Chapter 2– Ensuring Quality

Operations Management
by
Roberta Russell & Bernard W. Taylor, III
 Lecture Outline
 What is quality?
 Evolution of quality management
 Quality tools
 TQM and QMS
 Focus on quality management - customers
 Role of employees in quality improvement
 Quality in service companies
 Six Sigma
 The cost of quality
 Lecture Outline (cont.)
 Effects of quality management on productivity
 Quality Awards
 ISO 9000
 What is Quality?
 According to the Oxford American Dictionary,
quality is a degree or level of excellence

 According to the American Society for Quality

(ASQ), quality refers to the totality of features and
characteristics that satisfy needs without
deficiencies

 Quality can be defined in many ways depending on

who is defining it and the product or service it
refers to.
 What is Quality: Customer’s
Perspective
 Fitness for use  a Mercedes and a Ford
 How well product or are equally “fit for use”,
service does what it is but with different design
supposed to dimensions.
 Quality of design
 Designing quality
characteristics into a
product or service
 Dimensions of Quality

 For manufactured
goods
 For services
 Dimensions of Quality:
Manufactured Products
 The dimensions of quality for manufactured products a
consumer looks for include the following:
 Performance
 Basic operating characteristics of a product; how well a car handles 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’s 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; with care, L.L. Bean boots may last a
lifetime.
 Dimensions of Quality:
Manufactured Products (cont.)
 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
 Dimensions of Quality: Services
 The dimensions of quality for a service differ
somewhat from those of a manufactured product.
 Service quality is more directly related to time and the
interaction between employees and the customer.
 Dimensions of Quality: Services
 Time and timeliness
 How long must a customer wait for service, and is it completed on time?
 Is an overnight package delivered overnight?
 Completeness
 Is everything customer asked for provided?
 Is a mail order from a catalogue company complete when delivered?
 Courtesy
 How are customers treated by employees?
 Are catalogue phone operators nice and are their voices pleasant?
 Consistency
 Is same level of service provided to each customer each time?
 Is your newspaper delivered on time every morning?
 Dimensions of Quality: Services
 Accessibility and convenience
 How easy is it to obtain service?
 Does service representative answer your calls quickly?
 Accuracy
 Is service performed right every time?
 Is your bank or credit card statement correct every month?
 Responsiveness
 How well does company react to unusual situations?
 How well is a telephone operator able to respond to a customer’s
questions?
 What is Quality: Producer’s
Perspective
 Quality of conformance
 Making sure product or service is produced according to design
 If new tires do not conform to specifications, they wobble
 If a hotel room is not clean when a guest checks in, hotel is not
functioning according to specifications of its design.
The Meaning of Quality
 What is Quality: A Final
Perspective
 Customer’s and producer’s perspectives depend on each other
 Producer’s perspective
 Production process and COST
 Customer’s perspective
 Fitness for use and PRICE
 Customer’s view must dominate
 Quality Management System

