CHAPTER 6

ORGANIZATIONAL INNOVATIONS: TOTAL

QUALITY MANAGEMENT; JUST-IN-TIME
PRODUCTION SYSTEM
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The ultimate test of a quality product or service is whether the product

or service meets or exceeds customers’ expectations.
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Each individual, department or subdivision throughout an

organization needs to strive for conformity to specifications that
meet and improve upon customers’ satisfaction.
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As aptly described by Procter and Gamble,

“Total Quality (management) is the unyielding and continually improving

effort of everyone in an organization to understand, meet, and exceed the
expectation of customers.”
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This description of TQM points out that the core principles of TQM are processes
that

● Focus on satisfying the customer

● Strive for continuous improvement
● Involve fully the entire workforce
● Support and involve top management actively
● Use clear and measurable objective
● Recognize quality achievements in a timely manner
● Provide training on TQM continuously
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Focus on the Customer

Begins by:

1. Identifying the firm’s customers, external and internal;

2. Determining their needs, requirements, and expectations, and then
3. Doing what it takes to satisfy them
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Focus on the Customer

External Customers – ultimate recipients of the firm’s products or services

Internal Customers – individual or sub-unit within the firm involve in

manufacturing the product or providing services.

At some stage, everyone in the process or organization is a customer or

supplier to someone else inside or outside the organization
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Strive for Continuous Improvement (Kaizen)

The coca-cola company believe that quality is not a destination; it is a

way of life.

“We know we will never arrive, this is no finish.”

“Quality is a moving target, without continuous improvement, quality

disappears”

Taguchi and Wu believe that continuous quality improvement and cost reduction
(Kaizen) arfe necessary to remain competitive in today’s global marketplace.
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Strive for Continuous Improvement (Kaizen)

Taguchi and Wu believe that continuous quality improvement and cost

reduction (Kaizen) are necessary to remain competitive in today’s global
marketplace.
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Strive for Continuous Improvement (Kaizen)

“With a competitors forever trying to outperform us and customers exhibiting

ever-changing expectations, a firm can never reach the ideal quality standard.”
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Full involvement of the entire Workforce

“The requirement of the firm’s external customers can only be met if each of
the internal customers/suppliers in the process satisfies the requirements of the
downstream process or customer”
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Full involvement of the entire Workforce

“Any breakdown in the process no matter how insignificant can lead to a

defective product or service and unsatisfied customers”
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Full involvement of the entire Workforce

“Top management must encourage everyone in the firm, from the lowest level
employees, to upper echelon professionals and managers, to actively involve and
to participate in the firm’s efforts to continuously improve quality”
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Full involvement of the entire Workforce

A quality circle is a small group of employees from the same work area that
meets regularly to identify and solve work-related problems and to implement and
monitor solutions to the problems.
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Active support and involvement of Top Management

Most companies have found that successful implementation of TQM requires

unwavering and active leadership from the CEO and senior managers.
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Active support and involvement of Top Management

However, the CEO or Top Management alone cannot bring forth all desired
benefits of TQM.

Only with support from all managers in the top echelon can TQM attain the
most desirable results.
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Active support and involvement of Top Management

Also, they need to demonstrate their dedication to total quality to employees

at every level, all vendors and suppliers to the firm, all customers and the
community at every opportunity so that everyone is aware of the primary
importance of total quality in every aspect of the firm’s operations.
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Use clear and measurable objective

Progress can easily be seen if objectives are clear.

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Timely Recognition of Quality Achievement

Quality achievement of people and subunits when recognized timely is the

best way to emphasize the firm’s continuous struggle for better quality and to
ensure efforts towards total quality at every level.
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Timely Recognition of Quality Achievement

Efforts and progress will most likely be short-lived if the firm makes no change
to its compensation/appraisal/recognition system.

Continuous Education and Training

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Total Quality Management Implementation Guidelines

A firm cannot implement a successful TQM overnight. It’s not an easy task. It
takes several years (usually 3 to 5 years) of concerted and dedicated efforts by all
its members to become a world-class quality firm.

The Institute of Management Accountants (IMA) has devised an 11 phase process

spanning 3 years to establish TQM, It is recommended that full and genuine
involvement of all employees must be present to implement successfully TQM.
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Total Quality Management Implementation Guidelines

Year One – Preparation and Planning

● · Create quality council and staff

● Conduct executive-quality training programs
● Conduct quality audits
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Total Quality Management Implementation Guidelines

Year One – Preparation and Planning

● · Prepare gap analysis (determine the gap between

the best in class and the firm’s current practice)
● Develop strategy on quality improvement
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Total Quality Management Implementation Guidelines

Year Two – Training and Implementation

● Conduct employee communication and training program
● Establish quality teams
● Create a measurement system and set goals
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Total Quality Management Implementation Guidelines

Year Three – Assessment Review and Revise

● Revise compensation/appraisal/recognition system

● Launch external initiative with suppliers
● Review and revise
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Total Quality Management Implementation Guide

Types of Conformance

1. Goal post conformance (Zero-defects conformance)

This is a conformance to a quality specification expressed as a specified range

around the target.

