Introduction
 To satisfy their customers and to be
competitive, managers need to find cost-
effective ways to continuousl...
Two Aspects of Quality
1 Quality of design measures how closely
the characteristics of products or
services meet the needs...
Two Aspects of Quality
Actual
Performance
Design
Specifications
Customer
Satisfaction
Quality
of Design
Failure
Conformanc...
Costs of Quality
 The costs of quality (COQ) refer to costs
incurred to prevent, or costs arising as a
result of, the pro...
Costs of Quality
1 Prevention costs--costs incurred in
precluding the production of products
that do not conform to specif...
Costs of Quality
3 Internal failure costs--costs incurred by a
nonconforming product detected before
it is shipped to cust...
Costs of Quality
 Santa-Cruz Photo Corporation made
10,000 photocopying machines in the
year 2000.
 Santa-Cruz Photo det...
Costs of Quality (Steps 1 and 2)
 Step 1: Identify the chosen cost
object(s).
 The cost object is the 10,000
photocopyin...
Costs of Quality (Step 3)
 Step 3: Select the cost-allocation bases to
use for allocating indirect costs of
quality to th...
Costs of Quality (Step 4)
 Step 4: Identify the indirect costs of
quality associated with each cost-
allocation base.
 T...
Costs of Quality (Step 5)
 Step 5: Compute the rate per unit of
each cost-allocation base
used to allocate indirect costs...
Costs of Quality (Step 5)
 Santa-Cruz Photo chooses the number
of inspection hours as the cost-
allocation base for the i...
Costs of Quality (Step 5)
Cost of Quality and
Value Chain Category Rate
(Assumed) Prevention costs:
Design engineering (R&...
Costs of Quality (Step 5)
Cost of Quality and
Value Chain Category Rate
(Assumed) External failure costs:
Customer support...
Costs of Quality (Step 6)
 Step 6: Compute the indirect costs of
quality allocated to the product.
 Santa-Cruz Photo fir...
Costs of Quality (Step 6)
Cost of Quality and
Value Chain Category Quantity
Prevention costs:
Design engineering (R&D) 20,...
Costs of Quality (Step 6)
Cost of Quality and
Value Chain Category
Quantity External failure costs:
Customer support (Mark...
Costs of Quality (Step 6)
 What is the total cost for design
engineering?
 20,000 hours × $80 = $1,600,000
 What is the...
Costs of Quality (Step 6)
Cost of Quality and
Value Chain Category Total Costs
Prevention costs:
Design engineering (R&D) ...
Costs of Quality (Step 6)
Cost of Quality and
Value Chain Category Total
Costs Internal failure costs:
Rework (Manufacturi...
Costs of Quality (Step 6)
Cost of Quality and
Value Chain Category Total
Costs External failure costs:
Customer support (M...
Costs of Quality (Step 7)
 Step 7: Compute the total costs of quality
of the product by adding all direct and
indirect co...
Techniques Used to Analyze
Quality Problems
 Three methods that companies use to
identify quality problems and to improve...
Control Charts
 Statistical quality control (SQC), or
statistical process control (SPC), is a
formal means of distinguish...
Control Charts
 Each observation is plotted relative to
specified ranges that represent the
expected statistical distribu...
Control Charts
 On the basis of experience, Santa-Cruz
decides that any observation outside
the arithmetic mean m ± 2s st...
Control Charts
1 2 3 4 5 6 7 8 9 10
Days
m
m + s
m + 2s
Production Line
m - s
m - 2s
DefectRate
Control Charts
 For the production line, the last two
observations signal that an out-of-
control occurrence is highly li...
Pareto Diagram
 Observations outside control limits serve
as inputs to Pareto diagrams.
 A Pareto diagram indicates how
...
Pareto Diagram
Copies are
fuzzy and
unclear
Copies are
too
light/dark
Paper gets
jammed
NumberofTimes
DefectObserved
700
5...
Cause-and-effect Diagrams
 The most frequently recurring and costly
problems identified by the Pareto
diagram are analyze...
