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KNGX NOTES
ACCT2522

8. MANAGING QUALITY
8.1 WHAT IS QUALITY

The changed view of quality:

The Conventional Management View The Contemporary Quality Paradigm

Improving quality drives up costs and requires more
time
Some level of defects is acceptable
Quality should be inspected and reworked in
Quantity of output is as important as quality
Improving quality reduces time and costs in the long
run
The goal is zero defects
Quality should be designed and built in
Without quality, quantity is irrelevant

Quality: total features and characteristics of a product/service made or performed according to

specifications to satisfy customers at the time of purchase and use, or

- The extent to which a product [or service] meets/conforms to customers’ needs and expectations
o Quality of the entire experience
o Customer may be internal or external

Dimensions of Quality:

- Performance: how well does the product function?

o e.g. responsiveness and assurance
- Aesthetics: is the appearance of the product appealing?
- Serviceability: how easily can the product be maintained, repaired and kept in service?
- Features
- Reliability: is it likely that the product will continue to function?
- Durability: how long will the product continue to function at a satisfactory level?
- Quality of Conformance: does the product meet its design specifications?
- Fitness for use: is the product suitable for fulfilling its intended purposes

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TWO-STAGE APPROACH TO QUALITY ENHANCING CUSTOMER VALUE

In order to manage quality, a two-stage approach is adopted:

The gap between customer expectation and product/service performance comprises two elements

1) The quality of design refers to how closely the intended or designed characteristics of a
product/service meet the expectations of the customer
2) The quality of conformance refers to the extent to which the performance of the product or service
matches the intended specifications

This model highlights the need to firstly design products/services to satisfy customers and secondly to ensure
that the delivered products/service meet those design specifications

Customer Requirements
Ranking
(1) Requirement 1
(2) Requirement 2
Design parameters
Design Parameter 1 Design Parameter 2 Benchmark Ranking
(1-5)
* 5 (Lowest Ranking)
* * 1 (Highest Ranking)

8.2 DIFFERENT VIEWS ON QUALITY

Approaches to Quality:

1. Traditional Approach to Quality: Juran and the Costs of Quality

2. Contemporary - Zero Defects Approach to Quality: Crosby and Deming

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1. TRADITIONAL VIEW OF OPTIMAL QUALITY (ECL VIEW) - JURAN

A Juran argues that the goal of quality programs should be the minimisation of costs of quality and that some
level of defects is acceptable as it is too costly to achieve 100% conformance

- Increased spending on conformance activities

results in higher quality products or services and
lower nonconformance costs
- Further increases in conformance requires
increasing amounts of spending
- Juran’s Economic Conformance Level (ECL) or
Acceptable Quality Level (AQL) is the point where
cost is minimised

2. CONTEMPORARY VIEW (ZERO DEFECTS) –

CROSBY AND DEMING

Crosby and Deming argue that zero defect levels should be the goal of quality programs and that all failure
costs should be eliminated.

100% conformance is required for organizations to compete at a global scale.

Two main arguments for the zero-defect approach:

1. Firms get better at managing and reducing

conformance costs (flattens the curve)
- As seen on the new conformance cost curve the
marginal cost of achieving further improvements in
quality reduces due to ‘learning and efficiency.

2. The full amount of non-conformance cost is

difficult to measure (especially external failure) and
are argued to be the most significant costs.
- As seen on the new non conformance cost curve the losses associated with non-conformance cost
increases much more sharply

Overall impact is that the ECL moves closer to the 100% conformance level prescribed by advocates of the zero
defects approach.

COMPARING THE TWO VIEWS

Traditional View (ECL View) Contemporary View (Zero Defects)

Quality should be inspected and worked in Quality should be designed & built in
Improving quality increases time & cost Improving quality reduces time & cost
A certain level of defects is acceptable Aim for zero defects: driven by customer needs
Quantity is as important as quality Without quality, quantity is irrelevant

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(3 gurus) Juran (Traditional) Deming Crosby

(Contemporary)
Quality Goal Minimise Quality Costs Zero Defects Zero Defects
(I.e. cost of quality)
Basis for Improvement Quality Cost Information Direct Quality Cost Information and
Evaluation (Financial Measures) Measurement Direct Measurement
Quality Decision Minimise Quality Costs Optimise Direct Quality costs get management
Measures of attention. Direct measures for
Quality, Zero implementation for
Defects! implementation progress toward
zero defects

8.3 MEASURING AND MANAGING QUALITY

A. COST OF QUALITY (COQ)

Conformance Costs Non-Conformance Costs

1. Prevention 3. Internal Failure

2. Appraisal 4. External Failure

CONTROL/CONFORMANCE COSTS

Conformance Costs: to ensure products/services conform to quality standards

1. Prevention: are costs incurred to prevent poor-quality products/services being produced in the first
place
o Examples:
 Reengineering and continuous improvement efforts which enable the process, product or
service to be performed/produced correctly the first time
 Improving quality of inputs through careful selection and training of suppliers
 Enhancing the knowledge and skills of personnel through focused quality training
programs
o Only category that prevents production of poor quality by addressing root causes
2. Appraisal: incurred to identify non-conformities or quality problems after an activity is performed
(after the product has reached the customer)
o Examples:
 Supervision of activities
 Quality audit (usually by an external auditor)
 Inspection and testing of processes and incoming materials, work-in-progress inventory
and final output
o Don’t prevent poor quality products, only identifying defective products

Made at the discretion of the firm!

