Q8 IM08 Final

CHAPTER 8
Performance Measurement and Strategic

Information Management
Teaching Notes
This chapter develops facets of measurement and information management. These concepts may
be somewhat difficult for students to grasp, at first. This may especially be true if there are
accounting or finance majors in the class, or practicing accountants in a seminar. Some of the cost
concepts presented in this chapter may disagree with the "conventional" views of traditional
accountants and many economists. The concept of accounting for quality costs with a focus on
four categories of cost and the balanced scorecard approach may be new or strange to them.
Key objectives are:
To focus on the role of measurement as the act of quantifying the performance dimensions
of products, services, processes, and other business activities and the use of measures and
indicators -- the numerical information that results from measurement. These are key to
understanding the broad scope of performance management, based on factual data in the
total quality management process. Organizations need performance measures to drive
strategies and organizational change, manage resources and operate processes effectively,
and continually improve.
To develop the concept of performance measures and the associated needs for data.
Organizations need performance measures to drive strategies and organizational change,
to manage resources, and to operate processes effectively and continuously improve.
Thus, data and information support control, diagnosis, and planning at the three levels of
quality.
To develop an appreciation for the balanced scorecard concept that includes the four
perspectives of: financial, internal, customer, and innovation and learning perspectives, and
typically contains leading and lagging measures that are linked through logical cause-andeffect relationships.
To point out that the Baldrige criteria provide a slightly different view of the balanced
scorecard, focusing on six categories of performance measurements and indicators:
customer, product and service, financial and market, human resource, organizational
effectiveness, and governance and social responsibility measures.
To develop further understanding of the importance of measurement and strategic

information in processes by showing the need for comparative and benchmark data which
1
Performance Measurement and Strategic Information Management
must be used to gain an accurate assessment of performance; and the further need for
performance measures and indicators called key business drivers or key success factors
that determine what is important to the success of the organization. These must be used by
senior leaders for strategic purposes and be aligned with company strategy and be
actionable.
To introduce the concept of process-level measures, derived through close examination of

the processes that create products and services, and that should be actionable to provide
the basis for decisions at the level at which they are applied. Types of process level
measurements include nonconformities per unit, defects per unit, errors per opportunity,
and dpmo--defects per million opportunities. Many organizations use dashboards, which
typically consist of a small set of measures (five or six) that provide a quick summary of
process performance.
To categorize the four classes of quality costs as prevention, appraisal, internal failure and
external failure and show how they can help to translate quality issues into the language of
management -- money.
To define and provide examples of several tools used to measure, analyze, and allocate
quality costs, including the relatively new accounting technique of "activity-based"
information, or costing.
To introduce a relatively new tool, called return on quality (ROQ) and show how it can be
valuable to senior management as a means of justifying quality expenditures and
demonstrating their value to senior management.
Organizations must ensure that data are valid and reliable; that is, they measure what they
are supposed to consistently, and that employees have access to the data they need to do
their jobs. Confidentiality and security are important factors today, particularly with the
increased use of electronic data transfer.
To explore the role of knowledge assets -- the intellectual resources that an organization
possesses. An important requirement for making use of these assets is to have a process
for knowledge management, which can be used to identify, capture, organize, and use
knowledge assets to create and sustain competitive advantage.
To understand the nature of internal benchmarking, that is the ability to identify and
transfer best practices within the organization.
To explore requirements to identify and collect internal knowledge and best practices;
share and understand those practices; and how to adapt and apply them to new situations
and bring them up to best practice performance levels.
To study how the Baldrige criteria, ISO 9000:2000, and Six Sigma approaches
organizations needs to select, gather, analyze, manage, and improve its data, information,
and knowledge assets. ISO 9000:2000 provides a basic framework for managing data and
information regarding product and process characteristics. Six Sigma emphasizes fact-
based decisions, requiring measuring and reporting performance goals, and using
performance indicators to control and sustain improvements.
Several of the Baldrige video clips available in the Instructors Resource area on the website for
this chapter have scenes pertaining to performance measurement and strategic information
management.
ANSWERS TO QUALITY IN PRACTICE KEY ISSUES
Using the Balanced Scorecard at the United States Postal Service
1. The Voice of the Employee supports improved internal processes (Voice of the Business), and
the Voice of the Business supports customer satisfaction (Voice of the Customer). One of the first
areas of emphasis was the Voice of the Employee, which focused on providing a safe and secure
workplace in response to instances of violence and poor employee relations. A second major
initiative, the Voice of the Business, focused on the Breakthrough Productivity Initiative,
while the third area, the Voice of the Customer, focused on providing timely, reliable delivery.
In their balanced scorecard work, Kaplan and Norton advocated a well-connected mapping that
leads from an organizations main strategy to the four perspectives of the balanced scorecard:
Financial, Customer, Internal Process, and Learning and Growth. Each element works to support
the strategic objectives in a linked process. Learning and growth (Voice of the Employee in
postal terms) supports improved internal processes (Voice of the Business), which support
customer satisfaction (Voice of the Customer). Customer satisfaction leads to the desired
financial outcome, which in the case of the Postal Service is sufficient revenue to support the
universal delivery service mission.
2. Despite significant strides in improving performance, most customers would agree that there is
additional room for improvement in customer service by the USPS. This could start with efforts to
reduce queue times for customers in post offices across the county. Who hasnt wondered why
even small post offices have two or three service positions at their counters, often with only one
person to staff them, even during peak periods? An additional metric would be to measure the
percentage of miss-delivered mail.
Knowledge Management for Continuous Improvement at Convergys
1.
Convergys has established continuous improvement as part of the companys culture and
ties in leadership support, financial relevance and total participation so as to link CI to
important strategic business initiatives. The CI Portal has been developed to facilitate
sharing of success stories and best practices in order to accelerate improvement efforts.
Also, employees are guided by the Portals software on how to submit improvement ideas.
2.
This is apparently a two-stage process. Initially improvement ideas must be submitted to

the CI Pipeline using the following steps. Then, the improvement has to be submitted and
approved as a best practice.
Steps for submission to the CI Pipeline:
Submitter enters improvement and selects Sponsor

Sponsor requests more information
Submitter updates the improvement with more information
Sponsor approves improvement and selects implementation team
Submitter, Sponsor or Team Members enter the success story and Sponsor marks it
complete
(Alternately) Sponsor declines sponsorship
Improvements with no activity in 60 days are swept into inactive status
Steps for approval as a best practice
3.
Document potential best practice

Forward to vice president who is the subject matter expert for the area
VP reviews the potential best practice and decides if its use should be encouraged
VP approves it as a best practice
Best practices and tools are used to promote learning and develop a knowledge-based
organization in a number of ways. Besides facilitating the sharing of best practices, the CI
Portal makes it easy to record improvements using a standard format and categorizing
them in a way that makes it easy for employees to find information when it is needed.
Also, through the CI Portal, resources such as any of the 40 specific improvement tools
may be accessed to help facilitate and/or accelerate improvement efforts. In addition,
access is provided for employee training on an as-needed basis. Self-paced modules are
available on numerous CI topics. Finally, the CI approach has become a part of the
corporate culture with high involvement of management as well as line employees, and
bottom line impact of higher profit margins than competitors is significant.
ANSWERS TO REVIEW QUESTIONS

1. Measurement is the act of quantifying the performance dimensions of products, services,
processes, and other business activities.
2. Measures and indicators refer to numerical information that results from measurement. The
term indicator is used to define a measurement that is not a direct or exclusive measure
of performance, such as, complaints -- an indicator of customer dissatisfaction.
3. Organizations need performance measures for three reasons:
To lead the entire organization in a particular direction; that is, to drive strategies and
organizational change
To manage the resources needed to travel in this direction by evaluating the
effectiveness of action plans
To operate the processes that make the organization work and continuously improve
Other reasons for measurement, in general, are:

If you dont measure results, you cant tell success from failure
If you cant see success, you cant reward it -- and will probably end up rewarding
failure
If you cant recognize failure, you cant correct it.
4. Data at the individual level provide workers with information to continually evaluate and, if
necessary, correct the performances of machines and processes. At the process level, data
collected through systematic measurement describe process performance and identify
areas for improvement. At the organizational level, quality and operational performance
data, along with relevant financial data, provide the basis for strategic planning and
decision making
5. Good data and information management provide many benefits:
They help the company know that customers are receiving appropriate
levels of service because indicators are used to measure service attributes.
They provide concrete feedback to workers to verify their progress.
They establish a basis for reward and recognition.
They provide a means of assessing progress and signaling the need for
corrective action.
They reduce the costs of operations through better planning and

improvement actions.
6. The leading practices used by companies for successful quality data and information
management include:
7.
They develop a comprehensive set of performance indicators that reflect

internal and external customer requirements and the key factors that drive the
business.
They use comparative information and data to improve overall performance
and competitive position.
They involve everyone in measurement activities and use sound analytical
methods to support analysis and decision-making.
They ensure that data are reliable, accessible, and widely visible throughout the
organization.
They use sound analytical methods to conduct analyses and use the results to
support strategic planning and daily decision-making.
They continually refine information sources and their uses within the
organization.
Robert Kaplan and David Norton of the Harvard Business School in response to the
limitations of traditional accounting measures coined the term balanced scorecard. Its
purpose is to translate strategy into measures that uniquely communicate your vision to
the organization. Their version of the balanced scorecard consists of four perspectives:
Financial Perspective: Measures the ultimate results that the business provides
to its shareholders. This includes profitability, revenue growth, return on
investment, economic value added (EVA), and shareholder value.
Internal Perspective: Focuses attention on the performance of the key internal

processes that drive the business. This includes such measures as quality
levels, productivity, cycle time, and cost.
Customer Perspective: Focuses on customer needs and satisfaction as well as
market share. This includes service levels, satisfaction ratings, and repeat
business.
Innovation and Learning Perspective: Directs attention to the basis of a future
successthe organizations people and infrastructure. Key measures might
include intellectual assets, employee satisfaction, market innovation, and skills
development.
8. A good balanced scorecard contains both leading and lagging measures and indicators.
Lagging measures (outcomes) tell what has happened; leading measures (performance
drivers) predict what will happen. For example, customer survey results about recent
transactions might be a leading indicator for customer retention (a lagging indicator);
employee satisfaction might be a leading indicator for turnover, and so on. These measures
and indicators should also establish cause-and-effect relationships across perspectives.
Understanding such relationships is important in using data and information for strategic
and operational decisions.
9. The key categories of results measures for the Malcolm Baldrige Criteria are divided into six
sets:
1.
2.
3.
4.
5.
6.
Customer
Financial and market
Human resource
Supplier and partner performance
Organizational effectiveness.
Governance and social responsibility
Relevant measures and indicators of an organizations performance as viewed by

