COLLEGE OF SCIENCE AND TECHNOLOGY
Cagamutan Norte, Leganes, Iloilo - 5003
Tel. # (033) 396-2291 ; Fax : (033) 5248081
Email Address : svcst_leganes@yahoo.com
COO – FORM 12
SUBJECT TITLE: OPERATIONS MANAGEMENT AND TQM AND ERP
INSTRUCTOR:
HARVEY S. CHEN, CPA, MBA
SUBJECT CODE: MS1
FINALS MODULE
Topic 1:
Overview of Total Quality Management
LEARNING OBJECTIVES:
At the end of this topic, the students are expected to:
1.
2.
3.
4.
5.
Understand the importance of quality and its dimensions;
Explain the essence of total quality management and its objectives;
Enumerate and explain the characteristics of TQM;
Identify the different models used in quality management; and
Apply quality management tools in analyzing and solving problems of an
organization.
NOTES:
1.1 Quality
It is hard to define the quality of a product of service since it depends on people’s
perceptions and their own needs. Nevertheless, quality means user satisfaction: that
goods or services satisfy the needs and expectations of the user.
Quality refers to a parameter which decides the superiority or inferiority of a product
or service. Quality can be defined as an attribute which differentiates a product or
service from its competitors. Quality plays an essential role in every business.
Business marketers need to emphasize on quality of their brands over quantity to
survive the cut throat competition.
Dimensions of Quality
Quality has a number of dimensions, and these are:
a. Performance. The product or service is ready for the customer’s use at the time
of sale. It refers to the primary operating characteristics of a product.


Reliability. Consistency of performance and can be measured by the length of
time a product can be used before it fails.
Durability. The ability of a product to continue to function even when subjected
to hard wear and frequent use.
Page 1 of 33

Maintainability. Being able to return a product to operating condition after it
has failed.
b. Features. A product’s secondary characteristics or little extras, such as remote
control on an air conditioner.
c. Conformance. Achieved by meeting established standards or specifications and
often the responsibility of manufacturing.
d. Warranty. A company’s public promise to back up its products with a guarantee
of customer satisfaction.
e. Service. An intangible generally made up of a number of things such as
availability, speed of service, courtesy, and competence of personnel.
f.
Aesthetics. Pleasing to the senses, usually reflected by the exterior finish or the
appearance of a product.
g. Perceived quality. Total customer satisfaction based on the complete experience
with an organization (not just the product), such as a company’s reputation or past
performance.
h. Price. Customers pay for value in what they buy. Value is the sum of the benefits
the customer receives and can be more than the product itself.
1.2 Total Quality Management (TQM)
Total Quality management (TQM) is defined as a continuous effort by the
management as well as employees of a particular organization to ensure long term
customer loyalty and customer satisfaction.
Remember, one happy and satisfied customer brings ten new customers along with
him whereas one disappointed individual will spread bad word of mouth and spoil
several of your existing as well as potential customers.
You need to give something extra to your customers to expect loyalty in return. TQM
is a structured effort by employees to continuously improve the quality of their
products and services through proper feedbacks and research. Ensuring superior
quality of a product or service is not the responsibility of a single member. Every
individual who receives his paycheck from the organization has to contribute equally
to design foolproof processes and systems which would eventually ensure superior
quality of products and services. TQM is indeed a joint effort of management, staff
members, workforce, suppliers in order to meet and exceed customer satisfaction
level.
The objective of TQM is to provide a quality product to customers at a lower price. By
increasing quality and decreasing price, profit will increase which will also increase job
security and employment.
TQM is both a philosophy and a set of guiding principles that lead to a continuously
improving organization.
W. Edwards Deming, Joseph M. Juran, and Armand V. Feigenbaum jointly developed
the concept of total quality management. TQM originated in the manufacturing sector,
but can be applied to almost all organizations.
Importance of Quality Management
a. Quality management ensures superior quality products and services.
Quality management is essential to create superior quality products which not only
meet but also exceed customer satisfaction. Customers need to be satisfied with
your brand. Business marketers are successful only when they emphasize on
quality rather than quantity. Quality products ensure that you survive the cut
throat competition with a smile.
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b. Quality management is essential for
eventually leads to customer loyalty.
customer
satisfaction
which
A customer would be happy and satisfied only when your product meets his
expectations and fulfills his needs. Understand what the customer expects from
you. Find out what actually his need is. Collect relevant data which would give
you more insight into customer’s needs and demands. Customer feedbacks should
be collected on a regular basis and carefully monitored.
Quality management ensures high quality products and services by eliminating
defects and incorporating continuous changes and improvements in the system.
High quality products in turn lead to loyal and satisfied customers who bring ten
new customers along with them.
Quality management tools help an organization to design and create a product
which the customer actually wants and desires.
c. Quality Management ensures increased revenues and higher productivity
for the organization.
Remember, if an organization is earning, employees are also earning. Salaries are
released on time only when there is free cash flow. Implementing Quality
management tools ensure high customer loyalty, thus better business, increased
cash flow, satisfied employees, healthy workplace and so on. Quality management
processes make the organization a better place to work.
d. Quality management helps organizations to reduce waste and inventory.
It enables employees to work closely with suppliers and incorporate “Just in Time”
Philosophy.
1.3 Basic Concepts in TQM
The six basic concepts in TQM are:
1. Management Commitment
TQM is a continuous process and becomes part of an organization’s culture. Senior
management should start the process and form a quality council to establish core
values, and vision, mission, and quality policy statements.
Core values include such principles as customer-driven quality, continuous
improvement, employee participation, and fast response.
The vision statement describes what the organization should become 5 to 10 years
in the future.
The mission statement describes the function of the organization (who we are, who
our customers are, what the organization does, and how it does it).
The quality policy statement is a guide for all in the organization about how
products and services should be provided.
2. Customer Focus
Total quality management implies an organization that is dedicated to delighting
the customer by meeting or exceeding customer expectations at a low cost. It
means not only understanding present customer needs but also anticipating
customers’ future needs. There are two types of customers, external and internal.
External customers exist outside the organization and purchase goods or services
from the organization.
Page 3 of 33
Internal customers, on the other hand, are persons or departments who receive
the output from another person or department in an organization.
Customers often have six requirements of their suppliers:






High quality level.
High flexibility to change (volume, specifications, and delivery).
High service level.
Short lead times.
Low variability in meeting targets.
Low cost.
3. Employee Involvement
Total quality management is the responsibility of everyone in the organization. To
gain employee commitment to the organization and TQM requires the following:

Training.
People should be trained in their own job skills and, where possible, crosstrained in other related jobs. They should also be trained to use the tools
of continuous improvement, problem solving, and statistical process
control.

Organization.
The organization must be designed to put people in close contact with their
suppliers and customers. One way is to organize into customer-, product,
or service-focused teams.
A team is a group of people working together to achieve common goals or
objectives, and good teams can move beyond the contribution of individual
members so that the sum of their total effort is greater than their individual
efforts.

Local ownership.
People should feel ownership of the processes they work with. This results
in a commitment to make their processes better and to continuous
improvement. They should be empowered.
Empowerment means giving people the authority to make decisions and
take action in their work areas without getting prior approval. Giving people
the authority to make decisions motivates them to accomplish the goals and
objectives of the organization and to improve their jobs.
4. Continuous Process Improvement
Processes can and must be improved to reduce cost and increase quality. If a
product is excellent in one dimension, such as performance, then improved quality
in another dimension should be sought.
5. Supplier Partnerships
A partnering rather than adversarial relationship must be established between the
organization and the suppliers. There are three key factors in partnering:



Long-term commitment.
Trust.
Shared vision.
6. Performance Measures
Improvement is not possible unless there is some way to measure the results.
Performance measures can be used to:
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




Discover which process needs improvement.
Evaluate alternative processes.
Compare actual performance with targets so corrective action can be taken.
Evaluate employee performance.
Show trends.
The basic characteristics that can be used to measure the performance of a particular
process or activity include:




Quantity. The number of units a process produces in a period of time.
Cost. The amount of resources needed to produce a given output.
Time/delivery. The ability to deliver a service or product on time.
Quality. The function, aesthetics and accuracy of a product or service.
 Function. The performance of the product or service as specified.
 Aesthetics. The appeal of the product or service to customers.
 Accuracy. The number of non-conformances (defects or rejects)
produced.
Performance measures should be simple, easy for users to understand, relevant to the
user, visible to the user, preferably developed by the user, designed to promote
improvement, and few in number.
Some of the areas and possible measurements are as follows:




Customer. Number of complaints, on-time delivery, dealer or customer
satisfaction.
Production. Inventory turns, scrap or rework, process yield, cost per unit,
time to perform operations.
Suppliers. On-time delivery, rating, quality performance, billing accuracy.
Sales. Sales expense to revenue, new customers, gained or lost accounts,
sales per square foot.
1.4 Elements of TQM
Quality is an essential parameter which helps organizations outshine their competitors
and survive the fierce competition. The success of total quality management depends
on the following:
a. Foundation.
The entire process of TQM is built on a strong foundation of Ethics, Integrity and
Trust. TQM involves every single employee irrespective of his designation and level
in the hierarchy.

