Chapter 19

Cost Management: Quality, Time, and the Theory of Constraints

Copyright 2003 Pearson Education Canada Inc.

Slide 19-188

Quality As A Competitive Weapon

Actual Performance Design Specifications Customer Satisfaction

Conformance Quality

Quality of Design

Costs of quality (COQ) are costs incurred to rectify the production of of low-quality product Four categories of COQ Prevention costs (design and process engineering) Appraisal costs (inspection costs) Internal failure costs (spoilage and rework) External failure costs (warranty repair work)
Copyright 2003 Pearson Education Canada Inc. Pages 703 - 705 Slide 19-189

Methods to Analyze Quality Problems

Statistical quality control (SQC) or statistical process control (SPC) employ control charts to monitor successive observations at regular intervals of time

Pareto diagrams indicates the frequency of failures (defects)

Cause-and-Effect diagrams identifies potential causes of failures or defects such as human error or component failure
Copyright 2003 Pearson Education Canada Inc. Pages 707 - 709 Slide 19-190

Nonfinancial Measures of Quality

Even if a product is defect free and meets conformance quality, it still must satisfy customer needs Consider total customer satisfaction including: features that provide fair value delivery when promised delivery a defect-free product avoid early failure ensure that product will not fail excessively in use Focus attention on costs of poor quality Use financial measures to evaluate savings plans Use nonfinancial measures to monitor success
Copyright 2003 Pearson Education Canada Inc. Pages 713 - 714 Slide 19-191

Evaluating Quality Performance

Advantages of Cost of Quality (COQ) Measurements focuses attention on how costly poor quality can be allows for comparison of different programs and setting priorities provides a common basis for measuring quality

Advantages of nonfinancial measures of quality easy to quantify and understand direct attention at the precise problem provide intermediate feedback on achievements provide useful long-run indicators of performance
Copyright 2003 Pearson Education Canada Inc. Page 714 Slide 19-192

Time As A Competitive Weapon

Time is a key variable in competition Doing things faster helps increase revenues and decrease costs Think of time in terms of: Customer response time (order receipt to delivery) On-Time Performance: delivered on promised date A time driver is any factor where change in the factor causes a change in the speed of the activity Uncertainty about when the customer will order Limited capacity and bottlenecks

Copyright 2003 Pearson Education Canada Inc.

Pages 714 - 716

Slide 19-193

Theory of Constraints
Theory of Constraints (TOC) describes methods of maximizing operating income when faced with a bottleneck

Measurements 1. Throughput contribution: Sales direct materials 2. Investments (inventory): Material inventory, work-inprocess, finished goods, R&D, and cost of equipment and buildings 3. Operating costs: all operating costs Objective of TOC is to increase throughput contribution while decreasing investments and operating costs
Pages 719 - 720 Slide 19-194

Copyright 2003 Pearson Education Canada Inc.

Theory of Constraints (Continued)

Management of Bottleneck Resources 1. Recognize that the bottleneck resource determines throughput contribution 2. Search and find the bottleneck resource 3. Keep the bottleneck operation busy and subordinate all nonbottleneck resources to the bottleneck resource 4. Take action to increase bottleneck efficiency and capacity Examples of TOC Actions: eliminate idle time at the bottleneck, eliminate production of nonessential products, reduce setup time at bottleneck
Copyright 2003 Pearson Education Canada Inc. Pages 720 - 722 Slide 19-195