FINANCIAL MANAGEMENT & TQM

Course Description
- Operations management is about how organizations produce goods and
services. Every product you use and every service you

WHAT IS OPERATIONS?
Page | 1 - Operations is that part of a business organization that is responsible for
producing goods and/or services

• Goods Physical items produced by business organizations.

• Services Activities that provide some combination of time, location, form, and
psychological value.

OPERATION MANAGEMENT
- Operations management. The management of systems or processes that create
goods and/or provide services.
SUPPLY CHAIN
- A sequence of organizations their facilities, functions, and activities that are
involved in producing and delivering a product or service

A simple product supply chain

 Suppliers’ suppliers
 Direct suppliers
 Producer Distributor
 Final
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The three basic functions of business organizations

Organization

Finance Operations Marketing

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Examples of inputs, transformation, and outputs
INPUTS TRANSFORMATION OUTPUTS
Land Processes High goods percentage
Human Cutting. drilling Houses
Physical labor Transporting Automobiles
Intellectual labor Teaching Clothing
Capital Farming Computers
Raw materials Mixing Machines
Water Packing Televisions
Metals Copying Food products
Wood Analyzing Textbooks
Equipment Developing DVD players
Machines Searching High service percentage
Computers Researching Health care
Trucks Repairing Entertainment
Tools Innovating Car repair

The goods–service continuum

Goods Service
Surgery, teaching

Songwriting, software development

Computer repair, restaurant meal

Automobile repair, fast food

Home remodeling, retail sales

Automobile assembly, steelmaking

PRODUCTION OF GOODS VERSUS PROVIDING SERVICES

 Production of goods results in a tangible output
 Delivery of service, on the other hand, generally implies an act
o Manufacturing and service are often different in terms of what is done
but quite similar in terms of how it is done.
 Degree of customer contact. Many services involve a high degree of
customer contact, although services such as Internet providers, utilities, and
mail service do not. When there is a high degree of contact, the interaction
between server and customer becomes a “moment of truth” that will be judged
by the customer every time the service occurs.
 FINANCIAL MANAGEMENT & TQM

 Labor content of jobs. Services often have a higher degree of labor content
than manufacturing jobs do, although automated services are an exception.
 Uniformity of inputs. Service operations are often subject to a higher degree
of variability of inputs. Each client, patient, customer, repair job, and so on
presents a somewhat unique situation that requires assessment and flexibility.
Page | 3 Conversely, manufacturing operations often have a greater ability to control
the variability of inputs, which leads to more-uniform job requirements.
Measurement of productivity.
 Measurement of productivity can be more difficult for service jobs due
largely to the high variations of inputs. Thus, one doctor might have a higher
level of routine cases to deal with, while another might have more difficult
cases. Unless a careful analysis is conducted, it may appear that the doctor
with the difficult cases has a much lower productivity than the one with the
routine cases.
 Quality assurance. Quality assurance is usually more challenging for
services due to the higher variation in input, and because delivery and
consumption occur at the same time. Unlike manufacturing, which typically
occurs away from the customer and allows mistakes that are identified to be
corrected, services have less opportunity to avoid exposing the customer to
mistakes.

WHY LEARN ABOUT OPERATIONS MANAGEMENT?

Finance and operations management personnel cooperate by exchanging
information and expertise in such activities as the following:
1. Budgeting. Budgets must be periodically prepared to plan financial
requirements. Budgets must sometimes be adjusted, and performance
relative to a budget must be evaluated.
2. Economic analysis of investment proposals. Evaluation of alternative
investments in plant and equipment requires inputs from both operations and
finance people.
3. Provision of funds. The necessary funding of operations and the amount
and timing of funding can be important and even critical when funds are tight.
Careful planning can help avoid cash-flow problems.

Marketing’s focus is on selling and/or promoting the goods or services of an

organization. Marketing is also responsible for assessing customer wants and needs,
for communicating those to operations people (short term), and to design people
(long term).

CAREER OPPORTUNITIES AND PROFESSIONAL SOCIETIES

Sample operations management job descriptions

Businesses are composed of many interrelated processes.

1. Upper-management processes. These govern the operation of the entire

organization. Examples include organizational governance and organizational
strategy.
2. Operational processes. These are the core processes that make up the
value stream. Examples include purchasing, production and/or service,
marketing, and sales.
 FINANCIAL MANAGEMENT & TQM

3. Supporting processes. These support the core processes. Examples

include accounting, human resources, and IT (information technology)

Process -One or more actions that transform inputs into outputs.

