BALANCED SCORECARD: quality, time, and the theory of constraints
Quality costs (including the opportunity cost of lost sales because of poor quality) can be as much as 10% to 20% of sales revenues of many organizations. Quality-improvement programs can result in substantial cost savings and higher revenues and market share from increased customer satisfaction.
Quality of design refers to how closely the characteristics of a product or service meet the needs and wants of customers. Conformance quality refers to the performance of a product or service relative to its design and product specifications.
Exhibit 19-1 of the text lists the following six line items in the prevention costs category: design engineering; process engineering; supplier evaluations; preventive equipment maintenance; quality training; and testing of new materials.
An internal failure cost differs from an external failure cost on the basis of when the nonconforming product is detected. An internal failure is detected before a product is shipped to a customer, whereas an external failure is detected after a product is shipped to a customer.
Three methods that companies use to identify quality problems are: (a) a control chart which is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time; (b) a Pareto diagram, which is a chart that indicates how frequently each type of failure (defect) occurs, ordered from the most frequent to the least frequent; and (c) a cause-and-effect diagram, which helps identify potential causes of failure.
No, companies should emphasize financial as well as nonfinancial measures of quality, such as yield and defect rates. Nonfinancial measures are not directly linked to bottom-line performance but they indicate and direct attention to the specific areas that need improvement to improve the bottom line. Tracking nonfinancial measures over time directly reveals whether these areas have, in fact, improved over time. Nonfinancial measures are easy to quantify and easy to understand.
Examples of nonfinancial measures of customer satisfaction relating to quality include the following: 1.
the number of defective units shipped to customers as a percentage of total units of product shipped; 2.
the number of customer complaints;
delivery delays (the difference between the scheduled delivery date and date requested by customer); 4.
on-time delivery rate (percentage of shipments made on or before the promised delivery date); 5.
customer satisfaction level with product features (to measure design quality); 6. market share; and
7. percentage of units that fail soon after delivery.
Examples of nonfinancial measures of internal-business-process quality: 1.
the percentage of defects for each product line;
process yield (rates of good output to total output at a particular process; 3.
manufacturing lead time (the amount of time from when an order is received by production to when it becomes a finished good); and 4.
number of product and process design changes
Customer-response time is how long it takes from the time a customer places an order for a product or a service to the time the product or service is delivered to the customer. Manufacturing lead time is how long it takes from the time an order is received by manufacturing to the time a finished good is produced. Manufacturing lead time is only one part of customer-response time. Delays in delivering an order for a product or service can also occur because of delays in receiving customer orders and delays in delivering a completed order to a customer.
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No. There is a trade-off between customer-response time and on-time performance. Simply scheduling longer customer-response time makes achieving on-time performance easier. Companies should, however, attempt to reduce the...
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