The target is the ideal or desired outcome of the operations.

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Total Quality Management Implementation Guide

Types of Conformance

For example, a firm specifies a tolerance of ±0.05 inch thickness of its products
with a target of .05 thickness. This means that the firm meets the quality of
standard when the result shows that the thickness of its products is between
.055 inch and 0.45 inch.
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Total Quality Management Implementation Guide

Types of Conformance

12. Absolute quality conformance (Robust quality approach)

This is conformance which requires that all products or services to meet the target
value exactly with no variation. Any variation from the target value is less than
ideal and can have economic consequences. Any deviation from the target is a
quality failure and weakness in the overall quality of the product or service. (see
example metal thickness 0.5 not 0.05 or even 0.0005)
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Total Quality Management Implementation Guide

Generally, for firms desiring to attain long-term profitability and customer

satisfaction, absolute conformance is considered a better approach than
zero-defects conformance.

Each business function examines its own activities and works to meet
important goals. Accountants help operating managers understand how decisions
in product design affect quality (and costs) in manufacturing distribution and
customer service.
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Total Quality Management Implementation Guide

One of the tools used is benchmarking which involves studying

organizations that are among the best in the world at performing a particular task.

Identification of a quality-related costs is also necessary if TQM is to be applied to

a product or service.
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The bulk of all quality costs are associated with quality of conformance and these
costs can be broken down into four broad groups:

1. Prevention Costs

There are costs incurred to avoid poor quality goods or services or resuce the
number of defects in products or services. These include:

System development

Quality Engineering
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Quality Engineering

Quality Training

Quality Circles

Statistical process control activities

Supervision of prevention activities

Quality data gathering, analysis and reporting

Quality improvement projects

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Technical support provided to suppliers

Audits of the effectiveness of the quality system

2. Appraisal Costs

These costs, also called inspection costs, are incurred to identify products
before the products are shipped to customers. These include:

Test and inspection of incoming Materials

inspection of in-process goods

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inspection of in-process goods

Finished product testing and inspection

Supplies used in testing and inspection

Supervision of testing and inspection activities

Maintenance of Test Equipment

Plant utilities in the inspection area

Depreciation of test equipment, etc.

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1. Internal Failure Costs

These are costs that result from identification of defects during the
appraisal process. Examples are:

Net cost of scrap

Net cost of spoilage

Rework labor and overhead

Reinspection of reworked
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3. Internal Failure Costs

These are costs that result from identification of defects during the
appraisal process. Examples are:

Net cost of scrap

Net cost of spoilage

Rework labor and overhead

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Reinspection of reworked

Products

Retesting of reworked

Products

Downtime caused by quality

Problems
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4. External failure costs

These are incurred when poor-quality goods or services are detected after
delivery to customers. They include:

Cost of field servicing and handling complaints

Warranty repairs and replacements

Repairs and replacements beyond the warranty period

Product recalls
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Liability arising from defective products

Returns and allowances arising from quality problems

Lost sales arising from a reputation for poor quality

Prevention and appraisal costs are costs of conformance because they are
incurred to ensure that products and services meet customers’ expectations.

Internal failure and external failure costs are cost of non-conformance

because they are costs incurred and opportunity costs because of rejection of
products or services.
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COST OF QUALITY = CONFORMANCE COST + NON-CONFORMANCE COST

Prevention costs and appraisal costs are incurred in an effort to keep poor
quality of conformance from occurring
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The other two groups, known as Internal failure and external

failure costs are incurred because poor quality of conformance has
taken place. A company can reduce its toal quality costs by focusing
its efforts on prevention and appraisal. By this means, failures are
minimized and any defects are detected before delivery of products to
customers.
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Therefore as part of the quality cost system, companies must

gather the quality costs from each activity and accumulate these costs
on a quality cost report.
This report then becomes the foundation of the quality cost system
in that it will show management the type of quality costs being
incurred, as well as the amount and trend of these costs.
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Uses of Quality Cost Information

The quality cost information is used by managers in several ways, these are:

● Quality cost information provides a basis for establishing budgets for quality
costs as management looks for ways to reduce the total cost involved.
● Quality cost information helps managers see the financial significance of
quality.
● Quality cost information helps managers identify the relative importance of the
quality problems faced by the firm
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Uses of Quality Cost Information

● Quality cost information helps managers see whether their quality costs are
poorly distributed and when needed, it helps them distribute the costs better.
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Limitation of Quality Cost Information

1. Some important quality costs are typically omitted from the quality costs report.

Example: Opportunity cost of lost sales, cost of top management time in designing and
administering the quality program.

