hca14_PPT_CH19_GE

8/10/2019 hca14_PPT_CH19_GE

http://slidepdf.com/reader/full/hca14pptch19ge 1/40

© 2012 Pearson Education. All rights reserved.

Balanced Scorecard:

Quality, Time,

and the Theory of Constraints

8/10/2019 hca14_PPT_CH19_GE



Quality as a Competitive Tool Quality —the total features and characteristics of a

product or a service made or performed according tospecifications to satisfy customers at the time ofpurchase and during use.

A quality focus reduces costs and increases customersatisfaction.

8/10/2019 hca14_PPT_CH19_GE



Quality as a Competitive Tool Focusing on the quality of a product will generally

build expertise in producing it, lower the costs ofmaking it, create customer satisfaction for customersusing it, and generate higher future revenues for thecompany selling it.

8/10/2019 hca14_PPT_CH19_GE



Two Basic Aspects of Quality1. Design quality —refers to how closely the

characteristics of a product or service meet theneeds and wants of customers

2. Conformance quality —refers to the performance ofa product or service relative to its design andproduct specifications

8/10/2019 hca14_PPT_CH19_GE



Quality and Failure

ActualPerformance

DesignSpecifications

Customer Satisfaction

Conformance

Quality

Failure

DesignQuality

Failure

8/10/2019 hca14_PPT_CH19_GE



Four Perspectives of the

Balanced Scorecard1. Financial

2. Customer

3. Internal business process4. Learning and growth

8/10/2019 hca14_PPT_CH19_GE



The Financial Perspective:

Costs of Quality (COQ) Four categories of quality costs:

1. Prevention costs—incurred to preclude the production ofproducts that do not conform to specifications

2. Appraisal costs—incurred to detect which of the individualunits of products do not conform to specifications

3. Internal failure costs—incurred on defective productsbefore they are shipped to customers

4. External failure costs—incurred on defective products afterthey are shipped to customers

8/10/2019 hca14_PPT_CH19_GE



Elements of Costs of Quality

Reports

8/10/2019 hca14_PPT_CH19_GE



Determining COQ using

Activity-Based Costing1. Identify the chosen product.

2. Identify the product’s direct costs of quality.

3. Select the cost-allocation bases to use for allocatingindirect costs of quality to the product.

8/10/2019 hca14_PPT_CH19_GE




Activity-Based Costing4. Identify the indirect costs of quality associated with

each cost-allocation base.

5. Compute the rate per unit of each cost-allocationbase used to allocate indirect costs of quality to theproduct.

8/10/2019 hca14_PPT_CH19_GE




Activity-Based Costing6. Compute the indirect costs of quality allocated to

the product.

7. Compute the total costs of quality by adding alldirect and indirect costs of quality assigned to theproduct.

8/10/2019 hca14_PPT_CH19_GE



Activity-Based COG Analysis Illustration

8/10/2019 hca14_PPT_CH19_GE



Cost of Quality Exclusions Opportunity costs as a result from poor quality:

1. Contribution margin and income foregone from lostsales

2. Lost production3. Lower prices

These opportunity costs are not recorded in thefinancial accounting systems.

8/10/2019 hca14_PPT_CH19_GE



The Customer Perspective Nonfinancial measures of customer satisfaction

include:

Surveys on satisfaction

Market share

Number of defective units shipped to customers

Number of customer complaints

Product fail rates Delivery delays/On-time deliveries

8/10/2019 hca14_PPT_CH19_GE



The Internal Business Process Perspective Three techniques for identifying and analyzing

quality problems:

1. Control charts

2. Pareto diagrams

3. Cause-and-effect diagrams

8/10/2019 hca14_PPT_CH19_GE



Control Charts Statistical 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.

8/10/2019 hca14_PPT_CH19_GE



Control Charts Control charts are a graph of a series of successive

observations of a particular step, procedure, oroperation taken at regular intervals of time.

Each observation is plotted relative to specifiedranges that represent the limits within whichobservations are expected to fall.

Only those observations outside the control limits

are ordinarily regarded as nonrandom and worthinvestigating.

8/10/2019 hca14_PPT_CH19_GE



Quality Control Charts Illustrated

8/10/2019 hca14_PPT_CH19_GE



Pareto Diagrams Observations outside control limits serve as inputs for

Pareto diagrams.

Pareto diagram—a chart that indicates how frequentlyeach type of defect occurs, ordered from the mostfrequent to the least frequent.

