Implementing

Quality Concepts
Prepared By: SHIELA CORTADO AZON
BS Accountancy 4
11-0226c

Learning Objectives
What is quality, and from whose viewpoint should it be
evaluated?
What is benchmarking, and why do companies engage in
it?
What constitutes the total quality management
philosophy?
How is the Baldrige Award related to quality?
What are the types of quality costs, and how are those
types related?
How is cost of quality measured?
How are a cost management system and the balanced
scorecard used to provide information on quality in an
organization?
How is quality instilled as part of an organizations
culture?
(Appendix) What international quality standards exist?

Quality
Qualitythe

sum of all of the

characteristics of a product or
service that influence its ability
to meet the stated or implied
needs of the person acquiring it
Totality of internal processes that
generate a product or service
Customer satisfaction with that
product or service

Production View of Quality

ProductivityThe

quantity of good output

generated from a specific amount of input
during a time period
Increase productivity by reducing nonvalue-added activities
Reduce the need to reprocess, rework, replace,
repair
Fit machinery for mistake-proof operations

Have employees monitor and be responsible for

their own output
Do not store slow-moving inventory
Reduce unnecessary material moves
Reduce unscheduled production interruptions
Increase supplier quality/reduce inspections
Have suppliers inspect before shipping

Quality Control and Statistical

Process Control
Quality

controlall attempts to
reduce variability and product
defects
Six Sigma
Statistical Process Control
Analyze where fluctuations occur in processes
Use control charts
SPC charts require workers to respond when there are
Occurrences outside the control limits
Nonrandom patterns
Workers can prevent product defects and process
malfunctions

Consumer View of Quality

Product

or service meets and

satisfies all specified needs at a
reasonable cost
Relates to both performance
and value

Characteristics of Product
Quality
Objective

Performance
Features
Reliability
Conformance
Durability
Serviceability and
responsiveness

*Sloan Management Review

Subjective

Aesthetics
Perceived value

Characteristics of Service Quality

All

the characteristics of
product quality plus:
Assurance
Tangibles
Empathy

Evaluating Quality
GradeThe

quality level that a

product or service
has relative to the
inclusion or
exclusion of
characteristics to
satisfy customers
needs, especially
price

ValueMeets

the
highest number of
needs at the
lowest possible
cost (purchase
price plus
Its
too
operating,
expensive
maintenance, and
disposal costs)

Reasons to Benchmark

Benchmarking
Investigate, compare,
evaluate own products,
processes, services against
competitors or best in
class

Reasons

to benchmark:

Increase awareness of the

competition
Understand competitors
production and
performance methods as
well as cost structures
Identify areas of
competitors internal
strengths and weaknesses
Identify external and
internal threats and
opportunities

Justify and accelerate a

plan for continuous
process improvement and
change
Create a framework for
program and process
assessment and
evaluation
Establish a focus for
mission, goals, and
objectives
Establish performance
improvement targets
Understand customers
needs and expectations
Encourage creative
thinking
Identify state-of-the-art
business practices and
new technologies

Types of Benchmarking
Results

benchmarking

Focus on competitors
Reverse engineering

Focus on product/service
specifications and
performance results

Determine best in class

Process

Benchmarking

Often noncompetitor
benchmarking
Best in (specific
characteristic)

Flexible manufacturing
Equipment
maintenance
Worker training
Distribution and
logistics

Strategic

benchmarking

Noncompetitor,
nonindustry-specific
benchmarking

Understand how
successful companies
compete

Total Quality Management

Total

Quality Management (TQM)

Management approach of an organization,
centered on quality, based on the
participation of all its members and aiming
at long-term success through customer
satisfaction, and benefits to all members of
the organization and to society
Tenets

Dictate continuous improvement to the internal

managerial system (plan, control, make decisions)
Require participation by everyone in the
organization
Focus on improving goods and services from the
customers point of view
Value long-term partnerships with suppliers

The Quality System

Moves from after-the-fact inspection to proactive

quality assurance

Emphasizes
Planning for quality in every process and product
Prevention
Zero defects and continuous improvement

Results
Ability to set goals and methods for improvements
System for measuring quality and providing
feedback on quality enhancements
Encouragement of teamwork
Change from product inspection and defect
correction to proactive quality assurance

Upper-Level Management
Involvement
Personally

involved in quality process

Develop an atmosphere that
produces quality improvements
Set an example of commitment to
TQM
Provide constructive feedback for
opportunities for improvements
Provide positive feedback for
achieved improvements

Product/Service Improvement
Identify

value-adding customers
Identify customer wants
Quality
Value
Good serviceinteraction
between customer and
organizational employees