customers include direct measures of customer satisfaction and dissatisfaction, customer
retention, gains and losses of customers and customer accounts, customer complaints and
warranty claims. Other indicators of customer satisfaction include measures of perceived
value, loyalty, positive referral, and customer relationship building. Customer satisfaction
should be measured over three areas at a minimum: product quality, service quality, and
cycle times.
Financial measures are generally tracked by senior leadership to gauge overall company
performance and are often used to determine incentive compensation for senior
executives. Measures of financial performance might include revenue, return on equity,
return on investment, operating profit, pre-tax profit margin, asset utilization, earnings per
share, and other liquidity measures. Marketplace performance indicators could include
market share, measures of business growth, new product and geographic markets entered,
and percentage of new product sales as appropriate.
HR measures can relate to employee well-being, satisfaction, training and development,
work system performance, and effectiveness. Examples include safety, absenteeism,
turnover, and employee satisfaction. Other measures might include the extent of training,
training effectiveness, and measures of improvement in job effectiveness.
Key measures of supplier performance are quality, delivery and service, and price. Quality
might be measured by defect rates, complaints, functional performance, reliability, and
maintainability.
Organizational effectiveness includes measures and indicators of design, production,
delivery and support process performance. Examples of common measures are cycle
times, product and service quality, production flexibility, lead times, setup times, time to
market, product/process yields, and delivery performance.
Governance and social responsibility should be systematically measured and monitored to
maintain an ethical organization that is a good citizen in its communities. Measures and
indicators may be related to organizational accountability, stakeholder trust, and ethical
behavior. They include measures of regulatory/legal compliance, financial and ethics
review results, and measures of community service, such as volunteer hours and
presentations to educational or civic groups. Key financial measures that are tied strongly
to corporate governance include those found in income statements, balance sheets, as well
as distributions of stock and stock options, and management stock purchase and sales
activity.
10. Examples of common measures for organizational effectiveness are cycle times, product and
service quality, production flexibility, lead times, setup times, time to market,
product/process yields, and delivery performance.
Product and service quality indicators focus on the outcomes of manufacturing and service
processes. A common indicator of manufacturing quality is the number of
nonconformities per unit, or defects per unit. Because of the negative connotation of
defect and its potential implications in liability suits, many organizations use the term
nonconformity; however, quite a few still use defect. In this text, both terms are used
interchangeably to be consistent with current literature and practice. In services, a measure
of quality analogous to defects per unit is errors per opportunity. Each customer
transaction provides an opportunity for many different types of errors.
Nonconformities per unit or errors per opportunity are often reported as rates per
thousand or million. A common measure is dpmo--defects per million opportunities.
Thus, a defect rate of 2 per thousand is equivalent to 2,000 dpmo. At some Motorola
factories, quality is so good that they measure defects per billion!
Many organizational effectiveness measures focus on process (both core and support)
performance. Process data can reflect defect and error rates of intermediate operations,
and also efficiency measures such as cost, cycle time, productivity, schedule performance,
machine downtime, preventive maintenance activity, rates of problem resolution, energy
efficiency, and raw material usage.
Organizational effectiveness measures may also include measures of regulatory/legal
compliance and public responsibility.
11. Looking at data without a basis for comparison can easily lead to a false sense of achievement.
Organizations need comparative data, such as industry averages, best competitor
performance, and world-class benchmarks to gain an accurate assessment of performance.
For example, a performance measure may be improving, but at a rate slower than its
competition. Without that information, it would be difficult for an organization to
recognize the need for further improvements or an accelerated pace of change to close the
gap. Comparative and benchmark information also provides the motivation to seek
breakthrough improvements.
Comparative data should be driven by an organizations needs and priorities, and focus on
areas most critical to competitive strategy. There are many ways to obtain comparative
data. These include third party surveys and benchmarking approaches.
12. Many organizations make two fundamental mistakes: (1) not measuring key characteristics
critical to company performance or customer satisfaction, and (2) taking irrelevant or
inappropriate measurements. In the first case, the organization often fails to meet customer
expectations or performance goals. In the second, the measurement system directs
attention to areas that are not important to customers, thus wasting time and resources.
13. It is important to link performance measures to strategy. A balanced scorecard approach can
help to identify the right measures by aligning them with the organizations vision and
strategy. This provides a means of setting targets and allocating resources for short-term
planning, communicating strategies, aligning departmental and personal goals to strategies,
linking rewards to performance, and supplying feedback for organizational learning.
Effective performance measures that are aligned with business strategy are driven by
factors that determine what is important to the success of the business. These include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
the nature of a companys products and services

major markets
principal customers and their key quality and performance requirements
organizational culture; its purpose, mission, and vision
capabilities and core competencies, such as facilities and technologies
supplier and partnering relationships
regulatory environment
position in market and competitive environment
principal factors that determine competitive success, such as product
innovation, cost reduction, or productivity growth
current business directions, such as new product and market changes and
new business alliances
14. The term actionable as it relates to measures and indicators means that key business factors
that are strategic elements of a business and that drive all major elements of the quality
system must provide a basis for decisions at the level at which they are applied.
Key business factors include:

a.
b.
c.
d.
e.
f.
g.
h.
i.
The nature of a company's products and services.

Principle customers.
Major markets.
Key customer quality requirements.
Position in market and competitive environment.
Facilities and technologies.
Suppliers.
Regulatory environment.
Other factors, such as new company thrusts, industry changes, etc.
15. To determine useful process-level performance measures and indicators, one may use the
following steps:
Identify all customers of the system and determine their requirements and
expectations.
Define the work process that provides the product or service.
Define the value-adding activities and outputs that compose the process.
Develop performance measures or indicators.
Evaluate the performance measures to insure their usefulness.
16. Cost of quality programs are valuable to managers because it translates poor quality and its
results into the language that managers use and understand -- money. It serves purposes
such as 1) evaluating the importance of quality problems, 2) identifying areas for cost
reduction, 3) aiding in budgeting and cost control activities, and 4) serving as a scoreboard
to evaluate the degree of success in achieving quality objectives.
17. The four categories of quality costs are: prevention costs, appraisal costs, internal failure
costs, and external failure costs. The first are costs incurred to prevent non-conformance,
the second are costs incurred in measurement and data analysis, the third are costs of
unsatisfactory quality that is found prior to the product leaving the organization, and the
fourth is the cost of allowing defective products or services to be delivered to customers.
Examples are training costs in the prevention category, inspection costs in the appraisal
category, scrap and rework costs in the internal failure category, and replacement and
warranty costs in the external failure category.
18. Index numbers can be used to measure and interpret variations in quality costs. If costs can be
collected into each of the four categories (prevention, appraisal, internal and external
failure) then they can be related to a relevant base to form a relative index. For example,
we could determine the relative cost of quality as a fraction of labor costs, manufacturing
costs, or dollars of sales for each appropriate period (month, quarter, or year). By
comparing the indices over a period of time, it is possible to determine if quality costs are
increasing decreasing, or remaining stable despite changes in levels of the indices or the
absolute cost of quality that are reported.
19. Quality costs in services are generally less "uniform" than in manufacturing firms because
customers frequently place differing demands for service on the organization, even when
10
they are using the same basic product. Often project costs are collected for customized
services and can form the basis for quality cost reporting.
20. Activity-based costing organizes information about the work (or activity) that consumes
resources and delivers value in a business. People consuming resources in work ultimately
achieve the value that customers pay for. Examples of activities might be moving,
inspecting, receiving, shipping, and order processing. To get a handle on these activities,
cross-functional teams of workers, managers, and even secretaries map each step of every
business process using flowcharts. These flowcharts pinpoint the operations that add value
and reveal the ones that do not.
Activity-based costing allocates overhead costs to the products and services that use them.
Knowing the costs of activities supports efforts to improve processes. Once activities can
be traced to individual products or services, then additional strategic information is made
available. The effects of delays and inefficiencies become readily apparent. The company
can then focus on reducing these hidden costs
With the new information provided by activity-based costing, managers can make better
decisions about product designs, process improvements, pricing, and product mix. Other
benefits include the facilitation of continuous improvement activities to reduce overhead
costs, and the ease with which relevant costs can be determined.
21. Any measurement is subject to error, and, as a result, the credibility of data can be suspect. A
measure is valid if it measures what it says it measures. Reliability of a measurement
refers to how well the measuring instrument--manual instruments, automated equipment,
or surveys and questionnaires--consistently measures the true value of the characteristic.
Measurement reliability in manufacturing demands careful attention to metrology, the
science of measurement.
22. Traditionally, measuring reductions in quality-related costs through COQ was the principal
method of documenting the benefits of quality. However, this approach only focuses on
the internal view of quality. More attention has been paid recently to the external view
accounting for increases in revenues associated with improved customer satisfaction.
Balancing quality costs against expected revenue gains has become known as ROQ
return on quality. ROQ is based on four main principles.
1.
2.
3.
4.
Quality is an investment
Quality efforts must be made financially accountable
It is possible to spend too much on quality
Not all quality expenditures are equally valid
23. A company's efforts are wasted if collected data are not available to the right employees when
needed. In most companies, data are accessible to top managers and others on a need-toknow basis. In TQ-focused companies, quality-related data are accessible to everyone.
Many companies accomplish this through on-line computer networks supplemented by
local processing capabilities.
11
24. Data related to quality, customers, and operational performance support both operational-level
decision making and strategic planning. Data can be analyzed using many different types
of descriptive statistical techniques and charts to identify trends over time, compare
performance among business units, and show comparisons with key benchmarks. The
capabilities of todays spreadsheet and database software, such as Microsoft Excel and
Access, make this simple to do by nearly any employee. However, volumes of data
acquired at the process level, while useful for daily operations, generally are not
appropriate for senior executive review. Organizations need a process for transforming
data, usually in some integrated fashion, into information that top management can
understand and work with. For instance, some companies develop an aggregate customer
satisfaction index (CSI) by weighting satisfaction results, market share, and gains or losses
of customers.
25. Interlinking is the term that describes the quantitative modeling of cause and effect
relationships between external and internal performance criteria--such as the relationship
of customer satisfaction measures to internal process measures. Examples are provided in
the text.
26. Category 4 of the 2006 Malcolm Baldrige National Quality Award Criteria for Performance
Excellence (see the Bonus Materials on the Student CD-ROM for Chapter 3) is titled
Information and Analysis. This category examines an organizations performance
measurement system and how the organization analyzes performance data and
information.
Item 4.1, Measurement, Analysis and Review of Organizational Performance, focuses on
the major components of an effective performance measurement system. It addresses an
organizations selection, alignment, and integration of data and information for tracking
performance in support of organizational objectives and action plans.
The criteria ask organizational leaders to describe how the organization measures,
analyzes, aligns, reviews, and improves its performance data and information at all levels
and in all parts of the organization.
The criteria also ask how an organization selects and uses comparative data and
information to support operational and strategic decision-making and innovation. In
addition, the criteria ask what analyses are used to support senior leaders assessment of
overall organizational performance and strategic planning, how results are translated into
priorities for continuous and breakthrough improvement and into opportunities for
innovation, how results are communicated throughout the organization and to suppliers
and stakeholders, and how the performance measurement system is kept current with
changing business needs and directions.
Item 4.2, Information and Knowledge Management, looks at how an organization ensures
the availability of high-quality, timely data and information for all key users employees,
suppliers and partners, and customers. It also asks how the organization builds and
manages its knowledge assets. This includes ensuring that data, information, and
organizational knowledge have all the characteristics that users expect: integrity, reliability,
accuracy, timeliness, and appropriate levels of security and confidentiality. In addition, the
criteria ask how an organization ensures that hardware systems and software are reliable,
12
secure, and user friendly so that access is facilitated and encouraged, while also ensuring
the availability of hardware and software systems, in the event of an emergency. It also
addresses how an organization builds and manages its knowledge assets to improve
organizational efficiency, effectiveness, and innovation by capturing, protecting, and
disseminating organizational knowledge.
In a similar way, ISO 9000:2000 provides a basic framework for managing data and
information. The documentation and data control requirements of ISO 9000 require
companies to define a process for ensuring that any critical information that is required for
the performance of a business process is accurate, up-to-date, and effective for its intended
purpose. ISO 9000 places an emphasis on processes that, in many cases are cross
functional in nature, it forces companies to break down some of the organizational and
functional silos that inhibit effective sharing of information. The Measurement, Analysis
and Improvement requirements of ISO 9000:2000 deal with the measurement of product
and process characteristics, performance of the quality system, and search for continuous
improvement, requiring that management make decisions based on analysis and trends of
product and process performance indicators, internal auditing, and customer feedback.
Specific requirements include
Establishing, planning, and implementing measurement, monitoring, and improvement

activities
Monitoring information about customer satisfactions as a performance metric
Establishing measurement and monitoring methods to assure that product and process
requirements are attained
Acquiring and analyzing data to determine improvement effectiveness
Promoting continuous improvement using auditing reports, data analysis, and
management reviews.
Six Sigma emphasizes fact-based decisions and provides organizations with tools to
generate measurable results from Six Sigma projects. Six Sigma methodology requires
measuring and reporting performance goals, and using performance indicators to control
and sustain improvements. Project selection is based on understanding the financial as well
as the non-financial benefits to the organization, such as cost savings, increased sales,
reduced cycle times, or improved customer satisfaction. Thus, measurements are vital in
selling Six Sigma projects to top management. Six Sigma can also have a significant
impact on the cost of quality because of its focus on financial return. Many Six Sigma
projects focus on reducing the costs of poor quality that result from low sigma levels of
performance and improved designs that will increase customer satisfaction and hence,
revenue. The different categories of the cost of quality described earlier in this chapter
provide many opportunities for Six Sigma projects.
ANSWERS TO DISCUSSION QUESTIONS
1. The answers to this question could provoke a lively debate in a class. For many items on the
list in Figure 8.3, there are joint responsibilities. If the philosophy is held that quality is
everybodys job, then a process owner must be found to follow up on both process
improvements and individual performer empowerment and responsibility. Therefore, the
13
following table is meant to suggest the appropriate level of focus. Other measurements can
be developed and discussed by individual students. If they work either part-time or full
time in organizations, they could be encouraged to discuss what measures are used in their
organizations.
Organization
Customer-Related Measures
Perceived value
Overall satisfaction
Complaints
Gains and losses of customers
Customer awards/recognitions
X
X
Level of Quality
Process
Performer
X
X
X
X
X
X
Product and Service Measures

