Chapter 16 Total Quality Management 3 Learning Objectives

Chapter 16 Total Quality Management

3 Learning Objectives n Define Quality and Total Quality Management, and devise guidelines for implementing total quality management n Distinguish between the two types of conformance and explain their effects on workers’ behavior n Identify four major categories of quality costs Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

4 Learning Objectives n Prepare and interpret cost of quality reports n Describe methods commonly used to identify significant quality problems and their causes n Identify distinct characteristics of total quality management in service organizations Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

5 Learning Objectives n Explain the relationships between total quality management and productivity n Describe the role of management accountants in total quality management and the challenges they face Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

6 Learning Objective One Define Quality and Total Quality Management, and devise guidelines for implementing total quality management Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

7 What is Quality? Quality is providing a product or service that meets or

8 Why is Quality Important? Quality products and services Increased business volume Greater customer

9 Product Quality § Product quality and profitability are closely related. § Businesses that offer premium-quality products and services are more likely to have large market shares. § Quality relates positively to a higher return on investment. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

10 Improved Quality, Profitability, and Return on Investment Improved Quality Lower Return Sales Mc. Graw-Hill/Irwin Lower Manufacturing Cost Higher Perceived Value Lower Throughput Time © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

11 Improved Quality, Profitability, and Return on Investment Improved Quality Lower Return Sales Lower Warranty and Service Costs Mc. Graw-Hill/Irwin Lower Manufacturing Cost Higher Perceived Value Higher Prices Higher Market Share Lower Throughput Time Faster Delivery © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

12 Improved Quality, Profitability, and Return on Investment Improved Quality Lower Return Sales Lower Warranty and Service Costs Mc. Graw-Hill/Irwin Lower Manufacturing Cost Higher Perceived Value Higher Prices Higher Market Share Lower Throughput Time Faster Delivery Increased Revenue © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

13 Improved Quality, Profitability, and Return on Investment Improved Quality Lower Return Sales Lower Warranty and Service Costs Lower Manufacturing Cost Higher Perceived Value Higher Prices Higher Market Share Lower Throughput Time Faster Delivery Increased Revenue Higher Profit and Return on Investment Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

14 Total Quality Management is the unyielding and continually improving by everyone in an organization to understand, meet, and exceed the expectations of customers. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

15 Focus on the Customer þ Focus on customer satisfaction. þ Strive for continuous improvement. þ Involve the entire work force. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 Critical Total Quality Management Factors Total Quality Management Continuous Improvement Focus on the Customer Involve all Employees Expectation and Requirements of external customers Specifications for Internal Suppliers/Customers Specifications for External Suppliers Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

17 TQM Implementation Guidelines Year One Preparation and Planning § § Create quality council and staff. Conduct executive quality training programs. Prepare gap analysis. Develop strategic quality improvement plans. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

18 TQM Implementation Guidelines Year Two Training and Documentation § § § Conduct employee communication and training programs. Establish quality teams. Create management system and set goals. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

19 TQM Implementation Guidelines Year Three Assessment, Review, and Revise § § § Revise compensation/appraisal/recognition systems. Launch external initiatives and suppliers. Review and revise. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

20 Learning Objective Two Distinguish between the two types of conformance and explain their effects on workers’ behavior Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

21 Absolute Conformance Absolute quality conformance requires that all products or services meet exactly the target value with no variation allowed. Losses 0. 50 Target Value Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

22 Goalpost Conformance Goalpost or absolute conformance assumes that the firm incurs no quality or failure cost or loss if quality measures fall with the specified limits. Loss Lower Limit. 45 Mc. Graw-Hill/Irwin No Loss Target Value. 50 Loss Upper Limit. 55 Thickness © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

23 Quality Loss Function General expression of the loss function, L(x), for a quality characteristic of a product or service is observed x is: L(x) = k(x -T)2 where: x = an observed value of the quality characteristics T = the target value of the quality characteristic k = the cost coefficient, determined by the firm’s failure costs Total Quality Cost k = ----------------------(Tolerance Allowed the Target Value) Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

24 Quality Loss Function Your firm has determined that no customer will accept sheet-metal deviating more than. 05” from the target value in thickness, that the target thickness is. 50”, and that the cost to the firm is $5, 000 for each rejection by a customer. k= Total Quality Cost (Tolerance Allowed the Target Value) k= Mc. Graw-Hill/Irwin $5, 000. 05 2 = $2, 000 © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

25 Quality Loss Function L(x) = k(x -T) L(. 47) = $2, 000(. 47 -. 5)2 L(. 47) = $1, 800 If the actual thickness of a unit is. 47, then the estimated total loss for the unit is $1, 800. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

