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Quality, Time, and the Theory of Constraints

Quality, Time, and the Theory of Constraints. Chapter 19. Learning Objective 1. Explain the four cost categories in a cost-of-quality program. Two Aspects of Quality. Actual Performance. Design Specifications. Customer Satisfaction. Conformance Quality Failure. Quality of Design

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Quality, Time, and the Theory of Constraints

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  1. Quality, Time, and theTheory of Constraints Chapter 19

  2. Learning Objective 1 Explain the four cost categories in a cost-of-quality program.

  3. Two Aspects of Quality Actual Performance Design Specifications Customer Satisfaction Conformance Quality Failure Quality of Design Failure

  4. Costs of Quality Prevention costs Appraisal costs Internal failure costs External failure costs

  5. Costs of Quality Example Vegas Photo Corporation made 10,000 photocopying machines last year. Vegas Photo determines the costs of quality of its photocopying machines using a 7-step activity-based costing approach.

  6. Costs of Quality (Steps 1 and 2) Step 1 Step 2 Identify cost objects. Identify the direct costs of quality of the products. 10,000 photocopying machines No direct costs of quality

  7. Costs of Quality (Step 3) Step 3 Select the cost-allocation bases to use for allocating indirect costs of quality to the products. • Prevention • Appraisal • Internal failure • External failure Information on the total quantities of each of these cost-allocation bases used in all of Vegas operations is not provided.

  8. Costs of Quality (Step 4) Step 4 Identify the indirect costs of quality associated with each cost-allocation base. Information about total (fixed and variable) costs is not provided.

  9. Costs of Quality (Step 5) Step 5 Compute the rate per unit. Inspection hours is one cost-allocation base.

  10. Costs of Quality (Step 5) Prevention costs: Design engineering (R&D) $80 per hour Process engineering (R&D) $60 per hour Appraisal costs: Inspection (Manufacturing) $40 per hour

  11. Costs of Quality (Step 5) Internal failure costs: Rework (Manufacturing) $100 per hour External failure costs: Customer support (Marketing) $ 50 per hour Transportation (Distribution) $240 per load Warranty repair (Customer Service) $110 per hour

  12. Costs of Quality (Step 6) Step 6 Compute the indirect costs of quality allocated to the product.

  13. Costs of Quality (Step 6) Prevention costs: Design engineering (R&D) 20,000 hours Process engineering (R&D) 22,500 hours Appraisal costs: Inspection (Manufacturing) 120,000 hours

  14. Costs of Quality (Step 6) Internal failure costs: Rework (Manufacturing) 50,000 hours External failure costs: Customer support (Marketing) 6,000 hours Transportation (Distribution) 1,500 loads Warranty repair (Customer Service) 60,000 hours

  15. Costs of Quality (Step 6) What is the total cost for design engineering? 20,000 hours × $80 = $1,600,000 What is the total cost for inspection? 120,000 hours × $40 = $4,800,000

  16. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Total Costs Prevention costs: Design engineering (R&D) $1,600,000 Process engineering (R&D) 1,350,000 Total $2,950,000 Appraisal costs: Inspection $4,800,000

  17. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Total Costs Internal failure costs: Rework (Manufacturing) $5,000,000

  18. Costs of Quality (Step 6) Cost of Quality and Value Chain Category Total Costs External failure costs: Customer support (Marketing) $ 300,000 Transportation (Distribution) 360,000 Warranty repair (Customer Service) 6,600,000 Total $7,260,000

  19. Costs of Quality (Step 7) Step 7 Compute the total costs of quality of the product. Prevention costs$ 2,950,000 Appraisal costs4,800,000 Internal failure costs 5,000,000 External failure costs 7,260,000 Total $20,010,000

  20. Learning Objective 2 Use three methods to identify quality problems.

  21. Techniques Used to AnalyzeQuality Problems 1. Control charts 2. Pareto diagrams 3. Cause-and-effect diagrams

  22. Control Charts On the basis of experience, Vegas decides that any observation outside the arithmetic mean  ± 2 standard deviations should be investigated.

  23. Control Charts Production Line A  + 2 +   -   - 2 Defect Rate Days

  24. Control Charts Production Line B  + 2 +   -   - 2 Defect Rate Days

  25. Pareto Diagram 600 500 400 300 200 100 0 Copies are fuzzy and unclear Number of Times Defect Observed Copies are too light/dark Paper gets jammed

  26. Pareto Diagram As a first step, Vegas analyzes the causes of the most frequently occurring failure, fuzzy and unclear copies. Final Draft of a Sales Contract Final Draft of a Sales Contract

  27. Cause-and-effect Diagrams Methods and Design Factors Human Factors Flawed part design Incorrect manufacturing sequence Inadequate supervision Poor training New operator Inadequate tools Incorrect speed Poor maintenance Multiple suppliers Incorrect specification Variation in purchased components Machine-related Factors Materials and Components Factors

  28. Learning Objective 3 Identify the relevant costs and benefits of quality improvements.

  29. Relevant Costs Careful analysis of Vegas cause-and-effect diagram reveals that the frame of the copier is often mishandled as it travels from the suppliers’ warehouses to Vegas’ plant. Mishandling causes the dimensions of the frame to vary from specifications, resulting in fuzzy and unclear copies.