Internal quality measurements
Field performance of products
Defect levels
Response time
Customer ratings of prod/service performance
X
X
X
X
X
Financial and Market Measures

Return on equity
Return on investment
Operating profit
Earnings per share
X
X
X
X
Human Resource Measures

Absenteeism
Turnover
Employee satisfaction
Training effectiveness
Grievances
Suggestion rates
Safety
Organizational Effectiveness
Production flexibility
Lead times
Six Sigma initiative results
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

Innovation rates & time to market
Product & process yields
Productivity
Cycle time
Supply chain effectiveness
ISO 9000 audit results
Indicators of strategic goal achievement
Environmental improvements
Governance and Social Responsibility Measures
Environmental and regulatory compliance
Community service
Financial and ethics audit results
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
14
X
X
X
X
2. The measurements listed can be classified under the following perspectives of the balanced
scorecard:
j.
k.
l.
m.
n.
o.
p.
q.
On-time delivery -- Customer perspective

Next product generation --Innovation and learning perspective
Manufacturing yield -- Internal perspective
Engineering efficiency -- Internal perspective
Quarterly sales -- Financial perspective
Percent of product = 70 -- Financial perspective
Cash flow -- Financial perspective
Customer partnerships -- Customer perspective and/or innovation and learning
perspective
r. Increase market share -- Financial perspective and/or innovation and learning
perspective
s. Unit costs of products -- Internal perspective
3. SWOT (strengths, weaknesses, opportunities, and threats) analysis might be used to identify
measures in a balanced scorecard by concentrating on the strategic issues that the
company faces and how can those be measured and improved. For example, if surveys
show that customers perceive that the companys products are not well-designed and are
of inferior quality compared to competitors, the firm has a strategic issue to deal with.
Questions that might be asked are: how are our designs inferior? What are the critical
quality dimensions that the customer demands? And how might we make improvements
and hold the gains? This would lead to balanced scorecard measures for design quality and
performance quality for each product or product line.
4. Without going into all of the problems of what is wrong with course and instructor
evaluations, it can be said that at least four major flaws are common in most systems, as
well-intended as they may be: a) they typically lack customer (student) input and customer
focus; b) they are too general and fail to take into account the mission or objectives of the
course, department, college or university; c) only in rare cases have their validity and
reliability been statistically shown; and d) evaluations do not typically focus on
improvement.
15
Most university departments keep many statistics, but have few customer-oriented
measurement systems in place. It is not uncommon for universities to know exactly how
many students they graduate each year, but to have no information on how many have
obtained jobs. Admissions departments can tell how many students they have admitted, but
are unable to tell how long it takes for the admission decision to be made (sometimes
months after the completed application and paperwork has been received).
5. A number of measures might be discussed in answer to this question. For example, "Time to
market" is a statistic that many businesses have concerns about. Statistics indicate that it
takes an average of about five years for the typical student to obtain an undergraduate
degree in the U.S. Can that cycle time be reduced by better sequencing, reducing overlap
between courses, cutting out unnecessary requirements, and better advising to ensure that
students take full loads and don't switch majors every few semesters? These are questions
that better use of measurement might throw light on, so that related organizational,
process, and individual problems could be solved.
6. Answers will vary, depending on the experience and interests of the students in fraternities or
student organizations. However, some obvious categories of financial measures, recruiting
and retention measures, service to members and community, and academic and
competitive excellence come to mind. Financial measures might include standards for nonprofit organizations, such as good accounting practices, balanced books, contingency
reserve levels, etc. Recruiting and retention would include numbers of recruits pledged as
a percentage of those being recruited and numbers (percentages) retained and inducted of
those pledged. Service would include numbers, types, and success rates of service
activities. Academic and competitive excellence could be measured by overall grade-point
averages segmented by class level and major, with comparisons with similar fraternities
and sororities.
7. In the cheese-making process, customer requirements of full weight, wholesomeness (lack of
contamination, excessive chemical additives, or inferior content, such as excessive water),
smell and taste might all be customer related measures that could be interlinked with
internal measures.
8. This question refers to the IBM Rochester questions that are asked about process measures.
To answer these questions, the following sources would have to be consulted:
Mission support: refer to strategic plan and trace through action plans to the
measure.
Management of change: determine if similar measures have resulted in change in
the past.
Customer importance: consult with customers to determine if measure is/will be
meaningful.
Effectively measure performance: determine what outcomes/results are measured.
Effectively forecast results: determine if measure has a predictive capability.
Easy to understand: ask users to explain what the measure means to them.
Cost effective: estimate current/future costs before making the measure permanent.
16
Valid, has integrity, timely: determine how the measure is constituted, has it been
tested, how long does it take to gather and process required data?
Measurement owner identified: after he/she is identified, ask the person to
participate in validating/obtaining answers to the above questions.
9. Answers will vary here depending on the students observations and experience and on which
quality cost categories apply to the individual college or university in question. For
example, prevention costs might include costs of training guidance councilors about
various majors so that students are not mis-advised on course requirements and
sequencing. Appraisal costs include costs of testing students in various courses, for public
speaking proficiency, or senior comprehensive testing. Internal failure costs occur when a
student fails a course and must repeat it. External failure costs are incurred when a student
takes a co-op job after taking a course in quality management, but doesnt know how to
construct a control chart, so ends up making costly errors in measuring quality at the
employers plant. Measurement of some of these costs could be made based on direct
costs (such as the cost of a counselor training class). The most difficult measurement
would be for the external failure cost. Maybe the university would have to issue a recall
for students who took the quality course, but didnt learn the method for making a control
chart, due to faulty software in a computer program!
10. Juran, Crosby, and Deming are all correct, based on their own perspectives. Juran and Crosby
focus on the tangible costs of internal failure, appraisal, and prevention costs, many of
which can be objectively measured. Although some external failure costs such as the cost
of a product recall, can be measured, the cost of loss of customers, and even some internal
failure costs, such as losses from poor employee morale and fear, can never be measured.
11. This is one of those "gray areas" that depend on the situation. Managers typically want to
know the justification for an expensive purchase of equipment, whether it is quantitative
or qualitative. Thus, a quality department will probably have to "manage by facts" in their
requests. They must be prepared to answer such questions as: What "quantitative"
information do you have that tells you that competitors have this testing capability? What
are the costs versus benefits of the proposed purchase in quantitative and in qualitative
terms?
12. Statistics or quantitative methods can have numerous applications in analyzing performance
data. They include the 7 Tools, mentioned earlier, which can be used for graphical
analysis of day to day performance, up to very powerful techniques, such as material
resource planning (MRP and variations) and linear programming. In particular, Pareto
charts, histograms, linear regression, and control charts are useful. Resource allocation can
be done using linear programming techniques. Enterprise resource planning (ERP)
provides both modeling and feedback capabilities to map process measurements and track
them on a continuing basis.
13. As suggested in the answer to review question 26, above, Six Sigma can also have a
significant impact on the cost of quality because of its focus on financial return. An
organization that adopts the Six Sigma philosophy may wish to routinely gather
information that will be useful to financial evaluation of process and projects, for example.
Since Six Sigma projects often focus on reducing the costs of poor quality that result from
17
low sigma levels of performance and improved designs that will increase customer
satisfaction and revenue this can be worth the time and effort involved in capturing such
information.
14.
For a hospitals strategic priorities of:

Patient accessibility
Patient safety
Clinical excellence
Few hassles for patients and families
Workforce well-being
Family-centered care
Operational efficiency
For all of these priorities, the measures that might be used are dependent on how each
priority is defined. For example, patient accessibility may refer to doctors, staff, or medical
testing procedures or facilities within the hospital. Relating to facilities, patient access to
digital imaging may be measured by average waiting time after the tests have been
ordered. Patient safety concerning drugs could be measured by defects per million
opportunities in providing the correct drugs and dosages. Clinical excellence could be
measured by rate of readmissions for the same illness or injury. Fewer hassles for patients
and families might be measured by reducing patient/family complaints. Workforce wellbeing could be measured by attitudes on employee satisfaction surveys, as well as by
absenteeism and turnover rates. Family-centered care could be measured by satisfaction
surveys. Operational efficiency can be measured in countless ways, including cleanliness of
rooms, improvements in inventory levels and control, etc.
SOLUTIONS TO PROBLEMS
1.
The rate of baggage mishandling reported by the Department of Transportation in the

United States was 3.75 per 1,000 passengers. If the average number of checked bags per
passenger is now 1.3, how many defects per million opportunities (DPMO) does this
represent? How does this compare with the rate given in the chapter better or worse?
Answer
1.
dpmo = (Number of defects discovered) /opportunities for error x 1,000,000

Thus, a defect rate of 3.75 per 1,000 is equivalent to 3,750 dpmo if each passenger only
had one bag. However, customers may have different numbers of bags; thus the number of
opportunities for error must be based on the average number of bags per customer. If the
average number of bags per customer is 1.3, and the airline recorded 3.75 lost bags for
1000 passengers in a month, then
dpmo = 3.75/[1,000)(1.3)] x 1,000,000 = 2884.6
18
This number is considerably worse than the 234.375 hypothesized in the body of the
chapter.
2.
Analyze the cost data in the Excel workbook C8Data.xls for the Costcutin Co. What
percent of sales are represented by each category of cost? What are the implications of
these data for management?
Answer
2. Original Data:
A
Total sales
Product
B
$1,537,280
$ 933,600
$1,397,120
21%
18%
12%
19%
31%
39%
11%
10%
28%
36%
26%
Total quality costs

as % of sales
External failure
Internal failure
Appraisal
Prevention
30%
55%
11%
4%
(Bold figures represent percentages of quality costs by product.)

The values for percentages of Costcutins sales attributable to quality costs are the index
base for the three products A, B, and C and their cost categories. However, because no
time-phased data per product were provided, no trend can be established for various
product indexes.
Comparison of the data shows that both internal and external failure costs appear to be
very high for product A, internal failure cost and appraisal costs appear to be high for
product B in comparison to prevention costs, and internal failure, appraisal, and
prevention costs appear to be converging for product C. However, product C does have a
much lower total cost of quality as a percent of total sales. Managers of all product lines
should put more emphasis on prevention and attempt to reduce costs in other categories.
Also, they should determine what methods are being used in product C to keep the cost of
quality low. Further analysis could be done by analyzing the differences between the
processes and the characteristics of the products. Because of high internal and external
failure costs product A should have first priority for improvement. (See spreadsheet
Prob8-02.xls for details).
19
Costcutin Company
External failure
Internal failure
Appraisal
Prevention
3.
$ 000's
$Qual. Cost - A
$
96.85
$
177.56
$
35.51
$
12.91
$Qual. Cost - B
$
31.93
$
52.09
$
65.54
$
18.49
$Qual. Cost - C
$
16.77
$
46.94
$
60.36
$
43.59
Imagimatrix, which designs prototype components for the computer gaming industry has
begun a quality program. About a year ago, for the first time, they began to measure
quality costs. They were so shocked by their initial figure of 60 percent internal and
external failure costs that they immediately launched a Six Sigma quality improvement
effort. The percentage of total quality costs recently, after six months of improvements for
the firm, are distributed as follows:
Prevention
20%
Appraisal
33%
Internal failure
32%
External failure
15%
What conclusions can you reach from these data?
20
Answer
3.
The general conclusion that can be reached for Imagimatrix from inspecting the data is
that costs for internal and external failure are larger than they should be (totaling 47% of
quality costs). Improvements that have been made to date have probably involved
increasing prevention and appraisal costs that now stand at more than 50% of the total
quality costs. Since appraisal costs are a large percentage of costs, and internal failures are
a larger percentage than external failures, it is likely that quality is being inspected in,
and many defective items are being taken out and reworked after being caught by
inspection. More money and time needs to be invested in prevention, which will reduce
defects and costs in other areas in a fairly short time.
4.
Analyze the quality cost information by computing a sales dollar base index for Farwest
Sales, Inc., in the Excel workbook C8Data.xls. Prepare a memo to management
explaining your findings and conclusions.
Answer
4. Original Data:
Quarterly Costs (in thousands of dollars)
Total sales
External failure
Internal failure
Appraisal
Prevention
Total quality
costs
Quality costs % of sales
1
5120.0
290.8
478.2
199.2
29.4
2
5206.0
218.2
382.4
227.7
32.2
3
5544.0
152.8
284.4
284.4
55.2
4
5106.0
120.6
166.4
276.2
95.2
997.6
860.5
776.8
658.4
19.5
16.5
14.0
12.9
The composite index for quality costs for Farwest Sales shows a steady decrease in total
quality cost down from 19.5% to 12.9% (in other words, $0.195 to $0.129/total sales
dollars. Internal failure rates were reduced substantially, from $478.2 thousand in the first
quarter to $166.40 thousand in the fourth quarter. External failure rates also showed
substantial improvement since the first quarter, dropping from $290.8 thousand to
$120.60 thousand in the fourth quarter. Increases in prevention and appraisal expenditures
have apparently led to improvements in failure costs. The overall quality index, mentioned
above, fell by one-third (19.5 12.89 = 6.59 percentage points). Management should
maintain or increase the level of prevention and appraisal in an effort to reduce quality
costs, especially failure costs. (See spreadsheet Prob8-04.xls for more details).
INDEX OF QUALITY COSTS AS % OF
SALES
1 Qtr.
2 Qtr.
3 Qtr.
4 Qtr.
5.
External failure
Internal failure
Appraisal
Prevention
Total Quality
Cost
5.68
9.34
3.89
0.57
4.19
7.35
4.37
0.62
2.76
5.13
5.13
1.00
2.36
3.26
5.41
1.86
19.48
16.53
14.01
12.89
% Total
Sales/Base
100.00
101.68
108.28
99.73
21
Analyze the cost data in the Excel workbook C8Data.xls for Product B. What are the
implications of these data for management? Chart these data. Calculate the quality indices
as a relationship to the cost of sales. How do these data differ from those given in
Problem 2?
Answer
5. Original Data:
1 Qtr
Total sales
$1,000,000
Product B
2 Qtr
3 Qtr
$900,000
$1,200,000
Quality Categories as a % of Quality Cost

