LECTURE 6
QUALITY
MANAGEMENT
Operations Management - 5th Edition
Roberta Russell & Bernard W. Taylor, III: Chapter 3
Chapter 7: Operations Management – 9th Edition William J Stevension
International Business and
Quality
Globalization and The key to foreign
foreign competition competition –
began to change the producing quality
business products at
environment competitive prices.
March 09,
Lecture 6 OM Quality Management 2
2020
What is quality?
■ Quality is a measure of excellence or a state of
being free from defects, deficiencies and
significant variations. It is brought about by strict
and consistent commitment to certain standards
that achieve uniformity of a product in order to
satisfy specific customer or user requirements.
■ ISO 8402-1986 standard defines quality as "the
totality of features and characteristics of a product
or service that bears its ability to satisfy stated or
implied needs."
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What is quality?
■ American Society for Quality: "A combination of quantitative and
qualitative perspectives for which each person has his or her own definition;
examples of which include, "Meeting the requirements and expectations in
service or product that were committed to" and "Pursuit of optimal solutions
contributing to confirmed successes, fulfilling accountabilities". In technical
usage, quality can have two meanings:
a. The characteristics of a product or service that bear on its ability to
satisfy stated or implied needs;
b. A product or service free of deficiencies."
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What is quality?
■ Philip B. Crosby: "Conformance to requirements." The
requirements may not fully represent customer
expectations; Crosby treats this as a separate problem.
■ W. Edwards Deming: concentrating on "the efficient
production of the quality that the market expects,"[4] and
he linked quality and management: "Costs go down and
productivity goes up as improvement of quality is
accomplished by better management of design, engineering,
testing and by improvement of processes."
■ Peter Drucker: "Quality in a product or service is not what
the supplier puts in. It is what the customer gets out and is
willing to pay for."
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ISO 9000: "Degree to which
a set of inherent
characteristics fulfills
requirements." The standard
defines requirement as need
What is or expectation.
quality?
Joseph M. Juran: "Fitness for
use." Fitness is defined by the
customer.
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■ Quality management is an organisation -
wide approach to understanding
precisely what customers need and
consistently delivering accurate
solutions within budget, on time and
with the minimum loss to society.
– The term quality management has a
Quality
specific meaning within many business
sectors. This specific definition, which
does not aim to assure 'good quality' by
Management the more general definition, but rather to
ensure that an organization or product is
consistent, can be considered to have
four main components:
■ quality planning,
■ quality control,
■ quality assurance
■ quality improvement.
Lecture 6 OM Quality Management March 09, 2020 7
Quality Management
■ Quality management is focused not only on
product/service quality, but also the means to
achieve it. Quality management therefore uses
quality assurance and control of processes as well
as products to achieve more consistent quality.
(Wikipedia)
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Consumer’s
Perspective
• Fitness for use: how well
Two product or service does what
it is supposed to
Dimension
of Quality Producer’s perspective
• Quality of design: designing
quality characteristics into a
product or service
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Dimensions of Quality:
Manufactured Products
■ Performance :basic operating characteristics of a product; how well a car is handled or its
gas mileage
■ Features : “extra” items added to basic features, such as a stereo CD or a leather interior in
a car
■ Reliability: probability that a product will operate properly within an expected time frame;
that is, a TV will work without repair for about seven years
■ Conformance : degree to which a product meets pre–established standards
■ Durability: how long product lasts before replacement.
■ Serviceability: ease of getting repairs, speed of repairs, courtesy and competence of repair
person
■ Aesthetics: how a product looks, feels, sounds, smells, or tastes?
■ Safety: assurance that customer will not suffer injury or harm from a product; an especially
important consideration for automobiles
■ Perceptions: subjective perceptions based on brand name, advertising, and like
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Dimensions of Quality:
Service
■ Time and timeliness: how long must a customer wait for service, and is it completed on
time?
■ Completeness: is everything customer asked for provided?
■ Courtesy: how are customers treated by employees?
■ Consistency: is same level of service provided to each customer each time?
■ Accessibility and convenience: how easy is it to obtain service?
■ Accuracy: is service performed right every time?
■ Assurance: Ability to convey trust and confidence.
■ Empathy: Ability to be approachable.
■ Tangibles: Physical facilities and facilitating goods
■ Reliability: Perform promised service dependably and accurately.
■ Responsiveness: Willingness to help customers promptly.
