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1、Quality,Time,and the Theory of Constraints,Chapter 19,Introduction,To satisfy their customers and to be competitive,managers need to find cost-effective ways to continuously improve the quality of their products and to shorten delivery time.This chapter describes how managers streamline processes to
2、 improve quality and reduce delays.,Two Aspects of Quality,Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers.Conformance quality refers to the performance of a product or service according to design and product specifications.,Tw
3、o Aspects of Quality,Actual Performance,Design Specifications,Customer Satisfaction,Quality of Design Failure,Conformance Quality Failure,Costs of Quality,The costs of quality(COQ)refer to costs incurred to prevent,or costs arising as a result of,the production of a low-quality product.These costs f
4、ocus on conformance quality and are incurred in all business functions of the value chain.,Costs of Quality,Prevention costs-costs incurred in precluding the production of products that do not conform to specifications.Appraisal costs-costs incurred in detecting which of the individual units of prod
5、ucts do not conform to specifications.,Costs of Quality,Internal failure costs-costs incurred by a nonconforming product detected before it is shipped to customers.External failure costs-costs incurred by a nonconforming product detected after it is shipped to customers.,Costs of Quality,Peoria Phot
6、o Corporation made 10,000 photocopying machines in the year 2000.Peoria Photo determines the costs of quality of its photocopying machines using a 7-step activity-based costing approach.,Costs of Quality(Steps 1 and 2),Step 1:Identify the chosen cost object(s).The cost object is the 10,000 photocopy
7、ing machines that Peoria Photo makes.Step 2:Identify the direct costs of quality of the product.The photocopying machines have no direct costs of quality.,Costs of Quality(Step 3),Step 3:Select the cost-allocation bases to use for allocating indirect costs of quality to the product.Peoria Photo clas
8、sifies activities that result in prevention,appraisal,internal failure,and external failure costs.(Information on the total quantities of each of these cost-allocation bases used in all of Peorias operations is not provided.),Costs of Quality(Step 4),Step 4:Identify the indirect costs of quality ass
9、ociated with each cost-allocation base.These are the total costs(fixed and variable)incurred on each of the costs of quality activities.(Information about these total costs is not provided.),Costs of Quality(Step 5),Step 5:Compute the rate per unit of each cost-allocation base used to allocate indir
10、ect costs of quality to products.For each activity,the total costs calculated in Step 4 is divided by the total quantity of the cost-allocation base calculated in Step 3 to compute the rate per unit for each cost-allocation base.,Costs of Quality(Step 5),Peoria Photo chooses the number of inspection
11、 hours as the cost-allocation base for the inspection activity in all of Peorias operations.,Costs of Quality(Step 5),Cost of Quality and Value Chain Category Rate(Assumed)Prevention costs:Design engineering(R&D)$80 per hour Process engineering(R&D)$60 per hour Appraisal costs:Inspection(Manufacturi
12、ng)$40 per hour Internal failure costs:Rework(Manufacturing)$100 per hour,Costs of Quality(Step 5),Cost of Quality and Value Chain Category Rate(Assumed)External failure costs:Customer support(Marketing)$50 per hour Transportation(Distribution)$240 per load Warranty repair(Customer Service)$110 per
13、hour,Costs of Quality(Step 6),Step 6:Compute the indirect costs of quality allocated to the product.Peoria Photo first determines the quantities of each of the cost-allocation bases used by the photocopying machines.This amount is multiplied by the cost-allocation rate calculated in Step 5.,Costs of
14、 Quality(Step 6),Cost of Quality and Value Chain Category Quantity Prevention costs:Design engineering(R&D)20,000 hours Process engineering(R&D)22,500 hours Appraisal costs:Inspection(Manufacturing)120,000 hours Internal failure costs:Rework(Manufacturing)50,000 hours,Costs of Quality(Step 6),Cost o
15、f Quality and Value Chain Category Quantity External failure costs:Customer support(Marketing)6,000 hours Transportation(Distribution)1,500 loads Warranty repair(Customer Service)60,000 hours,Costs of Quality(Step 6),What is the total cost for design engineering?20,000 hours$80=$1,600,000What is the
16、 total cost for inspection?120,000 hours$40=$4,800,000,Costs of Quality(Step 6),Cost of Quality and Value Chain Category Total Costs Prevention costs:Design engineering(R&D)$1,600,000 Process engineering(R&D)1,350,000 Total$2,950,000 Appraisal costs:Inspection$4,800,000 Total$4,800,000,Costs of Qual
17、ity(Step 6),Cost of Quality and Value Chain Category Total Costs Internal failure costs:Rework(Manufacturing)$5,000,000 Total$5,000,000,Costs of Quality(Step 6),Cost of Quality and Value Chain Category Total Costs External failure costs:Customer support(Marketing)$300,000 Transportation(Distribution