External failure
37%
18%
11%
Internal failure
19%
28%
24%

Appraisal
42%
46%
40%
Prevention
2%
8%
25%
$162,000
$144,000
Total quality costs $210,000
22

As shown in the chart below, details are presented on Product B sales and cost of quality
from the problem, along with information on the percentage of total quality cost
attributable to each cost category (external, internal, appraisal and prevention). This
problem contains time-phased data, unlike problem 2. Thus it is possible to calculate an
index base and quarterly indices for the various cost categories. The data show that the
external and internal failure indices, as well as the appraisal index are declining, while the
prevention index is increasing. The overall quality cost index as a percent of sales is also
declining. This is an ideal situation in which manager of the B product line are continuing
to put more emphasis on prevention and attempting to reduce costs in other categories.
(See spreadsheet Prob8-05.xls for more details).
External failure
Internal failure
Appraisal
Prevention
Total Index
Qual. Indices as a % of Sales

1 Qtr.
2 Qtr.
0.0777
0.0324
0.0399
0.0504
0.0882
0.0828
0.0042
0.0144
0.210
0.180
$Qual. Cost - 1
Q.
77,700
39,900
88,200
4,200
$Qual. Cost - 2
Q.
29,160
45,360
74,520
12,960
3 Qtr.
0.0132
0.0288
0.0480
0.0300
0.120
$Qual. Cost - 3 Q.
15,840
34,560
57,600
36,000
6.
23
Analyze the cost data from ABEC Corp in the Excel workbook C8Data.xls. What are the
implications of these data for management? How do these data differ from those in
problem 5?
Answer
6. Original Data:
Product
B
A
Total sales
Quality cost as a % of sales
25
$2,500, 000
$1,800,000
30
$2,600,000
20
External failure
35%
23%
13%
Internal failure
45%
22%
30%
Appraisal
16%
48%
40%
Prevention
4%
7%
17%

The following table and chart for ABEC, below, show that total quality costs as a percent
of sales ranges from very high to moderate between products. This problem does not
contain time-phased data, unlike problem 4. It shows comparisons between products,
similar to problem 1. Internal and external failure costs are large for product A, because
little appraisal or prevention is done. For product B, defects are being screened out,
24
causing much higher appraisal costs, in total and as a percent of quality costs. However,
this method does reduce overall quality costs as a percent of sales (20%) somewhat.
Product C attained a good balance among quality cost categories, although a larger
percentage of prevention costs might prove to be advantageous. (See Excel spreadsheet
Prob8-05 for more details).
SALES AND QUALITY COSTS - $Millions
Total Sales
x% Quality Costs
External failure
Internal failure
Appraisal
Prevention
Total Qual. Cost
$2.500 $1.800
$2.600
30%
20%
25%
Product Product Product C
A
B
$0.263
$0.083
$0.085
$0.338
$0.079
$0.195
$0.120
$0.173
$0.260
$0.030
$0.025
$0.111
$0.750
$0.360
$0.650
Product A
Product B
Product C
35%
45%
16%
4%
23%
22%
48%
7%
13%
30%
40%
17%
7.
25
D.B. Smith Company recycles computers. It buys them and salvages parts and materials
from the obsolete systems. It considers that it has done a quality job if it can salvage 60
percent of the book value of equipment that it buys. The book value of a particular lot
that it bought was $1,700,000. What conclusions can be drawn from the cost data
incurred in processing the lot, as found in the Excel workbook C8Data.xls? Customer
returns are simply scrapped and replaced. Be sure and specify your assumptions about
categories of quality costs.
Answer
7. Original Data:
Cost Category
Quality equipment design
Scrap
Inspection and test
Customer returns
Supplier quality surveys
Repair
Amount
$ 23,000
325,000
300,000
95,000
7,000
75,000
Note to instructor
If you think that students might have difficulty determining the cost categories, the
following might be asked in order to guide their thinking: How would you categorize the
costs identified in the data? What is the total cost of quality? Did D.B. Smith Co. meet
their goal?
The data can be rearranged, as follows:

Type of Cost
Scrap
Inspection and test
Customer returns
Repair
Quality equipment design
Supplier quality surveys
Internal failure
External failure
Appraisal
Prevention
26
Cost Category $Cost

% of COQ
Int. failure
325,000
39.4
Appraisal
300,000
36.4
Ext. failure
95,000
11.5
Int. failure
75,000
9.1
Prevention
23,000
2.8
Prevention
7,000
0.8
$ Costs
400000
95000
300000
30000
$825,000
% of
COQ
0.485
0.115
0.364
0.036
Although scrap is part of the process, Smith Company needs to minimize the amount of
scrap produced, just as if it were making a product. The total cost of quality is $825,000.
Although the categories are not completely clear, the assumed categories are listed in the
revised table, above. Internal failure (scrap and repair) total 48.5% of quality costs and
external failure in the form of customer returns adds another 11.5%. Only 3.6 % of total
costs are being applied to prevention. Apparently, based on high internal failure and
appraisal costs, this organization is attempting to screen out bad product and scrap or
repair it. Also, on this batch, they didnt accomplish their goal of 60% of book value goal,
since (1,700,000 825,000)/ 1,700,000 = 51.47 %. (See spreadsheet Prob8-07.xls for
more details).
8.
Prepare a chart showing the different quality cost categories and percentages for the Great
Press Printing Company. See the data in the Excel workbook C8Data.xls.
Answer
8. Original Data:
Cost Element
Amount
Customer complaint remakes

Printing plate revisions
Quality improvement projects
Gauging
Other waste
Correction of typographical errors
Proofreading
Quality planning
Press downtime
Bindery waste
Checking and inspection
$ 27,000
28,000
13,000
100,000
38,000
210,000
450,000
56,000
285,000
51,000
42,000
The spreadsheet data and pie chart (see spreadsheet Prob8-07.xls for details) for the Great
Press Printing Company show that the company may be spending too much on appraisal
27
and internal failure cost and too little on prevention. Improvement efforts should
concentrate on the categories of proofreading, press downtime and correction of typos.
Cost Element
Categories
Amount
Customer complaint remakes

Printing plate revisions
Gauging
Other waste
Correction of typographical errors
Proofreading
Quality planning
Press downtime
Bindery waste
Checking and inspection
Ext. fail.
Int. fail.
Prev.
Appr.
Int. fail.
Int. fail.
Appr.
Prev.
Int. fail.
Int. fail.
Appr.
$ 27,000
28,000
13,000
100,000
38,000
210,000
450,000
56,000
285,000
51,000
42,000
GREAT PRESS
PRINTING COMPANY
$000's QUALITY COSTS
External failure
Internal failure
Appraisal
Prevention
Total Quality Cost
27,000
612,000
592,000
69,000
1,300,000
External failure
Internal failure
Appraisal
Prevention
Total Quality Cost
PERCENTAGE OF COSTS
2.08
47.08
45.54
5.31
100.00
9.
28
Compute a labor cost base index for Miami Valley Aircraft Service Co. to analyze the
quality cost information and prepare a memo to management explaining your conclusions.
See the data in the Excel workbook C8Data.xls.
Answer
9. Original data:
1
External failure
Internal failure
Appraisal
Prevention
Total Quality Cost
Total Labor Cost
1000
3,500
900
400
5,800
19,500
Quarterly Costs (in thousands of dollars)

2
3
4
900
3,250
1,200
500
5,850
18,000
950
2,900
1,550
650
6,050
23,000
725
2,200
800
800
4,525
19,000
Miami Valley Aircraft Service Companys data show a decreasing total quality cost index
as a percent of labor costs (except for a slight rise in the 2nd quarter), with significant
29
decreases in internal failure costs, possibly due to a concerted quality effort. The decrease
in both internal and external quality costs, as a percentage of total quality and labor costs,
while the prevention costs percentage is rising, is good. The recommendations would be to
increase prevention costs even more rapidly, while holding the line on appraisal costs (see
spreadsheet Prob8-09.xls for details) and to concentrate on projects especially aimed at
external failure, which has not decreased as rapidly as internal failure costs. However, the
caution is that doing so may increase total quality costs in the short run, as may have
happened in the 2nd quarter.
PERCENTAGES QTRLY. QUALITY/LABOR
COSTS
1 Qtr.
2 Qtr.
3 Qtr.
4 Qtr.
External failure
Internal failure
Appraisal
Prevention
Total Quality/Labor Cost
10.
5.13
17.95
4.62
2.05
29.74
5.00
18.06
6.67
2.78
32.50
4.13
12.61
6.74
2.83
26.30
3.82
11.58
4.21
4.21
23.82
The cost of quality data collected at the installment loan department of the McCutcheon
Bank can be found in the Excel workbook C8Data.xls. Classify these data into the
appropriate cost of quality categories and analyze the results. What suggestions would
you make to management?
Answer
10. Original Data:
Loan Processing

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Run credit checks:

Review documents:
Make document corrections; gather additional information:
Prepare tickler file; review and follow up on titles,
insurance, second meetings:
Review all output:
Correct rejects and incorrect output:
Reconcile incomplete collateral report:
Handle dealer problem calls; address associate problems;
research and communicate information:
Compensate for system downtime:
Conduct training:
30
$2,675.01
$3,000.63
$1,032.65
$ 155.75
$2,243.62
$425.00
$78.34
$2,500.00
$519.01
$1,500.00
Loan Payment
1.
Receive, inspect, and process payments:
$800.00
2.
Respond to inquiries when no coupon is presented with payments: $829.65
Loan Payoff
1.
Receive, inspect, and process payoff and release documents: $224.99
2.
Research payoff problems:
$ 15.35
For the McCutcheon Bank, a detailed report might be prepared by an internal or external
quality consultant to the bank as follows:
Cost Elements
Costs
Quality Cost Categories

Subtotal
Proportion
APPRAISAL
1. Run credit checks
2675.01
Loan Payment & Loan Payoffs

1. Receive, inspect,
& process documents (2 items)
1024.99
$ 3700.00
Cost Elements
Inspection
2. Review documents
4. Prepare tickler file, etc.
Costs

Subtotal
3000.63
155.75
Proportion

5. Review all output
31
2243.62
$ 5400.00
Total Appraisal Cost
$ 9100.00
0.569
$ 1500.00
0.094
PREVENTION
10. Conduct training
1500.00
Total Prevention Cost

INTERNAL FAILURE COSTS
Scrap and Rework
3. Make document corrections
1032.65
6. Correct rejects
425.00
7. Reconcile incomplete collateral
reports
78.34
9. Compensate for system downtime 519.01
$ 2055.00
Loan Payment or Payoff
2. Respond to inquiries - no coupon
2. Research payoff problems
829.65
15.35
$ 845.00
Total Internal Failure Cost
$ 2900.00
0.181
$ 2500.00
0.156
EXTERNAL FAILURE COSTS