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Perceived Service Quality
Word of Personal Past
mouth needs experience
Service Quality Expected Service Quality Assessment
Dimensions service 1. Expectations exceeded
Reliability ES<PS (Quality surprise)
Responsiveness 2. Expectations met
Assurance Perceived ES~PS (Satisfactory quality)
Empathy service 3. Expectations not met
Tangibles ES>PS (Unacceptable quality)
etc
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Each customer contact is called a
moment of truth.
Service You have the ability to either
Quality: satisfy or dissatisfy them when
Moments you contact them.
of Truth
A service recovery is satisfying a
previously dissatisfied customer
and making them a loyal
customer.
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Quality of conformance
Meaning of • Making sure product or service is produced
according to design
Quality: Consumer’s and producer’s
perspectives depend on each other
Producer’s • Consumer’s perspective: PRICE
• Producer’s perspective: COST
Perspective
Consumer’s view must dominate
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■ Cost of Achieving Good Quality
– Prevention costs
■ costs incurred during
product design
– Appraisal costs
■ costs of measuring,
testing, and analyzing
Cost of ■ Cost of Poor Quality
Quality – Internal failure costs
■ include scrap, rework,
process failure,
downtime, and price
reductions
– External failure costs
■ include complaints,
returns, warranty claims,
liability, and lost sales
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Prevention Costs
■ Quality planning costs ■ Training costs
– costs of developing and – costs of developing and
implementing quality putting on quality
management program
training programs for
■ Product-design costs employees and
– costs of designing management
products with quality
characteristics ■ Information costs
■ Process costs – costs of acquiring and
maintaining data
– costs expended to make
sure productive process related to quality, and
conforms to quality development of reports
specifications on quality performance
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Appraisal Costs
■ Inspection and testing
– costs of testing and inspecting materials, parts, and
product at various stages and at end of process
■ Test equipment costs
– costs of maintaining equipment used in testing quality
characteristics of products
■ Operator costs
– costs of time spent by operators to gar data for testing
product quality, to make equipment adjustments to
maintain quality, and to stop work to assess quality
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Internal Failure Costs
■ Scrap costs ■ Process downtime costs
– costs of poor-quality
products that must be – costs of shutting down
discarded, including labor, productive process to fix
material, and indirect costs problem
■ Rework costs ■ Price-downgrading costs
– costs of fixing defective
products to conform to – costs of discounting
quality specifications poor-quality products—
■ Process failure costs that is, selling products
– costs of determining why as “seconds”
production process is
producing poor-quality
products
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External Failure Costs
■ Customer complaint costs ■ Product liability costs
– costs of investigating and
satisfactorily responding to – litigation costs
a customer complaint resulting from product
resulting from a poor- liability and customer
quality product injury
■ Product return costs
■ Lost sales costs
– costs of handling and
replacing poor-quality – costs incurred because
products returned by customers are
customer dissatisfied with poor
■ Warranty claims costs quality products and do
– costs of complying with not make additional
product warranties purchases
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It helps to improve the brand image of the enterprise.
It facilitates standardization.
It helps to reduce costs by cutting down wastes caused
by the production of defective products.
SIGNIFICANC
E OF It helps to increase sales turnover.
QUALITY
CONTROL It enables the entrepreneur to face competition more
effectively in domestic as well as international markets.
It helps the entrepreneur to determine costs and prices
at competition levels in advance of production.
It enables the manufacturer to comply with quality
standards prescribed by the government.
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Measuring and
Reporting Quality Costs
■ Index numbers
– ratios that measure quality costs against a base value
– labor index
■ ratio of quality cost to labor hours
– cost index
■ ratio of quality cost to manufacturing cost
– sales index
■ ratio of quality cost to sales
– production index
■ ratio of quality cost to units of final product
March 09, 2020 Lecture 6 OM Quality Management 21
The following question
arises –
• Are productivity and quality
related?
• Are the two sides of the same
coin?
Quality and
Productivit Can you have both?
y • The answer of course is Yes.
• The quality management can
also improve productivity –
the number of units produced
from available recourses.
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Quality and Productivity
■ Effect of Quality Management on Productivity
– Improving quality by reducing defects will
increase good output and reduce inputs. In
fact, virtually all aspects of quality
improvement have a favourable impact on
different measures of productivity – labour
productivity and machine productivity.
– Improving product design and production
processes, improving the quality of material
and parts and improving job designs and
work activity will increase productivity.
March 09, 2020 Lecture 6 OM Quality Management 23
The Effect of Quality
Management on Productivity
■ Productivity is a measure of a company's effectiveness in converting inputs into outputs. It
is broadly defined as,
■ Quality management can improve productivity--the number of units produced from
available resources.
