What is quality?
Two basic concepts
- Often defined in terms of products/ services meeting customers’ needs and expectations. In other words,
- The total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use
- Two basic concepts need to be understood:
- 1.Quality of design: Degree to which a product’s design specifications meet customers’ expectations. For example, a coffee mug designed with a handle that is too small for the user’s fingers would have poor quality of design
- 2.Quality of conformance: Degree to which a product meets formal design specifications. (whether it was made correctly, whether it was made in conformance to that design)
- A coffee mug with an appropriately sized handle may be well
- designed, but if the handle breaks off due to shoddy manufacturing the mug will be useless. Such a mug has poor quality of conformance as it fails to conform to its design specifications.
Two aspects of quality
- Quality design failure: doesn't do the job the customer requires or expects. Bad design
- Conformance quality failure: manufacturing failure, eg. poor material used, not made correctly
- A clear understanding of customer value is needed to provide customers with a high-quality product.
- Customer value is the value that a customer places on particular aspects of a product.
- Once customers’ needs and expectations are known, managers need to be able to measure quality in order to improve and maintain it.
- Measures such as defect rates, yield, warranty claims and customer complaints are examples of performance measures that focus on quality.
- However, quality measures, such as customer complaints and delivery-on-time, may drive customer satisfaction, and are therefore lead indicators under the customer perspective.
- In addition, quality measures such as defect rates, yield, waste, scrap and rework rates would be lag indicators under the internal business process perspective of the balanced scorecard.
Focus on quality
- Seeks to reduce costs and increase customer satisfaction
- Focus on the quality of a product will generally:
- –build expertise in producing it
- –lower the costs of making it
- –create customer satisfaction for customers using it, and
- –generate higher future revenues for the company selling it
Why is quality cost management important?
Quality costs can be substantial: eg. Takata manufactures airbags. Quality problems which forced car companies to recall and replace airbags. Ended up costing them 24billion to fix these problems.
Source of significant cost savings: less rework, warranty claims, customer complaints, waste
Source of competitive advantage: this could be how we differentiate ourselves from competitors. Our products might be more reliable, higher quality- word of mouth (recommendations)
Costs of Quality 4 types
- Quality costs focus on the costs of the quality of conformance. There are four types of quality costs:
- 1. Internal failure costs : the costs incurred when defective products are detected before leaving the business.
- 2. External failure costs : the costs incurred because defective products are provided to customers.
- 3. Appraisal costs : the costs of determining whether defects exist.
- 4. Prevention costs : the costs incurred in preventing defects and in minimising appraisal activities.
Cost of Quality Reports- 1. Prevention costs
- 1.Prevention costs: incurred to preclude the production of products that do not conform to specifications.
- Money we spend trying to stop mistakes happening in the first place
- Examples of prevention costs designed to stop mistakes:
- Eg. we would expect higher skilled employees to make less mistakes
The costs of quality 2. Appraisal costs
- 2.Appraisal costs: incurred to detect which of the individual units of products do not conform to specifications
- Money spent looking for/finding mistakes if they have happened.
- Examples of appraisal costs:
- Whenever we see "monitoring, inspecting, testing" its probably appraisal activity
The costs of quality 3. Internal failure costs
- 3.Internal failure costs: incurred on defective products before they are shipped to customers
- Where we have found mistakes ourselves
- Eg. to fix it- wasted material and time
The costs of quality 4. External failure costs
- 4.External failure costs: incurred on defective products after they are shipped to customers
- Where we made a mistake but we didn't find it ourselves.
- Eg. legal fees from being sued
The costs of quality best to worst
Best to worst
- 1.Prevention costs: often the best type of costs. Lower costs and better quality product.
- If we spend more money, we would hope to see that internal failures go down and expect external failures to go down
- May allow a low level of appraisal activity
- 2.Appraisal costs: If manager spends more money on appraisal, we would expect to see internal mistakes goes up but we hope to see external failure costs to go down.
- 3.Internal failure costs: Concept is an internal failure cost is often much cheaper to fix than an external failure cost.
- 4.External failure costs: very expensive and don't do anything good for the organisation
- Eg. external might cause fire and thus compensation
- Note that the internal and external failure costs do not include the opportunity costs associated with scrapped products and lost sales.
- These costs are excluded because they are difficult to estimate, but they can be considered qualitatively when making decisions. It has been estimated that these hidden costs of quality amount to ‘at least three times and up to ten times the visible cost of quality’
Using cost of quality information
Cost of quality report
- Cost of quality report:
- Places a dollar figure on the costs of poor quality
- Looks at trends over time- (if we increased spending in prevention, did we see a reduction in cost overall?) ( are our external failures getting bigger over time?)