  30. Relevant Costs Alternative solutions: Improve the inspection of the frames immediately upon delivery. Redesign and strengthen the frames and the containers used to transport them to better withstand mishandling during transportation.

  31. Relevant Costs What must management do to evaluate each alternative? Additional Additional Inspection CostRedesign CostDifference $200,000 $230,000 $30,000 Vegas determines the fixed and variable cost component of each activity involved.

  32. Relevant Costs Further Redesigning InspectionFrames Relevant savings: Rework costs $480,000 $ 640,000 Customer-support costs 20,000 28,000 Transportation costs 45,000 63,000 Warranty repair costs 450,000 630,000 Total $995,000 $1,361,000

  33. Comparison Further Redesigning InspectionFrames Relevant savings $995,000 $1,361,000 Additional cost 200,000 230,000 Difference $795,000 $1,131,000 What should Vegas do? Redesigning the frames provides a $336,000 incremental benefit over further inspection.

  34. Learning Objective 4 Provide examples of nonfinancial quality measures of customer satisfaction and internal performance.

  35. Nonfinancial Measures Nonfinancial measures of customer satisfaction: • Number of customer complaints • Defective units as a percentage of total units • shipped to customers • Percentage of products that experience early • or excessive failure • On-time delivery rate

  36. Nonfinancial Measures Nonfinancial measures of internal performance: • Number of defects for each product line • Process yield • (ratio of good output to total output) • Employee turnover • (ratio of the number of employees who left • the company to the total number of employees)

  37. Learning Objective 5 Describe the benefits of financial and nonfinancial measures of quality.

  38. Evaluating Quality Performance Financialmeasures are helpful to evaluate trade-offs among prevention costs, appraisal costs, and failure costs. Nonfinancialmeasures help focus attention on the precise problem areas that need improvement and also serve as indicators of future long-run performance.

  39. Learning Objective 6 Describe customer-response time and explain why delays happen and their costs.

  40. Customer-Response Time Order is placed Order is received Order is set up Order is manufactured Order is delivered Waiting Time Mfg. Time Receipt Time Manufacturing Lead Time Delivery Time Customer-Response Time

  41. On-Time Performance On-time performance refers to situations in which the product or service is actually delivered at the time it is scheduled to be delivered.

  42. Time Drivers and Costs of Time Time drivers 1. Product or service order uncertainty 2. Bottlenecks due to limited capacity

  43. Time Drivers and Costs of Time Average waiting time equals: Average number of orders × (Manufacturing time)2 ÷ [ [ Annual machine Average no. Manufacturing capacity of orders time of product – ×

  44. Time Drivers and Costs of Time Fredonia uses one machine to convert steel bars into a special component (SC). Fredonia expects it will receive 30 orders, but it could actually receive 10, 30, or 40 orders for the special component. Each order is for 1,000 units and will take 100 hours of manufacturing time.

  45. Time Drivers and Costs of Time The annual capacity of the machine is 4,000 hours. What is the expected manufacturing time required on the machine? (100 × 30) = 3,000 hours What is the average waiting time?

  46. Time Drivers and Costs of Time 30 × 1002 = 30 × 10,000 = 300,000 300,000 ÷ 2 × [4,000 – (30 × 100)] 300,000 ÷ 2 × (4,000 – 3,000) 300,000 ÷ 2,000 150 hours average waiting time

  47. Time Drivers and Costs of Time What is the average manufacturing lead time for an order? 150 hours of average waiting time + 100 hours of manufacturing time = 250 hours Suppose that Fredonia is considering introducing a regular component (RC).

  48. Time Drivers and Costs of Time Fredonia expects to receive 10 orders for RCs (each order for 800 units). Each order will take 50 hours of manufacturing time. The expected demand for special components will be unaffected.

  49. Time Drivers and Costs of Time Assume that introducing RCs would cause average waiting time to more than double, from 150 hours to 325 hours. The average manufacturing lead time for a special component order becomes 425 hours (325 + 100). Average manufacturing lead time for a regular component order is 375 hours (325 + 50).

  50. Relevant Revenues andRelevant Costs of Time The average selling price per order is: Average manufacturing Product lead timeSCRC Less than 300 hours $22,000 $10,000 More than 300 hours $21,500 $ 9,600

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