Cause-and-effect Diagrams
 Santa-Cruz identifies four major
categories of potential causes of failure:
1 Human factors
2 ...
Cause-and-effect Diagrams
Methods and
design factors
Human factors
Machine-related
factors
Materials and
components factor...
Relevant Costs
 Careful analysis of Santa-Cruz’s cause-
and-effect diagram reveals that the
frame of the copier is often
...
Relevant Costs
 The team of engineers working to solve
this problem offers two alternative
solutions:
1 Improve the inspe...
Relevant Costs
 What must management do to evaluate
each alternative?
 Measure the total relevant costs and total
releva...
Relevant Costs
Variable Allocated
Costs Fixed Costs
Total
Rework-hour $ 40 $60 $100
Customer-support-hr $ 20 $30 $ 50
Tran...
Relevant Costs
 Only variable costs are relevant
because fixed costs are not affected.
 Before making a decision, manage...
Relevant Benefits
Further
Redesigning Inspection
Frames
Savings in rework costs:
$40 × 12,000 $480,000
$40 × 16,000 $640,0...
Relevant Benefits
Further
Redesigning
Inspection Frames
Savings in transportation costs for repair
parts: $180 ×
250 $45,0...
Relevant Benefits
Further
Redesigning
Inspection Frames Relevant savings:
Rework costs $480,000 $ 640,000
Customer-support...
Comparison
Further
Redesigning Inspection
Frames Relevant savings $995,000
$1,361,000 Additional cost
200,000 230,000 Diff...
Nonfinancial Measures
 Nonfinancial measures can be categorized
into:
– Nonfinancial measures of customer-
satisfaction
–...
Nonfinancial Measures
 Nonfinancial measures of customer
satisfaction include:
– Number of customer complaints
– Defectiv...
Nonfinancial Measures
 Nonfinancial measures of internal
performance include:
– Number of defects for each product line
–...
Evaluating Quality Performance
 Measuring the financial costs of quality
and the nonfinancial aspects of quality
have dis...
Evaluating Quality Performance
 Advantages of COQ measures:
– Consistent with the attention directing
role of management ...
Evaluating Quality Performance
– COQ provides a single, summary
measure of quality performance.
 Nonfinancial measures he...
Evaluating Quality Performance
 Advantages of nonfinancial measures of
quality:
– Nonfinancial measures of quality are
of...
Evaluating Quality Performance
– Nonfinancial measures provide
immediate short-run feedback on
whether quality improvement...
Time as a Competitive Weapon
 Companies need to measure time in
order to manage it properly.
 Two common operational mea...
Customer-Response Time
 Customer-response time is the amount of
time from when a customer places an order
for a product o...
Customer-Response Time
 Manufacturing lead time is the amount
of time from when an order is ready to
start on the product...
On-Time Performance
 On-time performance refers to situations
in which the product or service is
actually delivered at th...
Time Drivers and Costs of Time
 A time driver is any factor where change
in the factor causes a change in the
speed with ...
Time Drivers and Costs of Time
 Two important drivers of time are:
1 Uncertainty
2 Limited capacity and bottlenecks
 The...
Time Drivers and Costs of Time
 Average waiting time is the average
amount of time that an order will wait in
line before...
Time Drivers and Costs of Time
 The longer the manufacturing time, the
greater the chance that the machine will
be in use...
Theory of Constraints
 The three main measurements in the
theory of constraints are:
1 Throughput contribution equal to
r...
Theory of Constraints
3 Operating costs equal to all operating
costs (other than direct materials)
incurred to earn throug...
Theory of Constraints
 The theory of constraints emphasizes
the management of bottlenecks as the
key to improving the per...
Managing Bottlenecks
 The four steps in managing bottlenecks
are:
1 Recognize that the bottleneck operation
determines th...
Managing Bottlenecks
3 Keep the bottleneck busy and
subordinate all nonbottleneck operations
to the bottleneck operations....