- Classifies costs as fixed or variable with respect to the level of sales, so that they can compare them with a flexible budget
- Considers interactions between the four categories
Benefits of COQ information
- Creates opportunities
- –focuses managers’ attention on the costs of poor quality by placing a dollar figure on it
- –helps managers reduce costs and improve quality
- –helps managers monitor the effects of the ‘quality effort’ and identify the optimal level of quality for the firm
- Provides visibility
- –Helps prioritise quality improvement programs
- –Shows that firms typically spend money on the wrong categories
Optimal level of quality performance
- The traditional view is that there is some optimal level of quality (as measured by the percentage of defects) beyond which any further improvement will cause the total costs of quality to increase.
- This is based on the assumed interaction of prevention and appraisal costs, on the one hand, with failure costs on the other hand.
- Initially, as more money is spent on prevention and appraisal, the level of defects decreases and the failure costs decline.
- But, after a certain point, any further attempts to drive the defect rate down cause increases in prevention and appraisal costs that are greater than the savings in failure costs.
- Total quality costs are minimised by driving the defect rate down to this point, called the acceptable quality level (AQL) , and no further. This viewpoint is not driven by customer value; rather, it is concerned with optimising resources.
- As we spend more on prevention and appraisal costs, we should see failure costs go down. Inverse relationship
- What is the total cost of quality overall? The minimum quality cost is the bottom of the curve and represents the optimal level of defects.
- To minimise spending on failure costs, we need to spend on prevention and appraisal activities.
Cost of quality - unobserved costs
- Some costs of quality are frequently not accounted for due to estimation difficulties and being unrecorded in the company accounting records
- Doesn't capture what customers might do in the future. Might tell other customers and impact reputation.
- Opportunity costs as a result from poor quality:
- 1.Contribution to profit foregone from lost sales
- 2.Loss of goodwill
- 3.Lost production
- 4.Lower prices
COQ information – a word of caution
- Need to recognise expenditure lag
- –Quality costs first increase, then decrease
- –managers may be reluctant to incur initial expenses
- Spending on prevention doesn't guarantee lower failure costs
- The “optimal level of quality” for the firm is a debatable concept
- –two schools of thought
Alternate view of quality- aim for zero defects
- The alternative view is that a business should aim to push its level of quality (or defect rate) towards zero rather than accepting some apparently optimal level.
- Three arguments support this view:
- 1. Quality is recognised as a source of customer value in its own right. Thus, the level of defects should be pushed below that level that minimises costs. (This argument assumes that customers value zero defects.)
- 2. Many businesses underestimate the costs of failure, particularly the more nebulous costs of external failure such as lost future sales, which means that the optimal level of defects will be much lower than that estimated.
- 3. As failure costs reduce, businesses discover that they can reduce prevention and appraisal costs. In fact, the traditional view of a trade-off between prevention and appraisal costs on the one hand, and failure costs on the other hand, does not hold. The costs in all four categories go down. Quality costs move towards zero as the level of defects is driven towards zero.
Finally, it should be pointed out that cost of quality reports are not used by some companies,
as some managers believe that the emphasis on tracking costs is not an appropriate way to manage quality.
Schools of thought about “optimal level of quality”
Some companies don’t use COQ reports because they regard cost tracing as inadequate for quality management
Total quality management (TQM)
- With the realisation that quality underlies the competitive strengths of many businesses, total quality management became increasingly popular.
- TQM: “a holistic management philosophy that strives for continuous improvement in all functions of an organization”
- A comprehensive structured approach to achieving continuous improvement in processes to meet customers’ expectations.
- While TQM has been eclipsed by other quality management
- approaches, such as Six Sigma, the quality culture associated with TQM has permeated many businesses and has provided the framework for managing costs and other sources of customer value.
- Meeting customer requirements is central to all activities.
The six key features of TQM
- 1.Organisation-wide: Total quality management needs to
- infiltrate all aspects of a business, and involve all employees—it is not the exclusive concern of manufacturing. A quality management program should encompass the entire value chain, from research and development through production to customer services. In addition, TQM can focus on relationships with external suppliers. Only suppliers with a commitment to quality, and accredited suppliers, are engaged.
- 2.Customer-driven: Quality is defined by the needs and expectations of customers. Employees need to understand the requirements of their internal customer, who is the next person or group in the process.
- 3.Involves empowerment: In order for shopfloor employees to manage their own quality inspection and to correct problems, extensive training is required.