Ethics. Ethics is an individual’s understanding of what is good and bad at
the workplace. Ethics teach an individual to follow code of conduct of
organization and adhere to rules and regulations.

Integrity. Integrity refers to honesty, values and an individual’s sincerity
at workplace. You need to respect your organization’s policies. Avoid
spreading unnecessary rumors about your fellow workers. TQM does not
work in an environment where employees criticize and backstab each other.

Trust. Trust is one of the most important factors necessary for
implementation of total quality management. Employees need to trust each
other to ensure participation of each and every individual. Trust improves
relationship among employees and eventually helps in better decision
making which further helps in implementing total quality management
successfully.
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b. Bricks.
Bricks are placed on a strong foundation to reach the roof of recognition. The
foundation needs to be strong enough to hold the bricks and support the roof.

Training. Employees need to be trained on TQM. Managers need to make
their fellow workers aware of the benefits of total quality management and
how would it make a difference in their product quality and eventually yield
profits for their organization. Employees need to be trained on interpersonal
skills, the ability to work as a team member, technical know-how, decision
making skills, problem solving skills and so on. Training enables employees
to implement TQM effectively within their departments and also make them
indispensable resources.

Teamwork. Rather than working individually, employees need to work in
teams. When individuals work in unison, they are in a position to brainstorm
ideas and come up with various solutions which would improve existing
processes and systems. Team members ought to help each other to find a
solution and put into place.

Leadership. Leadership provides a direction to the entire process of TQM.
TQM needs to have a supervisor who acts as a strong source of inspiration
for other members and can assist them in decision making. A leader himself
needs to believe in the entire process of TQM for others to believe in the
same. Proper downloads, briefs about TQM must be given from to time to
employees to help them in its successful implementation.
c. Binding Mortar.
Binding Mortar binds all the elements together.

Communication. Communication binds employees and extracts the best
out of them. Information needs to be passed on from the sender to the
recipient in its desired form. Small misunderstandings in the beginning lead
to major problems later on. Employees need to interact with each other to
come up with problems existing in the system and find their solutions as
well.
Three types of Communication take place between employees:



Downward Communication. Flow of information takes place from
the management to the employees.
Upward Communication. Flow of information takes place from the
employees to the top level management.
Sideways Communication. Communication also takes place
between various departments.
d. Roof

Recognition. Recognition is the final element of TQM. Recognition is the
most important factor which acts as a catalyst and drives employees to work
hard as a team and deliver their lever best. Every individual is hungry for
appreciation and recognition. Employees who come up with improvement
ideas and perform exceptionally well must be appreciated in front of all.
They should be suitably rewarded to expect a brilliant performance from
them even the next time.
1.5 Role of Managers and Customers in TQM
Managers’ Important Role in Total Quality Management
Initiating and implementing total quality management programs require great amount
of planning and research. Managers need to get trained in various TQM practices before
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implementing the same. There are costs involved with the entire process of TQM. It is
the manager’s responsibility to allocate budgets for TQM at the beginning of every
financial year.
Managers must be convinced first why quality is such an important parameter in every
business. If they themselves are not convinced, it would be very difficult for them to
convince other departments for implementing TQM.
Managers must know who their customers are and understand their target market
carefully. They must go out, meet customers and find out as to what they expect from
the company’s brand. Customer feedbacks play an important role in formulating
strategies for total quality management.
Managers need to work closely with the senior management, human resource
professionals to develop foolproof implementation strategies. A manager has to act
as a bridge between the senior management and the entire workforce.
Managers act as facilitators at the workplace. It is their duty to assist employees in
implementing TQM. As managers, it is their responsibility to select and appoint right
individuals who can work as line managers and take charge of the entire project. The
employees selected should be reliable and diligent and should be capable enough to
handle a crucial project like total quality management. It is the manager’s
responsibility to assign resources for total quality management, allocate time for
various training programs and appreciate employees who come up with various
improvement ideas and strategies which would help the organization deliver superior
quality products.
Managers must communicate the benefits of total quality management to all other
members of the organization.
Customers’ Important Role in Total Quality Management.
A business is successful only when its products and services have enough buyers in
the market. There are several other parameters also but customers play a crucial role
in deciding the success and failure of an organization. Business marketers need to
focus on their end-users and what exactly they expect from their organization.
Customer feedbacks should be regularly and carefully monitored before formulating
any major business strategy.
TQM ensures that employees understand their target customers well before making
any changes in the processes and systems to deliver superior quality products for
better customer satisfaction. In fact, organizations introduce total quality management
or any other quality management process to increase their customer base and levels
of customer satisfaction. TQM increases an organization’s database of loyal customers
who would not go anywhere, no matter what.
Quality of a product is not defined only in terms of its durability, packaging, reliability,
timely delivery and so on but also a customer’s overall experience with the
organization. Customer dissatisfaction leads to loss of business.
In service industry, employees need to interact with the customers sensibly and with
utmost care and professionalism to expect happy and loyal customers. Design various
feedback forms for the customers for them to share what they feel about your products
and services. The feedbacks may be in favor of your organization, or may not be in
favor of your business. Negative comments or feedbacks of the customers should not
be ignored.
As a part of TQM, employees should sit on a common platform, brainstorm ideas and
come to concrete solutions which would improve the systems and processes to
eventually delivery what the customer expects. No amount of total quality
management would help if you ignore your customers.
In case of physical products, customers are satisfied when the products are

Durable.
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



Reliable.
Easy to Use.
Adaptable.
Appropriate.
In case of service industry customers are satisfied only when:





Employees are friendly and polite.
Employees are honest and do not make fake promises.
Employees are easy approachable.
Employees are willing to listen and address customer grievances.
Organizations respond to customer requests on time.
1.6 TQM Models
Credits for the process of total quality management go to many philosophers and their
teachings. Drucker, Juran, Deming, Ishikawa, Crosby, Feigenbaum and many other
individuals who have in due course of time studied organizational management have
contributed effectively to the process of total quality management. There are various
models of total quality management.
Deming Application Prize
The Deming Prize is the longest-running and one of the highest awards on TQM (Total
Quality Management) in the world.
It recognizes both individuals for their
contributions to the field of TQM) and businesses that have successfully implemented
TQM. It was established in 1951 to honor W. Edwards Deming who contributed greatly
to Japan’s proliferation of statistical quality control after World War II. His teachings
helped Japan build its foundation by which the level of Japan’s product quality has
been recognized as the highest in the world.
The award was originally designed to reward Japanese companies for major advances
in quality improvement. Over the years it has grown, under the guidance of the
Japanese Union of Scientists and Engineers (JUSE) to where it is now also available to
non-Japanese companies, albeit usually operating in Japan, and also to individuals
recognized as having made major contributions to the advancement of quality.
Malcolm Baldrige Criteria for Performance Excellence
The Malcolm Baldrige National Quality Award recognizes U.S. organizations in the
business, health care, education, and nonprofit sectors for performance excellence.
The Baldrige Award is the only formal recognition of the performance excellence of
both public and private U.S. organizations given by the President of the United States.
It is administered by the Baldrige Performance Excellence Program, which is based at
and managed by the national Institute of Standards and Technology (NIST), an agency
of the U.S. Department of Commerce.
Up to 18 awards may be given annually across six eligibility categories —
manufacturing, service, small business, education, health care, and nonprofit.
The Baldrige Performance Excellence Program and the associated award were
established by the Malcolm Baldrige National Quality Improvement Act of 1987 (Public
Law 100–107). The program and award were named for Malcolm Baldridge, who
served as United States Secretary of Commerce during the Reagan administration,
from 1981 until Baldrige's 1987 death in a rodeo accident. In 2010, the program's
name was changed to the Baldrige Performance Excellence Program.
The Baldrige Excellence Framework has three parts:



The criteria for performance excellence.
Core values and concepts.
Scoring guidelines.
The criteria for performance excellence are based on a set of core values:
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










Systems perspective
Visionary leadership
Customer-focused excellence
Valuing people
Organizational learning and agility
Focus on success
Managing for innovation
Management by fact
Societal responsibility
Ethics and transparency
Delivering value and results
Recipients are selected based on achievement and improvement in seven areas, known
as the Baldrige Criteria for Performance Excellence:







Leadership. How upper management leads the organization, and how the
organization leads within the community.
Strategy. How the organization establishes and plans to implement strategic
directions.
Customers. How the organization builds and maintains strong, lasting
relationships with customers.
Measurement, analysis, and knowledge management.
How the
organization uses data to support key processes and manage performance.
Workforce. How the organization empowers and involves its workforce.
Operations. How the organization designs, manages, and improves key
processes.
Results. How the organization performs in terms of customer satisfaction,
finances, human resources, supplier and partner performance, operations,
governance and social responsibility, and how the organization compares to its
competitors.
The framework serves to help organizations assess their improvement efforts,
diagnose their overall performance management system, and identify their strengths
and opportunities for improvement, and to identify Baldrige Award recipients that will
serve as role models for other organizations.
European Foundation for Quality Management (EFQM)
EFQM is a not-for-profit membership foundation in Brussels, established in 1989 to
increase the competitiveness of the European economy. The initial impetus for forming
EFQM was a response to the work of W. Edwards Deming and the development of the
concepts of TQM.
The EFQM excellence model is a non-prescriptive business excellence framework for
organizational management, promoted by the EFQM and designed to help
organizations to become more competitive. Regardless of sector, size, structure or
maturity, organizations need to establish appropriate management systems to be
successful. It is a tool to help organizations do this by measuring where they are on
the path to excellence, helping them understand the gaps, and promoting solutions.
The model consists of three components:

Eight core values or key management principles that drive sustainable
success








Adding value for customers
Creating a sustainable future
Developing organizational capability
Harnessing creativity and innovation
Leading with vision, inspiration and integrity
Managing with agility
Succeeding through the talent of people
Sustaining outstanding results
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
Nine criteria, separated into:



Five "enablers" (leadership, people, strategy, partnerships and
resources, and processes, products and services); and
Four "results" (people, customer, society, and business results)
RADAR logic, continuous improvement cycle used by EFQM. It was originally
derived from the PDCA Cycle.




Determine the Results aimed at as part of the strategy
Plan and develop a set of Approaches to deliver the required results now
and in the future
Deploy the approaches in a systematic way to ensure implementation
Assess and Refine the deployed approaches based on monitoring and
analysis of the results achieved and ongoing learning
The model is used by about 30,000 organizations across Europe. In recent years,
more and more countries started implementing the Model, especially across Middle
East and South America.
ISO Quality Management Standards
Established in 1947, the International Organization for Standardization (ISO) is
a nongovernmental organization based in Geneva, Switzerland. The ISO has issued a
series of standards, including ISO 9000.
ISO 9000 family of quality management systems (QMS) standards is designed to help
organizations ensure that they meet the needs of customers and other stakeholders
while meeting statutory and regulatory requirements related to a product or service.
ISO 9000 deals with the fundamentals of quality management systems, including the
seven quality management principles upon which the family of standards is based.
The ISO 9000 series are based on seven quality management principles (QMP). The
seven quality management principles are:

Principle 1 – Customer focus. Organizations depend on their customers and
therefore should understand current and future customer needs, should meet
customer requirements and strive to exceed customer expectations.

Principle 2 – Leadership. Leaders establish unity of purpose and direction of
the organization. They should create and maintain the internal environment in
which people can become fully involved in achieving the organization's
objectives.

Principle 3 – Engagement of people. People at all levels are the essence of an
organization and their full involvement enables their abilities to be used for the
organization's benefit.

Principle 4 – Process approach. A desired result is achieved more efficiently
when activities and related resources are managed as a process.

Principle 5 – Improvement.
Improvement of the organization's overall
performance should be a permanent objective of the organization.

Principle 6 – Evidence-based decision making. Effective decisions are based on
the analysis of data and information.

Principle 7 – Relationship management. An organization and its external
providers (suppliers, contractors, service providers) are interdependent and a
mutually beneficial relationship enhances the ability of both to create value.
ISO certification is a requirement for doing business in Europe and has become an
accepted standard throughout the world.
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1.7 Quality Management Tools
Quality Management tools help organization collect and analyze data for employees
to easily understand and interpret information. Quality Management models require
extensive planning and collecting relevant information about end-users. Customer
feedbacks and expectations need to be carefully monitored and evaluated to deliver
superior quality products.
Quality Management tools help employees identify the common problems which are
occurring repeatedly and also their root causes. Quality Management tools play a
crucial role in improving the quality of products and services. With the help of Quality
Management tools employees can easily collect the data as well as organize the
collected data which would further help in analyzing the same and eventually come to
concrete solutions for better quality products
The following are some of the most commonly used quality management tools:

Histograms. A histogram is a kind of bar chart showing a distribution of
variables or causes of problems. It represents cause of a problem as a column
and the frequency of each cause of problem as the height of the column.

Control Charts. Also known as Shewhart charts, control charts are used to
determine if a manufacturing or business process is in a state of control. The
chart is used to study how a process changes over time. Data are plotted in
time order. It has a central line for the average, an upper line for the upper
control limit, and a lower line for the lower control limit.

Checksheets. A checksheet is a document used to collect data in real time at
the location where the data is generated. Once an issue of interest is identified
(e.g., customer complaints about a product), the sources of the complaints are
listed as they occur. A check is put beside the reason. The number of checks
would clearly indicate the major source of complaint.
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
Pareto Charts. These charts are presented in such a way to show the highest
bar first and all others in descending order from high to low. The chart is named
after the Pareto principle, which suggests that most effects come from relatively
few causes. In quantitative terms, 80% of the problems come from 20% of
the causes (machines, raw materials, operators, etc.). therefore, effort aimed
at the right 20% can solve 80% of the problems.

Ishikawa Diagrams (Cause and Effect Diagrams). Also called fishbone
diagrams, these are used to plot out all the potential causes for an identified
problem (effect). The effect is shown as the fish’s head, facing to the right,
with the causes extending to the left as fishbones; the ribs branch off the
backbone for major causes, with sub-branches for root-causes, to as many
levels as necessary.
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
Scatter Plots or Scatter Graphs. These graphs show the relationship
between two variables of interest. For instance, a bank may want to know
whether there is a relationship between how long clients have to wait in line
and how satisfied they are with their service by the bank. Plotting many
customer scores would provide an indication whether there is a relationship and
also the strength of that relationship.

Process Flowcharts. These charts show in detail the steps required to
produce a product or service. Once the specific tasks are identified, data can
be collected about them to determine bottlenecks or other problems that can
be corrected to improve the process involved.

