Chapter 19: Quality, Time and the Theory of Constraints (TOQ) Quality on the production line (conformance to technical specifications) reduces costs and supports a cost leadership strategy Quality may also differentiate one product from what might otherwise be a selection of substitutes and this way supports a value-leadership strategy The term quality refers to a wide variety of factors – fitness for use, the degree to which a product satisfies the needs of a customer, or the degree to which a product conforms to design specification and engineering requirements Quality of design – business functions of the value chain
Conformance quality – production process
Quality of design measures how closely the characteristics of products or services match the needs and wants of customers E.g., if a customer wants a photocopier that combines faxing, scanning, and electronic printing, the photocopier machine must meet all of these needs or else it is a failure in quality of design Conformance quality is the performance of a product or service according to design and performance specifications E.g., photocopying machine breaks down = failure to satisfy conformance quality Costs of quality (COQ) – costs incurred to prevent or rectify the production of low-quality product Prevention costs – costs incurred to preclude the production of products that do not conform to specifications E.g., design engineering, process engineering, preventative equipment maintenance, quality training, testing of new materials Appraisal costs – costs incurred to detect which of the individual units of products do not conform to specifications E.g., inspection, online production manufacturing and process inspection, product testing Internal failure costs – costs incurred to detect a nonconforming product before it is shipped to customers E.g., spoilage, rework, scrap, machine repairs, manufacturing/process engineering on internal failures External failure costs – costs incurred to detect a non conforming product after it is shipped to customers E.g., customer support, manufacturing process/engineering for external failures, warranty repair costs, liability claims E.g., don’t catch defect and customer sends it back (warranty, customer service). Warranty costs are easy to measure but lost customers (lost CM) is un-measurable Internal and external failure costs can be very high so companies should spend more on prevention and appraisal costs to avoid internal/external failure costs The opportunity cost of lost sales and decreased market share can represent a significant hidden cost The nonfinancial measures of the customer perspective in the balanced scorecard provide advance warnings of the potential costs of internal/external failure (estimates) Even if products/services are defect-free and fully satisfy conformance quality, they will not be effective or sell well unless they also have design quality (satisfy customer needs) Usually management accountants are responsible for maintaining and reporting nonfinancial measures. Measure customer satisfaction trends over time: Market research information on customer preferences and satisfaction with specific attributes and the overall value proposition Market share
Percentage of customer complaints (companies estimate that for every customer who actually complains there are 10 to 20 others who have had bad experiences with the product but have not complained) Percentage of products that fail soon after delivery
Customer-response time (the difference between scheduled delivery date and date requested by customer) On-time delivery rate (percentage of shipments made on or before the scheduled delivery rate) Often customer complaints arise because of technical non-conformance, an internal production process failure frequently measured as a defect rate or mean time between failures (MTBF) Learning curve: curvilinear relationship of total output produced relative to quantity of labour input...
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