Part Three TQM – The Tools and the Improvement Cycle

1. Part ThreeTQM – The Tools and the Improvement Cycle Chapter # 7 Measurement of Quality

2. Chapter Outline • 7.1 Measurement and the Improvement cycle • 7.2 The implementation of performance measurement systems • 7.3 Benchmarking • 7.4 Costs of quality

3. 7.1 Measurement and the Improvement cycle • Traditionally, Performance measures and indicators have been derived from cost accounting information. these provide little motivation to support attempts to introduce TQM, and in some cases actually inhibit continuous improvement because they are unable to map process performance. • In the organization that is to survive over a long term, performance must begin to be measured by the improvements seen by the customer.

4. 7.1 Measurement and the Improvement cycle • In the cycle of never ending improvement, measurement plays an important role in: • Identifying opportunities for improvement (quality costing). • Comparing performance against internal standards (process control and improvement). • Comparing performance against external standards (benchmarking). • Measures are used in process control, eg control charts, and in performance improvement, eg quality improvement teams.

5. 7.1 Measurement and the Improvement cycle • Typical harmful summary measures of local performance are purchase price, machine or plant efficiencies, direct labor costs, and ratios of direct to indirect labor. • These are incompatible with quality-improvement measures such as process and throughput times, delivery performance, inventory reductions, and increases in flexibility, which are first and foremost non-financial. • Financial summaries provide valuable information of course, but they should not be used for control.

6. 7.1 Measurement and the Improvement cycle • Return on investment. • ROI tells us what happened, not what is happening or what will happen. • In many ways the financial indicators used in many businesses have remained static while the environment in which they operate has changed dramatically. • Traditionally, the measures used have not been linked to the processes where the value-adding activities take place. • TQM stresses the need to start with the process for fulfilling customer needs.

7. 7.1 Measurement and the Improvement cycle • The critical elements of a good performance measurement and management effort look like any other list associated with total quality management: • Leadership and commitment • Full employee involvement • Good planning • Sound implementation strategy • Measurement and evaluation • Control and improvement • Achieving and maintaining standards of excellence

8. 7.1 Measurement and the Improvement cycle • The Deming cycle of continuous improvement clearly requires measurement to drive it, and yet it is a useful design aid for the measurement system itself. • Before we use performance measurement in the improvement cycle, however, we should attempt to answer four basic questions: • Why measure? • What to measure? • Where to measure? • How to measure?

9. 7.1 Measurement and the Improvement cycle Why measure? • To ensure customer requirements have been met. • To be able to set sensible objectives and comply with them. • To provide standards for establishing comparisons. • To provide visibility and provide a ‘score-board’ for people to monitor their own performance levels. • To highlights quality problems and determine which areas require priority attention.

10. 7.1 Measurement and the Improvement cycle What to measure? • It is necessary to measure effectiveness, efficiency, quality, impact, and productivity. • In these areas there are many types of measurement, including direct output or input figures, the cost of poor quality, economic data, comments and complaints from customers, information from customer or employee survey. • Whichever measures and indicators are used by the process owners, they must reflect the true performance of the process in customer/supplier terms, and emphasize continuous improvement.

11. 7.1 Measurement and the Improvement cycle Where to measure? • If true measures of the effectiveness of TQM are to be obtained, there are three components that must be examined – the human, technical and business components. • The human component is clearly of major importance and the key tests are that, wherever measures are used, they must be: • Understood by all the people being measured. • Accepted by the individuals concerned. • Compatible with the rewards and recognition systems. • Designed to offer minimal opportunity for manipulation.

12. 7.1 Measurement and the Improvement cycle • Technically, the measures must be the ones that truly represent the controllable aspects of the processes, rather than simple output measures that cannot be related to process management. They must also be correct, precise and accurate. • The business component requires that the measures are objective, timely, and result oriented, and above all they must mean something to those working in and around the process, including the customers.

13. 7.1 Measurement and the Improvement cycle How to measure? • Measurement, as any other management system, requires the stages of design, analysis, development, evaluation, implementation and review. • The system must be designed to measure progress, otherwise it will not engage the improvement cycle. • Progress is important in five main areas: effectiveness, efficiency, productivity, quality, and impact.

14. 7.1 Measurement and the Improvement cycle Effectiveness • Effectiveness = (Actual output/Expected output)*100 • Effectiveness measures should reflect whether the organization, group or process owner(s) are achieving the desired results, accomplishing the right things. Measures of this may include: • Quality, eg a grade of product. • Quantity, eg tonnes. • Timeliness, eg speed of response. • Cost/price, eg unit costs.

15. 7.1 Measurement and the Improvement cycle Efficiency • Efficiency = (Resources actually used/Resources planned to be used)*100 • Performance efficiency improvement must be related to certain output objectives. • All process inputs may be subjected to efficiency measurement, so we may use labor/staff efficiency, equipment efficiency (or utilization), material efficiency, information efficiency, etc.