 To make sure that products and services have the

quality they have been designed for, strategy to achieve
quality throughout the organization is required.
 Quality management system (QMS) refers to the
approach to the management of quality throughout the
entire organization and supply chain.
 Evolution of Quality
Management: Quality Gurus
 Walter Shewart
 W. Edwards Deming
 Joseph M. Juran
 Armand V. Feigenbaum
 Philip Crosby
 Kaoru Ishikawa
 Evolution of Quality
Management: Quality Gurus
 Walter Shewart
 In 1920s, developed control charts
 Introduced the term “quality assurance”
 W. Edwards Deming
 Developed courses during World War II to teach statistical quality
control techniques to engineers and executives of companies that were
military suppliers.
 After war, began teaching statistical quality control to Japanese
companies
 Joseph M. Juran
 Followed Deming to Japan in 1954
 Focused on strategic quality planning
 Quality improvement achieved by focusing on projects to solve
problems and securing breakthrough solutions.
 Evolution of Quality
Management: Quality Gurus
 Armand V. Feigenbaum
 In 1951, introduced concepts of total quality control and
continuous quality improvement
 Philip Crosby
 In 1979, emphasized that costs of poor quality far outweigh
costs of preventing poor quality
 In 1984, defined absolutes of quality management –
conformance to requirements, prevention, and “zero defects”
 Kaoru Ishikawa
 Promoted use of quality circles
 Developed “fishbone” diagram
 Emphasized importance of internal customer
 Deming’s 14 Points
 Deming’s approach to quality management:
 Advocated the continuous improvement of the production process to
achieve conformance to specifications and reduce variability.
 Promoted the elimination of common causes of quality problems
such as poor product design and insufficient employee training, and
also the elimination of special causes such as specific equipment or
an operator.
 Emphasized the use of statistical quality-control techniques to
reduce variability in the production process.
 Dismissed the use of the final product inspection as a means of
ensuring good quality.
 Is embodied in his 14 points.
Deming’s 14 Points
Deming Wheel: PDCA Cycle
 Quality Tools
 Process Flow Chart
 Cause-and-Effect Diagram
 Check Sheet
 Pareto Analysis ( also known as the 80/20 rule)
 Histogram
 Scatter Diagram
 Statistical Process Control Chart
 Process Flowcharts
 Process Flowchart:
 Is a diagram of the steps in a job, operation, or process.
 Enables everyone involved in identifying and solving quality
problems to have a clear picture of how a specific operation
works and a common frame of reference.
 Enables a process improvement team to understand the
interrelationship of the departments and functions that
constitute a process.
Flow Chart
 Process Flowcharts: Example
Arnold Palmer hospital has undertaken a series of process improvement
initiatives. One of these is to make the MRI (Magnetic Resonance Imaging)
service efficient for patient, doctor, and hospital. The first step, the administrator
believes, is to develop a flowchart for this process.
A process improvement staffer observed a number of patients and followed them
(and information flow) from start to end. Here are the 11 steps:
1. Physician schedules MRI after examining patient (START).
2. Patient taken from the examination room to the MRI lab with test order and copy of
medical records.
3. Patient signs in, completes required paperwork.
4. Patient is prepped by technician for scan.
5. Technician carries out the MRI scan.
6. Technician inspects film for clarity.
7. If MRI not satisfactory (20% of time), Steps 5 and 6 are repeated.
8. Patient taken back to hospital room.
9. MRI is read by radiologist and report is prepared.
10. MRI and report are transferred electronically to physician.
11. Patient and physician discuss report (END).
Process Flowcharts: Example
 Cause-and-Effect Diagram
 Cause-and-Effect Diagram:
 Also called a fishbone or Ishikawa diagram
 Is a graphical description of the elements of a specific
quality problem and the relationship among those elements.
 Used to identify the causes of a quality problem so that it
can be corrected.
 Is usually developed as part of brainstorming to help a
quality team of employees and managers identify causes of
quality problems.
Cause-and-Effect Diagram
Cause-and-Effect Matrix
 Checksheets and Histograms
 Checksheets are frequently used in conjunction with
histograms, as well as with Pareto diagrams.
 A checksheet is a fact-finding tool used to collect
data about quality problems
 A typical checksheet tallies (counts) the number of
defects for a variety of previously identified problem
causes.
 When the checksheet is completed, the total tally of
defects for each cause can be used to create a
histogram or a Pareto chart.
Check Sheets and Histograms
 Pareto Analysis
 Pareto analysis
 Is a method of identifying the causes of poor quality.
 Is based on Juran’s finding that most quality problems and
costs result from only a few causes.
 Can be applied by tallying the number of defects for each of
the different possible causes of poor quality in a product or
service and then developing a frequency distribution from
the data. This frequency distribution is referred to as a
Pareto diagram.
 Pareto Analysis

