CHAPTER 6: ORGANIZATIONAL INNOVATION: TOTAL QUALITY MANAGEMENT;
JUST-IN-TIME PRODUCTION SYSTEM
Quality
Degree to which a set of inherent characteristics of an object fulfills requirement.
Core Principles of TQM
“Total quality (management) is the unyielding and continually improving effort by
everyone in an organization to understand, meet and exceed the expectation of customers.”
This description of TQM points out that the core principles of TQM are processes that
Focus on satisfying the customer
Strive for continuous improvement
Involve fully the entire work force
Support and involve top management actively
Use clear and measurable objective
Recognize quality achievements in a timely manner
Provide training on TQM continuously
TQM Implementation Guidelines
Year One – Preparation and Planning
Create quality council and staff
Conduct executive-quality training programs
Conduct quality audits
Prepare gap analysis (determine the between the best in class and the firm’s
current practice)
Develop strategy on quality improvement
Year-Two – Training and Implementation
Conduct employee communication and training program
Establish quality teams
Create a measurement system and set goals
Year Three – Assessment, Review and Revise
Revise compensation / appraisal / recognition systems
Launch external initiative with suppliers
Review and revise
Types of Conformance
Quality involves conformance with specification for product or services that meet or
exceed customer requirements and expectations. The general types however are
1. Goalpost Conformance (zero-defects conformance)
This is conformance to a quality specification expressed as a specified range around the
target. The target is the ideal or desired outcome of the operations. This is also called
zero-defects conformance with the specified range allowed of variations.
2. Absolute quality conformance (robust quality approach)
This is conformance which requires that all products or services to meet the target value
exactly with no variation.
Cost of Quality
1. Prevention Costs are costs incurred to avoid poor-quality goods or services or educe the
number of defects in product or services.
2. Appraisal Costs also called inspection costs, are incurred to identify products before the
products are shipped to customer.
3. Internal Failure Costs are costs that result from identification of defects during the
appraisal process.
4. External Failure Costs are incurred when poor-quality goods or services are detected
after delivery to customers.
Prevention and Appraisal costs are costs of conformance because they are incurred to
ensure that products and services meet customers’ expectations.
Internal failure and External failure costs are costs of nonconformance because they are
costs incurred and opportunity costs because of rejection of production or services.
The cost of quality is the sum of conformance and nonconformance costs.
Use of Quality Cost Information
1. Quality cost information provides a basis for establishing budgets for quality costs as
management looks for ways to reduce the total cost involved.
2. Quality cost information helps managers see the financial significance of quality.
3. Quality cost information helps managers identify the relative importance of the quality
problems faced by the firm.
4. Quality cost information helps managers see whether their quality costs are poorly
distributed and when needed, it helps them distribute the costs better.
Limitations of Quality Cost Information
1. Some important quality costs are typically omitted from the quality cost report.
2. Simply measuring and reporting quality costs does not solve quality programs. Only
management action can solve them.
3. A log may exist between when quality improvement programs are put into effect and
when the results are seen.
Reporting Quality Cost is to make management aware of the magnitude of quality costs and to
provide a baseline against which the impact of quality improvement activities could measured.
Tasks for reporting quality costs include data definitions, identification of data sources, data
collection, and preparation and distribution of quality cost reports.
Nonfinancial Measures of Quality and Customer Satisfaction to evaluate how well their actual
performance satisfies customer needs and wants, companies supplement financial measures
with nonfinancial measures of quality of design and conformance quality. Nonfinancial
measures indicate the future needs and preferences of customers, as well as specific areas that
need improvement.
Nonfinancial Measures of Customer Satisfaction
To evaluate how well they doing, companies measure customer satisfaction over time.
Some measures are:
1. On-time delivery rate (percentage of shipments made on or before the scheduled
delivery date)
2. Delivery delays (the difference between the scheduled delivery date and the date
requested by the customer)
3. Percentage of products that fail soon or often
4. Number 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 or service but did not complain)
5. Number of defective units shipped to customers as a percentage of total units shipped
6. Market research information on customer preferences and customer satisfaction with
specific product features.
Nonfinancial Measures of Internal Performance
Most companies use nonfinancial measures of internal quality to supplement financial
measures, such as prevention, appraisal, and internal failure costs. Example of trends to gauge
quality are:
1. Number of defects for each product line.
2. Employee turnover (ratio of number of employees who leave the company to the
average total number of employees
3. Process yield (ratio of good output to total output)
Time as a Competitive Tool
Many companies consider “time” as a driver of strategy. They need to measure time to
manage it properly.
Two common operational measures of time are:
Customer-Response Time is the duration from the time a customer places an order for a
product or service to the time the product or service is delivered to the customer.
Components of customer-response time
Manufacturing lead time also called manufacturing cycle time is the
duration between the time an order is received by Manufacturing to the
time it becomes a finished good.
Delivery time is how long it takes to deliver a completed order to the
customer.
On-Time Performance which the product or service is actually delivered by the time it was
scheduled to be delivered.
JUST-IN-TIME PRODUCTION SYSTEM
Just-in-time (JIT) production, also called lean production, is a demand-pull manufacturing system
because each component in a production line is produced as soon as and only when needed by
the next step in the production line.
Key Features
1. Maintaining a limited number of suppliers
2. Improving plant layout
3. Reducing Setup Time
4. Improving Production Scheduling
5. Targeting Zero Defects
6. Maintaining Flexible Workforce
Financial Benefits of JIT
Other benefits of lower inventories:
1. Greater transparency of the production process,
2. Heightened emphasis on elimination the specific causes of rework, scrap, and waste,
and
3. Lower manufacturing lead times.
JIT Effects on Costing System reduce overhead costs through the reduction of materials
handling, warehousing and inspection costs.