8. Handle dealer problem calls, etc.
Total costs
2500.00
$16000.00
Analysis:
As one would hope, the external failure costs for the bank are not extremely high at
$2500.00. However, they do represent 15.6% of the total quality costs. The process of
working with dealers should be investigated to determine whether it can be simplified, better
communications established, and problems avoided in the future.
The highest cost category is in appraisal costs at $ 9,100.00 and 56.9% of total quality costs.
If the categories of "document review" and "review all output" can be reduced without
compromising the quality of the lending procedure, these costs could be greatly improved.
32
The largest internal failure costs are being incurred in the document correction and "Respond
to inquiries - no coupon areas." A fairly substantial cost of quality for the "Compensate for
system downtime" category. These areas should be investigated to determine whether
procedures could be improved in order to reduce costs.
In the prevention area, it appears that not much attention is being given to the need for this
activity, since only 9.4% of quality costs are for prevention. If training could be given in
quality improvement techniques, as well as time spent on quality planning and improvement,
then the other cost categories might be reduced with only a modest increase in prevention
costs.
11.
Repack Solutions, Inc. has a distribution center in Cincinnati where it receives and breaks
down bulk orders from suppliers factories, and ships out products to retail customers.
Prepare a chart showing the different quality cost categories and percentages for the
companys quality costs that were incurred over the past year. See the Excel workbook
C8Data.xls for the data.
Answer
11. Original Data:
Cost Element
Amount
Checking outbound boxes for errors

Quality planning
Downtime due to conveyor/computer problems
Packaging waste
Incoming product inspection
Customer complaint rework
Correcting erroneous orders before shipping
Quality training of associates
Other waste
Correction of typographical errors--pick tickets
Total Quality Cost
$710,000
12,000
400,000
80,000
60,000
40,000
43,000
30,000
20,000
42,000
13,000
$1,450,000
Spreadsheet data and the Pareto chart (see Prob8-11.xls for details) for Repack Solutions,
Inc. show that the company is spending too much on appraisal and internal failure cost and
too little on prevention. Checking boxes, machine downtime, and packaging waste need
immediate improvement in order to have the greatest impact on quality costs, since they
constitute almost 82% of quality costs. However, it should be done with caution, since
checking boxes represents appraisal costs designed to screen out poor quality and
prevent it from reaching the customer.
REPACK SOLUTIONS, INC.
QUALITY COST &
PERCENTAGES

Percent Cumulative %
Checking boxes
Pkg. waste
Income. insp.
Other waste
Error corrn.
Typo corrn.
Cust. complaints
Qual. train. assoc.
Improv. proj.
Quality planning
Mach. downtime
Total
48.97
27.59
5.52
4.14
2.97
2.90
2.76
2.07
1.38
0.90
0.83
48.97
76.55
82.07
86.21
89.17
92.07
94.83
96.90
98.28
99.17
100.00
Cost
710,000
400,000
80,000
60,000
43,000
42,000
40,000
30,000
20,000
13,000
12,000
1,450,000
33
Quality Cost
Category
Appraisal
Int. Fail.
Appraisal
Int. Fail.
Int. Fail.
Int. Fail.
Ext. Fail.
Prevent.
Prevent.
Prevent.
Int. Fail.
Note that costs could also be classified by aggregating them into the
four categories of internal and external failure, prevention and
appraisal costs, instead of the above categories.
12.
Use Pareto analysis to investigate the quality losses at Nosoco Paper Mill. What
conclusions do you reach? See the Excel workbook C8Data.xls for the data.
Answer
34
12. Original Data

Category
Annual Loss
Downtime
Testing costs
Rejected paper
Odd lot
Excess inspection
Customer complaints
Wasted materials
Quality improvement training
Total Quality Cost
$ 28,000
12,000
373,000
66,000
21,000
103,000
39,000
8,000
$650,000
See the following table and figure for Pareto analysis of Nosocos quality cost categories.
See spreadsheet Prob8-12.xls for details.
Nosoco Paper Company
Quality Costs and Percentages
Rejected paper
Customer complaints
Odd lot
Wasted materials
Downtime
Excess inspection
Testing costs
Quality Imprv. Trng.
Total Costs
Percent
57.38%
15.85%
10.15%
6.00%
4.31%
3.23%
1.85%
1.23%
Cumulative %
57.38%
73.23%
83.38%
89.38%
93.69%
96.92%
98.77%
100.00%
Cost
373,000
103,000
66,000
39,000
28,000
21,000
12,000
8,000
650,000
Conclusion: Nosoco Paper Co. is experiencing problems in two major

categories: rejected paper and customer complaints. These
categories, which could be related to each other, account for 73.23
percent of their quality costs. Rejected paper (in paper manufacturing,
paper is sometimes rejected due to various internal manufacturing
problems) suggests a possible technical problem in the chemistry of
the materials or paper machine adjustments. If customers perceive
that the paper does not meet their requirements then the causes need
to be determined, as well. Thus, it may be recommended that two
improvement teams be formed, but that they coordinate closely to
work on these areas. After these problems have been eliminated, then
work could begin on addressing the next two defect areas.
Note that costs could also be classified into the four categories of
internal and external failure, prevention and appraisal costs, instead
35
of the above categories. However, this type of aggregation would

cover up the major categories, since one falls into the internal failure
and the other into external failure costs.
13.
Given the cost elements in the Excel workbook C8Data.xls, determine the total
percentage in each of the four major quality cost categories for the HiTeck Tool Company.
Answer
13. Original Data:
Cost Element
Incoming test and inspection
Scrap
Quality training
Inspection
Test
Adjustment cost of complaints
Quality audits
Maintenance of tools and dies
Quality control administration
Laboratory testing
Design of quality assurance equipment
Material testing and inspection
Rework
Quality problem-solving by product engineers
Inspection equipment calibration
Writing procedures and instructions
Amount
$ 7,500
35,000
0
24,000
5,000
21,150
2,500
9,200
5,000
1,200
1,200
1,250
70,000
10,000
2,500
2,500

Laboratory services
Rework due to vendor faults
Correcting imperfections
Setup for test and inspection
Formal complaints to vendors
36
2,500
17,500
6,250
10,750
10,000
For HiTeck Tool Company, the largest costs are internal failure (56.6%) and appraisal
(26.9%). More must be done in quality training, a component of prevention (currently
7.8%), if failure, appraisal, and overall quality costs are to be controlled. External failure
costs are 8.6% of quality costs, so screening methods are working fairly well. Note that
these proportions are fractions of the total quality costs of $ 245,000.
Cost Elements
APPRAISAL
Costs
Incoming test & inspection

Inspection
Test
Laboratory testing
Design of Q.A. equipment*
Material testing & insp.
Insp. equipt. calibration
Formal complaints to vendors*
Setup for test & inspection
Laboratory services
7500
24000
5000
1200
1200
1250
2500
10000
10750
2500
Subtotal
$ 65900
Cost Elements
Costs
Subtotal
Proportion
0.269
Proportion
PREVENTION
Quality training
Quality audits
Maintenance of tools and dies
Quality control admin.
5000
Writing proced. & instr.
0
2500
9200
2500
$ 19200
0.078
INTERNAL FAILURE COSTS

Scrap
Rework
Correcting imperfections
Rework due to vendor faults
Problem solving - prod. engrs.**
35000
70000
6250
17500
10000
$138750
0.566
37
EXTERNAL FAILURE COSTS

Adjustment cost of complaints
21150
$ 21150
$247,450
Total costs
0.086
* Note: Any cost traceable to inspection or quality assurance is considered an appraisal

cost. This includes Q.A. equipment and the cost of finding and correcting errors with
vendors. Q.A. and appraisal dont prevent bad product, they just keep it away from
internal or external customers, downstream.
** Problem solving for current problems is an internal failure cost. If a Six Sigma or other
team is formed to develop long-term solutions to a quality problem, then it would be
classified as a prevention cost.
14.
Worldwide Metrology Repairs, Inc. has a thriving business repairing and upgrading hightechnology measuring instruments. The costs of quality that they have collected over the
past year can be found in the Excel workbook C8Data.xls. Use Pareto analysis to
investigate their quality losses and to suggest which areas they should address first in an
effort to improve their quality.
Answer
14. Original Data:
Category
Customer returns
Inspection costs -- outgoing
Inspection costs -- incoming
Workstation downtime
Training/system improvement
Rework costs
Annual Loss
$ 110,000
35,000
18,000
55,000
30,000
52,000
Spreadsheet data and the Pareto chart (see spreadsheet Prob8-14.xls for details) for
Worldwide Metrology Repairs, Inc. are shown.
WORLDWIDE METROLOGY REPAIRS, INC.

QUALITY COSTS AND PERCENTAGES
Percent
Customer returns
Workstation downtime
Rework costs
Inspection - out
Training/improvement
Inspection - in
Total Costs
Cumul
ative %
36.67%
18.33%
17.33%
11.67%
10.00%
6.00%
Cost
36.67%
55.00%
72.33%
84.00%
94.00%
100.00%
38
$110,000
55,000
52,000
35,000
30,000
18,000
300000
The data show that two categories of customer returns and

workstation downtime total 55.0 percent of the defects. These two are
possibly related, and may indicate short staffing, and lack of training
of setup personnel. Only 10% of total quality cost is allocated to
prevention (training/improvement). Steps should be taken to analyze
root causes for these problem areas in order to correct them as
quickly as possible.
15.
Use Pareto analysis to investigate the quality losses at Beechcom Software Corp. using
the data in the Excel workbook C8Data.xls. What conclusions do you reach?
Answer
39
15. Original Data:

Category
Annual Loss
Rework costs
Rejected disks (loaded)
Rejected disks (blank)
Inspection costs (extra)--incoming
Inspection costs (extra)--outgoing
Customer returns
Training and system improvement costs
System downtime
$175,000
30,000
18,000
136,000
65,000
360,000
28,000
88,000
The data for Beechcom Software Corporation show that the three
categories of returns, rework, and incoming inspection account for
74.56 percent of the defects. These appear to be completely under the
control of the firm, so steps should be taken to analyze root causes for
these problem areas in order to correct them as quickly as possible.
(See spreadsheet Prob8-15.xls for more details).
BEECHCOM SOFTWARE CORPORATION
QUALITY COSTS AND PERCENTAGES
Returns
Rework
Insp. - In.
Sys. Downtime
Insp. - Out
Rej. disks (load.)
Trng./sys. improve.
Rej.disks (blank)
Total Costs
Percent
Cumulative %
Cost
40.00%
19.44%
15.11%
9.78%
7.22%
3.33%
3.11%
2.00%
40.00%
59.44%
74.56%
84.33%
91.56%
94.89%
98.00%
100.00%
360,000
175,000
136,000
88,000
65,000
30,000
28,000
18,000
$900,000
16.
40
The Hausburg Company has collected information about customer behavior and lost sales as
a result of service problems. They estimate that, given the current level of service and
historical data on complaints, the company will lose a total of 900,000 sales from customers
who experience problems over a five-year period.
a. At an average of $20 profit per sale, what is the average lost profit per year?
b.
Suppose the company can reduce its annual number of lost sales by 10 percent by
investing $300,000 to enhance its service through training and better technology. How
much profit can be earned as a result? What is the return on this quality investment?
Answer
16.
Because nothing is mentioned here about the Hausburg Company using

a discounted present value, simplified calculating methods, not
considering the time value of the money invested, are used in the
following solutions:
a) Lost profits = ($20/sale X 900,000) / 5 = $3,600,000 per year
b) Recovered profits = .10 X $3,600,000 = $360,000
So, return on quality for each year is $360,000 / $300,000 = 1.20 or
120% return. This result means that the investment will pay for itself
in approximately 10 months of savings, each year.
17.
41
Excelsior Inn, a medium-sized hotel (approximately 450 rooms) has gathered a

considerable amount of data and is trying to estimate its return on quality. The site
manager is interested in determining what the return would be if she invested in additional
service. She has evidence that additional effort in making sure that rooms (in particular,
the bathroom) are clean will result in increases in market share, which can easily be
translated into dollars of profit. In the table, found in the Excel workbook C8Data.xls, are
data taken from a pilot study where various amounts of additional labor, above the present
standard, were applied to room cleaning. These have been expressed in annual dollar
amounts, based on wages and fringe benefits of current employees servicing the rooms.
Customers who stayed in those rooms were then surveyed to determine their levels of
satisfaction/dissatisfaction. Percentages of dissatisfied customers have been matched with
the annual dollars of improvement efforts from the study.
a. Using linear regression (for example, the Data Analysis tool or Add Trendline option in
Excel), determine the equation that can be used to estimate the reduction in customer
dissatisfaction, based on additional cleaning effort. What would be the appropriate level of
effort to apply, based on your calculations?
b. If each point of market share increase brings in approximately $600,000 of profit per
year, and the cost per year is your suggested investment in improvement (from part a
above), what would be the return on quality (improvement), based on a three year
discounted cash flow at 10 percent of the investment costs, if the site manager estimated
that she could realize a 2.5 percent increase in market share?
Answer
17. Original Data:
42
Excelsior Inn - Return on Quality