Cause Number of defects

BTS system 17
beepers 7
room cleaning 13
laundry 4
family 3
staff communication 83
patients 3
Pareto Analysis
Pareto Chart
Scatter Diagram
 Process Control Charts
 A control chart:
 Is a means for measuring if a process is doing what it is
supposed to do, like a thermostat monitoring temperature room.
 Is constructed with a horizontal line through the middle of a chart
representing the process average or norm.
 Has a line below the center line representing the lower control
limit and a line above it for the upper control limit.
Control Chart
 TQM and QMS
 Total Quality Management (TQM)
 Customer-oriented, leadership, strategic planning, employee
responsibility, continuous improvement, cooperation, statistical
methods, and training and education
 Quality Management System (QMS)
 System to achieve customer satisfaction that complements other
company systems
 Basic Principles of TQM
 Deming’s 14 points and the philosophies and teachings of the
early quality gurus are clearly embodied in the basic
principles of TQM:
 Quality can and must be managed.
 The customer defines quality, and customer satisfaction is the top goal; it is a
requirement and is not negotiable.
 Management must be involved and provide leadership.
 Continuous quality improvement is “the” strategic goal, which requires
planning and organization.
 Quality improvement is the responsibility of every employee; all employees
must be trained and educated to achieve quality improvement.
 Quality problems are found in processes, and problems must be prevented,
not solved.
 The quality standard is “no defects.”
 Quality must be measured; improvement requires the use of quality tools, and
especially statistical process control.
 Focus of Quality Management -
Customers
 TQM and QMSs serve to achieve customer satisfaction
 Partnering
 A relationship between a company and its suppliers based on
mutual quality standards
 Measuring customer satisfaction
 Important component of any QMS
 Customer surveys, telephone interviews
 Role of Employees in Quality
Improvement
 Participative problem  Involves everyone in process of
continuous improvement
solving  If an improvement is not part of a
 Employees involved in quality continuous, ongoing process, it is
management not considered kaizen.
 Every employee has undergone  Kaizen is most closely associated
extensive training to provide quality with lean systems, an approach to
to Disney’s guests continuous improvement
throughout the organization.
 Kaizen
 Quality Circles and QITs
 Quality circle  Process/quality improvement
 Group of workers and supervisors teams
from same area who address  Focus attention on business
quality problems processes rather than separate
company functions.
 Quality in Services
 Service defects are not always easy to measure because
service output is not usually a tangible item
 Services tend to be labor intensive
 Dividing a job into a series of small tasks each

performed by a different worker

 Services and manufacturing companies have similar inputs
but different processes and outputs
 Quality Attributes in Services
 Principles of TQM apply  Benchmark
equally well to services and  “best” level of quality
manufacturing achievement in one company
that other companies seek to
 Timeliness achieve
 How quickly a service is
provided?
 Six Sigma
 Six Sigma:
 Was first developed at Motorola and is currently one of the most
popular quality management systems in the world.
 Is a project-oriented methodology (or system) that provides
businesses with the tools and expertise to improve their processes.
 Is based on Deming’s PDCA cycle and Joseph Juran’s assertion
that ‘all quality improvement occurs on a project-by-project’ basis,
with elements of kaizen-type employee involvement.
 Six Sigma
 A process for developing and delivering virtually perfect
products and services
 Measure of how much a process deviate from perfection
 3.4 defects per million opportunities (DPMO).
 Is championed by an executive responsible for project
success.
 Six Sigma Process
 Six Sigma follows four basic steps:
 Align – senior executives create a balanced scorecard of strategic
goals, metrics, and initiatives to identify areas of improvement that
will have the greatest impact on the company’s bottom line.
 Mobilize – project teams are formed and empowered to act. The
teams follow a step-by-step, problem-solving approach referred to
as DMAIC.
 Accelerate – improvement teams made up of Black Belt and Green
Belt team members with appropriate expertise use an action-
learning approach to build their capability and execute the project.
 Govern – executive process owners monitor and review the status
of improvement projects to make sure the system is functioning as
expected. Leaders share the knowledge gained from the
improvement projects with other parts of the organization to
maximize profits.
Six Sigma
 The Breakthrough Strategy: DMAIC
 At the heart of Six Sigma is the breakthrough strategy, a five-
step process applied to improvement projects.
 The breakthrough strategy steps are:
 Define – the problem is defined, including who the customers are and what
they want, to determine what needs to improve. It is important to know which
quality attributes are most important to the customer, what the defects are, and
what the improved process can deliver.
 Measure – the process is measured; data are collected and compared to the
desired state.
 Analyze – the data are analyzed in order to determine the cause of the
problem.
 Improve – the team brainstorms to develop solutions to problems; changes are
made to the process, and the results are measured to see if the problems have
been eliminated. If not, more changes may be necessary.
 Control – if the process is operating at the desired level of performance, it is
monitored to make sure the improvement is sustained and no unexpected and
undesirable changes occur.
Six Sigma: Black Belts and Green Belts