8/10/2019 hca14_PPT_CH19_GE



Pareto Diagram Illustration

8/10/2019 hca14_PPT_CH19_GE



Cause-and-Effect Diagrams Identifies potential causes of defects

Problems identified by the Pareto diagram areanalyzed using cause-and-effect diagrams

Also called fishbone diagrams because they resemblethe bone structure of a fish

8/10/2019 hca14_PPT_CH19_GE



Cause-and-Effect Diagram

Illustration

8/10/2019 hca14_PPT_CH19_GE



Nonfinancial Measures of

Internal Business Process Quality

Percentage of defective products

Percentage of reworked products

Number of different types of defects found

Number of design and process changes made

8/10/2019 hca14_PPT_CH19_GE


8/10/2019 hca14_PPT_CH19_GE



Advantages of COQ (Financial) Measures COQ focuses managers’ attention on the costs of

poor quality.

COQ measures assist in problem solving by

comparing costs and benefits of different quality-improvement programs and setting priorities forcost reduction.

COQ provides a single, summary measure of quality

performance for evaluating trade-offs among thecosts of prevention, appraisal, internal failure, andexternal failure.

8/10/2019 hca14_PPT_CH19_GE



Advantages of Nonfinancial Measures of

Quality Nonfinancial measures of quality are often easy to

quantify and understand.

Nonfinancial measures direct attention to physicalprocesses and to areas that need improvement.

Nonfinancial measures provide immediate short-runfeedback on whether quality-improvement efforts

have succeeded. Nonfinancial measures are useful indicators of

future long-run performance.

8/10/2019 hca14_PPT_CH19_GE



Time as a Competitive Tool Companies view time as a driver of strategy.

Operational measures of time: how quickly firmsrespond to customers’ demand for their products andservices, and their reliability in meeting scheduleddelivery dates.

8/10/2019 hca14_PPT_CH19_GE



Two Operational Measures of Time1. Customer-response time—how long it takes from

the time a customer places an order for a product orservice is delivered to the customer

2. On-time performance—delivering a product orservice by the time it was scheduled to be delivered

8/10/2019 hca14_PPT_CH19_GE



Customer-Response Time Illustrated

8/10/2019 hca14_PPT_CH19_GE



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 andservices.

2. Bottlenecks due to limited capacity. A bottleneck occurs inan operation when the work to be performed approaches or

exceeds the capacity available to do it.

8/10/2019 hca14_PPT_CH19_GE



Simple Time Presumptions When demand uncertainty is high, some unused

capacity it desirable.

Increasing the capacity of a bottleneck resourcereduces manufacturing lead times and delays.

Reduce set-up times.

Invest in new equipment to increase capacity.

Careful scheduling of production.

8/10/2019 hca14_PPT_CH19_GE



Theory of Constraints and Throughput-

Contribution Analysis The theory of constraints (TOC) describes methods

to maximize operating income when faced with

some bottleneck and some nonbottleneckoperations.

TOC focuses on a short-run time horizon andassumes that operating costs are fixed costs.

Throughput margin equals revenues minus thedirect material cost of the goods sold.

8/10/2019 hca14_PPT_CH19_GE



Four Steps in Managing

Bottleneck Operations1. Recognize that the bottleneck operation determines

throughput contribution of the entire system.

2. Identify the bottleneck operation by identifyingoperations with large quantities of inventory waitingto be worked on.

8/10/2019 hca14_PPT_CH19_GE



Four Steps in Managing

Bottleneck Operations3. Keep the bottleneck operation busy and subordinate

all nonbottleneck operations to the bottleneckoperation.

4. Take actions to increase the efficiency and capacityof the bottleneck operation. The objective is toincrease the difference between throughputcontribution and the incremental costs of increasing

efficiency and capacity.

8/10/2019 hca14_PPT_CH19_GE



Methods to Relieve Bottlenecks Eliminate idle time at the bottleneck operation.

Process only those parts or products that increase

throughput contribution, not parts or products that will remain in finished goods or spare partsinventories.

Shift products that do not have to be made on the

bottleneck operation to nonbottleneck processes, orto outside processing facilities.

8/10/2019 hca14_PPT_CH19_GE



Methods to Relieve Bottlenecks Reduce setup time and processing time at bottleneck

operations.

Improve the quality of parts or products manufacturedat the bottleneck operation.

8/10/2019 hca14_PPT_CH19_GE



The Balanced Scorecard and Time-Related

Measures Financial measures:

Revenue losses or price discounts attributable to delays

Carrying costs of inventories

Throughput contribution minus operating costs

Customer measures:

Customer-response time

On-time performance

8/10/2019 hca14_PPT_CH19_GE



The Balanced Scorecard and Time-Related

Measures Internal business process measures:

Average manufacturing time for key products

Idle time at bottleneck operations

Defective units produced at bottleneck operations

Average reduction in setup time and processing time atbottleneck operations

8/10/2019 hca14_PPT_CH19_GE


8/10/2019 hca14_PPT_CH19_GE


© 2012 P Ed ti All i ht d

Documents

hca14_PPT_CH19_GE