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Transcript of © 2009 Pearson Prentice Hall. All rights reserved. Balanced Scorecard: Quality, Time, and the...
© 2009 Pearson Prentice Hall. All rights reserved.
Balanced Scorecard:Quality, Time,
and the Theory of Constraints
© 2009 Pearson Prentice Hall. All rights reserved.
Quality as a Competitive ToolQuality – the total features and
characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use
A quality focus reduces costs and increases customer satisfaction
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Quality as a Competitive ToolFocusing on the quality of a product will
generally build expertise in producing it, lower the costs of making it, create customer satisfaction for customers using it, and generate higher future revenues for the company selling it
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Two Basic Aspects of Quality1. Design Quality – refers to how closely the
characteristics of a product or service meet the needs and wants of customers
2. Conformance Quality – refers to the performance of a product or service relative to its design and product specifications
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Quality and Failure
ActualPerformance
DesignSpecifications
CustomerSatisfaction
ConformanceQualityFailure
DesignQualityFailure
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Four Perspectives of theBalanced Scorecard1. Financial2. Customer3. Internal Business Process4. Learning and Growth
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The Financial Perspective: Costs of Quality (COQ) Four Categories of Quality Costs:
1. Prevention Costs – incurred to preclude the production of products that do not conform to specifications
2. Appraisal Costs – incurred to detect which of the individual units of products do not conform to specifications
3. Internal Failure Costs – incurred on defective products before they are shipped to customers
4. External Failure Costs – incurred on defective products after they are shipped to customers
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Elements of Costs of Quality Reports
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Determining COQ using Activity Based Costing1. Identify the Chosen Product2. Identify the Product’s Direct Costs of
Quality3. Select the Cost-Allocation Bases to Use for
Allocating Indirect Costs of Quality to the Product
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Determining COQ using Activity Based Costing (cont)4. Identify the Indirect Costs of Quality
Associated with each Cost-Allocation Base5. Compute the Rate per Unit of Each Cost-
Allocation Base Used to Allocate Indirect Costs of Quality to the Product
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Determining COQ using Activity Based Costing (cont)6. Compute the Indirect Costs of Quality
Allocated to the Product7. Compute the Total Costs of Quality by
Adding All Direct and Indirect Costs of Quality Assigned to the Product
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Activity-Based COG Analysis Illustration
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Cost of Quality Exclusions Opportunity Costs as a result from poor
quality:1. Contribution Margin and Income foregone
from lost sales2. Lost Production3. Lower Prices
Excluded due to estimation difficulties and being unrecorded as to the financial accounting records
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The Customer PerspectiveNonfinancial Measures of Customer
Satisfaction include:Surveys on satisfactionMarket shareNumber of defective units shipped to
customersNumber of customer complaintsProduct fail ratesDelivery delays / On-time deliveries
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The Internal Business Process Perspective Three techniques for identifying and
analyzing quality problems:1. Control Charts2. Pareto Diagrams3. Cause-and-Effect Diagrams
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Control ChartsStatistical Quality Control (SQC) is a formal
means of distinguishing between random and nonrandom variations in an operating process
Control Charts are a part of SQC.
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Control ChartsControl Charts are a graph of a series of
successive observations of a particular step, procedure, or operation taken at regular intervals of time.
Each observation is plotted relative to specified ranges that represent the limits within which observations are expected to fall.