Process management - managing quality, time by applyingthe theory of constraints - pareto presentation
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Process management - managing quality, time by applyingthe theory of constraints - pareto presentation

  1. 1. Introduction  To satisfy their customers and to be competitive, managers need to find cost- effective ways to continuously improve the quality of their products and to shorten delivery time.  This chapter describes how managers streamline processes to improve quality and reduce delays. G e t u s e f u l a n d f u n d o w n l o a d s a t
  2. 2. Two Aspects of Quality 1 Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers. 2 Conformance quality refers to the performance of a product or service according to design and product specifications. G e t u s e f u l a n d f u n d o w n l o a d s a t
  3. 3. Two Aspects of Quality Actual Performance Design Specifications Customer Satisfaction Quality of Design Failure Conformance Quality Failure
  4. 4. Costs of Quality  The costs of quality (COQ) refer to costs incurred to prevent, or costs arising as a result of, the production of a low-quality product.  These costs focus on conformance quality and are incurred in all business functions of the value chain. G e t u s e f u l a n d f u n d o w n l o a d s a t
  5. 5. Costs of Quality 1 Prevention costs--costs incurred in precluding the production of products that do not conform to specifications. 2 Appraisal costs--costs incurred in detecting which of the individual units of products do not conform to specifications. G e t u s e f u l a n d f u n d o w n l o a d s a t
  6. 6. Costs of Quality 3 Internal failure costs--costs incurred by a nonconforming product detected before it is shipped to customers. 4 External failure costs--costs incurred by a nonconforming product detected after it is shipped to customers. G e t u s e f u l a n d f u n d o w n l o a d s a t
  7. 7. Costs of Quality  Santa-Cruz Photo Corporation made 10,000 photocopying machines in the year 2000.  Santa-Cruz Photo determines the costs of quality of its photocopying machines using a 7-step activity-based costing approach. G e t u s e f u l a n d f u n d o w n l o a d s a t
  8. 8. Costs of Quality (Steps 1 and 2)  Step 1: Identify the chosen cost object(s).  The cost object is the 10,000 photocopying machines that Santa-Cruz Photo makes.  Step 2: Identify the direct costs of quality of the product.  The photocopying machines have no direct costs of quality.
  9. 9. Costs of Quality (Step 3)  Step 3: Select the cost-allocation bases to use for allocating indirect costs of quality to the product.  Santa-Cruz Photo classifies activities that result in prevention, appraisal, internal failure, and external failure costs.  (Information on the total quantities of each of these cost-allocation bases used in all of Santa-Cruz’s operations is not provided.)
  10. 10. Costs of Quality (Step 4)  Step 4: Identify the indirect costs of quality associated with each cost- allocation base.  These are the total costs (fixed and variable) incurred on each of the costs of quality activities.  (Information about these total costs is not provided.) G e t u s e f u l a n d f u n d o w n l o a d s a t
  11. 11. Costs of Quality (Step 5)  Step 5: Compute the rate per unit of each cost-allocation base used to allocate indirect costs of quality to products.  For each activity, the total costs calculated in Step 4 is divided by the total quantity of the cost-allocation base calculated in Step 3 to compute the rate per unit for each cost-allocation base. G e t u s e f u l a n d f u n d o w n l o a d s a t
  12. 12. Costs of Quality (Step 5)  Santa-Cruz Photo chooses the number of inspection hours as the cost- allocation base for the inspection activity in all of Santa-Cruz’s operations.