 Black Belt  A teacher and mentor for

 Project leader Black Belts
 Master Black belt
 Green Belts
 Project team members
 Design for Six Sigma (DFSS)
 Design for Six Sigma (DFSS):
 An important element of the Six Sigma system.
 A systematic methodology for designing products and
processes that meet customer expectations and can be
produced at Six Sigma quality levels.
 Also known as DMADV (Define, Measure, Analyze, Design,
and Verify)
 A more effective and less expensive way to achieve the Six
Sigma goal than fixing problems after the product or process
is already developed and in place.
 Lean Six Sigma
 Lean Six Sigma:
 A recent trend in quality management which integrates Six
Sigma and ‘lean systems’.
 Attempts to combine the best features of lean and Six Sigma.
 Lean Six Sigma
 The lean approach to process improvement includes
five steps:
 First, it is determined what creates value, i.e. quality from the
customer’s perspective
 Second, the sequence of activities(in the process) that create
value, called value stream is identified and activities that do
not add value to the production process are eliminated.
 Third, waste (such as inventory or long process times) along
the value stream is removed through process improvements.
 Fourth, the process is made responsive to customer’s needs
(making the product or service available when the customer
needs it).
 Finally, lean continually repeats the attempt to remove waste
and improve flow.
 The Bottom Line - Profitability
 The criterion for selecting Six Sigma projects by executives
is typically based on the financial impact of the
improvement expected from the project (how it will affect
the bottom line)
 Focusing on profitability for initiating quality improvement
projects is one of the factors that distinguishes Six Sigma
from TQM.
 Quality improvement and profitability are closely related:
 As quality improves, the costs associated with poor quality decline
 As the quality of a company’s products or services improves, the
company becomes more competitive and its market share
increases.
 Cost of Quality
 Cost of achieving good quality
 Prevention costs
 Costs incurred during product design
 Appraisal costs
 Costs of measuring, testing, and analyzing
 Cost of Quality
 Cost of poor quality (COPQ):
 Is the difference between what it actually costs to produce a
product or deliver a service and what it would cost if there
were no defects.
 Is generally the largest cost category in a company and is
also where the greatest cost improvement is possible.
 Internal failure costs
 Include scrap, rework, process failure, downtime, and price reductions
 External failure costs
 Include customer complaints, returns, warranty claims, liability, and lost
sales.
 Prevention Costs
 Quality planning costs
 Costs of developing and implementing quality management
program
 Product design costs
 Costs of designing products with quality characteristics
 Process costs
 Costs expended to make sure productive process conforms to
quality specifications
 Training costs
 Costs of developing and putting on quality training programs
for employees and management
 Information costs
 Costs of acquiring and maintaining data related to quality, and
development and analysis of reports on quality performance.
 Appraisal Costs
 Inspection and testing
 Costs of testing and inspecting materials, parts, and products
at various stages and at the 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 gather data for testing
product quality, to make equipment adjustments to maintain
quality, and to stop work to assess quality
 Internal Failure Costs
 Scrap costs
 Costs of poor quality products that must be discarded including
labor, materials, and indirect costs.
 Rework costs
 Costs of fixing defective products to conform to quality
specifications.
 Process failure costs
 Costs of determining why production process is producing
poor-quality products.
 Process downtime costs
 Costs of shutting down productive process to fix problems.
 Price-downgrading costs
 Costs of discounting poor-quality products that’s selling
products as “seconds”
 External Failure Costs
 Customer complaint costs
 Costs of investigating and satisfactorily responding to a
customer complaint resulting from a poor-quality product.
 Product return costs
 Costs of handling and replacing poor-quality products returned
by customers
 Warranty claim costs
 Costs of complying with product warranties
 Product liability costs
 Litigation costs resulting from product liability and customer
injury
 Lost sales costs
 Costs incurred because customers are dissatisfied with poor-
quality products and do not make additional purchases.
 Measuring and Reporting Quality
Costs
 Index numbers
 Ratios that measure quality costs against a base value
 Labor index
 Ratio of quality cost to direct labor hours
 Cost index
 Ratio of quality cost to manufacturing cost (direct and indirect)
 Sales index
 Ratio of quality cost to sales
 Production index
 Ratio of quality cost to units of final product
 Measuring and Reporting Quality
Costs: Example
The H & S Motor Company produces small motors for use
in lawnmowers and garden equipment. The company
instituted a quality management program in 2011 and has
recorded the following quality cost data and accounting
measures for four years.
Year
2011 2012 2013 2014
Quality Costs
Prevention $27,000 41,500 74,600 112,300
Appraisal 155,000 122,500 113,400 107,000
Internal failure 386,400 469,200 347,800 219,100
External failure 242,000 196,000 103,500 106,000
Total $810,400 829,200 639,300 544,400