Run Charts or Line Charts. These graphs display observed data in a time
sequence. Data displayed often represent some aspect of the output or
performance of a manufacturing or other business process. Run charts are
analyzed to find anomalies in data that suggest shifts in a process over time or
special factors that may be influencing the variability of the process. Although
similar in some regards to the control charts, run charts do not show the control
limits of the process and are therefore simpler to produce.
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Exercises:
1. In which areas must quality be considered? How do they interrelate?
2. What is empowerment and how is it important in TQM?
3. What is the best quality management toll to use and why?
4. Explain the significance of ISO quality standards.
5. What roles do management need to take in TQM?
END OF TOPIC 1
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Topic 2:
Quality Cost and Quality Improvement
LEARNING OBJECTIVES:
At the end of this topic, the students are expected to:
1.
2.
3.
4.
Identify the different types of quality costs and their importance;
Enumerate and discuss the process of continuous process improvement;
Explain the impact of kaizen in organizations;
Differentiate between continuous process improvement and benchmarking;
and
5. Explain the significance of Six Sigma.
NOTES:
2.1 Cost of Quality
Cost of quality (COQ) is defined as a methodology that allows an organization to
determine the extent to which its resources are used for activities that prevent poor
quality, that appraise the quality of the organization’s products or services, and that
result from internal and external failures. Having such information allows an
organization to determine the potential savings to be gained by implementing process
improvements.
Quality-related activities that incur costs may be divided into conformance costs and
nonconformance costs.
Conformance Costs (Costs of Controlling Quality)
The cost of controlling quality can be broken down into preventive costs and appraisal
costs.
a. Prevention costs.
Prevention costs are incurred to prevent or avoid quality problems. These costs
are associated with the design, implementation, and maintenance of the quality
management system. They are planned and incurred before actual operation, and
they could include:

Marketing/customer/user




Product/service/design development






Design quality progress reviews
Design support activities
Product design qualification test
Service design qualification
Field tests
Purchasing





Marketing research
Customer/user perception surveys/clinics
Contract/document review
Supplier reviews
Supplier rating
Purchase order tech data reviews
Supplier quality planning
Operations (manufacturing or service)
Page 15 of 33





Operations process validation
o Operations quality planning
o Design and development of quality measurement and control
equipment
Operations support quality planning
Operator quality education
Operator SPC/process control
Quality administration








Administrative salaries
Administrative expenses
Quality program planning
Quality performance reporting
Quality education
Quality improvement
Quality audits
Other prevention costs
b. Appraisal costs.
Appraisal costs are associated with measuring and monitoring activities related to
quality. These costs are associated with the suppliers’ and customers’ evaluation
of purchased materials, processes, products, and services to ensure that they
conform to specifications. They could include:

Purchasing appraisal costs





Operations (manufacturing or service) appraisal costs


Receiving or incoming inspections and tests
Measurement equipment
Qualification of supplier product
Source inspection and control programs
Planned operations inspections, tests, audits
o Checking labor
o Product or service quality audits
o Inspection and test materials
 Set-up inspections and tests
 Special tests (manufacturing)
 Process control measurements
 Laboratory support (Measurement equipment)
- Depreciation allowances
- Measurement equipment expenses
- Maintenance and calibration labor
 Outside endorsements and certifications
External appraisal costs



Field performance evaluation
Special product evaluations
Evaluation of field stock and spare parts

Review of tests and inspection data

Miscellaneous quality evaluations
Nonconformance Costs (Costs of Failure)
The cost of failing to control quality are the costs of producing material that does not
meet specification. They may be broken down into internal failure costs and external
failure costs.
a. Internal Failure Costs.
Page 16 of 33
Internal failure costs are incurred to remedy defects discovered before the product
or service is delivered to the customer. These costs occur when the results of work
fail to reach design quality standards and are detected before they are transferred
to the customer. They could include:

Product/service design failure costs (internal)




Purchasing failure costs






Purchased material reject disposition costs
Purchased material replacement costs
Supplier corrective action
Rework of supplier rejects
Uncontrolled material losses
Operations (product or service) failure costs








Design corrective action
Rework due to design changes
Scrap due to design changes
Material review and corrective action costs
o Disposition costs
o Troubleshooting or failure analysis costs (operations)
o Investigation support costs
o Operations corrective action
Operations rework and repair costs
o Rework
o Repair
Re-inspection / retest costs
Extra operations
Scrap costs (operations)
Downgraded end product or service
Internal failure labor losses
Other internal failure costs
b. External Failure Costs.
External failure costs are incurred to remedy defects discovered by customers.
These costs occur when products or services that fail to reach design quality
standards are not detected until after transfer to the customer. They could include:










Complaint investigation/customer or user service
Returned goods
Retrofit costs
Recall costs
Warranty claims
Liability costs
Penalties
Customer/user goodwill
Lost sales
Other external failure costs
2.2 Continuous Process Improvement (CPI)
Process improvement is concerned with improving the effective use of human and
other resources. It is concerned with increases in the productivity or value of quality
or condition. Continuous process improvement system is based on the scientific
method, and consists of a logical set of steps and techniques used to analyze processes
and to improve them.
The six steps are as follows:
Page 17 of 33
a. Select the process. The first step is to decide what to study. Existing methods
should be observed to indicate areas that need the most improvement, such as the
following:






High scrap, reprocessing, rework, and repair costs.
Backtracking of material flow caused by poor plant layout.
Bottlenecks.
Excessive overtime.
Excessive manual handling of materials
Employee grievances without true causes.
In selecting jobs or operations for method improvement, there are economic and
human factor considerations. Pareto analysis can be used to select problems with
the greatest economic impact. However, this method does not report what the
problems are, only where they seem to occur. The cause-and-effect diagram is a
very useful tool for identifying root causes.
b. Record the existing method. In this step, all the facts relating to the existing
process is recorded. To properly define the process, the following should be
considered:







Process boundaries
Process flow
Process inputs and outputs
Components
Customer
Suppliers
Environment
c. Analyze the recorded data. This step involves analyzing every aspect of the
present method and evaluating all proposed possible methods. Finding the root
cause of problems is a difficult task, and the following approaches may help:



A questioning attitude.
Examining the total process to define what is accomplished, how, and why.
Examining the parts of the process (value adding and non-value adding
activities).
d. Develop possible solutions. When developing possible solutions,




Eliminate all unnecessary work.
Combine operations wherever possible.
Rearrange the sequence of operations for more effective results.
Simplify wherever possible by making the necessary operations less complex.
e. Install the new method. In planning the installation, the best time to install,
the method of installing, and the people involved must be considered. At actual
installation, a dry run will show whether all equipment and tooling are working
properly. Training the operator is the most important part of the installation.
f.
Maintain the new method. Maintaining is a follow-up activity that involves
making sure that the new method is being done as it should be. Another purpose
of maintaining is to evaluate the change to be sure than the planned benefits are
accomplished.
2.3 Kaizen
“Kaizen” refers to a Japanese word which means “improvement” or “change for the
better”. Kaizen is defined as a continuous effort by each and every employee (from
the CEO to field staff) to ensure improvement of all processes and systems of a
particular organization.
Page 18 of 33
The process of Kaizen helps Japanese companies to outshine all other competitors by
adhering to certain set policies and rules to eliminate defects and ensure long term
superior quality and eventually customer satisfaction.
Kaizen works on the basic principle that “Change is for good”.
Kaizen means “continuous improvement of processes and functions of an organization
through change”. In a layman’s language, Kaizen brings continuous small
improvements in the overall processes and eventually aims towards organization’s
success. Japanese feel that many small continuous changes in the systems and policies
bring effective results than few major changes.
Kaizen process aims at continuous improvement of processes not only in
manufacturing sector but all other departments as well. Implementing Kaizen tools is
not the responsibility of a single individual but involves every member who is directly
associated with the organization. Every individual, irrespective of his/her designation
or level in the hierarchy needs to contribute by incorporating small improvements and
changes in the system.
Kaizen is part action plan and part philosophy.

As an action plan, Kaizen is about organizing events focused on improving
specific areas within the company. These events involve teams of employees
at all levels, with an especially strong emphasis on involving plant floor
employees.

As a philosophy, Kaizen is about building a culture where all employees are
actively engaged in suggesting and implementing improvements to the
company. In truly lean companies, it becomes a natural way of thinking for
both managers and plant floor employees.
The Core of Kaizen
There are 5 Fundamental KAIZEN Principles that are embedded in every KAIZEN tool
and in every KAIZEN behavior. The 5 principles are:





Know your Customer. Creating customer value. Identify their interests so
you can enhance their experience.
Let it Flow. Targeting zero waste. Everyone in the organization should aim
9to create value and eliminate waste.
Go to Gemba. Following the action. Value is created where things actually
happened.
Empower People. Organize teams. Set the same goals for your team and
provide a system and tools to reach them.
Be Transparent. Speaking with real data. Performance and improvements
should be tangible and viable.
The implementation of those 5 principles in any organization is fundamentally
important for a successful continuous improvement culture and to mark a turning point
in the progression of quality, productivity, and labor-management relations.
Five S of Kaizen
“Five S” of Kaizen is a systematic approach which leads to foolproof systems, standard
policies, rules and regulations to give rise to a healthy work culture at the organization.
You would hardly find an individual representing a Japanese company unhappy or
dissatisfied. Japanese employees never speak ill about their organization.
Page 19 of 33
The process of Kaizen plays an important role in employee satisfaction and customer
satisfaction through small continuous changes and eliminating defects. Kaizen tools
give rise to a well-organized workplace which results in better productivity and yield
better results. It also leads to employees who strongly feel attached towards the
organization.