18、)360,000 Warranty repair(Customer Service)6,600,000 Total$7,260,000,Costs of Quality(Step 7),Step 7:Compute the total costs of quality of the product by adding all direct and indirect costs of quality assigned to it.What are the total costs of quality?Prevention costs$2,950,000 Appraisal costs 4,800
19、,000 Internal failure costs 5,000,000 External failure costs 7,260,000 Total$20,010,000,Techniques Used to Analyze Quality Problems,Three methods that companies use to identify quality problems and to improve quality are:Control chartsPareto diagramsCause-and-effect diagrams,Control Charts,Statistic
20、al quality control(SQC),or statistical process control(SPC),is a formal means of distinguishing between random variation and nonrandom variation in an operating process.A control chart is a graph of a series of successive observations of a particular step,procedure,or operation taken at regular inte
21、rvals of time.,Control Charts,Each observation is plotted relative to specified ranges that represent the expected statistical distribution.Only those observations outside the control limits are ordinarily regarded as nonrandom and worth investigating.,Control Charts,On the basis of experience,Peori
22、a decides that any observation outside the arithmetic mean m 2s standard deviations should be investigated.,Control Charts,1 2 3 4 5 6 7 8 9 10 Days,m,m+s,m+2s,Production Line,m-s,m-2s,Defect Rate,Control Charts,For the production line,the last two observations signal that an out-of-control occurren
23、ce is highly likely.Given the 2s from the mean rule,both observations would lead to an investigation.,Pareto Diagram,Observations outside control limits serve as inputs to Pareto diagrams.A Pareto diagram indicates how frequently each type of failure(defect)occurs.,Pareto Diagram,Copies are fuzzy an
24、d unclear,Copies are too light/dark,Paper gets jammed,Number of Times Defect Observed,700,500,200,Cause-and-effect Diagrams,The most frequently recurring and costly problems identified by the Pareto diagram are analyzed using cause-and-effect diagrams.A cause-and-effect diagram identifies potential
25、causes of failures or defects.As a first step,Peoria analyzes the causes of the most frequently occurring failure,fuzzy and unclear copies.,Cause-and-effect Diagrams,Peoria identifies four major categories of potential causes of failure:Human factorsMethods and design factorsMachine-related factorsM
26、aterials and components factors,Cause-and-effect Diagrams,Methods anddesign factors,Human factors,Machine-related factors,Materials and components factors,Multiple suppliers,New operator,Flawed part design,Poor maintenance,Relevant Costs,Careful analysis of Peorias cause-and-effect diagram reveals t
27、hat the frame of the copier is often mishandled as it travels from the suppliers warehouses to Peorias plant.Mishandling causes the dimensions of the frame to vary from specifications,resulting in fuzzy and unclear copies.,Relevant Costs,The team of engineers working to solve this problem offers two
28、 alternative solutions:Improve the inspection of the frames immediately upon delivery.Redesign and strengthen the frames and the containers used to transport them to better withstand mishandling during transportation.,Relevant Costs,What must management do to evaluate each alternative?Measure the to
29、tal relevant costs and total relevant revenues.Additional Additional Inspection Cost Redesign Cost Difference$200,000$230,000$30,000Peoria determines the fixed and variable cost component of each activity involved.,Relevant Costs,Variable Allocated Costs Fixed Costs TotalRework-hour$40$60$100Custome
30、r-support-hr$20$30$50Transportation/load$180$60$240Warranty/repair hour$45$65$110,Relevant Costs,Only variable costs are relevant because fixed costs are not affected.Before making a decision,management must compare the incremental costs of each alternative against the corresponding incremental bene
31、fit.,Relevant Benefits,Further Redesigning Inspection Frames Savings in rework costs:$40 12,000$480,000$40 16,000$640,000 Savings in customer-support costs:$20 1,000$20,000$20 1,400$28,000,Relevant Benefits,Further Redesigning Inspection Frames Savings in transportation costs for repair parts:$180 2
32、50$45,000$180 350$63,000 Savings in warranty repair costs:$45 10,000$450,000$45 14,000$630,000,Relevant Benefits,Further Redesigning Inspection Frames Relevant savings:Rework costs$480,000$640,000 Customer-support costs 20,000 28,000 Transportation costs 45,000 63,000 Warranty repair costs 450,000 6
33、30,000 Total$995,000$1,361,000,Comparison,Further Redesigning Inspection Frames Relevant savings$995,000$1,361,000 Additional cost 200,000 230,000 Difference$795,000$1,131,000What should Peoria do?Redesigning the frames provides a$336,000 incremental benefit over further inspection.,Nonfinancial Mea