Service Improvement
Investment (in thousands of dollars)
0
50
150
260
290
300
450
600
750
900
1050
1200
1350
1500
1650
1800
1950
2100
Percent of Customers
- Dissatisfied
0.200
0.150
0.100
0.076
0.067
0.059
0.052
0.045
0.040
0.035
0.031
0.027
0.024
0.021
0.017
0.014
0.010
0.007
Note to instructors: This is a problem that could challenge even advanced students.
It could also be expanded into a case study. The concepts were adapted from the Rust, et
al. article, footnoted, here1. You may wish to pass this reference on to the students for
their use in analysis. The data has been fabricated, instead of using that from the article, so
that further computations could be made.
Students would typically calculate the linear regression equation,
given below, based on the data given in the problem. Note that fitting
a curvilinear model would provide a higher R-squared value. This
would require more mathematical sophistication than the average
undergraduate business student would typically possess, however.
There is no cut and dried answer to what level of additional quality
improvement effort would be best, of course. A number of what if
questions and scenarios could be raised. Some of these might include:
1. What if the sample of hotel guests was not representative of the
general population of guests?
2. What if the site manager was simply interested in reducing, rather
than eliminating dissatisfied customers?
3. What if her objective was to eliminate the competition, then go back
to the previous level of quality?
Ronald J. Rust, Anthony J. Zahorik, and Timothy L. Keiningham. Return on Quality (ROQ): Making Service
Quality Financially Accountable, Journal of Marketing, 59, April, 1995, 58-70.
43
4. What are the disadvantages of fitting a linear model to the data?

(Note: In using Excel 4.0 when this solution was developed, it appears
that there is a bug in the module that calculates the equation for the
graph. Therefore, the add-in Excel model was used to get the
equation and the R-squared value, below.) See spreadsheet Prob8-15
for further details.
Excelsior Inn - Return on Quality
Svc. Improvemt. Effort - $ 000
0
50
150
260
290
300
450
600
750
900
1050
1200
1350
1500
1650
1800
1950
2100
Percent of Customers - Dissatisfied

0.200
0.150
0.100
0.076
0.067
0.059
0.052
0.045
0.040
0.035
0.031
0.027
0.024
0.021
0.017
0.014
0.010
0.007
PARTIAL SUMMARY OUTPUT

Excel Regression Analysis
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Intercept
X Variable 1
Predicted Y - Regression Line

0.1075
0.1046
0.0987
0.0922
0.0905
0.0899
0.0811
0.0723
0.0635
0.0547
0.0459
0.0371
0.0283
0.0195
0.0107
0.0019
-0.0070
-0.0158
0.795781742
0.633268581
0.610347868
0.031875396
18
Coefficients
0.107507099
-5.87234E-05
Equation: y = 0.10751 - .0000587 x i
Assume that we use the calculated value of y = 0 (no dissatisfied customers). The model tells us
that we will have:
0 = 0.10751 - 0.0000587 x i
So x i = 0.10751 / 0.0000587 = $1831.5 thousand
We can calculate the net present value, using standard present value table figures of:

Year
1
2
3
Total Net Present Value
PV Factor for 10%

0.909
0.826
0.751
Cost
1831.5
1831.5
1831.5
44
Present Value ($000)

1664.83
1512.82
1375.46
4553.11
The return on quality of: ROQ = Annual profit increase/ discounted present value of investment
ROQ = (2.5 points - market share increase x $600) / 4553.11 = 32.9%, which is a very
healthy return on investment
Customer Dissatisfaction vs. Svc. Improvement
0.25
% Dissatisfied Custom ers
0.20
0.15
y = -0.0000587x + 0.10751
R2 = 0.6333
0.10
Regression Trend Line

0.05
% of Cust. - Dissat.
21
00
18
00
15
00
12
00
90
0
60
0
30
0
26
0
50
0.00
-0.05
Service Im provem ent Expenditures - $000
PROJECTS. ETC.
1.
Answers will vary, depending on the experience and interests of the students. For example,
an airline might measure revenue passenger miles and market share at the organizational
level, hours between failures for various mechanical components (such as radios and radar
units), hours of flying time for flight crew members, number of delayed or canceled flights
in flight operations.
45
2.
The answers will vary here, depending on students' choice of restaurants from which they
gather data. Note that many of the internal performance characteristics that relate to the
pizza restaurant example in the body of the chapter would also apply to other restaurants,
regardless of type.
3.
This field exercise is designed to further student awareness of the breadth of the "quality
management" and to help them to confirm that key factors from the theory of quality are
being applied in practical settings in business and industry.
4.
management" and to help them to confirm that leading practices from the theory of quality
are being applied in practical settings in business and industry.
5.
This diagram may be as simple or as complex as students care to make it. For example it
might be hypothesized that a leading indicator of decreased customer satisfaction and
loyalty might be complaints, while a lagging indicator would be losses of customers. In the
financial and market area, a leading indicator would be increases in sales, while the lagging
indicator would be increases in market share. In human resources, absenteeism might be a
leading indicator of turnover and decreased employee satisfaction. In the supplier/partner
area, quality and delivery would possibly lead to increased costs (the lagging indicator),
and in organizational effectiveness, defects and errors would lead productivity declines.
6.
management" and to help them to confirm that the cost of quality factors from theory of
quality are being applied in practical settings in business and industry.
7.
Spreadsheet programs can be used to develop the database, compute the indices, print
reports of quality costs in a tabular and graphical form, and calculate "what-if" cases for
management decision-making purposes.
8.
management" and to help them to confirm that the Six Sigma approaches from the theory
of quality are being applied in practical settings in business and industry.
46
ANSWERS TO CASE QUESTIONS

Skyhigh Airlines
The solution to this case involves a fairly straight-forward sequential analysis of the system that
can be obtained by using the following model (note each X = 1 person hour, and the fractions are
additional fractions of person-hours required to complete the task, once it has been started):
A -------------- B --------
C ---------- D -------------
(Tasks) Elapsed
Time
Productive Time Person-hours
Working Mechanics
Mech. 1
X 2/3
XX
Mech. 2
X 2/3
XX
Mech. 3
X 2/3
Mech. 4
Mech. 5
7.67
Idle Mechanics
Mech. 3
XX
Mech. 4
X 2/3
XX
Mech. 5
X 2/3
XX
5/12.5=
5/6.25
Fraction of productive hrs

5/8.33=
5/6.25=
5/5=
60%
80%
100%
40%
80% 15.36% RTY
60%
80%
100%
100%
80% 38.4% RTYRevised
[Note: RTY is the product of the fractions of productive hours for all the tasks.]
Thus:
a) How much elapsed time will it take to complete the entire procedure?
1 2/3 + 1 + 1 + 2 + 1 = 7.67 hours
b) What percent of time will be productive and what percent will be wasted on each task?
Productive: A = 60%; B= 80%; C = 100%; D = 40%; and E = 80%
Non-productive time will be the reciprocal for each task.
47
c) What is the rolled throughput yield (RTY) of the procedure?

RTY = .60 X .80 X 1.00 X .40 X .80 = 15.36%
d) If a tool could be developed which would allow all 5 workers to work on task D at the same
time, how would that effect the RTY of the procedure?
RTY = .60 X .80 X 1.00 X 1.00 X .80 = 38.4%, which is 23.94 percentage point increase and
represents a 150% labor utilization improvement.
The overall conclusion that can be reached is that the time to complete a process is highly
dependent on the efficiency of each operation. Thus, the rolled throughput yield shows that labor
efficiency can be dramatically improved by improving each stage in a process which depends on
sequentially linked tasks. The recommendation to management is that they seek to optimize each
stage in the process, but to be cautious not to sub-optimize the results for the entire system.
Coyote Community College2
During the 1998/99 planning cycle, the Leadership Team developed its first balanced scorecard,
which they called the LEARNing Board since the measures included on it demonstrate how
effectively the college is implementing and deploying the LEARN philosophy. The departments
and areas submit an annual report to the Leadership Team that summarizes its performance,
including relevant LEARNing Board measures, during the previous academic year.
Measures developed by Coyote for their LEARNing Board are shown below. The Associated
Outcomes, encoded in the second column, are defined specifically for each of the four quadrants
in Item 2.1 of the criteria (see table on LEARNing Board Outcomes, below). The LEARNing
Board holds the measures that are used to drive, guide, and deploy Coyotes strategic initiatives
and to ensure alignment.
The Vice Presidents and the Dean of Instruction hold monthly meetings with the managers of the
offices reporting to them to review progress toward goals. Each division and office system are
integrated into strategic planning. WILEE (the schools information management system) is
described in Item 4.1 of the criteria and is used to track goals, measures and progress based on
reporting requirements. The concept of focusing on the LEARN philosophy and measures is
standard for all Coyote meetings.
Associated
Outcomes
(see LEARNing
Board
Outcomes below)
Funder/Financial View
State Revenues
F1
Tuition and Fees Revenue
F2
Grant and Foundation Funding
F3, F4
Direct Costs
F5
Student/Participant View
Enrollment
S1
Measure
Adapted from the 2000 Malcolm Baldrige National Quality Award Examiner Preparation Course.
case study materials for Coyote Community College.

% of Citizens Participating in
S1
Programs and Events
Student Goal Attainment
S2
Number of Students Completing
S2
Occupational Degree and
Certificate Programs
Passing Rates on Licensure and
S2
Certification Exams
Student Success at Transfer
S2
Institutions
Graduate Placement Rate
S2
Graduate Hourly Wage
S2
New Mexico State Competency
S2
Examination Pass Rates
Student Persistence
S3
Course Completion Rate
S3
% Technology Delivered Offerings
S3
Responsiveness to Requests for
S3
Courses and Workshops
Student/Stakeholder Satisfaction
S4
with Programs and Instructional
Services
Internal Process View
High Value Content of Curricula
P1
Cycle Time for Curricula
P1
Development
Implementation of Individualized
P2
Learning
Learner Involvement in Active
P2
Learning
Basic Skills Improvement
P2
Attainment of Program
P2
Competencies
ESL/Remedial Preparation for
P2
College Eligibility
Access for Underserved Groups
P3
Student Satisfaction with Student
P4
Services
Student Satisfaction with Support
P5
Processes
Innovation and Resource View
Faculty/Staff Satisfaction Surveys
R1
Faculty/Staff Retention
R1
ESL Expertise
R2
Training and Development in Key
R2, R3
Areas
Faculty and Staff Technology Tool
R3
Availability
Investment in Technology to
R4
Support Learning Programs
48
49
Internal Stakeholder Input

Area of Focus
Faculty and
Staff
Type of Input
Needs and
requirements,
capabilities
Faculty
Needs and
rerquirements
Budget data,
1997 2000
(projected)
Risk
assessment
Risk
assessment
Budget
Legal Risks
Environmental
Risks
Technology
Educational
technology
evaluation
Method
Faculty/Staff Satisfaction
Survey
Capabilities matrix
Performance data
Structured interview
Source
Business Support Services
Team, Human Resource
Subteam
Collective Bargaining Unit
Trends, variances, projections

Team, Accounting Subteam
Legal Risk Assessment Report
College Attorneys Office
1999
Facility Assessment and
Environmental ReviewCoyote
Team, Community College
Campuses 1999
Review of current technology in
use at Coyote, including
performance data
Evaluation of potential
additional technology for future
use

Team, Facilities Subteam
Learning Team, Distributed

Education Subteam
LEARNing Board Outcomes
F4
Funder/Financial View
Maintain level of state
funding
Increase total revenue
from tuition and fees
Increase donations to the
Foundation
Increase grant funding
F5
Increase fiscal efficiency
F1
F2
F3
S1
S2
Student/Participant View
Increase credit
enrollment and noncredit participation
Increase the
value/impact of Coyotes
programs
P2
Internal Process view