26 Learning Objective Three Identify four major categories of quality costs Mc. Graw-Hill/Irwin ©

27 Cost of Quality § Prevention – expenditures incurred to keep quality defects § § § from occurring. Appraisal – costs incurred in the measurement and analysis of data to find out if products and services conform to specification. Internal failure – costs incurred as a result of poor quality found through appraisal prior to delivery to customers. External failure – Costs incurred to rectify quality defects after unacceptable products or services reach the customer. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

28 Cost of Quality Prevention costs include: Quality training costs Quality planning costs Equipment maintenance costs Information systems costs Appraisal costs include: Testing and inspection costs Test equipment and instruments Quality audits Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

29 Cost of Quality Internal failure costs include: Cost of corrective action. Rework and scrap costs. Process costs. Expediting costs. Reinspect and retest costs. External failure costs include: Costs to handle customer complaints and returns. Product recall and product liability costs. Lost sales from unsatisfactory products and customer ill-will. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

30 Conformance and Nonconformance Costs Cost of Conformity n n prevention costs appraisal costs Cost of Nonconformity t internal failure costs t external failure costs Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

31 Learning Objective Four Prepare and interpret cost of quality reports Mc. Graw-Hill/Irwin ©

32 Reporting Quality Costs Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. ,

33 Learning Objective Five Describe methods commonly used to identify significant quality problems and

34 Control Charts Size. 1255”. 1245” Batch # Mc. Graw-Hill/Irwin © 2005 The Mc.

35 Control Charts Size. 1255”. 1245” Batch # The circled observations are unacceptable. This batch suggests that the workstation needs immediate investigation. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

36 Histogram 1 3 5 Mc. Graw-Hill/Irwin Quality of chocolate Egg size Blending duration 2 4 6 Liqueur Blending speed Improper refrigeration © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

37 Pareto Diagram 220 200 180 Cumulative 160 140 120 100 80 60 - 1 Egg size 2 Blending speed 3 Liqueur 4 Blending duration 5 Quality of chocolate 6 Improper refrigeration 40 20 - 1 Mc. Graw-Hill/Irwin 2 3 4 5 6 © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

38 Brainstorming Œ Don’t criticize anyone’s idea by word or gesture. Once an idea has been put forth, there should be no further discussion of the idea during the session, except for clarification. Ž No idea is ‘dumb’ or ‘silly. ’ Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

39 Brainstorming Each team member can introduce only one idea at a time. Until most of the members present his or her idea, no member can introduce more than one idea. ‘ No single individual should be allowed to dominate the session. ’ Never allow any finger-pointing during the session. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

40 Main Causes of Quality Problems Manufacturing Operations § § Mc. Graw-Hill/Irwin Machines Materials

41 Basic Cause-and-Effect Diagram Cause Contribute to the cause Quality Problem Contribute to the

42 Chocolate Mousse Cause-and Effect Diagram Machine Timer Improper calibration Mc. Graw-Hill/Irwin © 2005

43 Chocolate Mousse Cause-and Effect Diagram Machine Materials Timer Improper calibration Low quality chocolate Egg size Wrong liqueur Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

44 Chocolate Mousse Cause-and Effect Diagram Machine Materials Timer Improper calibration Low quality chocolate Egg size Wrong liqueur Improper calibration Methods Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

45 Chocolate Mousse Cause-and Effect Diagram Machine Materials Timer Improper calibration Low quality chocolate Egg size Wrong liqueur Improper calibration 20% Rejection Rate Not following instructions New workers Methods Mc. Graw-Hill/Irwin Manpower © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

46 Learning Objective Seven Explain the relationships between total quality management and productivity Mc.

47 Total Quality and Productivity o Improvements in quality can lead to increases in productivity. o Activity-based accounting is ideally suited to total quality management. o JIT necessitates a strong emphasis on quality. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

48 Learning Objective Eight Describe the role of management accountants in total quality management and the challenges they face Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

49 Challenge to Management Accountants o Ensure full representation of management accountants on the main quality control committees and quality improvement teams. o Make the company fully aware of the competitive benchmarks, competitive gaps, customers’ retention rate, and the cost of quality. o Participate actively in identifying areas of greatest quality improvement opportunities and needs. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

50 Challenge to Management Accountants o Develop quality measures to monitor and assess ongoing progress toward quality goals. o Be involved closely in vendor rating decisions. o Review and evaluate quality control effectiveness and the value of training courses for quality control personnel. o Gather and review continually scrap and recovery costs. Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

51 Tasks of Management Accountants Ensure that the measurement and reporting process meet the following criteria: • meets the need of the internal customer • include all relevant cost of quality measures including • • both financial and non-financial measures adjusts measures to reflect quality and business challenges adapts measures as the need changes Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

52 Tasks of Management Accountants Ensure that the measurement and reporting process meet the following criteria: • is simple and easy to use, execute, and monitor • provides fast and timely feedback to users and • • managers foster improvement rather than just monitoring motivates and challenges team members to strive for the highest quality gains Mc. Graw-Hill/Irwin © 2005 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.