  13. 13. Costs of Quality (Step 5) Cost of Quality and Value Chain Category Rate (Assumed) Prevention costs: Design engineering (R&D) $ 80 per hour Process engineering (R&D) $ 60 per hour Appraisal costs: Inspection (Manufacturing) $ 40 per hour Internal failure costs: Rework (Manufacturing) $100 per hour
  14. 14. Costs of Quality (Step 5) Cost of Quality and Value Chain Category Rate (Assumed) External failure costs: Customer support (Marketing)$ 50 per hour Transportation (Distribution) $240 per load Warranty repair (Customer Service) $110 per hour
  15. 15. Costs of Quality (Step 6)  Step 6: Compute the indirect costs of quality allocated to the product.  Santa-Cruz Photo first determines the quantities of each of the cost- allocation bases used by the photocopying machines.  This amount is multiplied by the cost- allocation rate calculated in Step 5. G e t u s e f u l a n d f u n d o w n l o a d s a t
  16. 16. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Quantity Prevention costs: Design engineering (R&D) 20,000 hours Process engineering (R&D) 22,500 hours Appraisal costs: Inspection (Manufacturing) 120,000 hours Internal failure costs: Rework (Manufacturing) 50,000 hours
  17. 17. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Quantity External failure costs: Customer support (Marketing) 6,000 hours Transportation (Distribution) 1,500 loads Warranty repair (Customer Service) 60,000 hours
  18. 18. Costs of Quality (Step 6)  What is the total cost for design engineering?  20,000 hours × $80 = $1,600,000  What is the total cost for inspection?  120,000 hours × $40 = $4,800,000
  19. 19. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Total Costs Prevention costs: Design engineering (R&D) $1,600,000 Process engineering (R&D) 1,350,000 Total $2,950,000 Appraisal costs: Inspection $4,800,000 Total $4,800,000
  20. 20. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Total Costs Internal failure costs: Rework (Manufacturing) $5,000,000 Total $5,000,000
  21. 21. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Total Costs External failure costs: Customer support (Marketing)$ 300,000 Transportation (Distribution) 360,000 Warranty repair (Customer Service) 6,600,000 Total $7,260,000 G e t u s e f u l a n d f u n d o w n l o a d s a t
  22. 22. Costs of Quality (Step 7)  Step 7: Compute the total costs of quality of the product by adding all direct and indirect costs of quality assigned to it.  What are the total costs of quality? Prevention costs $ 2,950,000 Appraisal costs 4,800,000 Internal failure costs 5,000,000 External failure costs 7,260,000 Total $20,010,000
  23. 23. Techniques Used to Analyze Quality Problems  Three methods that companies use to identify quality problems and to improve quality are: 1 Control charts 2 Pareto diagrams 3 Cause-and-effect diagrams
  24. 24. Control Charts  Statistical quality control (SQC), or statistical process control (SPC), is a formal means of distinguishing between random variation and nonrandom variation in an operating process.  A control chart is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time.
  25. 25. Control Charts  Each observation is plotted relative to specified ranges that represent the expected statistical distribution.  Only those observations outside the control limits are ordinarily regarded as nonrandom and worth investigating.
  26. 26. Control Charts  On the basis of experience, Santa-Cruz decides that any observation outside the arithmetic mean m ± 2s standard deviations should be investigated.
  27. 27. Control Charts 1 2 3 4 5 6 7 8 9 10 Days m m + s m + 2s Production Line m - s m - 2s DefectRate
  28. 28. Control Charts  For the production line, the last two observations signal that an out-of- control occurrence is highly likely.  Given the ± 2s from the mean rule, both observations would lead to an investigation.
  29. 29. Pareto Diagram  Observations outside control limits serve as inputs to Pareto diagrams.  A Pareto diagram indicates how frequently each type of failure (defect) occurs.
  30. 30. Pareto Diagram Copies are fuzzy and unclear Copies are too light/dark Paper gets jammed NumberofTimes DefectObserved 700 500 200
  31. 31. Cause-and-effect Diagrams  The most frequently recurring and costly problems identified by the Pareto diagram are analyzed using cause- and-effect diagrams.  A cause-and-effect diagram identifies potential causes of failures or defects.  As a first step, Santa-Cruz analyzes the causes of the most frequently occurring failure, fuzzy and unclear copies. G e t u s e f u l a n d f u n d o w n l o a d s a t
  32. 32. Cause-and-effect Diagrams  Santa-Cruz identifies four major categories of potential causes of failure: 1 Human factors 2 Methods and design factors 3 Machine-related factors 4 Materials and components factors
  33. 33. Cause-and-effect Diagrams Methods and design factors Human factors Machine-related factors Materials and components factors Multiple suppliers New operator Flawed part design Poor maintenance
  34. 34. Relevant Costs  Careful analysis of Santa-Cruz’s cause- and-effect diagram reveals that the frame of the copier is often mishandled as it travels from the suppliers’ warehouses to Santa-Cruz’s plant.  Mishandling causes the dimensions of the frame to vary from specifications, resulting in fuzzy and unclear copies.