2. Simply measuring and reporting quality costs does not solve quality programs.
Only management action can solve them.
3. A log may exist between when quality improvement programs are put into effect
and when the results are seen
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Reporting Quality Costs

Purpose: To make management aware of the magnitude of quality costs

and to provide a baseline against which impact of quality improvement
activities could be measured. Tasks for reporting quality costs include:
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- data definitions

- identification of data sources

- data collection, and

- preparation and distribution of quality cost reports

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Nonfinancial Measures of Quality and Customer Satisfaction

To evaluate how well their actual performance satisfies customer needs and
wants, companies supplement financial measures with nonfinancial measures of
quality of design and conformance quality. Nonfinancial measures indicate the
future needs and preferences of customers, as well as specific areas that need
improvement. In this sense, nonfinancial measures of quality are leading
indicators of future long-run performance, unlike financial measures of quality that
focus on the short run. Management accountants usually maintain and present
these nonfinancial measures.
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Nonfinancial Measures of Quality and Customer Satisfaction

We focus first on nonfinancial measures of customer satisfaction,

including nonfinancial measures of quality of design and external failure, and
then we look at internal performance measures, including nonfinancial
measures of prevention, appraisal, and internal failure.

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Nonfinancial Measures of Customer Satisfaction

To evaluate how well they are doing, companies measure customer satisfaction
overtime.Some measures are:

● Onetime delivery rate (the percentage of shipments made on or before the

scheduled delivery rate)
● Delivery delays (The difference between the scheduled delivery date and the
date required by the customer)
● Percentage that products that fail soon or often

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Nonfinancial Measures of Customer Satisfaction

● Number of customer complaints (companies estimate that for every customer

who actually complains, there are 10 to 20 others who have had bad
experiences with the product or service but did not complain)\
● Number of defective units shipped to customers as a percentage of totol units
shipped
● Market research information on customer preference and customer
satisfaction with specific product features

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Nonfinancial Measure of Internal Performances

To satisfy their customers, managers must constantly improve the quality of

work done inside their company.

Example of trends to gauge quality are:

1. Number of defects for each product line

2. Employee turn-over (ratio of number of empLoyees who leave the company to
the average total number of employees)
3. Process yield (ratio of good output to toal output)
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Time as a Competitive Tools

Many companies consider :time” as a driver strategy. They need to
measure time to manage properly
Two common operational measures of time are:
Customer Response Time
On-Time performance
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Customer-Response Time
...duration from the time the customer places an order for a
product or service to the time the product or service is delivered to
the customer. Fast responses to customers are of strategic
importance in industries such as construction, banking, car rental,
and fast food.
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Manufacturing lead time (also called manufacturing cycle time) is the

duration between the time an order is received by manufacturing to the time it
becomes a finished good.

Manufacturing lead time is the sum of waiting time and manufacturing time
for an order

Delivery time is how long it takes to deliver a completed order to the

customer
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On-time Performance

Refers to situations in which the product or service is actually delivered by the

time it was scheduled to be delivered .

On-time Performance increases customer satisfaction.

Commercial airlines gain loyal passengers as a result of consistent on-line

service. But there is a trade off between customer-response time and online
performance.
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JUST-IN-TIME (Lean Production)

In a JIT production line, manufacturing activity at any particular

workstation is prompted by the need for the workstation output at the following
stations.

The demand-pull feature JIT production systems achieves close

coordination among work stations. It smoothes the flow of goods, despite low
quality of inventory.
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JIT production systems aim to simultaneously

1. Meet customer’s demand in a timely way
2. With high-quality products, and
3. At the lowest possible total cost
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Key Features of JIT Production System

● Maintaining a limited number of suppliers

A company must learn to rely on a few ultrareliable suppliers who are willing to
make frequent deliveries in small lots because companies are vulnerable to any
interruption in supply when JIT is in use.

If a single part is unavailable, the entire assembly operation may have to be

shut down.
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Key Features of JIT Production System

● Improving Plant Layout

All machines needed to make a particular product are often brought together in
one location (focused factory approach) so that partially completed units are not
shifted from place to place all over the factory to minimize handling and moving.
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Key Features of JIT Production System

● Reducing set-up time

It involve activities such as

- Moving materials

- Changing machine settings

- Setting up of equipment

- Running test, etc.

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Key Features of JIT Production System

If reduced, then the company can respond quickly to the market, reduce cycle
times, and make it easier to spot manufacturing problems before the result in a
large number of defective units.
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Key Features of JIT Production System

● Improving Production Scheduling

JIT businesses schedule production in small batches just in time to satisfy needs

There should be a good coordination of efforts throughout the value chain

– from the time the orders are received from the customers to the time the goods
are manufactured and readied for delivery to the same customers
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Key Features of JIT Production System

● Targeting Zero defects

Although it may be next to impossible to obtain a zero defect goal, companies

have found that they can come very close through “continuous monitoring”
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Key Features of JIT Production System

● Maintaining Flexible Workforce

Companies employing JIT must have workers who are flexible and multi-skilled
workers assigned to a particular JIT product flow line are often expected to know
how to operate all the equipment on that line. Cross training increases flexibility,
boosts employee morale, and decreases costs.
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Financial Benefits of Just-in-Time

Lower carrying costs of inventory

Other benefits of Lower Inventories

1. Greater transparency of the production process

2. Heightened emphasis on eliminating the specific causes of rework, scrap and
waste, and
3. Lower manufacturing lead time
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Financial Benefits of Just-in-Time

In computing teh relevant benefits and costs of reducing inventories in

JIT production systems, the cost analyst should take into account all
benefits.
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