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Chapter 9

Total quality management: managing the entire organization so that it excels on all dimensions
of products and services that are important to the customer. It has two fundamental operational
goals: careful design of the product or service 2) ensuring that the organization system can
consistently produce the design.
Malcom Baldrige national quality award: An award established by the U.S department of
commerce and given annually to companies that excel in quality.
Design quality: refers to the inherent value of the product in the marketplace and is thus a
strategic decision in a firm.
Conformance quality: refers to the degree to which the product or service design specifications
are met.
Quality at the source is frequently discussed in the context of conformance quality. This means
that the person who does the work takes the responsibility for making sure his or her output
meets specifications.
Dimensions of quality: Criteria by which quality is measured/
Cost of quality: expenditures related to achieving product or service quality such as the costs of
prevention, appraisal, internal failure, and external failure.
Six sigma refers to the philosophy and methods companies such as general electric and Motorola
use to eliminate defects in their products and processes. (A statistical term describe the quality
goal of no more than four defects out of every million units. Also refers to a quality improvement
philosophy and program).
DPMO(Defects per million opportunities) a metric used to describe the variability of a
DOE(design of experiments): referred to as multivariate testing, is statistical methodology used
for determining the cause-and-effect relationship between process variables (Xs) and the output
variable (y).
DMAIC: an acronym for the define, measure, measure, analyze, improve. And control
improvement methodology followed by companies engaging in six six-sigma programs. Three
pieces : Unit, defect, opportunity.
PDCA cycle also called the Deming cycle or wheel, refers to the plan do check act cycle of
continuous improvement.
Continuous improvement the philosophy of continually seeking improvements in process
through the use of team efforts.
Kaizen Japanese term for continuous improvement.

Lean six sigma combines the implementation and quality control tools of six sigma with the
materials management concept of lean manufacturing with a focus o reducing cost by lowering
inventory to an absolute minimum.
Black belts, master black belts, green belts term used to describe different levels of personal
skills and responsibilities in six sigma programs.
Fail-safe or poka-yoke procedures: simple practices that prevent errors or provide feedback in
time for the worker to correct errors.
ISO 9000: formal standards used for quality used for quality certification, developed by the
international organization for standardization.
External benchmarking: looking outside the company to examine what excellent performers
inside and outside the companys industry are doing in the way of quality.

Cost of quality

Prevention Costs

Designing and improving products and processes

Appraisal Costs

Inspection, testing, calibration

Failure Costs

Internal Failure Costs failures that occur before a product is sent to a customer.
Scrap, rework, retesting

External Failure Costs failures that occur after a product is sent to customer.

Customer complaints, recalls, returns, warranties.

*Loss of Goodwill*
Total quality Management

Take control of quality from the moment the product is conceived.

See that both the product and the process to make the product is designed to minimize

Dimensions of Quality

Note: Oftentimes there are tradeoffs among these dimensions in a design!

Six-Sigma introduction

First developed by Motorola in the 1980s.

Represents a focus and desire to reduce any variation in the process to random variation

Philosophy starts by determining three things:

Identifying and understanding value-adding steps of the process in detail

Understanding the levels of quality that customers expect

Measuring the effectiveness and efficiency of each step of the process (measured
as Defects per Million Operations, or DPMO)

Ishikawa, or Fishbone, Diagram

Seeks to get to the root cause of errors.

Seeks reasons and reasons for reasons until root causes are determined.

Starts with sources of People, Machinery, Methods, and Materials, and expands
on them until root causes for errors are determined.

In some cases, Management and Environment are added.


Defects Per Million Operations.

A measurement of quality; basically, how much do we get wrong out of a million possible

If six-sigma is working properly, should have 3.4 DPMO.

99% good (3.8 Sigma)

- 20,000 lost articles of mail per hour
- Unsafe drinking water for almost 15
minutes per day
- 5,000 incorrect surgical operations per
- Two short or long landings at most
major airports each day
- 200,000 wrong drug prescriptions
each year
- No electricity for almost seven hours
each month

99.99966% good (6 Sigma)

- 7 lost articles of mail per hour
- One unsafe minute of drinking water
every seven months
- 1.7 incorrect surgical operations per
- One short or long landing every five
- 68 wrong drug prescriptions each year
- One hour without electricity every 34

What does Six Sigma mean?