Accounting Measures
Sales $4,360,000 4,450,000 5,050,000 5,190,000
Manufacturing costs 1,760,000 1,810,000 1,880,000 1,890,000
 Measuring and Reporting Quality
Costs: Example
The company wants to assess its quality management
program and develop quality index numbers using sales
and manufacturing cost bases for the four-year period.
Measuring and Reporting Quality
Costs: Example

Quality Quality Manufacturing

Year Sales Index Cost Index
2011 18.58 46.04
2012 18.63 45.18
2013 12.66 34
2014 10.49 28.8
 Quality – Cost Relationship
 Cost of quality
 Difference between price of nonconformance (cost of doing
things wrong) and conformance (cost of doing things right).
 Cost of doing things wrong
 Can account for 20 to 35% of revenues
 Cost of doing things right
 Is typically 3 to 4% of revenues
 Effect of Quality Management on
Productivity
 Productivity
 A measure of a company ’s effectiveness in converting inputs into
outputs.
 Defined as the ratio of output to input
 Quality impact on productivity
 Fewer defects increase output, and quality improvement reduces
inputs
 Improving product design and production processes, improving the
quality of materials and parts, and improving job designs and work
activity will all increase productivity.
 Effect of Quality Management on
Productivity
 Yield
 A measure of output used as an indicator of productivity
 Can be computed for the entire production process (or for one stage
in the process)
 Computing Product Yield
The H&S Motor Company starts production for a
particular type of motor with a steel motor housing. The
production process begins with 100 motors each day. The
percentage of good motors produced each day averages
80% and the percentage of poor-quality motors that can
be reworked is 50%.
The company wants to know the daily product yield and
the effect on productivity if the daily percentage of good-
quality motors is increased to 90%.
 Computing Product Yield

Yield = (I)(%G) + (I)(1 - %G)(%R)

Y = 100(0.8) + 100(1 – 0.8)(0.5)
= 90 motors

If product quality is increased to 90%, the yield will be

Y = 100(0.9) + 100(1 – 0.9)(0.5)
= 95 motors
A 10 percentage-point increase in quality products results
in 5.5% increase in productivity output.
Computing Product Cost per Unit
 Computing Product Cost per Unit
The H&S Motor Company has a direct manufacturing cost
per unit of $30, and motors that are of inferior quality can
be reworked for $12 per unit. 100 motors are produced
daily, 80% on average are of good quality and 20% are
defective. Of the defective, half can be reworked to yield
good-quality products. Through its quality management
program, the company has discovered a problem in its
production process, that, when corrected (at a minimum
cost), will increase the good-quality products to 90%.
The company wants to assess the impact on the direct
cost per unit of improvement in product quality.
 Computing Product Cost per Unit