– An output is the final product from a service or production process.
– Inputs are the parts, material, labor, capital, and so on that go into the productive
process. Productivity measures, depending on the outputs and inputs used, are labor
productivity (output per labor-hour) and machine productivity (output per machine-
hour).
– Improving quality by reducing defects will increase good output and reduce inputs.
– In fact, all aspects of quality improvement have a favorable impact on different
measures of productivity.
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Effect of Quality Management on Productivity
Yield Calculation
■ Yield = (total input) (%age good units) +
■ (total input) (1 - %age good units)
■ (%age reworked)
■ OR
■ Y = (I) (%age G) + (I) (1 - %age G) (%age R)
■ I = planned number of units of product started in the
production process
■ G = Good units produced
■ R = Defective units that are successfully reworked
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Computing Product
Yield for Multistage Processes
Y = (I)(%g1)(%g2) … (%gn)
where:
I = input of items to the production process that will result
in finished products
gi = good-quality, work-in-process products at stage i
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Product Cost
where:
Kd = direct manufacturing cost per unit
I = input
Kr = rework cost per unit
R = reworked units
Y = yield
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The Quality-Productivity Ratio
(QPR)
■ A measure of the effect of quality on productivity combines the
concepts of quality index numbers and product yield. Called the
quality-productivity ratio (QPR), it is computed as follows:
𝐺𝑜𝑜𝑑 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝑈𝑛𝑖𝑡𝑠
𝑄𝑃𝑅= × 100
( 𝐼𝑛𝑝𝑢𝑡 ) ( 𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 ) +(𝐷𝑒𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑢𝑛𝑖𝑡𝑠)(𝑅𝑒𝑤𝑜𝑟𝑘 𝑐𝑜𝑠𝑡𝑠)
■ This is actually a quality index number that includes productivity and
quality costs. The QPR increases if either processing cost or rework
costs or both decrease. It increases if more good-quality units are
produced relative to total product input (i.e., the number of units that
begin the production process).
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Example
■ The H&S Motor Company produces small motors at a
processing cost of $30 per unit. Defective motors can be
reworked at a cost of $12 each. The company produces 100
motors per day and averages 80 percent good-quality motors,
resulting in 20 percent defects, 50% of which can be reworked
prior to shipping to customers. The company wants to examine
the effects of
1. increasing the production rate to 200 motors per day;
2. reducing the processing cost to $26 and the rework cost to
$10;
3. increasing through quality improvement the product yield
of good-quality products to 95 percent; and
4. the combination of 2 and 3.
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Solution
The QPR for the base case is computed as follows.
Case 1. Increase input to production capacity of 200 units.
Increasing production capacity alone has no effect on the QPR; it remains the same as
the base case.
Case 2. Reduce processing cost to $26 and rework cost to $10.
These cost decreases caused the QPR to increase.
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Solution
Case 3. Increase initial good-quality units to 95 percent.
The QPR increases as product quality improves .
Case 4. Decrease costs and increase initial good-quality units.
The largest increase in the QPR results from decreasing costs and increasing
initial good-quality product through improved quality.
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Problem 3-1
■ Backwoods American, Inc., produces expensive water repellent, down-
lined parkas. The company implemented a total quality-management
program in 2000. Following are quality-related accounting data that
have been accumulated for the five-year period after the program's start.
1. Compute the company's total failure costs as a percentage of total quality costs for
each of the five years. Does there appear to be a trend to this result? If so, speculate
on what might have caused the trend.
2. Compute prevention costs and appraisal costs, each as a percentage of total costs,
during each of the five years. Speculate on what the company's quality strategy
appears to be.
3. Compute quality-sales indices and quality-cost indices for each of the five years. Is it
possible to assess the effectiveness of the company's quality-management program
from these index values?