  35. 35. Relevant Costs  The team of engineers working to solve this problem offers two alternative solutions: 1 Improve the inspection of the frames immediately upon delivery. 2 Redesign and strengthen the frames and the containers used to transport them to better withstand mishandling during transportation.
  36. 36. Relevant Costs  What must management do to evaluate each alternative?  Measure the total relevant costs and total relevant revenues.  Additional Additional Inspection Cost Redesign Cost Difference  $200,000 $230,000 $30,000  Santa-Cruz determines the fixed and variable cost component of each activity involved. G e t u s e f u l a n d f u n d o w n l o a d s a t
  37. 37. Relevant Costs Variable Allocated Costs Fixed Costs Total Rework-hour $ 40 $60 $100 Customer-support-hr $ 20 $30 $ 50 Transportation/load $180 $60 $240 Warranty/repair hour $ 45 $65 $110 G e t u s e f u l a n d f u n d o w n l o a d s a t
  38. 38. Relevant Costs  Only variable costs are relevant because fixed costs are not affected.  Before making a decision, management must compare the incremental costs of each alternative against the corresponding incremental benefit.
  39. 39. Relevant Benefits Further Redesigning Inspection Frames Savings in rework costs: $40 × 12,000 $480,000 $40 × 16,000 $640,000 Savings in customer- support costs: $20 × 1,000 $20,000 $20 × 1,400 $28,000
  40. 40. Relevant Benefits Further Redesigning Inspection Frames Savings in transportation costs for repair parts: $180 × 250 $45,000 $180 × 350 $63,000 Savings in warranty repair costs: $45 × 10,000 $450,000 $45 × 14,000 $630,000
  41. 41. Relevant Benefits Further Redesigning Inspection Frames Relevant savings: Rework costs $480,000 $ 640,000 Customer-support costs 20,000 28,000 Transportation costs 45,000 63,000 Warranty repair costs 450,000 630,000 Total $995,000 $1,361,000 G e t u s e f u l a n d f u n d o w n l o a d s a t
  42. 42. Comparison Further Redesigning Inspection Frames Relevant savings $995,000 $1,361,000 Additional cost 200,000 230,000 Difference $795,000 $1,131,000  What should Santa-Cruz do?  Redesigning the frames provides a $336,000 incremental benefit over further inspection.
  43. 43. Nonfinancial Measures  Nonfinancial measures can be categorized into: – Nonfinancial measures of customer- satisfaction – Nonfinancial measures of internal performance
  44. 44. Nonfinancial Measures  Nonfinancial measures of customer satisfaction include: – Number of customer complaints – Defective units as a percentage of total units shipped to customers – Percentage of products that experience early or excessive failure – On-time delivery rate
  45. 45. Nonfinancial Measures  Nonfinancial measures of internal performance include: – Number of defects for each product line – Process yield (ratio of good output to total output) – Employee turnover (ratio of the number of employees who left the company to the total number of employees) G e t u s e f u l a n d f u n d o w n l o a d s a t
  46. 46. Evaluating Quality Performance  Measuring the financial costs of quality and the nonfinancial aspects of quality have distinctly different advantages.  Financial measures are helpful to evaluate trade-offs among prevention costs, appraisal costs, and failure costs.  They focus attention on the costs of poor quality. G e t u s e f u l a n d f u n d o w n l o a d s a t
  47. 47. Evaluating Quality Performance  Advantages of COQ measures: – Consistent with the attention directing role of management accounting, COQ focuses attention on how costly poor quality can be. – Financial COQ measures assist in problem solving by comparing different quality-improvement programs and setting priorities for achieving maximum cost reduction.