The Five Steps of Six Sigma


Who is our customer? What do they want? What needs to be done?


How do we see how well our process is performing?


What are the most likely causes of defects?


Remove the causes of defects


Maintain improvement
Analytical tools for six sigma and continuous improvement
Run charts
Pareto charts
Check sheets
Cause-of-effect diagrams
Opportunity flow diagram

Control charts
Process Capability

Broadly defined as the ability of a process to meet customer expectations (Bothe, 1997)

Customer expectations expressed as lower and upper specifications limits (LSL and USL)

Process Control Charts

Control Charts provide a means for distinguishing between common cause variability and
assignable cause variability!
The objective of process control is to gather data and monitor progress to detect shifts in the
process that cause products to violate design specifications.
Types of process variation

Assignable Variation

Caused by factors that can be identified

Workers not equally trained, machine out of adjustment, etc.
Assignable variation results in an out of control process.

Common Variation

Culmination of random noise inherent to system.

Not traceable to any single primary factor.
X bar Charts

Plots sample means over time

Monitors process average

Example: Weigh samples of coffee and compute means of samples.

Xi: Mean of sample

Ri: Range of sample. Maximum minimum.

Process control limits (LPL and UPL)

Control Charts
We establish our Lower Control Limit and Upper Control Limit (UCL and LCL)

UCL and LCL are set +/- 3 standard deviations from average value, respectively.
Based on Normal distribution, we expect 99.7% of our sample averages to fall within
these limits.

UCL and LCL reflect how consistent our process is.

Demonstrate consistency of process

Specification limits (LSL and USL)
Communicate requirements of customer
Plots sample ranges over time

Differences between smallest and largest values in inspection sample.

Monitors variability in process.

What type of control chart do we use?

A room is either ready or not. In other words, were answering a yes-no question
rather than measuring.
So, we use a p-chart.
Shows percentage of nonconforming items
Construct by counting number of defective items and dividing by the total number of
items inspected.

Chapter fifteen
Supply chain management: the strategic coordination of the supply chain for the purpose of
integrating supply and demand management.
Logistics: the part of a supply chain involved with the forward and reverse flow of goods,
services, cash, and information.
Purchasing cycle: series of steps that begin with a request for purchase and end with notification
of shipment received in satisfactory condition.
Centralized purchasing: purchasing is handles by one special department
Decentralized purchasing: Individual departments or separate locations handle their own
purchasing requirements.
E-business: the use of electronic technology to facilitate business transactions.
Vendor Analysis: Evaluating the sources of supply in terms of price, quality, reputation, and
Strategic partnering: two or more business organizations that have complementary products or
services join so that each may realize a strategic benefit.

Inventory Velocity: the speed at which goods move through a supply chain.
Bullwhip effect: inventory oscillations become progressively larger looking backward through
the supply chain.
Vendor-managed inventory: Vendors monitor goods and replenish retail inventories when
supplies are low.
Order fulfillment: the processes involved in responding to customer orders.
Logistics: the movement of materials, services, cash, and information in a supply chain.
Traffic management: overseeing the shipment of incoming and outgoing goods.
Radio frequency Identification: a technology that uses radio waves to identify objects, such as
goods in supply chains.
Third-party logistics: the outsourcing of logistics management.
Strategic sourcing: analyzing the procurement process to lower costs by reducing waste and
non-value-added activities, increase profits, reduce risks, and improve supplier performance.
Information velocity: the speed at which information is communicated in a supply chain.
Supply chain visibility: a major trading partner can connect to its supply chain to access data in
real time.
Event management: the ability to detect and respond to unplanned events.
Fill rate: the percentage of demand filled from stock on hand.
Reverse logistics: the process of transporting returned items.
Gatekeeping: Screening returned goods to prevent incorrect acceptance of goods.
Avoidance: Finding ways to minimize the number of items that are returned.
Closed-loop supply chain: A manufacturer controls both the forward and reverse shipment of
Cross-docking: a technique whereby goods arriving at a warehouse from a supplier are unloaded
from the suppliers truck and loaded onto outbound trucks, thereby avoiding warehouse storage.
Delayed differentiation: Production of standard components and subassemblies, which are held
until late in the process to add differentiating features.
Disintermediation: reducing one or more steps in a supply chain by cutting out one or more


Supply Management

A Supply Chain is the sequence of organizations involved in producing a product or



Mining company produces iron ore.

