QUALITY NONFINANCIAL MEASURES THEORY OF CONSTRAINT CHAPTER 19

QUALITY, NON-FINANCIAL MEASURES, THEORY OF CONSTRAINT CHAPTER 19

COST OF QUALITY • FOUR CATAGORIES – PREVENTION – APPRAISAL – INTERNAL FAILURE – EXTERNAL FAILURE • MEASURING EACH CATEGORY’S COST OF QUALITY HELPS DETERMINE WHERE EFFORT SHOULD BE APPLIED

TECHNIQUES TO ANALYZE QUALITY PROBLEMS • CONTROL CHARTS • PARETO DIAGRAMS • CAUSE AND EFFECT DIAGRAM

CONTROL CHARTS • Units Should Be 1 Inch Wide • 1 Standard deviation from the mean = ¼ in. • 2 std. devs. = ½ in. • 10 units produced of 1. 1 in, . 95 in, 1. 2 in, 1. 45 in, . 90 in, . 85 in, . 93 in, 1. 2 in, 1. 55 in, . 95 in,

PARETO DIAGRAM • You observe three errors in production: size, color, and texture. Out of 1, 000 units you observe the following errors: size 24; color 19; texture 13 • frequency • size • 25 • 20 • 15 • color texture type of error

Cause and Effect Diagram • During the month we found that defective units were caused by: • Lack of maintenance 10; operator inattention 13 Human Factor Operator Error - 13 23 Maintenance - 10 Machine-Related

NON-FINANCIAL MEASURES • THIS IS AN IMPORTANT MEASURE FOR ACCOUNTANTS TO GATHER AND REPORT • TWO SUCH MEASURES ARE QUALITY AND CUSTOMER SATISFACTION

EXAMPLE OF MEASURES • You produce prescription glasses • QUALITY MEASURES – Lenses reworked – Frames failing inspection CUSTOMER SATISFACTION MEASURES Number of customers who complain Delivery delays Defective units returned

EXERCISE • Fly-By-Night Airways is developing Nonfinancial measures of Quality and Customer Service • List some Quality Measures • List some Customer Service Measures

TIME DRIVERS AND COST OF TIME • Two cost drivers are • Uncertainty of customer orders and • Production capacity • Uncertainty of customer orders affects lead-time, i. e. , the AVERAGE WAITING TIME

AVERAGE WAITING TIME [ Average number of orders for product A 2 ( X [ -( Actual Capacity ) ]+[ Manufacturing time per order of product A 2 Average number of orders for product B ( X ) -( Average number Manufacturing of orders for X time per order product A of product A 2 )] Manufacturing time per order of product B Average number of orders for of product B X Manufacturing time per order product B )] If there is only one product, the formula is simplified by inserting zeroes in the elements of the second product. If there are more than two products, simply insert a third element consistent with the first two. NOTICE that the numerator is related to the production time of a product and the denominator is simply two times excess capacity.

EFFECTS OF INCREASED WAITING TIME • REVENUES – We may not be able to charge the same price if the customer has to wait, i. e. , higher sales price for faster delivery. • COSTS – We may incur higher carrying costs of inventory if there is a greater wait period for materials to be put into production, e. g. , more storage, more capital costs, more insurance

THEORY OF CONSTRAINTS (TOC) • Determine where constraints (bottlenecks) occur and deal with them, not with other parts of the production • Example: Our production goes through machines A, with a production rate of 60 units per hour, and then machine B, with a production rate of 100 units per hour. We can purchase a new machine B that will produce 130 units per hour at a very good price. Should we spend much time analyzing this option? • NO. Replacing machine B will probably not increase production, the constraint is machine A.

TOC EXERCISES • WHERE WERE THE CONSTRAINTS THE LAST TIME YOU FLEW? • WHERE ARE THE TRAFFIC CONSTRAINTS WHEN YOU DRIVE TO CAMPUS? • WHERE ARE THE CONSTRAINTS AT THE STUDENT UNION’S FOOD SERVICE?