  48. 48. Evaluating Quality Performance – COQ provides a single, summary measure of quality performance.  Nonfinancial measures help focus attention on the precise problem areas that need improvement and also serve as indicators of future long-run performance.
  49. 49. Evaluating Quality Performance  Advantages of nonfinancial measures of quality: – Nonfinancial measures of quality are often easy to quantify and understand. – Nonfinancial measures direct attention to physical processes and hence focus attention on the precise problem areas that need improvement.
  50. 50. Evaluating Quality Performance – Nonfinancial measures provide immediate short-run feedback on whether quality improvement efforts have, in fact, succeeded in improving quality. – Nonfinancial measures are useful indicators of future long-run performance. G e t u s e f u l a n d f u n d o w n l o a d s a t
  51. 51. Time as a Competitive Weapon  Companies need to measure time in order to manage it properly.  Two common operational measures of time are: 1 Customer-response time 2 On-time performance
  52. 52. Customer-Response Time  Customer-response time is the amount of time from when a customer places an order for a product or requests service to when the product or service is delivered to the customer.  The following are different components of customer-response time:  Receipt time is the time it takes a Marketing Department to specify a customer’s exact requirements to manufacturing.
  53. 53. Customer-Response Time  Manufacturing lead time is the amount of time from when an order is ready to start on the production line to when it becomes a finished good.  Delivery time is the time it takes to deliver a completed order to the customer.
  54. 54. On-Time Performance  On-time performance refers to situations in which the product or service is actually delivered at the time it is scheduled to be delivered.  On-time performance is an important element of customer satisfaction because customers want and expect on- time deliveries.
  55. 55. Time Drivers and Costs of Time  A time driver is any factor where change in the factor causes a change in the speed with which an activity is undertaken.  Managing customer-response time and on-time performance requires an understanding of the causes of delays and the resulting costs.
  56. 56. Time Drivers and Costs of Time  Two important drivers of time are: 1 Uncertainty 2 Limited capacity and bottlenecks  The following are different components of customer-response time:  Receipt time is the time it takes a Marketing Department to specify a customer’s exact requirements to manufacturing.
  57. 57. Time Drivers and Costs of Time  Average waiting time is the average amount of time that an order will wait in line before it is set up and processed.  Average waiting time = Average number of orders × (Manufacturing time)² Divided by 2 × [Annual machine capacity – (Average number of orders × Manufacturing time)]
  58. 58. Time Drivers and Costs of Time  The longer the manufacturing time, the greater the chance that the machine will be in use when an order arrives, and the longer the delays.  The denominator in this formula measures unused capacity, or cushion.  The smaller the unused capacity, the greater the delays.
  59. 59. Theory of Constraints  The three main measurements in the theory of constraints are: 1 Throughput contribution equal to revenues minus direct material costs. 2 Investments equal the sum of material costs in direct materials inventory, work-in-process inventory, finished goods inventory, R&D costs, and costs of equipment and buildings.
  60. 60. Theory of Constraints 3 Operating costs equal to all operating costs (other than direct materials) incurred to earn throughput contribution.  The objective of TOC is to increase throughput contribution while decreasing investments and operating costs.  TOC considers a short-run time horizon and assumes operating costs to be fixed costs.
  61. 61. Theory of Constraints  The theory of constraints emphasizes the management of bottlenecks as the key to improving the performance of the production system as a whole.
  62. 62. Managing Bottlenecks  The four steps in managing bottlenecks are: 1 Recognize that the bottleneck operation determines throughput contribution of the system as a whole. 2 Search and find the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on. G e t u s e f u l a n d f u n d o w n l o a d s a t
  63. 63. Managing Bottlenecks 3 Keep the bottleneck busy and subordinate all nonbottleneck operations to the bottleneck operations. 4 Take actions to increase bottleneck efficiency and capacity – the objective is to increase throughput contribution minus the incremental costs of taking such actions. G e t u s e f u l a n d f u n d o w n l o a d s a t

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