- 4. Has a process perspective: A process perspective focuses on the smooth flow of activity across the organisation rather than within functional departments.
- 5.Supported by a quality management system: Although TQM is more a philosophy than a set of techniques, it should be supported by documented quality procedures and practices to keep the entire TQM process under control.
- 6.Involves continuous improvement: Given the goal of meeting customer requirements, and because customer requirements are constantly changing, continuous improvement is an essential part of TQM. Continual incremental improvement towards perfection.
Total quality management (TQM) continued
- Making it right the first time
- Zero defects should be the goal
- Costs of non-conformance are so high that evaluating the costs of quality are unnecessary
- Aims to improve the quality of life for producers, consumers and investors
- Quality is a journey, not a destination
Accounting Impediments to TQM
- System not set up to capture COQ costs: accounting doesn't capture all external costs
- Process costing: scrap and rework normal allowances
- No non-financial measures
- Variance analysis
- –Volume variances - maximise production
- –Raw material variance – reduce input prices
- Meet predetermined standard costs
- Additional quality costs incurred now, benefit later (lag)
- Don’t record opportunity costs
Other approaches to quality management: Six Sigma
- A more tightly structured approach to managing quality compared to TQM
- Focuses on improving business processes, in particular by identifying and eliminating defects.
- It is based on the idea that business processes have certain characteristics that can be measured, analysed, improved and controlled.
- Six Sigma is a business improvement methodology that uses a structured approach involving rigorous data analysis and unique team based structures
- Developed by Motorola to reduce the level of defects in manufacturing processes. Over time, however, it has evolved into an effective method for improving any business process.
- Six Sigma uses two different process improvement methodologies, one for existing processes and the other for new products or processes.
- Both methodologies begin by identifying customer expectations and then analyse the processes needed to meet these expectations. The collection and analysis of data is fundamental to both methodologies.
- The selection of Six Sigma projects is prioritised according to detailed estimates of their financial outcomes.
- In improving existing processes, data is collected to measure critical aspects of the process and analysed rigorously to identify underlying causes of defects. In addition, data is used in controlling the process once problems have been resolved.
Could Six Sigma could stifle creativity and innovation? So focused on small improvements that we miss big leaps for innovation
Six Sigma compared to other approaches
- Not unlike ABM, BPR and TQM, Six Sigma works by seeking to understand what customers want and aligning the organisation’s key business processes to meet these expectations.
- The methods used to collect and analyse data, such as variance analysis, process mapping, cause and effect diagrams, and statistical process control, are not exclusive to Six Sigma.
- Also, the team-based structure used to implement Six Sigma is unique.
- Highly trained staff are designated as executive leaders, champions, master black belts, black belts, green belts and yellow belts, each with their own specific role to play in leading and implementing process improvement.
Other approaches to quality management: Quality accreditation
- One of the driving forces behind the growth in quality management in Australia has been the quality accreditation process.
- Quality accreditation is obtained by meeting a series of quality standards set out in the International Organization for Standardization’s ISO 9000 series.
- The standards cover the systems, documentation, process controls and delivery methods that an organisation must have in place to deliver quality products (including services).
- The certifications are issued by approved quality auditors.
- –Accreditation is no guarantee of TQM practice, but probably a good indicator
- –TQM is a philosophy / body of ideas
- –Accreditation is a process of assurance, highly process driven and based on documentary evidence
Quality accreditation versus total quality management
and Six Sigma
- Does a quality-accredited organisation practise total quality management? Probably, but not necessarily
- Total quality management is a philosophy or body of ideas. It is
- much broader than quality accreditation, which is a documentation process—it may encourage employees to think about ways to improve quality but it has no broad, underlying philosophy to guide management or employees.
- ‘TQM is pushing the ball up that hill... Certification is a way of ensuring the ball does not roll back down the hill’
Quality and the BSC
- Customer Perspective:
- –Surveys on satisfaction
- –Market share
- –Number of defective units shipped to customers
- –Number of customer complaints
- –Product fail rates
- –Delivery delays / on-time deliveries
- Internal business
- –Percentage of defective products
- –Average repair time at customer site
- –Percentage of reworked products
- –Number of different types of defects found
- –Number of design and process changes made
- Learning and growth
- –Employee turnover ratio
- –Employee empowerment – number of processes in which employees have the right to make decisions without consulting supervisors
- –Employee satisfaction
- –Employee training
- The management of quality contributes to customer value (does the product meet my needs and is this made correctly?)
- Cost of quality reports are a useful means to help manage quality
- TQM, Six Sigma and ISO 9000 provide ways of developing and reinforcing a quality culture and meeting customer expectations