Only those observations outside the control limits are ordinarily regarded as nonrandom and worth investigating
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Quality Control Charts Illustrated
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Pareto DiagramsObservations outside control limits serve as
inputs for Pareto DiagramPareto Diagram – a chart that indicates how
frequently each type of defect occurs, ordered from the most frequent to the least frequent
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Pareto Diagram Illustration
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Cause-and-Effect DiagramsIdentifies potential causes of defectsProblems identified by the Pareto Diagram
are analyzed using cause-and-effect diagramsAlso called Fishbone Diagrams because they
resemble the bone structure of a fish
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Cause-and-Effect Diagram Illustration
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Nonfinancial Measures of Internal Business Process Quality
Percentage of defective productsAverage repair time at customer sitePercentage of reworked productsNumber of different types of defects foundNumber of design and process changes made
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The Learning & Growth Perspective for QualityEmployee turnover ratioEmployee empowerment – number of
processes in which employees have the right to make decisions without consulting supervisors
Employee SatisfactionEmployee Training
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Advantages of COQ (Financial) MeasuresCOQ focuses managers’ attention on the
costs of poor qualityCOQ measures assist in problem solving by
comparing costs and benefits of different quality-improvement programs and setting priorities for cost reduction
COQ provides a single, summary measure of quality performance for evaluating tradeoffs among the costs of prevention, appraisal, internal failure and external failure
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Advantages of Nonfinancial Measures of QualityNonfinancial measures of quality are often
easy to quantify and understandNonfinancial measures direct attention to
physical processes and to areas that need improvement
Nonfinancial measures provide immediate short-run feedback on whether quality-improvement efforts have succeeded
Nonfinancial measures are useful indicators of future long-run performance
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Time as a Competitive ToolCompanies view time as a driver of strategyOperational measures of time: how quickly
firms respond to customers’ demand for their products and services, and their reliability in meeting scheduled delivery dates
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Two Operational Measures of Time1. Customer-Response Time – how long it
takes from the time a customer places an order for a product or service is delivered to the customer
2. On-Time Performance – delivering a product or service by the time it was scheduled to be delivered
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Customer-Response Time Illustrated
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Time Drivers Time Driver is any factor in which a
change in the factor causes a change in the speed of an activity.
Two Time Drivers:1. Uncertainty about when customers will order
products and services2. Bottlenecks due to limited capacity. A bottleneck
occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it
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Simple Time PresumptionsWhen demand uncertainty is high, some
unused capacity it desirableIncreasing the capacity of a bottleneck
resource reduces manufacturing lead times and delays
Reduce set-up timesInvest in new equipment to increase
capacityCareful scheduling of production
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Theory of Constraints and Throughput- Contribution AnalysisThe Theory of Constraints (TOC) describes
methods to maximize operating income when faced with some bottleneck and some nonbottleneck operations
TOC focuses on a short-run time horizon and assumes that operating costs are fixed costs
Throughput Contribution equals revenues minus the direct material cost of the goods sold
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Four Steps in Managing Bottleneck Operations1. Recognize that the bottleneck operation
determines throughput contribution of the entire system
2. Identify the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on
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Four Steps in Managing Bottleneck Operations3. Keep the bottleneck operation busy and
subordinate all nonbottleneck operations to the bottleneck operation
4. Take actions to increase the efficiency and capacity of the bottleneck operation. The objective is to increase the difference between throughput contribution and the incremental costs of increasing efficiency and capacity
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Methods to Relieve BottlenecksEliminate idle time at the bottleneck
operationProcess only those parts or products that
increase throughput contribution, not parts or products that will remain in finished goods or spare parts inventories
Shift products that do not have to be made on the bottleneck operation to nonbottleneck processes, or to outside processing facilities
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Methods to Relieve BottlenecksReduce setup time and processing time at
bottleneck operationsImprove the quality of parts or products
manufactured at the bottleneck operation
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The Balanced Scorecard and Time-Related MeasuresFinancial Measures
Revenue losses or price discounts attributable to delays
Carrying costs of inventoriesThroughput contribution minus operating costs
Customer MeasuresCustomer-response timeOn-time performance
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The Balanced Scorecard and Time-Related MeasuresInternal Business Process Measures
Average manufacturing time for key productsIdle time at bottleneck operationsDefective units produced at bottleneck
operationsAverage reduction in setup time and
processing time at bottleneck operations
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The Balanced Scorecard and Time-Related MeasuresLearning and Growth Measures
Employee satisfactionNumber of employees trained in managing
bottleneck operations
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