Increase the design and development
of high-impact programs
Increase instructional effectiveness
P3
Increase access to programs
P4
Increase effectiveness of student

services
Increase the effectiveness of support
processes
Innovation and Resource View
Increase faculty/staff retention
P1
P5
R1
R2
Increase the percentage of

faculty/staff who have
the skills they need to be effective

S3
S4
Increase course offerings

meeting
student/participant
needs
Increase satisfaction with
programs
50
R3
Increase the percentage of

faculty/staff who have
the tools to optimize productivity
R4
Increase investment in technology to

support
Learning programs
Novel Connect: Identifying Key Performance Measures

After reviewing the Organizational Profile for Novel Connect and their response to Category 7 of
the Baldrige criteria (Business Results), some generalizations can be made about the conformance
of their measurement processes and results. After carefully analyzing the measures used in
tracking their performance results in comparison with their vital organizational factors and
strategic challenges, gaps can be seen in their performance measurement system.
Considering the applicants key business/organization factors, some of the most significant
opportunities, vulnerabilities, and/or gaps (related to data, comparisons, linkages) found in
its response to Results Items include:
Many results do not include competitive or comparative data. For example, no comparisons are
provided for leadership results or for most financial results, including Return on Long-Term
Investments, Manufacturing vs. Distribution Ratio, Short-Term vs. Long-Term Investment Ratio,
and Ratio of Liquid Assets (Figures 7.3-37.3-6). In addition, comparisons are missing for many
of the reported process effectiveness outcomes, such as Customer Satisfaction With Carrier
(Figure 7.5-1), Supplier Performance Index (Figure 7.5-2), Quality System Performance (Figure
7.5-7), People Utilization Ratio (Figure 7.5-8), Emergency Preparedness Effectiveness (Figure
7.5-9), Assembly Process Effectiveness (Figure 7.5-10), Defect and Return Rates (Figure 7.5-13),
and Process Improvement Effectiveness (Figure 7.5-18). Likewise, comparisons are not provided
for some workforce-focused outcomes, including workforce capability and capacity results such
as Advanced Proficiency Training Completion (Figure 7.4-5) and Job Vacancies Filled Within or
by Employee Referrals (Figure 7.4-6). Additionally, when comparisons are used, it is not always
clear if the organization is comparing itself to its key competitors, industry leaders, or
benchmarks. Without relevant comparisons, the applicant may have difficulty effectively
evaluating and managing its performance in a rapidly changing, competitive marketplace.
Results are not provided for some measures important to the organization. For example, while
financial outcomes do include the return on long-term investments, they do not include the return
on short-term investments, which represent over 70% of every investment dollar. Additionally,
workforce-focused outcomes do not include staffing levels and trends or results related to
leadership development or workforce security, services, and benefits. Finally, process effectiveness
outcomes do not include results for security breaches, challenge tests, the relationship
management of carriers and distributors, or the cycle time and productivity of key processes.
These gaps may make it difficult for the applicants SLT to track progress toward the
51
accomplishment of related strategic objectives and to effectively target areas in need of

improvement.
Many results lack segmented data. For example, no results for process effectiveness are
segmented by product types, locations, or market segments. Workforce satisfaction and
engagement results such as the Trot Engage 14 survey scores (Figure 7.4-2), Employee
Participation in PIPs (Figure 7.4-3), and the Voluntary Turnover Rate (Figure 7.4-4) are not
segmented by employee groups or sites. Similarly, workforce climate measures such as Days
Away/Restricted Time (Figure 7.4-7), Total Recordable Rate (Figure 7.4-8), Repetitive Motion
Injuries (Figure 7.4-9), and Employee Participation in Wellness Programs (Figure 7.4-10) are not
segmented to reflect the applicants dispersed and diverse workforce. Results segmented by
customer group are missing for some important measures, including Percentage of Repeat
Customers (Figure 7.2-9) and Customers Willing to Be Contacted (Figure 7.2-10). Finally, most
financial results are missing segmentation (e.g., by the applicants major market segments or
subsegments or by its diverse customer groups), and process effectiveness outcomes are not
segmented by any dimension. Without segmented results, the applicant may not fully understand
the underlying contribution of various groups or segments to overall performance and therefore
may have difficulty translating performance information into improvement actions.
Thus other metrics should be added, consisting of comparative leadership and financial data
comparing themselves with key competitors, industry leaders, or benchmarks; closing gaps
in measurement by providing some other measures important to the organization, such as,
the return on short-term investments, not just the return on long-term investments;
workforce-focused outcomes, including staffing levels and trends or results related to
leadership development or workforce security, services, and benefits; finally, process
effectiveness outcomes should be improved to include results for security breaches,
challenge tests, the relationship management of carriers and distributors, or the cycle
time and productivity of key processes. Obviously, all measures reported have not been
appropriately segmented by location, type of employee, type of customer, and so on. Findings as a
consultant to the organization may use the above facts to develop a well-written report to the
company president.
Novel Connect: Measurement, Analysis, and Knowledge Management
Novel Connects response to Category 4 in the context of the leading practices described in this
chapter, shows the following strengths and opportunities for improvement.
4.1 Measurement, Analysis, and Improvement of Organizational Performance
STRENGTHS
The SLT is responsible for selecting data and information for tracking overall
organizational performance. As part of the SPP, the SLT chooses performance measures
and ensures the measures address all principal success factors. The MAP data warehousing
software is used to collect and manage the performance data. All members of the workforce
can access MAP and enter their own performance data directly, with some real-time data
52
automatically uploaded and integrated into process scorecards. Routine performance

reports are automatically generated from MAP, including supplier scorecards that are
shared with key suppliers and partners. Twenty two key operational and strategic
performance measures, with associated performance goals and comparisons, are presented
in the organizational scorecard (Figure 4.1-1). These measures are linked to Novel
Connects strategic objectives, strategic advantages and challenges, and core values, and
they provide the potential for the integration of strategic planning, operations, decisions,
and actions.
Key organizational comparisons are selected from a variety of sources as part of the annual
SPP. The Chief Workforce Officer selects comparative workforce data semiannually, and processlevel and supplier performance comparisons are selected by the appropriate team leader at each
pod. Comparative data are used regularly at Triple-M review meetings to help drive improvement.
Additional information is provided by the Marketing and Public Relations Team, the Research and
Development Team, and the Product Engineering and Design Team, who perform analyses and
scan for benchmark data at trade conferences, in journals, and during continuing education
classes.
The SLT reviews organizational performance at monthly Triple-M meetings, using the scorecard
and supporting summary reports. For senior leaders, the MAP database provides preprogrammed
analyses, which include trending, statistical process control charts, and Pareto charts, in support
of performance reviews. Subcommittees of the SLT also review progress on specific action plan
projects in their areas of responsibility, and individual leaders, other subcommittees, and process
leaders may conduct additional analyses as needed. Triple-M meetings are used to adjust resource
deployment, make changes in action plans, and address gaps in organizational performance. Any
changes to performance measures are completed in MAP by the Information Technology and
Internal Communications (IT/IC) Team.
The SLT uses its review of the Novel Compass Scorecard and supporting analyses to determine
where opportunities for innovation and/or improvement exist. The SLT establishes the scope of
changes, which then are cascaded to appropriate process leads, who develop final plans for
deploying the changes. If changes involve suppliers and partners, these changes are communicated
by the Chief Operations Officer (COO) and Distribution and Supply Chain Management Team or
the Chief Innovation Officer (CIO) and Channel/Retail Sales and Customer Service Team, as
appropriate. Leaders weekly meetings with their teams help ensure any changes are sustained.
OPPORTUNITIES FOR IMPROVEMENT
It is unclear how Novel Connects organizational performance reviews are used to assess its
ability to respond to rapidly changing organizational needs and challenges in the operating
environment. These considerations may be important for Novel Connect due to its heavy reliance
on data for decision making, heavy reliance on technology within the business, dispersed
workforce, and strategic challenge of rapidly changing customer and market needs in niche
markets.
While Novel Connect conducts monthly organizational performance reviews, a systematic
process is not evident for ensuring that the conclusions drawn from these reviews are valid. In
addition, although a review of scorecard data and various analyses are used to identify
53
opportunities for improvement and innovation, a systematic process for prioritizing these findings
is not described. Without systematic processes in these areas, Novel Connect may have difficulty
ensuring that its conclusions and resulting decisions most effectively address organizational needs.
Although selected performance metrics are reviewed for effectiveness in monthly Triple-M
meetings, there is little evidence of systematic improvements to Novel Connects approaches for
measuring, analyzing, and improving organizational performance. For example, it is unclear how
Novel Connect uses the industry standard measures and comparisons from its TL 9000 and
QuEST Forum certification to continuously improve its approaches to measurement. Without a
systematic process for reviewing and improving measurement and analysis approaches, Novel
Connect may miss opportunities to improve its effectiveness.
4.2 Management of Information, Information Technology, and Knowledge
STRENGTHS
Novel Connect uses a variety of methods to make data and information available and easily
accessible. All employees have assigned levels of access to desktop systems and MAP data
appropriate to their responsibilities. Pod and process leaders share summary results with suppliers,
partners, and customers. A dedicated IT/IC Team has responsibility for ensuring that hardware
and software are reliable, and the Process Engineering Team works with the IT/IC Team to make
sure hardware and software on the plant floor are performing. The contracted hub-provider,
Hubs-R-Us, Inc. (HRU), conducts a semiannual survey to assess the systems user-friendliness,
and the IT/IC Team reviews help desk calls after training is completed to assess user-friendliness.
HRU maintains a high-bandwidth, high-access broadband data network with availability
ensured through planned redundancy. To help ensure system continuity in the event of
emergencies, daily backups of all data on every device connected to the servers are performed by
the hub provider. The backup files are stored offsite, and replacement hardware is stored at Novel
Connects technology center and support nodes. The hardware can be shipped to any site within
one or two days. Continued availability of systems, information, and data are key to successfully
addressing many of Novel Connects success factors, such as time to market with new products,
process performance, supply chain management, and collaborations with key suppliers and
partners.
Organizational knowledge is made available through a variety of mechanisms, including project
and process scorecards accessible to all employees involved, daily informational emails, regular
meetings with leadership, Improvement Reports that are available on the intranet, and a weekly
intranet newsletter highlighting innovations and improvements. The IT/IC Team tracks hits on
the intranet, as well as MAP log-on times and access durations, to evaluate whether employees
are using these internal learning approaches. Externally, relevant information is made available to
partners through cross-sharing of technology roadmaps.
A fully deployed, systematic approach is not evident for ensuring the security of hardware and
software or the security and accuracy of organizational data, information, and knowledge. While
HRU helps maintain system security by locating network servers offsite and by controlling access
54
through passwords, it is unclear how security is maintained on those systems the hub provider
does not operate. For example, the internal MAP system, process logic controller (PLC) software,
and interfaces at the manufacturing facility are all managed by the IT/IC Team, and how the
security of these systems is maintained is not addressed. In addition, other than expecting those
who enter data to be responsible for its accuracy, it is unclear how Novel Connect ensures that
manual data entries are free of errors. These issues may be important due to Novel Connects
strategic challenge of protecting intellectual property, the widely dispersed workforce, and Novel
Connects extensive use of data in its organizational performance reviews and decision making.
While Novel Connect has a variety of mechanisms for making organizational knowledge
available to its workforce, suppliers, and partners, it is not clear how it uses these
mechanisms to systematically collect and transfer knowledge or best practices. For example,
it is unclear if Improvement Reports enable rapid sharing and implementation of best
practices since they rely on users accessing them. Technology roadmaps and supplier
scorecard results are shared with key partners, but there is little evidence of a systematic
approach to transferring relevant knowledge from and to suppliers and partners.
Additionally, it is unclear how Novel Connect determines which data and information are
appropriate to share with suppliers and partners, or how it ensures that suppliers and
partners have timely access to information that they need. Systematic approaches to ensure
appropriate and timely transfer of knowledge may be important in light of Novel Connects
principal success factors of rapid response to marketplace changes, supply chain
management, and collaborations with key suppliers and partners.
Although HRU conducts a semiannual survey to assess the systems user-friendliness and the
IT/IC Team tracks hits and access durations to help assess employees use of these internal
learning resources, there is limited evidence of a systematic approach to evaluation and
improvement of key processes related to management of information resources and knowledge
systems.
These strengths and OFIs do relate well to their Key Factors. For example, Novel Connect links
measures from its balanced scorecard to strategic objectives, strategic advantages and challenges,
and core values, and they provide the potential for the integration of strategic planning,
operations, decisions, and actions.
Specific advice, including useful tools and techniques that might help them, would you suggest?
Relating to Section 4.1, organizational performance reviews should be used to assess its ability to
respond to rapidly changing organizational needs and challenges in the operating environment.
Also, a systematic process should be developed for ensuring that the conclusions drawn from
these reviews are valid and for prioritizing these findings. Finally, Novel Connect should develop
systematic improvements to approaches for measuring, analyzing, and improving organizational
performance. For example, they could use the industry standard measures and comparisons from
its TL 9000 and QuEST Forum certification to continuously improve approaches to measurement.
Relating to Section 4.2, a fully deployed, systematic approach is needed to ensure the security of
hardware and software or the security and accuracy of organizational data, information, and
knowledge. Novel Connect should also develop comprehensive ways to ensure that manual data
55
entries are free of errors. Novel Connect should modify and enhance its organizational knowledge
system to systematically collect and transfer knowledge or best practices. For example, they might
provide a systematic approach to transferring relevant knowledge from and to suppliers and
partners. Novel Connect should systematically determine which data and information are
appropriate to share with suppliers and partners, and ensure that suppliers and partners have
timely access to information that they need. Systematic approaches to ensure appropriate and
timely transfer of knowledge may be important. In summary, a systematic approach is needed to
evaluation and improvement of key processes related to management of information resources
and knowledge systems.
Bonus Materials
Case - Baldrige Assessment of Measurement, Analysis, and Knowledge Management
Share Foods Part 1
Assignment 1: For Item 4.1 the most important business or organizational factors relevant to this
item in the Organizational Profile are:
Technologies: Uses FoodAnswers software from Food Banks of America (FBA) and
Rapid Inventory Control Enterprise (RICE); an information technology firm provides pro
bono hardware and software support
Governance by 12-member board, including a county commission representative and a
rotating member agency position, with five subcommittees linked to management
functions
Comparative and competitive data sources: FBA national comparisons, IFBA state
comparisons, Assistance Now Finder, and collaborative FBLC regional data and best
practice sharing
Five strategic challenges: Ensure food reaches those most in need when they need it most,
optimize human resources and partnerships, respond to member agency needs, obtain and
maintain adequate financial resources, recruit volunteers from a broad range of age
segments
Performance improvement system: Plan-Do-Check-Act (PDCA) Process
Assignment 2: Relating to Item 4.1 in the case study.