Quality Awards
USAMalcolm

Baldridge Award
JapanDeming Prize

Malcolm Baldridge National

Quality Award (slide 1 of 2)
Focuses

on

Management
systems
Processes
Consumer
satisfaction
Business results

Types

of entrants

Business and notfor profit

Education
Health care

Represents Excellence

Malcolm Baldridge National

Quality Award (slide 2 of 2)
Must

excel in:

Leadership
Strategic planning
Customer focus
Measurement, analysis, and knowledge
management
Workforce focus
Operations focus
Results
Award

winners are effective and

systematic in deploying and achieving
the multiple requirements within each
category and are innovative in
continuously seeking improvement

Types of Quality Costs

Cost

of Compliance
Preventive costsprevent product
defects
Appraisal costsmonitor and
compensate when prevention fails
Cost of Noncompliance
Failure costs
Internal lossesscrap, rework
External losseswarranty work,
customer complaint departments,
litigation, product recalls

Quality Cost Principles

The

cost of compliance and the cost of

noncompliance are inversely related
A decrease in preventive costs will
probably increase failure costs
A increase in preventive costs will
probably decrease failure costs

Improvements

in quality often result

in
Lower total cost
Improved productivity

Total Failure Costs

Profit

lost by selling defective

units
Cost of rework
Cost of processing customer
returns
Cost of warranty work
Cost of product recalls
Cost of litigation related to
products
Opportunity cost of lost

Measuring the Cost of Quality

Determine

where to spend dollars on

quality prevention
Pareto Analysis

Track

the costs of quality

Change chart of accounts or coding system

Develop

a quality reporting system

Traditional general ledger accounts bury
quality costs in

Work in process inventory

Finished goods inventory
Marketing and advertising
Personnel
Engineering

Cost of Quality
Separate cost of quality accounts include:
Prevention

costs

Quality training
Quality market research
Quality technology
Quality product design
Preventive maintenance

Appraisal

costs

Quality inspections
Procedure verifications
Measurement equipment

Internal failure costs

Reworking products
Scrap and waste
Storing and disposing of waste
Reprocessing
Rescheduling and setup

External failure costs

Complaint handling
Warranty handling
Repairing or replacing returns
Customer reimbursements
Expediting replacements
Product recalls
Image improvement after
failure

Computing Cost of Quality

Compute

Quality costs incurred for

production/service activities
Costs of non-value-added activities
Product/service life-cycle costs
Rework costs

Calculating Lost Profits

Profit Lost
by Selling
Units as
Defects

Total
Defective
Units

Number
of Units
Reworked

=
Profit
for Good
Unit

Profit for
Defective
Unit

Z = (D Y) (P1 P2 )

Calculating Internal Costs of Failure

Rework
Cost

Cost to
Number of
Rework
Units
X Defective
Reworked
Unit

R = (Y)(r)

Calculating External Costs of Failure

Cost of
Processing
Customer
Returns

Number of
Cost
= Defective Units X of a
Returned
Return

W = (Dr)(w)

Calculating Total Failure Cost

Total Failure Cost =
Profit Lost by Selling Units as Defects
+ Rework Cost
+ Cost of Processing Customer Returns
+ Cost of Warranty Work
+ Cost of Product Recalls
+ Cost of Litigation Related to Products
+ Opportunity Cost of Lost Customers

F = Z + R + W + PR + L + O

Calculating the Total Quality Cost

Total
Quality
Cost

Prevention
Appraisal
Failure
+
+
Cost
Cost
Cost

T=K+A+F

Balanced Scorecard and Quality

Customer loyalty/
percentage of revenue
from repeat customers

Employee empowerment/
number of units reworked

Financial

Internal
Business

Customer
Value

Learning and
Growth

Satisfied customers/number
of customer complaints

Technology leadership/
percentage of production
automated

Balanced Scorecard Additional

Measures
Additional

measures

Manufacturing cycle efficiency

Time to market for new products
Customer satisfaction levels
On-time deliveries
Defect rates
Success rates of research and
development activities

Organizational Culture of Quality

Committed

and consistent top

leadership
Employees who are eager to meet
and exceed customer expectations
Work environment that cares
about employees and rewards
efforts to achieve high quality
Empowered employees
Job and quality training
Pursuit of quality awards

Questions
What

is quality?
How is benchmarking used to
improve quality?
What are the different measures
of the cost of quality?

Potential Ethical Issues

Ignoring

acceptable variation limits and therefore

accepting defect levels that are excessive
Using lower grade raw material and components
than specified
Using benchmarking to illegally gain information
from competitors
Discriminating against minority supplies
Choosing to ignore internal information about
defects and failures
Minimizing estimates of internal and external
failure costs
Not supporting TQM initiatives in company
practices
Selling products at low prices and attempting to
recover revenue with exorbitant repair charges
after warranty time period