16. 7.1 Measurement and the Improvement cycle Productivity • Productivity = Outputs/Inputs • Expected Productivity = Expected output/Resources expected to be consumed • Actual Productivity = Actual output/ Resources actually consumed • Productivity measures may be developed for each input or a combination of inputs, eg sales/all employee costs.

17. 7.1 Measurement and the Improvement cycle Quality • The non-quality related measures include the simple counts of defect or error rates, percentage outside specification values, deliveries not on time, or more generally as the costs of poor quality. • The quality measures should also indicate positively whether we are doing a good job in terms of customer satisfaction, implementing the objectives, and whether the designs, systems, and solutions to problems are meeting the requirements. These really are voice-of-the customer measures.

18. 7.1 Measurement and the Improvement cycle Impact • Impact measures should lead to key performance indicators for the business or organization, including monitoring improvement over time. • Value-added management (VAM) requires the identification and elimination of all non-value adding wastes, including time. • Value added is simply the volume of sales minus the total input costs, and provides a good direct measure of the impact of the improvement process on the performance of the business.

19. 7.1 Measurement and the Improvement cycle • A related ratio, percentage return on value added (ROVA): ROVA = (Net profits before tax/Value added)* 100 • Other measures or indicators of impact on the business are growth in sales, assets, numbers of passengers/students, etc, and asset-utilization measures such as return on investment (ROI) or capital employed (ROCE), earnings per share. • Activity-based costing (ABC) is an information system that maintains and processes data on an organization’s activities and cost objectives.

20. 7.2 The implementation of performance measurement systems • It has already been established that a good measurement system will start with the customer and measure the right things. • All critical parts of the process must be measured, and it is often better to start with simple measures and improve them. • Process-owners can assist in defining the required performance measures, provided that senior managers have communicated their mission clearly, defined the critical success factors, and identified the critical processes.

21. 7.2 The implementation of performance measurement systems • If all employees participate, and own the measurement processes: • There will be lower resistance to the system, • A positive commitment towards future changes will be engaged, • The links in the customer-supplier chains will be strengthened, • Quality improvement teams will be given much clearer objectives, and • This should lead to greater short-term and long-term productivity gains.

22. 7.2 The implementation of performance measurement systems • There are a number of possible reasons why measurement systems fail: • They do not define performance operationally. • The measures are misunderstood or misused or measure the wrong things. • There is a fear of exposing poor and good performance. • Too many measurements are focused internally and too few are focused externally. • These and other problems are frequently due to poor planning at the implementation stage or a failure to assess current systems of measurement.

23. 7.2 The implementation of performance measurement systems • Before the introduction of a total quality-based performance measurement system, an audit of the existing systems should be carried out. • Its purpose is to establish the effectiveness of existing measures, their compatibility with the quality drive, their relationship with the processes concerned, and their closeness to the objectives of meeting customer requirements. • The audit should also highlight areas where performance has not been measured previously, and indicate the degree of understanding and participation of the employees in the existing systems and the actions that result.

24. 7.2 The implementation of performance measurement systems • Generic questions that may be asked during the audit include: • Is there a performance measurement system in use? • Has it been effectively communicated throughout the organization? • Is it systematic? • Is it efficient? • Is it well understood? • Following such an audit, there are twelve basic steps for the introduction of TQM-based performance measurement. Half of these are planning steps and the other half implementation.

25. 7.2 The implementation of performance measurement systems Planning • Identifying the purpose of conducting measurement, ie is it for: • Reporting, (ROI reported to shareholders) • Controlling, (using process data on control charts) • Improving, (monitoring the results of a qualiy improvement team project) • Choose the right balance between individual measures (activity- or task-related) and group measures (process- and sub-process) and make sure they reflect process performance.

26. 7.2 The implementation of performance measurement systems • Plan to measure all the key elements of performance, not just one, eg time, cost, and product quality variables may all be important. • Ensure that the measures will reflect the voice of the internal/external customers. • Carefully select measurement that will be used to establish standards of performance. • Allow time for the learning process during the introduction of a new measurement system.

27. 7.2 The implementation of performance measurement systems Implementation • Ensure full participation during the introductory period and allow the system to mould through participation. • Carry out cost/benefit analysis on the data generation, and ensure measures that have high ‘leverage’ are selected. • Make the effort to spread the measurement system as widely as possible, since effective decision-making will be based on measures from all areas of the business operation.

28. 7.2 The implementation of performance measurement systems • Use surrogate measures for subjective areas where quantification is difficult, eg improvements in morale may be ‘measured’ by reductions in absenteeism or staff turnover rates. • Design the measurement systems to be as flexible as possible, to allow for changes in strategic direction and continual review. • Ensure that the measures reflect the quality drive by showing small incremental achievements that match the never ending improvement approach.

29. 7.2 The implementation of performance measurement systems • In summary the measurement system must be: • designed, planned and implemented to reflect customer requirements, • give visibility to the process and the progress made, • communicate the total quality effort and engage the never ending improvement cycle. • So it must be periodically reviewed.