34、sures,Nonfinancial measures can be categorized into:Nonfinancial measures of customer-satisfactionNonfinancial measures of internal performance,Nonfinancial Measures,Nonfinancial measures of customer satisfaction include:Number of customer complaintsDefective units as a percentage of total units shi
35、pped to customersPercentage of products that experience early or excessive failureOn-time delivery rate,Nonfinancial Measures,Nonfinancial measures of internal performance include:Number of defects for each product lineProcess yield(ratio of good output to total output)Employee turnover(ratio of the
36、 number of employees who left the company to the total number of employees),Evaluating Quality Performance,Measuring the financial costs of quality and the nonfinancial aspects of quality have distinctly different advantages.Financial measures are helpful to evaluate trade-offs among prevention cost
37、s,appraisal costs,and failure costs.They focus attention on the costs of poor quality.,Evaluating Quality Performance,Advantages of COQ measures:Consistent with the attention directing role of management accounting,COQ focuses attention on how costly poor quality can be.Financial COQ measures assist
38、 in problem solving by comparing different quality-improvement programs and setting priorities for achieving maximum cost reduction.,Evaluating Quality Performance,COQ provides a single,summary measure of quality performance.Nonfinancial measures help focus attention on the precise problem areas tha
39、t need improvement and also serve as indicators of future long-run performance.,Evaluating Quality Performance,Advantages of nonfinancial measures of quality:Nonfinancial measures of quality are often easy to quantify and understand.Nonfinancial measures direct attention to physical processes and he
40、nce focus attention on the precise problem areas that need improvement.,Evaluating Quality Performance,Nonfinancial measures provide immediate short-run feedback on whether quality improvement efforts have,in fact,succeeded in improving quality.Nonfinancial measures are useful indicators of future l
41、ong-run performance.,Time as a Competitive Weapon,Companies need to measure time in order to manage it properly.Two common operational measures of time are:Customer-response timeOn-time performance,Customer-Response Time,Customer-response time is the amount of time from when a customer places an ord
42、er for a product or requests service to when the product or service is delivered to the customer.The following are different components of customer-response time:Receipt time is the time it takes a Marketing Department to specify a customers exact requirements to manufacturing.,Customer-Response Tim
43、e,Manufacturing lead time is the amount of time from when an order is ready to start on the production line to when it becomes a finished good.Delivery time is the time it takes to deliver a completed order to the customer.,On-Time Performance,On-time performance refers to situations in which the pr
44、oduct or service is actually delivered at the time it is scheduled to be delivered.On-time performance is an important element of customer satisfaction because customers want and expect on-time deliveries.,Time Drivers and Costs of Time,A time driver is any factor where change in the factor causes a
45、 change in the speed with which an activity is undertaken.Managing customer-response time and on-time performance requires an understanding of the causes of delays and the resulting costs.,Time Drivers and Costs of Time,Two important drivers of time are:Uncertainty Limited capacity and bottlenecksTh
46、e following are different components of customer-response time:Receipt time is the time it takes a Marketing Department to specify a customers exact requirements to manufacturing.,Time Drivers and Costs of Time,Average waiting time is the average amount of time that an order will wait in line before
47、 it is set up and processed.Average waiting time=Average number of orders(Manufacturing time)Divided by 2 Annual machine capacity(Average number of orders Manufacturing time),Time Drivers and Costs of Time,The longer the manufacturing time,the greater the chance that the machine will be in use when
48、an order arrives,and the longer the delays.The denominator in this formula measures unused capacity,or cushion.The smaller the unused capacity,the greater the delays.,Theory of Constraints,The three main measurements in the theory of constraints are:Throughput contribution equal to revenues minus di
49、rect material costs.Investments equal the sum of material costs in direct materials inventory,work-in-process inventory,finished goods inventory,R&D costs,and costs of equipment and buildings.,Theory of Constraints,Operating costs equal to all operating costs(other than direct materials)incurred to
50、earn throughput contribution.The objective of TOC is to increase throughput contribution while decreasing investments and operating costs.TOC considers a short-run time horizon and assumes operating costs to be fixed costs.,Theory of Constraints,The theory of constraints emphasizes the management of