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Problem 3-1
Year
2000 2001 2002 2003 2004
Quality Costs (000s)
Prevention 3.2 10.7 28.3 42.6 50
Appraisal 26.3 29.2 30.6 24.1 19.6
Internal failure 39.1 51.3 48.4 35.9 32.1
External failure 118.6 110.5 105.2 91.3 65.2
Accounting Measures
Sales $2,700.60 2,690.10 2,705.30 2,810.20 2,880.70
Manufacturing Cost 420.9 423.4 424.7 436.1 435.5
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I Quality Costs (000) 2000 2001 2002 2003 2004
a Prevention 3.2 10.7 28.3 42.6 50
b Appraisal 26.3 29.2 30.6 24.1 19.6
c Internal Failurs 39.1 51.3 48.4 35.9 32.1
d External Failure 118.6 110.5 105.2 91.3 65.2
Total Quality Cost 187.2 201.7 212.5 193.9 166.9
II Accounting Measures
e Sales 2700.6 2690.1 2705.3 2810.2 2880.7
f Manufacturing Cost 420.9 423.4 424.7 436.1 435.5
[1] Total failure cost (c+d) 157.7 161.8 153.6 127.2 97.3
Total quality costs (a+b+c+d) 187.2 201.7 212.5 193.9 166.9
Ratio 0.84 0.80 0.72 0.66 0.58
Prevention cost to Total quality cost
[2] (a/(a+b+c+d) 0.02 0.05 0.13 0.22 0.30
Appraisal cost to total quality cosys
(b/(a+b+c+d) 0.14 0.14 0.14 0.12 0.12
[3] Quality-Sales Index (a+b+c+d/e) 0.07 0.07 0.08 0.07 0.06
Quality-Cost Index (a+b+c+d/f) 0.44 0.48 0.50 0.44 0.38
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Problem 3-3
■ The Colonial House Furniture Company manufactures
two-drawer oak file cabinets that are sold unassembled
through catalogues. The company initiates production of
150 cabinet packages each week. The percentage of good
quality cabinets averages 83% per week, and the percentage
of poor-quality cabinets that can be reworked is 60%.
1. Determine the weekly product yield of file cabinets.
2. If the company desires a product yield of 145 units per
week, what increase in the percentage of good-quality
products must result'?
Y = (I) (%age G) + (I) (1 - %age G) (%age R)
March 09, 2020 Lecture 6 OM Quality Management 35
Product Cost
where:
Kd = direct manufacturing cost per unit
I = input
Kr = rework cost per unit
R = reworked units
Y = yield
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Problem 3-5
■ The Omega Shoe Company manufactures a number of
different styles of athletic shoes. Its biggest seller is the
XPacer running shoe. In 2002 Omega implemented a
quality-management program. The company's shoe
production for the past three years and manufacturing costs
are as follows.
■ Only one-quarter of the defective shoes can be reworked, at
a cost of $2 apiece. Compute the manufacturing cost per
good product for each of the three years and indicate the
annual percentage increase or decrease resulting from the
quality-management program.
March 09, 2020 Lecture 6 OM Quality Management 37
Problem 3-5
Year
2002 2003 2004
Units produced/input 32,000 34,600 35,500
Manufacturing cost $278,000 291,000 305,000
Percent good quality 78% 83% 90%
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Problem 3-8
■ The Backwoods American company operates a telephone order system for a
catalogue of its outdoor clothing products. The catalogue orders are processed in
three stages. In the first stage, the telephone operator enters the order into the
computer; in the second stage, the items are secured and hatched in the warehouse;
and in the final stage, the ordered products are packaged. Errors can be made in
orders at any of these stages, and the average percentage of errors that occurs at each
stage are as follows.
Stage % Errors
1 12%
2 8%
3 4%
■ If an average of 320 telephone orders are processed each day, how many errorless
orders will result?
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Problem 3-9
■ The total processing cost for producing the X-Pacer running
shoe in Problem 3-5 is $18. The Omega Shoe Company starts
production of 650 pairs of the shoes weekly, and the average
weekly yield is 90%, with 10% defective shoes. One quarter of
the defective shoes can be reworked at a cost of $3.75.
1. Compute the quality-productivity ratio (QPR).
2. Compute the QPR if the production rate is increased to
800 pairs of shoes per week.
3. Compute the QPR if the processing cost is reduced to
$16.50 and the rework cost to $3.20.
4. Compute the QPR if the product yield is increased to 93%
good quality.
March 09, 2020 Lecture 6 OM Quality Management 40
Bright Electronics produce televisions at a
processing cost of Tk. 4700 per unit. The
company processes an average of 250
televisions per week and gets 89% good-
quality televisions. 60% of defective
televisions can be reworked. The cost of
reworking a defective television is Tk. 1600.
Compute the present product yield, product
cost and quality-productivity ratio (QPR).
Problem The company has planned to undertake a
quality improvement plan to achieve a yield
of 245 televisions per week. What level of
good-quality televisions must be produced to
achieve this yield? It is expected that after
implementation of the plan rework cost will
reduce to Tk. 950. What will be QPR and
product cost after implementation of quality
improvement plan?
March 09,
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