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FAILURE/NON-CONFORMANCE COSTS

Non-Conformance Costs: because products/services have not conformed to standard

3. Internal Failure: products/services that fail to meet [conform to] standard after production [but] are
corrected before they are delivered to the ultimate customer
o Examples:
 Rework
 Scrap
 Repair
 Downtime
 Retesting
4. External Failure: costs “incurred when poor-quality products/services are delivered to the ultimate
customer”
o Implicit Cost Examples:
 Sales returns and allowances
 Recalls
 Warranty Repairs
 Replacements
 Product liability insurance
 Handling customer complaints
o Explicit (Hidden) Cost Examples:
 Damaged reputation (opportunity costs)
 Lost sales
 Lost customers

Notes:

- Quality Costs to Sales percentage should be low (10-20%, ideally 2-4%)

- You should spend more on conformance costs than non-conformance costs
- Ideally ratio should be less than 1

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USING COG INFORMATION TO MANAGE QUALITY

- Identify Problems: creating awareness and attention directing

- Improving Quality:

Four-Step Approach To Reducing Quality Costs:

Understand why one should spend more on
conformance than non-conformance costs

1. Reduce failure cost activities

2. Undertake corrective and prevention activities
3. Reduce appraisal activities once failure cost
activities have been reduced (to zero)
4. Prevention cost activities be continuously
assessed and adjusted

- Prioritise quality improvement projects

o Dealing with the highest cost item? or highest cost problem?
Note: appraisal and “failure cost” activities are generally non-value adding, while prevention
activities are value adding!
o Match quality-related expenses to customer needs:

Quality Dimension Importance Ranking by Quality Cost What to do

Customers
Safety 50% 15% Requires more attention
Speed to Boil 25% 24% About right
Appearance 15% 25% Requires less attention
Clock/timer 5% 32% Requires less attention
Other 5% 4% About right

- Monitoring
o Keeping track of quality cost
o Evaluate effectiveness of quality
program

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B. DIRECT MEASURES OF QUALITY (DMOQ)

Direct or non-financial measures of quality that measure an attribute of the product, service or process that
reflects quality

- Often in physical terms (in contrast with COQ ($))

- External or internal
- External Examples:
o Customer satisfaction ratings
o Number of customer complaints
o Percentage of returns
o On-time delivery rate
- Internal Examples:
o Defect parts per million

COMPARING THE TWO VIEWS

Traditional View (ECL View) Contemporary View (Zero Defects)

Focus on consequences which associates Focus on process:
quality with $ - Timely
- Understandable
- Identify root cause of problems
Prioritise improvement programs Facilitate direct solutions & feedback
Monitoring purposes: highlight trade-off
btwn conform and non conform costs
Allows aggregation Disaggregated
Summary: awareness creation, prioritising, Summary: awareness creation, monitoring,
monitoring problem solving

COMBINING COQ AND DMOQ – AN EXAMPLE

Early stages of quality improvement:

- COQ and DMOQ for prioritising problems with tools such as Pareto diagram and fishbone diagram

Later stages (improvement programs)

- DMOQ for “direct feedback

- COQ still important to monitor performance & impact on bottom line

C. VARIABILITY – THE QUALITY LOSS FUNCTION

Variability: the lack of consistency in product or services

- Adversely affects customer perceptions

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- Variability multiplies
- Processes are harder to manage (e.g. storage)

A key concept in a quality process is variability management

- Use Statistical Process Control Chart (SPC)!

TRADITIONAL VIEW ON VARIABILITY (AND QUALITY COSTS)

Traditional Assumption: is that variability is only costly when it falls outside of upper/lower limits

CONTEMPORARY VIEW ON VARIABILITY (AND QUAITY COSTS)

Quality Loss Function: assumes any variation from the target

value of a quality characteristic causes hidden (explicit) quality
costs

- These costs increase quadrilatically as the actual value

deviates from the target value
- Any variability will result in losses!!

L = unit loss
2 Y = actual value of characteristic
L = k (Y – T)
T = target value of characteristic
k = proportionality constant

Where: K = c/d2
- c = loss associated with a unit produced at the specification limit
- d = distance from target value to specification limit

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8.4 CONTEMPORARY APPROACHES TO QUALITY MANAGEMENT

Total Quality Management (TQM): a comprehensive structure approach to achieving continuous

improvement in processes to meet customers’ expectations

Some other features of TQM

- Design in quality
- All members of the organisation (and potentially supply chain) have to be committed to TQM)
- Supported by quality management system
o E.g. ISO 9000 series

ROLE OF MANAGEMENT ACCOUNTS IN QUALITY MANAGEMENT

- Encourage quality awareness

- Evaluate quality performance
- Identify and prioritise quality problems
- Ascertain causes of poor quality
- Monitor quality improvements