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Quality and throughput concerns in managing costs

Q: Examples of non-financial measures

Customer Satisfaction 1. market research information on customer preferences and satisfaction w/ specific product features 2. # of defective units shipped as % of total units 3. # of customer complaints 4. % of products that experience early or excessive failure 5. # of deliveries delayed 6. on-time delivery rate Internal Performance7. # of defects for each product line 8. process yield (ratio good output vs total output) 9. employee turnover 10. # of processes where employees have the right to make decisions w/o supervision 11. satisfaction ratings of employees

9 important questions on Quality and throughput concerns in managing costs

Quality as a competitive weapon

In general a quality focus reduces costs and increases customer satisfaction. The benefit of better quality is in preventing lower revenues, not in generating higher revenues. Because a company that doesn't invest in quality improvement will suffer a decline in its market share and revenues. Quality improvement has both non-financial and qualitative effects that improve a company's long-term performance. A product of high quality can enhance a company's reputation and increase customer goodwill. This may lead to higher future revenues.

Costs of quality (COQ)

1. Prevention costs (any type of engineering, supplier evaluations, quality training, new
     materials used, before production)

2. Appraisal costs (any type of inspection, or testing, or review of produced products)

3. Internal failure costs (spoilage, rework, scrap, breakdown maintenance, manufacturing or
     process engineering on internal failure, and costs due to products identified as faulty)

4. External failure costs (customer support, transportation costs, manufacturing or process
    engineering, warranty repair, liability claims, costs due to products identified as faulty, after
    shipment to customers)

Costs of Quality measures (COQ)

1. focusses attention on how costly poor quality can be
2. are a useful way of comparing different improvement priorities for achieving maximum
cost reduction
3. serve as a common denominator for evaluating trade-offs among prevention and failure
costs

Non-financial quality measures

Useful indicators of future long-run performance, unlike financial measures of quality that have a short-run quality focus.

Advantages of non-financial quality measures

1. They are often easy to quantify and easy to understand
2. They direct attention to physical processes and hence focus attention on the precise
problem areas that need improvement
3. They provide immediate short-run feedback if improvement efforts have, in fact, succeeded
in improving quality

Examples of non-financial measures

Customer Satisfaction
1. market research information on customer preferences and satisfaction w/ specific product
features
2. # of defective units shipped as % of total units
3. # of customer complaints
4. % of products that experience early or excessive failure
5. # of deliveries delayed
6. on-time delivery rate

Internal Performance7. # of defects for each product line
8. process yield (ratio good output vs total output)
9. employee turnover
10. # of processes where employees have the right to make decisions w/o supervision
11. satisfaction ratings of employees

Theory of constraints (TOC)

Methods to maximize operating profit when faced with both bottleneck and non-bottleneck operations. The objective of TOC is to increase throughput contribution while decreasing investments and operating costs. The theory emphasizes the management of bottlenecks as the key to improving performance of the system as a whole.

TOC Measurements (kengetallen)

1. Throughput Contribution (revenues minus direct materials costs)
2. Investments (direct materials costs + WIP stock costs + finished goods stock costs + R&D
costs + costs of equipment and buildings)
3. Operating costs (all operating costs, such as saleries, wages, rent, utilities, depreciation
excl. direct materials costs)

4 steps in managing bottlenecks

1. recognizing that the bottleneck operation determines throughput contribution
2. searching for and finding the bottleneck
3. keeping the bottleneck busy and subordinate all non-bottleneck operations to the
bottleneck operation
4. increase bottleneck efficiency and capacity

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Quality and throughput concerns in managing costs

9 important questions on Quality and throughput concerns in managing costs

Quality as a competitive weapon

Costs of quality (COQ)

Costs of Quality measures (COQ)

Non-financial quality measures

Advantages of non-financial quality measures

Examples of non-financial measures

Theory of constraints (TOC)

TOC Measurements (kengetallen)

4 steps in managing bottlenecks

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