SEIRI. SEIRI stands for Sort Out. Employees should sort out and organize
things well. Label the items as “Necessary”, ”Critical”, ”Most Important”, “Not
needed now”, “Useless and so on. Throw what all is useless. Keep aside what
all is not needed at the moment. Items which are critical and most important
should be kept at a safe place.

SEITION. SEITION means to organize. Research says that employees waste
half of their precious time searching for items and important documents. Every
item should have its own space and must be kept at its place only.

SEISO. The word “SEISO” means shine the workplace. The workplace ought
to be kept clean. De-clutter your workstation. Necessary documents should be
kept in proper folders and files. Use cabinets and drawers to store your items.

SEIKETSU. SEIKETSU refers to standardization. Every organization needs to
have certain standard rules and set policies to ensure superior quality.

SHITSUKE. SHITSUKE means self-discipline. Employees need to respect
organization’s policies and adhere to rules and regulations. Self-discipline is
essential. Follow work procedures and do not forget to carry your identity cards
to work. It gives you a sense of pride and respect for the organization.
Understanding the Approach
Because Kaizen is more a philosophy than a specific tool, its approach is found in many
different process improvement methods ranging from Total Quality Management
(TQM), to the use of employee suggestion boxes. Under kaizen, all employees are
responsible for identifying the gaps and inefficiencies and everyone, at every level in
the organization, suggests where improvement can take place.
Kaizen aims for improvements in productivity, effectiveness, safety, and waste
reduction, and those who follow the approach often find a whole lot more in return:








Less waste. Inventory is used more efficiently as are employee skills.
People are more satisfied. They have a direct impact on the way things are
done.
Improved commitment. Team members have more of a stake in their job
and are more inclined to commit to doing a good job.
Improved retention. Satisfied and engaged people are more likely to stay.
Improved competitiveness. Increases in efficiency tend to contribute to
lower costs and higher quality products.
Improved consumer satisfaction. Coming from higher quality products with
fewer faults.
Improved problem solving.
Looking at processes from a solutions
perspective allows employees to solve problems continuously.
Improved teams. Working together to solve problems helps build and
strengthen existing teams.
Another Japanese term associated with kaizen is muda, which means waste. Kaizen
is aimed at decreasing waste by eliminating overproduction, improving quality, being
more efficient, having less idle time, and reducing unnecessary activities. All these
translate to money savings and turn potential losses into profits.
The kaizen philosophy was developed to improve manufacturing processes, and it is
one of the elements which led to the success of Japanese manufacturing through high
quality and low costs. However, you can gain the benefits of the kaizen approach in
many other working environments too, and at both a personal level or for your whole
team or organization.
Page 20 of 33
Much of the focus in kaizen is on reducing "waste" and this waste takes several forms:





Movement. Moving materials around before further value can be added to
them.
Time. Spent waiting (no value is being added during this time).
Defects. Which require re-work or have to be thrown away.
Over-processing. Doing more to the product than is necessary to give
customer maximum value for their money.
Variations. Producing bespoke solutions where a standard one will work just
as well.
2.4 PDSA Technique
The PDSA or the Plan-Do-Study-Act technique is a famous Quality Improvement
Tool or Initiative that helps organizations enhance the quality of their products and
services.
The PDSA technique hinges on the iterative process wherein each cycle begins with
planning the quality improvement, actualizing the method or the process for QI,
studying the results to determine whether the QI was successful or not, and then
acting upon the feedback for the next cycle to incorporate such feedback.
The PDSA Cycle is a systematic series of steps for gaining valuable learning and
knowledge for the continual improvement of a product or process. Also known as the
Deming Wheel, or Deming Cycle, the concept and application was first introduced
to Dr. Deming by his mentor, Walter Shewhart of the famous Bell Laboratories in New
York.
This means that the emphasis on continuous improvement of products and services
through iterative cycles starting with planning and then performing the steps needed
to enhance the quality, studying the results to determine what went right and what
went wrong, and lastly, incorporating the feedback into the next cycle to make the
process better lies at the heart of the PDSA technique.
Components of the PDSA Technique

Planning Phase.
Planning is the most crucial phase of total quality
management. In this phase employees have to come up with their problems
and queries which need to be addressed. They need to come up with the various
challenges they face in their day to day operations and also analyze the
problem’s root cause. Employees are required to do necessary research and
collect relevant data which would help them find solutions to all the problems.

Doing Phase. In the doing phase, employees develop a solution for the
problems defined in planning phase. Strategies are devised and implemented
to overcome the challenges faced by employees. The effectiveness of solutions
and strategies is also measured in this stage.

Studying Phase. This is the stage where people actually do a comparison
analysis of before and after data to confirm the effectiveness of the processes
and measure the results.

Acting Phase. In this phase, employees document their results and prepare
themselves to address other problems.
2.5 Benchmarking
Benchmarking is a systematic method by which organizations can compare their
performance in a particular process to that of a “best-in-class” organization, finding
out how that organization achieves those performance levels and applying them to
their own organization.
Page 21 of 33
While continuous improvement seeks to make improvement by looking inward and
analyzing current practice, benchmarking looks outward to what competitors and
excellent performers outside the industry are doing.
The following steps are followed in benchmarking:
a. Select the process to benchmark.
b. Identify an organization that is “best in class” in performing the process you want
to study.
c. Study the benchmarked organization.
d. Analyze the data.
2.6 Six Sigma
Six Sigma is a business management strategy which aims at improving the quality of
processes by minimizing and eventually removing the errors and variations. It
requires thorough understanding of product and process knowledge and is completely
driven by customer expectations. In other words, it is a methodology to achieve 3.4
defects per million opportunities. It can also be used to bring breakthrough
improvements in the process. It focuses on the bottom-line and is a proven
methodology for problem solving.
The concept of Six Sigma was introduced by Motorola in 1986, but was popularized by
Jack Welch who incorporated the strategy in his business processes at General Electric.
The concept of Six Sigma came into existence when one of Motorola’s senior executives
complained of Motorola’s bad quality. Bill Smith, a veteran engineer of Motorola,
eventually formulated the methodology in 1986.
Quality plays an important role in the success and failure of an organization.
Neglecting an important aspect like quality, will not let you survive in the long run.
Six Sigma ensures superior quality of products by removing the defects in the
processes and systems.
Six Sigma is a process which helps in improving the overall processes and systems by
identifying and eventually removing the hurdles which might stop the organization to
reach the levels of perfection. According to Six Sigma, any sort of challenge which
comes across in an organization’s processes is considered to be a defect and needs to
be eliminated.
Six Sigma Methods
The process of Six Sigma originated in manufacturing processes but now it finds its
use in other businesses as well. Proper budgets and resources need to be allocated for
the implementation of Six Sigma in organizations.
Following are the two Six Sigma methods:
a. DMAIC. This method focuses on improving existing business practices.

D - Define the Problem. In the first phase, various problems which need to
be addressed to are clearly defined. Feedbacks are taken from customers as to
what they feel about a particular product or service. Feedbacks are carefully
monitored to understand problem areas and their root causes.

M - Measure and find out the key points of the current process. Once
the problem is identified, employees collect relevant data which would give an
insight into current processes.

A - Analyze the data. The information collected in the second stage is
thoroughly verified. The root cause of the defects is carefully studied and
investigated as to find out how they are affecting the entire process.

I - Improve the current processes based on the research and analysis done
in the previous stage. Efforts are made to create new projects which would
ensure superior quality.
Page 22 of 33

C - Control the processes so that they do not lead to defects.
b. DMADV. This method focuses on creating new strategies and policies.

D - Design strategies and processes which ensure hundred percent customer
satisfaction.

M - Measure and identify parameters that are important for quality.

A - Analyze and develop high level alternatives to ensure superior quality.

D - Design details and processes.

V - Verify various processes and finally implement the same.
Six Sigma Belts
Organizations practicing Six Sigma create special levels for employees within the
organization. The experience and abilities of project managers are designated by terms
from karate.
At the project level, there are master black belts, black belts, green belts, yellow belts,
and white belts. These people conduct projects and implement improvements.

