissatis fied customer has had a poor quality service regardless of the cause of the problem. Unambiguous specifications are difficult to produce for services, , will not necessarily be accepted by all customers. Many fast food chains (Mc. Donald's for example) seek to control waiting time a quality indicator, and objective measurable standards can be specified. However, while a three minute wait might be acceptable even desirable for someone who is out for the day and not familiar with the menu, it may be far too long for someone on a thirty minute lunch break who knows exactly what they want. Services are multifaceted and complex. The criteria that de 1 mine quality vary from service to service and person to person. The SERVQUAL model identifies five dimensions of service quality tangibles reliability responsiveness assurance empathy and the SERVQUAL questionnaire subdivides each of these into four or five elements. Despite this the model is sometimes criticized for not being comprehensive enough. 67