Chapter 6 Strat cost

• Total Quality Management (TQM)


  The unyielding and continually improving effort by everyone in an organization to understand, meet and exceed the expectation of customers
• Core principles of TQM

  • Focus on satisfying the customer
  • Strive for continuous improvement
  • Involve fully the entire work force
  • Support and involve top management actively
  • Use clear and measurable objectives
  • Recognize quality achievements in a timely manner
  • Provide training on TQM continuously
• Focus on the customer

  Identifying the firm's customers, external and internal; determining their needs, requirements, and expectations; and then doing whatever it takes to satisfy them
• Strive for continuous improvement (Kaizen)


  Quality is a moving target, without continuous improvement quality disappears
• Full involvement of the entire workforce

  The requirement of the firm's external customers can only be met if each of the internal customers/suppliers in the process satisfies the requirements of the downstream process or customer
• Active support and involvement of top management

  Unwavering and active leadership from the CEO and senior managers is required for successful TQM implementation
• Use clear and measurable objectives


  Progress can easily be seen if objectives are clear, measurable objectives forge efforts toward the common goal
• Timely recognition of quality achievement

  Quality achievement of people and subunits when recognized timely is the best way to emphasize the firm's continuous struggle for better quality
• Continuing education and training

  Mandatory continuing education and training of employees at all levels is necessary to achieve the culture change and continuous focus required in a TQM environment
• TQM implementation guidelines


  1. Year 1 - Preparation and planning

  2. Year 2 - Training and implementation

  3. Year 3 - Assessment, review & revise
• Goalpost conformance (zero-defects conformance)


  Conformance to a quality specification expressed as a specified range around the target
• Absolute quality conformance (robust quality approach)


  Conformance which requires that all products or services to meet the target value exactly with no variation
• Prevention costs


  Costs incurred to avoid poor-quality goods or services or reduce the number of defects in products or services
• Appraisal costs


  Costs incurred to identify products before the products are shipped to customers
• Internal failure costs


  Costs that result from identification of defects during the appraisal process
• External failure costs


  Costs incurred when poor-quality goods or services are detected after delivery to customers
• Cost of quality


  The sum of conformance and nonconformance costs
• Quality cost information


  • Helps managers see the financial significance of quality
  • Helps managers identify the relative importance of the quality problems faced by the firm
  • Helps managers see whether their quality costs are poorly distributed and when needed, it helps them distribute the costs better
• Purpose of reporting quality costs

  To make management aware of the magnitude of quality costs and to provide a baseline against which the impact of quality improvement activities could be measured
• Reporting quality costs


  1. Data definitions

  2. Identification of data sources

  3. Data collection

  4. Preparation and distribution of quality cost reports
• Nonfinancial measures of customer satisfaction

  • On-time delivery rate
  • Delivery delays
  • Percentage of products that fail soon or often
  • Number of customer complaints
  • Number of defective units shipped to customers as a percentage of total units shipped
  • Market research information on customer preferences and customer satisfaction with specific product features
• Nonfinancial measures of internal performance


  • Number of defects for each product line
  • Employee turnover
  • Process yield
• Customer-response time


  The duration from the time a customer places an order for a product or service to the time the product or service is delivered to the customer
• Manufacturing lead time


  The duration between the time an order is received by Manufacturing to the time it becomes a finished good
• On-time performance


  Situations in which the product or service is actually delivered by the time it was scheduled to be delivered
• Customer-response time and on-time performance

  There is a trade-off between them
• Just-in-time (JIT) production system

  • Maintaining a limited number of suppliers
  • Improving plant layout
  • Reducing setup time
  • Improving production scheduling
  • Targeting zero defects
  • Maintaining flexible workforce
• Timely, meaningful feedback is critical in JIT systems because the lack of inventories makes it urgent to detect and solve problems quickly
• JIT systems reduce overhead costs through the reduction of materials handling, warehousing and inspection costs
• JIT facilitates direct tracing of some costs usually classified as indirect (e.g. materials handling, machine operating costs, setup, maintenance and quality inspection costs)</b>