Master Black Belt. Trains and coaches Black Belts and Green Belts. Functions
more at the Six Sigma program level by developing key metrics and the
strategic direction. Acts as an organization’s Six Sigma technologist and
internal consultant.

Black Belt. Leads problem-solving projects. Trains and coaches project teams.

Green Belt. Assists with data collection and analysis for Black Belt projects.
Leads Green Belt projects or teams.

Yellow Belt. Participates as a project team member.
improvements that support the project.

White Belt. Can work on local problem-solving teams that support overall
projects, but may not be part of a Six Sigma project team. Understands basic
Six Sigma concepts from an awareness perspective.
Reviews process
Exercises:
1. What are the basic concepts of TQM?
2. Which among the four types of quality cost is the most significant and which?
3. What is benchmarking and how is it different from continuous improvement?
4. Explain the principle of kaizen.
5. Explain the relationship between TQM and six sigma.
END OF TOPIC 2
Page 23 of 33
Topic 3:
Enterprise Resource Planning
LEARNING OBJECTIVES:
At the end of this topic, the students are expected to:
1.
2.
3.
4.
5.
Identify the purpose of an enterprise resource planning system;
Enumerate and discuss the features of an ERP system;
Understand the advantages and disadvantages of using an ERP system;
Identify the different types of ERP deployment models; and
Explain the application of ERP modules.
NOTES:
3.1 Definition of ERP
Growing companies eventually reach a point where spreadsheets no longer cut it.
That’s where enterprise resource planning software comes in. ERP systems collect and
organize key business information and help organizations run lean, efficient
operations, even as they expand.
At its core, an ERP or enterprise resource planning is an application that automates
business processes, and provides insights and internal controls, drawing on a central
database that collects inputs from departments including accounting, manufacturing,
supply chain, sales, marketing and human resources (HR).
Once information is compiled in that central database, leaders gain cross-departmental
visibility that empowers them to analyze various scenarios, discover process
improvements and generate major efficiency gains. That translates to cost savings
and better productivity as people spend less time digging for needed data.
ERP software that’s tailored to meet the needs of an individual business pays major
dividends, making these systems a critical tool for companies across industries and of
all sizes. Many of the world’s best-known and most successful firms have leaned on
ERP for the last quarter century. Now, this software can be configured and priced to
meet the needs of all-size businesses.
An ERP system helps unify people, processes and technology across an organization.
3.2 How ERP Systems Work
The main purpose of an ERP system is to increase organizational efficiency of an
organization by managing and improving how company resources are utilized.
Improving and/or reducing the number of resources necessary without sacrificing
quality and performance are keys to effectively improving business growth and
profitability.
ERP systems typically cover all aspects of business operations and commonly provide:






An integrated system
Common database
Real-time operation
Support for all applications/components
Common user interface across application/components
On-premise, cloud hosted, or SaaS deployment
ERP software has the ability to collect and compare metrics across departments and
provide a number of different reports based on roles or specific user preferences. The
data collected makes finding and reporting on data faster and gives a complete view
of business performance with complete insights on how resources are being spent.
Page 24 of 33
ERP synchronizes reporting and automation by reducing the need to maintain separate
databases and spreadsheets that would have to be manually merged to generate
reports. This combined data collection and reporting offers valuable insight, such as
where to cut costs and streamline processes, providing the information to make realtime business decisions.
ERP systems work by using a defined, standard data structure. Information entered
by one department is immediately available to authorized users across the business.
This uniform structure helps keep everyone on the same page.
For example, a local food distribution chain has multiple locations that often share
stock and personnel. As to quality, sales and employee data from these sites is fed
into the ERP system, it is formatted to indicate which location it comes from.
Data is then woven into business processes and workflows across departments.
Company leaders can see if one location is doing significantly better at avoiding
spoilage than a sister site a few towns over and work to figure out why, while
operations can make sure staffing levels align with traffic patterns. Finance can
compare sales to rents to help executives decide whether to consolidate.
ERP systems deliver the most value when a company has modules for each major
business function and ensures timely, accurate data entry.
And, the more
stakeholders have access, the better.
When a company uses business systems from multiple vendors, integrations are
generally possible to make data automatically flow into the ERP. This data can then be
used throughout the ERP instance to benefit any process or workflow.
3.3 History of ERP
Enterprise resource planning systems have been used in the manufacturing industry
for over 100 years and continue to evolve as industry needs change and grow. Here
is a brief history of the ERP:

In 1913, an engineer named Ford Whitman Harris developed the Economic
Order Quantity (EOQ) model, a paper-based manufacturing system for
production scheduling.

In 1964, toolmaker Black and Decker adopted the first Material Requirements
Planning (MRP) solution that combined EOQ with a mainframe computer.

During the 1970s and 1980s, computer technologies evolved and concept
software handled business activities outside of manufacturing, including
finance, human resources data, and customer relationship management (CRM).

In 1983, MRP II was developed and featured “modules” and integrated core
manufacturing components, and integrated manufacturing tasks into a
common shared-data system.

During the 1990s to 2000s, Gartner Group coined the term “ERP” to
differentiate it from MRP-only systems. ERP systems expanded to encompass
business intelligence while handling other functions such as sales force
automation (SFA), marketing automation and e-commerce.

During the years 2000 to 2005, cloud-based ERP software solutions arrive when
ERP software makers create “Internet Enabled” products, providing an
alternative to traditional on-premise client-server models.

