+

Business Process
Performance
+
The Value Chain

 The value chain describes the company’s chain of activities for

transforming inputs into the outputs that customers value.

 Primary activities (business functions) that add value to a

product or service are:
 R&D
 Production
 Marketing, Sales and Distribution
 Customer Service

 Support activities are:

 Infrastructure
 Information Systems
 Materials Management
 Human Resources
+
Value Chain Analysis

 Value chain analysis helps an organization gain competitive

advantage by identifying what activities add value to
customers.

 The organization can increase the related benefits of value-

added activities and reduce non-value added activities.

 Three steps in value chain analysis:

 Identify activities that add value to the end product.
 Identify the cost driver(s) for each activity.
 Build competitive advantage by either increasing value to the
customer or reducing the costs of production.
+
Business Process Reengineering

 Management disassembles its business processes and,

starting from scratch, redesigns its entire processes to
achieve company objectives.

 The steps in business process reengineering are:

1. The organization identifies what it does better than the
competition. These are its distinctive competencies. By
identifying them, the organization understands what activities
are vital to its success.
2. Management determines what processes it uses in its efforts
to generate a product or service that have value. Thereafter
management is enabled to determine the degree of value for
each process. This effort can uncover low value processes to
discard.
+
Benchmarking Process
Performance
 One of the best ways to achieve superior performance and
competitive advantages for a firm is to identify and adopt
best practices. This can be done through benchmarking.

 Benchmarking is the process of measuring the organization

against the products, practices and services of its most
efficient global competitors.

 This process involves continuously striving to imitate the

performance of the best companies in the world. By meeting
these higher standards, the organization is able to create a
competitive advantage over its competitors.
+
Benchmarking Process
Performance Cont´d
 The steps to follow to benchmark a company´s business
processes are:
 Identify the critical success factors for the business and the
processes to benchmark. Critical success factors are the aspects
of the company´s business that are essential to its competitive
advantage.
 Set up a team to do best practice analysis and document the
best practices for the processes that are used in performing the
firm´s critical success factor activities.
 The team will need to identify what areas need improvement and
how they will accomplish this improvement by utilizing the
experience of the benchmarked company.
+
Activity Based Management (ABM)

 Activity-based management is a means of performing value

chain analysis and business process engineering. Activity-
based management uses activity analysis and activity-based
costing data to improve the value of the company’s products
and services.

 Activity-based management is divided into operational

ABM and strategic ABM.
1. Operational ABM uses ABC data to improve efficiency.
2. Strategic ABM uses ABC data to make strategic decisions
about what products or services to offer and what activities to
use to provide those products and services.
+
Kaizen

 The term Kaizen is a Japanese work that means

“improvement”. As used in business, it implies “continuous
improvement”, or slow but consistent incremental
improvements in all areas of operations.

 Kaizen says that improvement is always possible. The goal is

to attain the ideal standard, even when practical standards
are being attained.

 Implementing ideal standards and quality improvements is

the heart of the kaizen concept. Kaizen challenges people to
imagine the ideal condition and strive to make the necessary
improvements to achieve that ideal.
+
The Costs of Quality

 There are two main difference in the classifications of the

costs of quality.

 Each of these two classifications can be broken down into two

further classifications of the cost of quality.

 Cost of Conformance
 Prevention Costs
 Appraisal Costs

 Costs of Nonconformance
 Internal Failure
 External Failure
+
Costs of Conformance

 These are the costs of making sure that the unit is produced
properly and according to all design specifications.
 Prevention costs are the costs of trying to prevent a defect from
occurring.
 Include quality training and planning costs,
equipment maintenance costs, supplier training and
confirmation costs, and information systems costs.
 Appraisal costs are the costs of assessing whether a unit was
produced properly or not.
 Include testing and inspections, quality audits and
internal quality programs.
+
Costs of Nonconformance

 These are the costs that are incurred after a defective unit has
been produced. These costs are further classified based on
who finds the defect – the company or the customer.
 Internal failure costs are the costs of fixing the defect when the
defect is discovered by the company.
 Include rework, scrap, tooling and downtime and
expediting costs.
 External failure costs are the costs of fixing the defects when
the defect is discovered by the customer.
 Include warranty costs, product liability costs, the
loss of customer goodwill and, potentially,
environmental costs.
+
Opportunity Cost of Quality

 There may also be a large cost associated with not producing

a product of quality.
 Money and time must be spent fixing the initial product,
 More customer service is necessary after the sale to fix defective
products. These resources could be used elsewhere in the
company.
 Customers are less likely to repurchase from the company, and
 Customers are less likely to recommend the company.
+
Quality of Design

 Quality of design refers to how well a product or service

meets the needs and wants of its customers.

 If there is a demand for a particular feature on a product, or a

particular service, and a manufacturer or service company is
supplying its product without that feature, there is a problem.

 Not providing what the customer wants is a quality-of-design

failure.
+
Total Quality Management (TQM)

 Total Quality Management (TQM) – an approach committed

to customer satisfaction and continuous improvement.

 TQM’s goals are to both reduce costs and improve quality.

 Objectives of TQM:
 Enhanced and consistent quality of the product or service
 Timely and consistent responses to customer needs
 Elimination of non-value adding work or processes to lower costs
 Quick adaptation and flexibility in response to customers’ shifting
requirements.
+
Core Principles of TQM

 Certain core principles, or critical factors, are common to

all TQM systems:
 They have the support and active involvement of top
management.
 They have clear and measurable objectives.
 They recognize quality achievements in a timely manner.
 They continuously provide training in TQM.
 They strive for continuous improvement (Kaizen).
 They focus on satisfying their customers’ expectations and
requirements.
 They involve all employees.
+
TQM is Not a Short-Term Project

 TQM is something that requires the commitment of top

management and implementation throughout an
organization.

 Part of this pursuit of excellence is a focus on continuing

education. Employees at all levels participate regularly in
continuing education and training in order to promote and
maintain a culture of quality.

 In TQM, the role of quality manager is not limited to a special

department; instead, every person in the organization is
responsible for finding errors and correcting any problems
as soon as possible.
+
Methods of Analyzing Quality
Problems
 Control chart – records observations of an operation taken
at regular intervals. The sample is used to determine whether
all the observations fall within the specified range to
determine whether the process is in statistical control or
out of control.

 Histogram – a bar graph that represents the frequency of

events in a set of data to help see patterns in it.

 Pareto diagram – a type of histogram illustrating the Pareto

Principle: 20% of the causes account for 80% of the
problems.
+
Methods of Analyzing Quality Problems
cont´d

 Cause-and-effect diagram, or Ishikawa diagram –

organizes causes and effects visually to sort out root causes
and identify relationships between causes.
+
TQM and Activity Based Costing

 A TQM system is most compatible with an Activity Based

Costing (ABC) system.
 An ABC system identifies costs with activities and makes the costs
of quality, such as costs to correct poor quality, more apparent.
 If an ABC system is in place, most of the cost information needed
for TQM is already being captured.
 A company that uses ABC will continuously identify non-value
added activities that can be reduced or eliminated and ensure
that necessary activities – value added activities – are carried
out efficiently.
+
Quality Management and
Productivity
 While it may seem that producing a quality product is more
difficult and time consuming, in fact, companies that focus on
quality are more productive than other companies.

 This is because the company will have:

 A reduction in the number of defective units. This in turn
reduces the amount of time, material and effort wasted on
unusable output as well as time spent fixing salvageable defective
units.
 A more efficient manufacturing process.
 A commitment to doing it right the first time.