Chapter 2a Performance
measures
Manage by facts
Performance measures
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One of core values in MBNQA is manage by facts –
not gut feelings
Effective management requires info from
measurement activities
Performance measures used as baseline to
identify potential project
- justify project resource allocation
- assess improvement results
Production – defects per million (or ppm), inventory
turns, on-time delivery
Service activities – billing errors, sales per square
feet, engineering changes, activity times, etc.
Cost of poor quality
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In the final analysis - value of QC / QA / TQM
initiative and programs are based on ability to
contribute to profits.
An effective performance measure is cost of poor
quality- decisions depends on expense and income
of the business activity.
Efficiency of any business measured in RM, $
(monetary value)
Costs of poor quality can be found – same as for
cost of maintenance, production, design, inspection,
etc.
We can measure, program, analyze and budget the
cost of poor quality (COPQ) or (PONC) to achieve
better quality and customer satisfaction.
Cost of poor quality
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 COSTS ,  PROFIT
Quality costs involves all department;
purchasing, design, etc.
What is quality costs? Cost of poor quality are
“those costs associated with non-achievement
of product/service quality defined by the
requirements”
Cost of poor quality
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Quality cost - used in pursuit of quality improvement,
customer satisfaction, and basic data for TQM
High quality cost – inefficient, ineffective management
Quality Cost Program quantifies magnitude quality
problem in management language (RM);
- 20% of sales dollars in manufacturing
- 35% of sales dollars in service
Need to develop Quality Cost Program
Identify opportunities for improvement
Justification for corrective action
Every sen saved will  profits - Take care of the penny
and penny will take care of itself!!
Cost of poor quality
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Principle advantage – identify hidden costs
which is not able to detect in operation
Program – comprehensive and not ‘firefighting’ problem
Real improvement occurs – ROOT CAUSE
OF PROBLEM identified and eliminated
Quality Costs Categories
Prevention
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Prevention achieved by examining experience gained
from identification of specific causes of failures, and
developing specific activities incorporated into basic
management system that make it difficult or
impossible for error/failure to occur again
Cost incurred for planning, implementing &
maintenance a quality system to ensure conformance
to requirements
Design review, Quality Management system,
Measuring Equipment Calibration
Quality Costs Categories
Appraisal
 Cost incurred to determine degree on
conformance to quality requirements
 Examples – incoming inspection, source
inspection, operations inspections, measuring
equipment
Quality Costs Categories
Failures
- Internal failure
- External failure
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Cost incurred when products/services,
components, materials, fail to meet
requirements 1) before, 2) after transfer of
ownership to customer
Internal - purchasing errors, rework, repair,
scrap, reappraisal, etc.
External - complaint investigation, returned
goods, retrofit. Warranty costs, liability costs, etc
Collection and Reporting Quality Data
Current
month
Prevention costs
RM (000)
Yr to date
Current
Current month
Prior Yr
Appraisal Costs
Marketing/Customer
Product/Service
development
Product/Service
development
Purchasing
Purchasing
Operations
Operations
External Appraisal
Quality Administration
Total
Internal failure
Costs
RM (000)
RM
(000)
Yr to date
Current
Prior
Yr
Total
Current
month
Product/Service Design
Yr to date
Current
External Failure
Costs
Prior Yr
RM
(000)
Current month
Customer complaints
Purchasing
Returned Goods
Operations (Subtotal)
Retrofit Costs
Material
Warranty Claims
Rework
Liability Costs
Repair
Penalties
Scrap
Customer Goodwill
Yr to date
Current
Prior
Yr
Total
Baseline Data
Net Sales
RM (000)
Current
month
Ratios
Current
Prior Yr
External Failure Cost/Net
Sales
Direct Labor
Operations Failure
Costs/Prod Costs
Production
Operations Appraisal
Costs/Production Costs
Unit
Purchasing Costs of Poor
Quality/Material Costs
Design Costs of Poor
Quality/Design Costs
RM
(000)
Current month
Yr to date
Current
Prior
Yr
Quality Costs
QUALITY COST REPORT
 for control purposes
 establish budget
 variances measured
ANALYSIS
1) Trend analysis
 by cost categories (P-A-F)
 product
 indices (baseline)
 plants in the corporation
2) Pareto Analysis
 categories
 department
 product lines, e.g. failure costs, warranty costs, appraisal
 Cost incurred to determine degree on conformance to quality
requirements
 Examples – incoming inspection, source inspection, operations
inspections, measuring equipment
Optimum Costs
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Mgmt. wants to know
optimum costs when
analyzing quality costs
(this is difficult to
specify). Propose
techniques
Technique #1
Make comparisons with other companies - difficult
Technique #2
Optimize individual categories
e.g. Failure costs optimized when no identifiable & profitable
projects to reduce them
Technique #3
Analyze relationship between different cost categories
As Quality Improves () - 100% conformance, Failure costs
will decrease ( ~ 0 ), therefore need to  Prevention and
Appraisal costs
Combine TQ cost curves ;
Q
,  QUALITY COSTS
( but 100% ~ costs may become infinity)
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Perfection is achievable, if 99.9%
conformance (i.e. 1 error in 1000);
16,000 pieces of lost mail every hour,
500 failed surgical operations each week,
2 unsafe airplane landings at O’Hare airport,
22,000 wrong checks deduction,
2 million dead/sick food poisoning each year,
etc.
Quality Improvement Strategy
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Guiding Principles
1.
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3.
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All failures/problems has ROOT CAUSE
Causes are preventable
Prevention cheaper than cure
Based on the three principles, possible strategy is
as follows:
Reduce failure costs by problem solving
Invest in the ‘right’ prevention actions
Reduce appraisal costs where appropriate ~
statistically sound
Continuously evaluate & redirect prevention effort to
gain further improvement
Malcolm Baldrige National Quality
Award (MBNQA)
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Annual award to recognize US organizations
for performance excellence
Established Public Law 100-107 on August
1987
Award promotes :
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understanding of the requirements for
performance excellence and competitiveness
improvement
sharing of information on successful performance
strategies, and benefits derived form those
strategies
Malcolm Baldrige National Quality
Award
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5 categories – manufacturing, service, small
business, health care, education
Organizations use criteria as a technique to
measure their TQM effort on an annual basis
(conduct self assessment)
Core values and concepts embodied in seven
categories
Categories further subdivided into examination items
– 19 items (always improving)
MBNQA Framework
MBNQA Criteria and Score
Other performance measures
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Balanced scorecard – Customer Measures,
Financial measures, Learning and growth,
internal processes (integrated as strategic
management and communication tools)
Six sigma program – what sigma level