Analysis of Strengths
The reasons why the examiners identified the 3 strengths as listed were because they clearly
corresponded to, and exceeded the basic requirements in the criteria. For example, in the set of
questions in Section 4.1 of the criteria, the questions that are raised have been strongly answered
by the applicant in their Baldrige application:
Strength 1 supplies the answer to this question.
4.1a (1) HOW do you select, collect, align, and integrate data and information for tracking
daily operations and for tracking overall organizational PERFORMANCE, including
56
progress relative to STRATEGIC OBJECTIVES and ACTION PLANS? What are your
KEY organizational PERFORMANCE MEASURES, including KEY short-term and
longer term financial MEASURES? HOW do you use these data and information to
support organizational decision making and INNOVATION?
In a similar fashion, strength 2 supplies the answer to:
4.1 a (3) HOW do you keep your PERFORMANCE measurement system current with
business needs and directions? HOW do you ensure that your PERFORMANCE
measurement system is sensitive to rapid or unexpected organizational or external
changes?
Strength 3 provides the answer to the following Criterion question of section 4.1 b.
PERFORMANCE ANALYSIS, Review, and Improvement:
4.1b (1) HOW do you review organizational PERFORMANCE and capabilities? What
ANALYSES do you perform to support these reviews and to ensure that conclusions are
valid? HOW do you use these reviews to assess organizational success, competitive
PERFORMANCE, and progress relative to STRATEGIC OBJECTIVES and ACTION
PLANS? HOW do you use these reviews to assess your organizations ability to respond
rapidly to changing organizational needs and challenges in your operating environment?
Analysis of OFIs
The reasons why the examiners identified the 3 opportunities for improvement (OFIs) as listed
were because the applicants responses did not correspond to, and/or meet the requirements in the
criteria. For example, in the set of questions in Section 4.1 of the criteria, the following questions
are raised, but the answers are not apparent in the Baldrige application:
For example the Criteria raise the question:
4.1 a(2) HOW do you select and ensure the EFFECTIVE use of KEY comparative data
and information to support operational and strategic decision making and INNOVATION?
SFs answer in their application reflects the OFI seen by the examiners (bullet 1) as:
While the applicant states that during Step 9 of the SPP it selects comparative data
relevant to the local, regional, and national food banking industries, it is not clear how the
organization selects and ensures the effective use of key comparative data to support
operational and strategic decision making and innovation. For example, comparative data
are selected during the SPP to track performance against goals; however, it is not apparent
how the comparative data used in reviews address all organizational key success factors,
such as the optimization of human, financial, food, and other resources and organizational
learning, collaboration, and innovation. Without an effective, systematic approach, the
applicant may not fully understand its performance relative to other providers or
effectively use comparative data when making decisions that affect performance in these
key areas.
Other OFIs can be matched with their respective Criterion questions in a similar fashion.
57
These strengths and OFIs do relate well to the Key Factors, listed above for Assignment 1. This
shows that the organizations mission, vision, and values must be aligned with their Measurement,
Analysis, and Knowledge Management systems in order to be effective.
Other strengths and OFIs may always be considered, so there is room for judgment. In the Stage
2 evaluation process for Baldrige consensus feedback to applicant, 6 or 8 examiners compare their
scorebook results on the strengths and OFIs for the same applicant. There is always a very high
level of agreement between examiners on the strengths and OFIs when independently prepared
scorebooks for the same applicant are compared.
Case - Baldrige Assessment of Measurement, Analysis, and Knowledge Management
Part 2
1. The most relevant business and organization factors from the Organizational Profile pertaining
to Item 4.2 are:
More than 500 volunteers, including a core team of 20 volunteers, contributed 28,600
hours in 2006. Volunteers include university nutrition and management students,
government and foundation fellows, and court-ordered community-service placements.
Nearly half of volunteers are over age 55.
Technologies: Uses FoodAnswers software from Food Banks of America (FBA) and
Rapid Inventory Control Enterprise (RICE); an information technology firm provides
pro bono hardware and software support
Food suppliers and partners provide food, facilitate innovation, broaden the
organizations reach, and improve core processes; finances and services suppliers and
partners provide funds for food and activities, donate inkind support, fund improved
organizational capabilities, provide fiduciary controls, and volunteer.
Comparative and competitive data sources: FBA national comparisons, IFBA state
comparisons, Assistance Now Finder, and collaborative FBLC regional data and bestpractice sharing
Data limitations: incomplete or old data, time lags from government sources,
inconsistencies in tracking and reporting systems, and manual data entry by volunteers
(mitigated by the help of students and fellows)
Strategic challenges: Optimize partnerships; respond to member agency needs
2. Strengths that the organization has relative to the 2008 criteria questions are:
STRENGTHS
SF makes data and information available through five software systems (Figure 4.2-1):
Donation Tracker, Rapid Inventory and Control Enterprise (RICE), Expense Tracker,
FoodAnswers, and Training and Volunteer Tracker. Access to information is provided on
an as-needed basis to employees, volunteers, suppliers, partners, collaborators, and
58
member agencies. Protection of sensitive information is facilitated by limiting access to it

(e.g., access to member agency information is given only to employees who have been
trained regarding privacy laws). Maturational cycles of improvement include the
implementation of FoodAnswers in 2003-2004 and RICE in 2005.
SF keeps its information availability mechanisms current with business needs and
directions and technological changes through the SWOT Analysis during the SPP. The
results are deployed using annual action plans.
Industry-specific software and validation processes are used to ensure that SFs electronic
data, information, and knowledge are accurate, have integrity and reliability, are timely,
and are secure and confidential. Figure 4.2-2 outlines how SF ensures the quality of
electronic data and information. Validation processes include, but are not limited to,
training, limited data entry fields, audits, drop-down menus, field validation, bar codes,
beta testing, policies and procedures, an off-site system backup, 24/7 Web access,
passwords, and limited administrator rights. SF accomplishes much of this work through a
pro bono partnership with a local technology firm.
Workforce knowledge is shared with employees, member agencies, and food donors
through a variety of processes, including orientation for employees and volunteers, emails, an organizational newsletter, training and materials, routine supply chain
interactions, industry-specific software, job rotations, visual process descriptions, and
daily walkarounds. Senior leaders facilitate the identification and sharing of best practices
using daily walk-arounds, FoodAnswers, Monthly Harvest Reviews, and participation in
FBA, IFBA, and FBLC activities.
3. Opportunities for improvement relative to the criteria questions are:

It is not apparent how SF ensures that its hardware and software are reliable and
secure. For example, SF relies on a few core volunteers and pro bono services from a
local IT provider to maintain hardware and software; however, the processes to
ensure that these key information systems are maintained to achieve reliability and
security are not evident.
A systematic process is not apparent to ensure the functionality of critical

information systems in the event of an emergency. Without an effective, systematic
approach, problems in this area may limit SF in meeting its community requirement
of responsiveness in time of need.
While SF has established methods to validate electronic data (Figure 4.2-2), it is not clear
how the accuracy, integrity and reliability, timeliness, and security and confidentiality of
nonelectronic data, information, and knowledge are addressed in these or other processes.
The absence of a comprehensive, systematic approach in this area may hamper SFs ability
to ensure that decisions are based on reliable information in its efforts to respond to
member agency needs.
59
A systematic process is not described for managing organizational knowledge to

accomplish the assembly and transfer of relevant knowledge for use in the SPP. For
example, SF has established several mechanisms, such as daily walk-arounds and Monthly
Harvest reviews, to collect and share best practices; however, it is not clear how these or
other methods are employed to transfer and use the best practices or other relevant
knowledge in the SPP. Without an effective, systematic approach, SF may have difficulty
developing innovative solutions that add value for customers and the organization.

Q8 IM08 Final

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Q8 IM08 Final

Încărcat de

Drepturi de autor:

Formate disponibile

CHAPTER 8

Performance Measurement and Strategic

To develop further understanding of the importance of measurement and strategic

Performance Measurement and Strategic Information Management

To introduce the concept of process-level measures, derived through close examination of

Performance Measurement and Strategic Information Management

This is apparently a two-stage process. Initially improvement ideas must be submitted to

Performance Measurement and Strategic Information Management

Submitter enters improvement and selects Sponsor

Steps for approval as a best practice

Document potential best practice

ANSWERS TO REVIEW QUESTIONS

Other reasons for measurement, in general, are:

Performance Measurement and Strategic Information Management

They provide concrete feedback to workers to verify their progress.

They establish a basis for reward and recognition.

They reduce the costs of operations through better planning and

They develop a comprehensive set of performance indicators that reflect

Performance Measurement and Strategic Information Management

Internal Perspective: Focuses attention on the performance of the key internal

Relevant measures and indicators of an organizations performance as viewed by

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

the nature of a companys products and services

Performance Measurement and Strategic Information Management

The nature of a company's products and services.

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

Establishing, planning, and implementing measurement, monitoring, and improvement

Performance Measurement and Strategic Information Management

Product and Service Measures

Financial and Market Measures

Human Resource Measures

Performance Measurement and Strategic Information Management

On-time delivery -- Customer perspective

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

For a hospitals strategic priorities of:

The rate of baggage mishandling reported by the Department of Transportation in the

dpmo = (Number of defects discovered) /opportunities for error x 1,000,000

Performance Measurement and Strategic Information Management

Total quality costs

(Bold figures represent percentages of quality costs by product.)

Performance Measurement and Strategic Information Management

What conclusions can you reach from these data?

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

Quality Categories as a % of Quality Cost

Performance Measurement and Strategic Information Management

Total quality costs $210,000

(Bold figures represent percentages of quality costs by product.)

Qual. Indices as a % of Sales

Performance Measurement and Strategic Information Management

(Bold figures represent percentages of quality costs by product.)

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

Performance Measurement and Strategic Information Management

Cost Category $Cost

Customer complaint remakes

Performance Measurement and Strategic Information Management

Customer complaint remakes

$000's QUALITY COSTS