Today, Software-as-a-Service (SaaS) and Anything-as-a-Service (XaaS) offer
new delivery models for ERP. Remote web-based access for cloud ERP solutions
provide mobile solutions, security, and integration with the changing industries
and smart technologies, including integrations with the Internet of Things (IoT),
Internet of Everything (IoE), and even social media to provide comprehensive
solutions for every industry.
Page 25 of 33
3.4 Roles and Users
Within those organizations, a number of job functions benefit from ERP, including but
not limited to:
a. Finance/accounting. The accounting team is often the first adopter. This group
will track and report on all transactions and other financial information in the
system, including accounts payable (AP), accounts receivable (AR) and payroll.
With ERP, financial planning and analysis (FP&A) experts (whether a separate role
or part of the accounting department) can turn comprehensive financial data into
forecasts and reports on revenue, expenses and cash flow.
b. Supply chain. Employees focused on operations, a group that includes purchasing
agents, inventory planners, warehouse managers and senior supply chain leaders,
rely on the ERP system to ensure a smooth and continuous flow of goods from
supplier to customer. They count on accurate, detailed information provided by
the system to optimize inventory levels, prioritize orders, maximize on-time
shipments, avoid supply chain disruptions and identify inefficient processes.
c. Sales and marketing. An ERP solution can increase the productivity of and drive
better results for your sales team by automating lead management and monitoring
the interactions prospects have with your company. Reps can document
discussions and change the status of prospects as they move through the sales
funnel. Using those same records, marketing can automate and manage outreach
across all channels, from email to display ads to social media, and measure the
effectiveness of those messages and channels to better allocate its budget.
d. Human resources. The HR department tracks all employee information and
broader workforce trends in the ERP. It can quickly find contact information,
compensation and benefits details and other documents for each employee. HR can
also monitor metrics like retention by department, average pay by title, promotion
rate and other metrics to better allocate its own staff and assist line-of-business
managers.
3.5 Key Features of ERP systems
There are a few fundamental features that make an ERP system an ERP system and
distinguish it from other types of software. These include:
a. Common database. Many of an ERP’s advantages stem from a common database
that allows organizations to centralize information from numerous departments.
This single source of data eliminates the need to manually merge separate
databases, each controlled by the business functions they serve. A common
database enables a consistent, cross-functional view of the company.
b. Consistent UX/UI. Across departments and roles, everyone uses the same user
interface (UI) and has a similar user experience (UX) with an ERP. Modules for
inventory management, HR and finance all have the same look and feel and shared
functionality. This increases the software’s adoption rate and can make it easier
for staff to move between departments. A consistent UX and UI also result in
efficiency gains because users can quickly find and understand information from
all corners of the business.
c. Business process integration. An ERP must be able to support and integrate
the processes that make your business successful, whether related to accounting,
supply chain or marketing. The right platform will have the ability to unify a diverse
set of processes, connecting workflows that play crucial roles in the company’s
success boosts productivity and visibility, and that translates to lower costs.
d. Automation. Another basic feature of ERP software is the ability to automate
repetitive tasks like payroll, invoicing, order processing and reporting. This reduces
manual, and sometimes duplicative, data entry, saving time and minimizing errors.
Automation frees up your staff to focus on value-added work that takes advantage
of their special knowledge and skills.
Page 26 of 33
e. Data analysis. One of the most valuable aspects of an ERP is that it breaks down
information siloes. When an organization can mix and match data from just about
any part of your business into insightful reports, it can uncover areas that are
performing exceptionally well and those that are failing to meet expectations.
Leaders can analyze problems and get to work resolving them right away.
3.6 Benefits and Disadvantages of ERP Systems
Today’s ERP solutions have rich feature sets that bring countless benefits to
businesses. While what an individual firm sees as the greatest value of this technology
will vary, here are some of the key advantages that ERP systems can deliver:
a. Cost savings. Perhaps the biggest value proposition of ERP systems is they can
save organizations money in a number of ways. By automating many simple,
repetitive tasks, errors and the need to add employees at the same rate as
businesses grow can also be minimized. Cross-company visibility makes it easier
to spot inefficiencies that drive up costs and leads to better deployment of all
resources, from labor to inventory to equipment. And with cloud ERP, companies
may quickly see incremental value from the software, over and above what they’re
spending.
b. Workflow visibility. With all workflows and information in one place, employees
with access to the system can see the status of projects and the performance of
different business functions relevant to their jobs. This visibility may be particularly
valuable to managers and department heads, and it is far faster and easier than
searching for the right documents and constantly asking colleagues for updates.
c. Reporting/analytics.
Data is useful only if companies can analyze and
understand it, and an ERP helps with that. Leading solutions have impressive
reporting and analytics tools that allow users to not only track key performance
indicators or KPIs, but display any metrics or comparisons they can dream up.
Since an ERP is all-encompassing, it can help a business understand how a change
or problem with a process in one department affects the rest of the company.
d. Business insights/intelligence. Because ERPs can access data from across the
company, these systems can uncover impactful trends and provide extensive
business insights. This leads to better decision-making by organizational leaders
who now have easy access to all relevant data.
e. Regulatory compliance & data security. Financial reporting standards and
governmental and industry-specific data security regulations change frequently,
and an ERP can help your company stay safe and compliant. An ERP provides an
audit trail by tracking the lifecycle of each transaction, including adherence to
required approval workflows. Businesses may also reduce the chance of errors and
related compliance snafus with automation. ERP software provides financial
reports that comply with standards and regulations.
f.
Risk management. ERP technology reduces risk in a few ways. Granular access
control and defined approval workflows can strengthen financial controls and
reduce fraud. Additionally, more-accurate data heads off mistakes that could lead
to lost sales or fines. And finally, the ability to see the status of the entire operation
enables employees to quickly handle risks posed by business disruptions.
g. Data security. ERP providers understand that a company’s system houses critical,
sensitive data and take necessary steps to ensure it is secure. This diligence is
more important than ever as the volume and scale of cyberattacks increase. Cloud
ERP software, in particular, uses cutting-edge security protocols to ensure a
company does not fall victim to a damaging attack.
h. Collaboration. Employees are most effective when they work together. ERP
solutions make it easy to share information, like purchase orders, contracts and
customer-support records, among teams. It knocks down walls between
departments by giving employees appropriate access to data on related business
functions.
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i.
Scalability. The right ERP system will be scalable and flexible enough to meet a
company’s needs today and for the foreseeable future. Cloud systems in particular
adapt to minor and major operational changes even as the amount of data the
organization captures and demand for access increase.
j.
Flexibility. While ERP software helps businesses follow best practices, it also
offers the flexibility to support unique processes and objectives. The system gives
administrators the ability to build out company-specific workflows and create
automatic reports important to different departments and executives. An ERP
enhances an organization’s innovation and creativity.
k. Customization. While most companies find that modern ERPs support their
businesses “out of the box,” some firms need to add to the extensive built-in
functionality. If an organization has a lot of specialized processes, they need to
look for an extensible system that allows its IT staff to write code that adds needed
features, or that can integrate with homegrown or legacy solutions. However,
before going the custom route, one needs to take a close look at his processes,
because the prebuilt functionality and configurations modern ERP solutions support
are based on best practices gathered from thousands of companies.
Customizations should be minimized.
l.
Customer & partner management. An ERP can strengthen a company’s partner
and customer relationships. It can provide insights on suppliers, shipping carriers
and service providers, with the cloud enabling even better, more convenient
information exchange. When it comes to customers, the solution can track survey
responses, support tickets, returns and more so the organization can keep its finger
on the pulse of customer satisfaction.
Despite all the value an ERP system can bring, there are certain challenges businesses
may encounter. Many of these, however, can be avoided by preparation and choosing
the right supplier partner.
a. System cost. Because they were expensive to purchase, implement and maintain,
early ERP systems were accessible only to large companies. However, that has not
been the case for the past two decades. While ERPs still require a time and financial
investment, the technology has become much more affordable thanks to both SaaS
systems that charge a recurring fee and more solutions designed for small and
medium-sized entities entering the market. Organizations can use tools to calculate
estimated savings after one and three years, for instance, to find out when returns
will surpass costs.
b. Need for training. Like any new tech, ERP has a learning curve. Anyone who
will use the software, that is, ideally, most or all of your employees, requires some
level of training. Although there may be resistance at first, that should fade away
as people realize how much the technology will help them. Newer systems that
receive frequent updates are more intuitive and user-friendly, reducing training
requirements and increasing adoption.
c. Data conversion costs. When moving to a new ERP, some data may need to be
converted into a format that is compatible with the new platform. This can lead to
unexpected costs and delays, so potential data compatibility issues should be
identified early on. Then, conversion efforts can be factored into the ERP
implementation plan.
d. Complexity. An ERP system is loaded with features, and that can be daunting to
a company’s workforce. But the software available today is far easier to use than
legacy systems because vendors have focused on improving the user experience.
Additionally, employees need access to only the modules and dashboards required
for their jobs, which can make it more approachable. Thorough training should
temper concerns about complexity.
e. Maintenance. In the past, maintenance was a large expense that deterred lowerrevenue businesses from adopting ERP. Not only did a company need an IT staff
to handle patches, security and required system upgrades, it often had to pay the
vendor or a third-party service provider for its expertise. This is less of a concern
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with a SaaS system because the provider takes care of all maintenance and
regularly moves all customers to the latest version, and it’s all built into the
subscription price. Companies concerned about maintenance should thoroughly
vet a potential supplier to ensure it offers a true vendor-managed SaaS system.
f.
Doesn’t solve process and policy issues. If an organization has an error-prone
or inefficient processes, an ERP won’t necessarily fix them, even though it may
increase accuracy. It can, however, uncover problems in operations and help