The original manufacturing cost per motor is

Product cost = [($30)(100) + ($12)(10)]/90
= $34.67 per motor

The manufacturing cost per motor with the quality

improvement is
Product cost = [($30)(100) + ($12)(5)]/95
= $32.21 per motor
Computing Product Yield for
Multistage Processes
 Computing Product for a
Multistage Process
At the H&S Motor Company, motors are produced in a
four-stage process. Motors are inspected following each
stage, with percentage yields (on average) of good-
quality, work-in-process units as follows:
Average Percentage
Stage Good Quality
1 0.93
2 0.95
3 0.97
4 0.92
 Computing Product for a
Multistage Process

The company wants to know the daily product yield for

product input of 100 units per day. Furthermore, it would
like to know how many input units it would have to start
with each day to result in a final daily yield of 100 good-
quality units.
 Computing Product for a
Multistage Process

Y = (I)(%g1)(%g2)(%g3)(%g4)
= (100)(0.93)(0.95)(0.97)(0.92)
= 78.8 motors

To determine the product input that would be required to

achieve a product yield of 100 motors, I is treated as a decision
variable when Y equals 100
I = Y/[%g1)(%g2)(%g3)(%g4)
= 100/[(0.93)(0.95)(0.97)(0.92)]
= 126.8 motors
To achieve output of 100 good-quality motors, the production
process must start with approximately 127 motors.
 Quality – Productivity Ratio
 Quality-productivity ratio (QPR):
 A measure of the effect of quality on productivity by combining the
concept of quality index numbers and product yield.
 Increases if either processing costs or reworked costs or both decrease.
 Increases if more good-quality units are produced relative to total
product input (the number of units that begin the production process).
 Quality – Productivity Ratio
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% good-quality
motors, resulting in 20% defects, 50% of which can be
reworked prior to shipping to customers. The company
wants to examine the effects of (1) increasing the
productivity 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%; (4) the combination of 2
and 3.
 Quality – Productivity Ratio
The QPR for the base case is computed as follows:
QPR = (80 + 10)*100/[(100)($30) + (10)($12)]
= 2.89
Case 1: increase input to 200 units
QPR = (160 + 20)*100/[(200)($30) + (20)($12)]
= 2.89
Increasing production capacity alone has no effect on QPR
Case 2: reduce processing cost to $26 and rework cost to $10
QPR = (80 + 10)*100/[(100)($26) +(10)($10)]
= 3.33
The cost decreases cause the QPR to increase.
 Quality – Productivity Ratio

Case 3: increase initial good-quality units to 95%

QPR = (95 + 2.5)*100/[(100)($30) + (2.5)($12)]
= 3.22
Again the QPR increases as product quality improves
Case 4: decrease costs and increase initial good-quality units
QPR = (95 + 2.5)*100/[(100)($26) + (2.5)($10)]
= 3.71
The largest increase in the QPR results from decreasing costs
and increasing initial good-quality product through improved
quality.
 Malcom Baldrige Award
 Created in 1987 to stimulate growth of quality
management in the United States
 Categories
 Leadership
 Information and analysis
 Strategic planning
 Human resource focus
 Process management
 Business results
 Customer and market focus
 Other Awards for Quality
 National individual awards
 Armand V. Feigenbaum Medal
 Deming Medal
 E. Jack Lancaster Medal
 Edwards Medal
 Shewart Medal
 Ishikawa Medal
 International awards
 European Quality Award
 Canadian Quality Award
 Australian Business Excellence Award
 Deming Prize from Japan
 ISO 9000
 A set of procedures and policies for international
quality certification of suppliers
 Standards
 ISO 9000: 2000
 Quality Management Systems – Fundamentals and Vocabulary
 Defines fundamental terms and definitions used in ISO 9000 family
 ISO 9001: 2000
 Quality Management Systems – Requirements
 Standard to assess ability to achieve customer satisfaction
 ISO 9004: 2000
 Quality Management Systems – Guidelines for performance Improvements
 Guidance to a company for continuous improvement of its quality
management system
 ISO 9000 Certification,
Implications, and Registrars
 ISO 9001: 2000
 Only standard that carries
third-party certification
 Many overseas companies
will not do business with a
supplier unless it has ISO
9000 certification
 ISO 9000 accreditation
 ISO 9000 registrars