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Page | 4 INTRODUCTION TO TOTAL QUALITY MANAGEMENT
OBJECTIVES
After reading this chapter, students should be able to
• define quality
• identify primary elements, core concepts and benefits of total quality
management
• distinguish between traditional management and TQM
• compare and contrast reengineering and TQM

Defining QUALITY
 The totality of features and characteristics of a product or service that bears
on its ability to meet a stated or implied need

Other definitions of Quality

People have found many ways to describe quality. Some of the most popular
definitions for quality are listed below.
1. A degree of excellence
2. Conformance to requirements
3. Totality of characteristics which act to satisfy a need
4. Fitness for use
5. Fitness for purpose
6. Freedom from defects
7. Delighting customers

5 APPROACHES TO QUALITY DEFINITION

 TRANSCENDENT- beyond or above the range of normal or merely physical
human experience or surpassing the ordinary; exceptional.
 PRODUCT BASED- product characteristics and attribute
 USER BASED- based on customer preferences into products
 MANUFACTURING BASED- quality is evident in how the product is
conformed to design specifications and manufacturing standards.
 VALUE BASED- if a product is perceived to be offering good value for the
price, it possesses good quality.

QUALITY TYPES
In general quality is meeting and exceeding customer expectations at a price that he
is willing to pay to possess the product or experience the service.

 QUALITY OF DESIGN- defined as a fit between a product's (service's) design

and customer needs;
 QUALITY OF CONFORMANCE- the capability of a product, service, or
process to meet certain design standards set by the producer. It measures
how close a product, service, or process is to meeting design specifications.
 FINANCIAL MANAGEMENT & TQM

 QUALITY OF PERFORMANCE- is how sound the product functions or

service performs when put to use. It measures the degree to which the
product or service pleases the customer.

QUALITY LEVELS
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Quality focused organization must evaluate at three levels namely organization,
process and individual. Quality systems and standards must be defined at each level
and then manage quality through improvement efforts.
• Organizational level: meeting external customer requirements
1. Products or services that meet customer expectations
2. Products or services that do not meet customer expectations
3. Products or services that are needed by the customers but they do not
received
4. Products or services that are not needed by the customer but they received

• Process level: at the process level, units of the organization are categorized
into functions or departments like marketing, operations, finance human
resource and so on.
1. Products or services that are most important to external customers
2. Processes that produce those products and services
3. The key inputs to the process
4. Processes that have the most major effect on the organizations customer-drive
performance standards
5. The internal customers and their needs

• Performer/job level- The Job/Performer Level is so named because it looks at

jobs at all levels and at the people (performers) who serve in those jobs. At this
Performance Level, we take the same systems view that we take at the
Organization and Process Levels.
1. The input an individual receives which consists of how clear the performance
expectations are, the reasoning of the work procedures, the sufficiency of
resources, the appropriateness of skills and knowledge and how clear the cues
that prompt performance.
2. The positive/negative results for performing as desired/not desired.
3. The feedback an individual obtains such as the nature of the information given,
when and how frequent it is given and the manner in which it is provided
4. An individual's physical, mental and emotional capacity.

FIVE DISTINCT QUALITY PARADIGMS

I. The custom-craft paradigm - focuses on the product specification relative to
customer demands. In this case the craftsperson and customer communicate
directly so the product is customized to exactly what the customer wants.
II. Mass production and sorting paradigm - The focus in the mass production
and sorting paradigm is on productivity.
III. The statistical quality control paradigm - similar to the mass production
and sorting paradigm with the difference that more attention is given to
production processes. Statistical process control and lot-by-lot sampling
inspection are used.
 FINANCIAL MANAGEMENT & TQM

IV. The total quality management (TQM) paradigm - involves customers and
suppliers in addition to mass production and statistical methods. The
production process is similar to that in mass production and sorting paradigm.
Nevertheless, the TQM paradigm recognizes the importance of customer
focuses on continuous quality improvement in day-to-day processes, aiming
Page | 6 at higher product performance, lower cost, and faster delivery than in either
the mass production and sorting or the statistical quality control paradigms.
V. The techno-craft paradigm - is the socio-technical counterpart to the
custom- craft paradigm. The techno- craft paradigm is a new frontier in quality
that seeks to emulate the custom-craft paradigm in performance, but reduce
the cost and the delivery time. The techo-craft paradigm is possible through
the proper integration of people, machines and automation.