30. 7.3 Benchmarking • Benchmarking is the continuous process of measuring products, services and processes against those of industry leaders or the toughest competitors. • This results in a search for best practice, those will lead to superior performance, through measuring performance, continuously implementing change, and emulating the best. • There may be many reasons for carrying out benchmarking (Table7.1).

31. 7.3 Benchmarking • The links between benchmarking and TQM are clear – establishing objectives based on industry best practice should directly contribute to better meeting of the internal and external customer requirements. • There are four basic types of benchmarking: • Internal – a comparison of internal operations. • Competitive – specific competitor to competitor comparisons for a product or function of interest. • Functional – comparisons to similar functions within the same broad industry or to industry leaders. • Generic – comparisons of business processes that are very similar, regardless of the industry.

32. 7.3 Benchmarking • The evolution of benchmarking in an organization is likely to progress through four focuses: • Competitive products or services including, design, development and operational features. • Industry best practices including, aspects of distribution or service. • The total business performance across all functions and aspects. • Continuous improvement the final focus.

33. 7.3 Benchmarking • At its simplest competitive benchmarking, the most common form, requires every department to examine itself against its counterpart in the best competing companies. • Benchmarks that may be important for customer satisfaction, for example, might include: • Product or service consistency. • Correct and on-time delivery. • Speed of response or new product development. • Correct billing.

34. 7.3 Benchmarking • Benchmarking process has fifteen stages, and these are all focused on trying to measure comparisons of competitiveness: PLAN • Select department(s) or process group(s) for benchmarking. • Identify best competitor, perhaps using customer feedback or industry observes. • Identify benchmarks. • Bring together the appropriate team. • Decide information and data collection methodology.

35. 7.3 Benchmarking • Prepare for any visits and interact with target organizations. • Use data collection methodology. ANALYSE • Compare the organization and its ‘competitors’. Using the benchmark data. • Catalogue the information and create a ‘competency center’. • Understand the ‘enabling processes’ as well as the performance measures.

36. 7.3 Benchmarking DEVELOP • Set new performance level objectives/standards. • Develop action plans to achieve goals and integrate into the organization. IMPROVE • Implement specific actions and integrate them into the business processes. REVIEW • Monitor the results and improvements. • Review the benchmarks and the ongoing relationship with the target organization.

37. 7.3 Benchmarking • Technologies and conditions vary between different industries and markets, but the basic concepts of measurement and benchmarking are of general validity. • The objective should be to produce products and services that conform to the requirements of the customer in a never ending improvement environment. • Measurement and benchmarking are not separate sciences or unique theories of quality management, but rather strategic approaches to getting the best out of people, processes, products, plant, and programs.

38. 7.4 Costs of quality • Manufacturing a quality product, providing a quality service, or doing a quality job is not enough. • The cost of achieving these goals must be carefully managed, so that the long-term effect of quality costs on business or organization is a desirable one. • A competitive product or service based on balance between quality and cost factor is the principal goal of responsible management. • The objective is best accomplished with the aid of competent analysis of the costs of quality (COQ).

39. 7.4 Costs of quality • The analysis of quality related costs is a significant management tool that provides: • A method of assessing the effectiveness of the management of quality. • A mean of determining problems areas, opportunities, savings, and action priorities. • The costs of quality are no different from any other costs. • The necessary activities will incur costs that may be separated into prevention costs, appraisal costs and failure costs, the so called P-A-F model first presented by Feigenbaum.

40. 7.4 Costs of quality Prevention costs • These are associated with the design, implementation and maintenance of the total quality management system. • Prevention costs are planned and are incurred before actual operation. Prevention includes: • Quality planning • Quality assurance • Inspection equipment • Training • Miscellaneous • Resources devoted to prevention give rise to the ‘costs of doing it right the first time’.

41. 7.4 Costs of quality Appraisal costs • These costs are associated with the supplier’s and customer’s evaluation of purchased materials, processes, intermediates, products and services to assure conformance with the specified requirements. Appraisal includes: • Verification • Quality audits • Inspection equipment • Vendor rating • Appraisal activities result in the ‘costs of checking it is right’.

42. 7.4 Costs of quality Internal failure costs • These costs occur when the results of work fail to reach designed quality standards and are detected before transfer to the customer takes place. Internal failure includes the following: • Waste • Scrap • Rework of rectification • Re-inspection • Downgrading • Failure analysis

43. 7.4 Costs of quality External failure costs • These costs occur when products or services fail to reach design quality standards but are not detected until after transfer to the consumer. External failure includes: • Repair and servicing • Warranty claims • Complaints • Returns • Liability • Loss of goodwill • External and internal failure produce the ‘costs of getting it wrong’.

44. 7.4 Costs of quality • Every organization must be aware of the costs of getting it wrong, and management needs to obtain some idea how much failure is costing each year. • There is an important relationship between the quality related costs of prevention, appraisal, and failure and increasing quality awareness and improvement the organization. • Where the quality awareness is low the total quality related costs are high, the failure costs predominating.