Managing Quality and
Time to Create Value
Chapter 7
How much quality is enough?
Total quality management (TQM)
Continuous improvement toward perfection
Assumes customers seek high quality and will
pay for it
Return on quality (ROQ)
Tradeoff between costs and benefits of quality
Maximize profit instead of quality
Costs of quality
Prevention costs
Cost incurred to prevent a problem
Design, process improvement, training, etc.
Appraisal costs
Cost incurred to identify problems
Inspection, testing, evaluations, etc.
Costs of quality
Internal failure costs
Costs incurred to correct problems while still
in the company’s control
Rework, scrap, retesting, delays, etc.
External failure costs
Costs incurred to correct problems after the
problem leaves the company’s control
Warranty repairs, replacement, recalls, lawsuits,
damage to reputation, lost sales, etc.
Costs of quality
In theory:
Spending on prevention reduces appraisal
and failure costs
Spending on appraisal reduces external
failure costs
ROQ is maximized where combined cost is
minimized
Quality cost tradeoff
120
100
Cost
80
60
40
20
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Problems
Failure cost
Prevention/appraisal cost
Total quality cost
Tracking quality
Indicators
Frequency distributions
Run chart
Control chart
Diagnostics
Scatter diagrams
Cause and effect diagrams/flowcharts
Pareto charts
Time matters
Time is the one resource you cannot buy
Speed is a competitive advantage
Product/service development time
Customer response time
Receipt of order to delivery
Production cycle time
Start to completion of production process
Time/efficiency measures
Productivity
Outputs / inputs
Cycle time
Total processing time / good output produced
Throughput efficiency
Value-added time / Total processing time
Measuring capacity
Theoretical (rated) capacity
-- Planned downtime
= Practical capacity
-- Capacity used to meet demand
= Excess capacity
Time-based ABC
Simpler version of traditional ABC
Time used as driver base
Calculation of driver rate
Cost of capacity to provide service
Time available to complete service
Cost = time required * driver rate
Just-in-time systems
Traditional “push” system
Prepare sales
forecast
Order
components
Receive
customer
order
Produce
inventory
Ship from
inventory or
produce
Results in mismatch between supply and
demand
Excess inventory or lost sales
Just-in-time systems
JIT “pull” system
Receive
customer
order
Schedule
production
Produce
customer's
order
Order
components
Ship to
customer
Better match between supply and demand
Less inventory
Possibly slower response
Just-in-time systems
Requirements of JIT
Flexible capacity and workforce
Smooth production flow
Short cycle times and processing times
Reliable suppliers
Commitment to quality