Steel mill smelts the iron ore to make steel. It further shapes the steel into sheet metal.
Automotive parts supplier buys the sheet metal, shapes it into a car fender.
Car manufacturer takes the fender, and uses it to help build a car.
Car dealer buys the car from the manufacturer, and sells it to the customer.
ALL of these companies are part of one supply chain!
Supply Chain Management
Planning, organizing, directing, and controlling flows of materials
Begins with raw materials
Continues through internal operations
Ends with distribution of finished goods
Involves everyone in supply chain!
Example: Your suppliers suppliers supplier.
Types of Supply Chain issues

Strategic Issues

Setting up the supply chain who are we partnering with, what will they supply to us, how
much can we manufacture with this supply chain, how are we going to coordinate the supply
chain, etc.

Tactical Issues

Making large-scale decisions within the supply chain forecasting demand, procuring parts
within the supply chain, where to store inventory, delivering goods on time.

Operating Issues

Making day-to-day decisions checking quality of goods, managing inbound deliveries,

producing goods to meet orders from customers
Supply vs. Demand Uncertainty

Disruptions are a form of supply uncertainty

Supply and demand uncertainty are very similar

Having too much demand is the same thing as having too little supply

Similar mitigation strategies

Inventory (safety stock)
Multiple sourcing
Improved forecasts

The good news: We know a lot about SCM under demand uncertainty


Transfer goods from incoming trucks at receiving docks directly to outgoing trucks at
shipping docks

Avoids placing goods in storage, thus reduces inventory.

Disruptions happen

Common causes

Extreme weather (hurricanes, blizzards)

Natural disasters (fires, earthquakes)



Failed businesses or partnerships

We can rarely predict disruptions, but we can plan for them.

Supply vs. Demand Uncertainty

Disruptions are a form of supply uncertainty

Supply and demand uncertainty are very similar

Having too much demand is the same thing as having too little supply

Similar mitigation strategies

Inventory (safety stock)

Multiple sourcing

Improved forecasts

The good news: We know a lot about SCM under demand uncertainty
The Bad News

The conventional wisdom for demand uncertainty does not always hold for supply


Risk Pooling

Inventory Placement

Lean Supply Chain Management

Inventory Placement

Hold inventory upstream or downstream?

If demand is uncertain:

Hold inventory upstream

Holding cost is smaller

If supply is uncertain (but demand is not):

Hold inventory downstream

Protects against disruptions anywhere in system.

Innovations in SCM

Smart Labels, RFID technology

Environmental Supply Chain Management

Reclamation, Reverse Logistics, Green Logistics

Purchasing Strategies

Plans to help achieve company mission

Affect long-term competitive position

Strategic options

Many suppliers

Few suppliers

Keiretsu network

Vertical integration

Virtual company

Consequences of the Bullwhip Effect

Inefficient production of excessive inventory

Low utilization of the distribution channel

Necessity to have capacity far exceeding average demand

High transportation costs

Poor customer service due to stockouts

Causes of the Bullwhip Effect

Order synchronization

Order batching

Supplier gives retailer a temporary discount, so retailers buy more

Reactive and over-reactive ordering

Retailers required to purchase in integer multiples of some batch size, e.g. case
quantities, pallet quantities, full truck load, etc.

Trade promotions / forward buying

Customers order on the same cycle, e.g. first of the month, every Monday, etc.

High order causes shift in optimal order amount

Shortage gaming

Overordering in scarce conditions, e.g. Wii, PS2.

Shortage Gaming

Retailers submit orders for delivery in a future period

If supplier production is less than orders, orders are rationed, i.e. retailers are put
on allocation

To secure a better allocation, the retailers inflate their orders, i.e. order more than they

So retailer orders do not convey good information about true demand

Combating the bullwhip effect

Information sharing

Collaborative Planning, Forecasting, and Replenishment (CPFR)

Smooth the flow of products

Coordinate with retailers to spread deliveries evenly

Reduce minimum batch sizes smaller and more frequent replenishments (EDI)

Combating the bullwhip effect some more

Eliminate pathological incentives

Every Day Low Price

Restrict returns and order cancellations

Order allocation based on past sales in case of shortages

Vendor Managed Inventory (VMI): delegation of stocking decisions

Used by Barilla, P&G/Wal-Mart, and others