COST OF QUALITY
Cost of quality is a method that permits an organization to decide on the level to
which its resources are used for activities that avoid poor quality, that assess the
quality of the organization's products or services, and that result from internal and
external failures. An organization is able to determine the potential savings to be
gained by implementing process improvements having such information. Quality-
related activities that incur costs may be divided into prevention costs, appraisal
costs, and internal and external failure costs.

1. Prevention Costs These are incurred to prevent or avoid failure problems.

They are planned and incurred before actual operation, and they could include:

a. Product or service requirements establishment of qualifications for

inward bound materials, processes, finished products, and services
b. Quality planning - drawing of plans for quality, reliability, operations,
production, and inspection
c. Quality assurance - planning and continuance of the quality system
d. Training - development, preparation, and continuance of programs

2. Appraisal Costs - These costs are associated with measuring and monitoring
activities related to quality standards and performance requirements. These
costs take place from spotting defects rather than prevention.

a. Verification checking of inward bound material, process setup, and

products against contracted specifications
b. Quality audits - confirmation that the quality system is operating
properly
c. Supplier rating-appraisal and endorsement of suppliers of products and
services

3. Internal failure Costs - These costs are acquired to treat defects revealed
earlier when the product or service is delivered to the customer. These costs
happen when the results of work fail to attain design quality standards and are
noticed before they are transferred to the customer. They could include:
 FINANCIAL MANAGEMENT & TQM

a. Waste-performance of needless work or holding of stock as an

outcome of errors, poor organization, or communication
b. Scrap- faulty product or material that cannot be repaired, used, or sold
Rework or rectification – improvement of flawed material or errors
c. Failure analysis - activity necessary to ascertain the reasons of internal
Page | 7 product or service failure

4. External Failure Costs - These are costs obtained to treat defects exposed by
customers. These costs occur when products or services that fail to attain
design quality standards are not discovered until after transfer to the customer.
They could include:

a. Repairs and servicing - of both returned products and those in the field
b. Warranty claims - failed products that are replaced or services that are
re-performed under a guarantee
c. Complaints - all work and costs connected with handling and servicing
customers' complaints
d. Returns - handling and investigation of discarded or recalled products,
including transport costs

TOTAL QUALITY MANAGEMENT (TQM)

 is an all-inclusive and well thought-out means to organizational management
that searches to advance the quality of processes, products, services and
culture through continuing minor changes in reply to constant feedback. TQM
consists of continuous process enhancement activities concerning managers
and workers alike in an organization in a completely integrated effort toward
improving performance at all level.

CORE CONCEPTS OF TQM

the following core concepts of TQM can be used to drive the process of continuous
improvement and to develop a framework for quality improvement over many years.

CUSTOMER SATISFACTION INTERNAL CUSTOMER SATISFACTION

TQM is centered on the Customers are not only external
requirements of the customer. customers, but the people outside who are
In order to meet customer the end user of a firm's products and
requirements, it is imperative to services. There is also the internal
listen to them and customer, the person within the company
do what is agreed upon. who receives the work of another and
adds his contribution to the product or
ALL WORK IS PROCESS service before and met, a chain of quality
Another possible focal point of passing it on to someone else
improvement is that of business
processes. A process is a MEASUREMENT
combination of methods, In order to improve, one must first
materials, manpower and measure one's present performance. This
machines that work collectively will help one focus both on satisfying
to produce a product or service. internal customers and meeting the
requirements of external customers.
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SYNERGY IN TEAMWORK PEOPLE MAKE QUALITY

The idea of synergy in teamwork, Most of the quality problems within an
where the whole is greater than organization are not usually within the
the sum of the parts, is a key control of an individual employee. The
concept in TQM. Here, it is used to system often comes In the way of
employees who are trying to do a good
Page | 8 promote collaboration,
consensus, "creative conflict" and job. In such a situation, motivation by itself
team winning. cannot work. Therefore, managers are
required to ensure that all necessary is
prepared to let people to produce quality.

CONTINUOUS PREVENTION
IMPROVEMENT CYCLE At the heart of TQM is the conviction that
The continuous cycle of instituting it is possible to achieve defect-free work
customer requirements, meeting most of the time. This is termed "right first
and measuring them, measuring time, every time" or zero defects.
success and continuing The
improvement can be used both
externally and internally to stimulate
quality improvements.