brainstorm better ways to do business. The same goes for policies that hold the
organization back. It’s up to the organization to adjust those and then configure
the system to support better ways of doing business
3.7 Types of ERP Deployment Models
There are several types of ERP systems that function with different deployment model
options. The most common types of ERP system include the following:
a. On-Premise ERP software.
It is implemented onsite and maintained in physical office space within an
organization, hosted on the company’s own computers and servers for full control,
support and ownership of the entire system once implemented. For many years,
on-premises ERP was the only option, but the popularity of this deployment model
has declined rapidly in recent years.
b. Cloud-Based ERP.
It runs on remote servers managed by a third party. Cloud-based ERP software is
a web-based solution, known as Software as a Service (SaaS), where an
organization typically accesses and stores data through a web browser, giving them
greater flexibility; they can dig into information and reports from anywhere with
an internet connection.
There are multiple deployment options for cloud ERP, including single-tenant and
multi-tenant.
A single-tenant solution is a separate instance of the ERP used by just one
company that doesn’t share server space. This setup can give the client greater
control over the software and allow for more customizations, but it also creates
more work for the business.
With a multi-tenant solution, a number of organizations use the same software
instance and hardware. Most SaaS ERP solutions are multi-tenant, with the
software vendor handling all updates and upgrades and regularly moving
customers to the latest version. This reduces the need for an in-house IT team and
ensures that the company always has the most up-to-date, secure instance of the
software.
c. Hybrid ERP.
It combines elements of on-premises and cloud deployments. One hybrid
approach is two-tier ERP, where a corporation keeps its on-premises ERP in place
at headquarters but employs cloud systems for subsidiaries or certain regional
offices. These cloud solutions are then integrated with the on-premises system.
Other companies may turn to cloud solutions for certain business needs while
sticking with their on-premises systems for other functions.
Either way, the cloud systems must be linked to the on-premises platform to ensure
a steady flow of information.
d. Open-source ERP.
Like other open-source applications, open-source ERP is an inexpensive, and
sometimes free, alternative that is suitable for some companies. Many open-
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source ERP providers allow businesses to download their software for free and
charge a low annual fee only if the customer wants cloud access. These solutions
have improved, with more modern web-based interfaces and a growing number of
modules, but companies need to understand what they’re taking on with an opensource ERP.
Support from the provider will be minimal, and configurations and system
improvements tend to fall on the client. Technical staff with a deep knowledge of
how to develop and configure the software is often needed.
3.8 ERP Systems by Business Size
Revenue and/or number of employees is just one factor in shaping an organization’s
ERP requirements. No single system will be best for every small, midsize or large
company, respectively. But there are features specific to these segments as well as
favored deployment models.
a. Small-business ERP.
Small firms should map out their requirements before starting a search to avoid
software that has far more functionality than they need. This will keep costs down
and reduce the training required for employees. However, the system should have
the ability to scale up and support new initiatives over time as well as a
straightforward implementation process.
That is why cloud ERP is generally the best option for small businesses because it
has lower upfront costs, a faster setup timeline and less need for technical
resources compared with on-premises or hybrid options. The cloud offers the
scalability to meet the business’s needs as it grows, and the right provider can
supply modules and features as required.
b. Midsize-business ERP.
Medium-sized companies should demand a platform that can support all its
business functions with specialized modules and, like smaller firms, select a vendor
capable of scaling to meet future needs.
Because many midsize organizations lack large IT teams, cloud ERP software is
very popular in this segment as well. In addition to lower initial expenses, leading
SaaS solutions can be more user-friendly for a company that has limited technical
expertise. However, midsize businesses that require numerous customizations or
must follow regulatory policies that bar them from storing information in the cloud
may opt for on-premises deployments or a hybrid approach. This group is more
likely to have the financial and human capital to support this model than small
businesses.
c. Enterprise ERP.
Enterprises should opt for software that can support all components of their
businesses, which could quickly thin the list of contenders. Corporations require
systems that can capture, process and interpret a vast amount of data and handle
the demands of many business units.
On-premises and hybrid ERP that combines cloud and on-premises solutions are
most common with enterprises, simply because they may have adopted ERP before
pure cloud systems were available. While moving a massive ERP to the cloud can
be a time- and resource-intensive undertaking, more of the world’s largest
companies are taking that step as they realize the benefits and try to put
themselves in a better position for future growth. Some enterprises have also
deployed two-tier ERP, which uses a SaaS solution for parts of the business and
integrates with the primary on-premises ERP.
Today, the foregoing phrases are used less frequently as the important factor is not
company size but determining if the ERP system is effectively addressing current and
future business requirements, no matter the size of the organization. It is imperative
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that organizations consider and select ERP systems that eliminate the need for costly
customizations, adapt to the rapid pace of business change, address future
technologies and meet other identified requirements.
3.9 ERP Modules
An ERP comprises a number of different modules, bundles of features tailored for
various aspects of the business, including back- and front-office roles. The most widely
used ERP modules are as follows:
a. Finance. A finance module, the foundation of just about every ERP system,
manages the general ledger and all financial data. It tracks every transaction,
including accounts payable (AP) and accounts receivable (AR), and handles
reconciliations and financial reporting.
b. Procurement. The procurement module manages purchasing, whether raw
materials or finished goods. It can automate requests for quotes and purchase
orders and, when linked to demand planning, minimize over-buying and underbuying.
c. Manufacturing.
Manufacturing can be complicated, and this module helps
companies coordinate all the steps that go into making products. The module can
ensure production is in line with demand and monitor the number of in-progress
and finished items.
d. Inventory management.
inventory levels down to the
real time. It also measures
company needs this module
forecasted demand.
An inventory management module shows current
stock keeping units and updates those numbers in
key inventory-related metrics. Any products-based
to optimize stock on-hand based on current and
e. Order management. This application monitors and prioritizes customer orders
from all channels as they come in and tracks their progress through delivery. An
order management module can speed fulfillment and delivery times and improve
the customer experience.
f.
Warehouse management. A warehouse management module directs warehouse
activities like receiving, picking, packing and shipping. It can generate time and
cost savings in the warehouse by identifying more efficient ways to execute these
tasks.
g. Customer relationship management (CRM). CRM is a popular module for
businesses in a wide range of industries. It tracks all communications with clients,
assists with lead management and can enhance customer service and boost sales.
h. Professional services automation (PSA). Services businesses often utilize a
professional services automation module to plan and track projects, including the
time and resources spent on them. It can simplify client billing and encourage
collaboration among staff members working on a project.
i.
Workforce management (WFM). A workforce management module keeps track
of attendance and hours worked, and some can also manage payroll. This tool can
record absenteeism and productivity by department, team and individual
employee.
j.
Human resources management (HRM). A human resources management or
human capital management module version of a WFM module. It keeps employee
records with detailed information, like available PTO and performance reviews, and
can tease out workforce trends in various departments or demographics.
k. E-commerce. An e-commerce module allows retailers and brands to manage the
back- and front-ends of their online stores. They can change the site look and feel
and add and update product pages with this application.
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l.
Marketing automation. This module manages marketing efforts across all digital
channels (email, web, social) and enables organizations to optimize and
personalize their messaging. A marketing automation tool can boost leads, sales
and customer loyalty.
3.10 ERP Implementation Stages
ERP implementations are important projects that, without proper preparation, can eat
up a lot of time and money. Exactly how long a project takes and how much it costs
will depend on many factors, including deployment model, implementation strategy,
complexity of the system, size of the company and resources dedicated to it.
The seven key stages of an ERP implementation are:
i. Discovery and planning. To start, pull together a cross-functional team to
determine what, exactly, the company needs from an ERP system. The team
should then identify inefficient processes and other roadblocks to business growth.
ii. Evaluation and selection. Now that the team has a requirements document, it
is time to evaluate leading offerings and select the platform that can best resolve
existing problems, meet all departments’ needs and promote the company’s
growth.
iii. Design. At this stage, the implementation team figures out whether the system
can support existing workflows and which processes may need to change. This is
also the time to identify any required customizations.
iv. Development. Internal and/or external technical professionals configure the
software to meet the company’s defined needs and begin migrating the company’s
data to the new solution. This is also the time to decide how to train employees
on the system and begin scheduling sessions and producing or acquiring needed
training materials.
v. Testing. This is not a step to be skipped. It is crucial to make sure everything
works as expected and fix any unforeseen problems. Users from across the
company should be included when testing the platform.
vi. Deployment. It’s time to go live. There are often hiccups early on, and
businesses should prioritize employee training to mitigate resistance to change.
Some firms opt for a phased rollout, while others push all modules live at once.
vii. Support. Ensure users have everything they need to take advantage of the new
system. This is an ongoing process and could include additional configurations,
often with the help of the vendor or specialized consultants.
Exercises:
1. In areas of a business is the use of an ERP most beneficial?
2. Is it feasible to implement an ERP system given the different disadvantages of
implementing such system?
3. Differentiate the different types of ERP deployment module.
4. How can an ERP system benefit an organization?
5. Distinguish an ERP from MRP?
END OF TOPIC 3
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References:
1. Adam, E.E. Jr & Ebert, R.J. (1992).
Production and Operations Management:
Concepts, Models and Behavior.
2. Arnold, Tony & Chapman, Stephen (2008). Introduction to Materials Management (6th
Edition)
3. Bolling, David J.. Production & Operations Management.
4. Panucker, Vinay. Production Management.
5. Pattnaik, Sarojrani & Mishra, Swagatika. Lecture Notes on Production and Operation
Management.
6. Reid, R. Dan & Sanders, Nada R. (2010). Operations Management (4th Edition). Wiley
7. Stevenson, William J. (2007). Operations Management (9th Edition).
8. The Open University of Hong Kong (2013). Operations Management.
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