CHAPTER 1



CHAPTER 25

Quality Management and Measurement

reviewing the chapter

Objective 1: Describe a management information system, and explain how it enhances management decision making.

1. A management information system (MIS) is a reporting system that identifies, monitors, and maintains continuous, detailed analyses of a company’s activities and provides managers with timely measures of operating results. An MIS captures both financial and nonfinancial information. It is designed to support total quality management, the just-in-time operating philosophy, activity-based costing and activity-based management, and other management philosophies. The primary focus of an MIS is on activities, not costs. By focusing on activities, it provides managers with improved knowledge of the processes under their control. The MIS pinpoints resource usage for each activity and fosters management decisions that lead to continuous improvement throughout the organization.

2. A management information system can be designed as a customized, informally linked series of systems for specific purposes, such as financial reporting, product costing, and process measurement, or as a fully integrated database system known as an enterprise resource planning (ERP) system. An ERP system manages all major business functions through one easy-to-access centralized data warehouse capable of communicating not only inside the organization but with other business’s databases.

3. A management information system supplies managers with relevant, reliable information throughout the management process. As managers plan, they use the MIS database to obtain the information for formulating strategic plans, making forecasts, and preparing budgets. When managers perform their duties, they use the financial and nonfinancial information in the MIS database to implement decisions about personnel, resources, and activities that will minimize waste and improve quality. When managers evaluate performance, they identify and track financial and nonfinancial performance measures to evaluate all major business functions. Managers communicate by using the MIS database to generate customized reports that evaluate performance and provide useful real-time information for decision making.

Objective 2: Define total quality management (TQM), and identify financial and nonfinancial measures of quality.

4. Total quality management (TQM) is an organizational environment in which all business functions work together to build quality into a firm’s products or services. The first step in creating a total quality environment is to identify and manage the financial measures of quality, or the costs of quality. The second step is to analyze operating performance using nonfinancial measures and to require that all business processes and products or services be improved continuously.

5. Quality is the result of an operating environment in which a company’s product or service meets a customer’s specifications the first time it is produced or delivered. Costs of quality are costs associated with the achievement or nonachievement of product or service quality. The costs of quality have two components: the costs of conformance and the costs of nonconformance.

a. Costs of conformance are the costs incurred to produce a quality product or service. They include prevention costs (the costs of preventing failures) and appraisal costs (the costs of measuring quality).

b. Costs of nonconformance are the costs incurred to correct the defects of a product or service. They include internal failure costs (costs resulting from defects discovered before shipment) and external failure costs (costs resulting from defects discovered after shipment).

c. There is an inverse relationship between the cost of conformance and the cost of nonconformance; if the cost of one is low, the cost of the other is likely to be high. An organization’s overall goal is to avoid the costs of nonconformance because these costs affect customer satisfaction. High initial costs of conformance can be justified if they minimize the total costs of quality over a product’s or service’s life cycle.

6. Measuring the costs of quality helps a company track how much it has spent in its efforts to improve product or service quality. Nonfinancial measures of quality are used to supplement the cost-based measures. By monitoring and controlling leading nonfinancial measures, managers can maximize the resulting financial return from operations. Nonfinancial measures of quality include measures of product design, vendor performance, production performance, delivery cycle time, and customer satisfaction.

a. To improve the quality of product design, many businesses use computer-aided design (CAD). CAD is a computer-based engineering system that can detect flaws in product design before production begins.

b. To ensure that high-quality materials are available when needed, managers monitor the performance of vendors by using measures of quality (such as defect-free materials as a percentage of total deliveries) and measures of delivery (such as on-time deliveries as a percentage of total deliveries).

c. To improve production performance by reducing waste caused by defective products, scrapped parts, machine maintenance, and downtime, many companies use computer integrated manufacturing (CIM) systems. In these systems, production and its support activities are coordinated by computers. Most direct labor hours are replaced by machine hours.

d. To evaluate their responsiveness to customers, companies measure delivery cycle time—the time between acceptance of an order and final delivery of the product or service. The delivery cycle time consists of the purchase-order lead time (the time it takes for the company to process the order and organize so production can begin), production cycle time (the time it takes to make a product), and delivery time (the time between the product’s completion and the customer’s receipt of the product).

e. Measures of customer satisfaction include the number and types of customer complaints, the number and causes of warranty claims, and the percentage of shipments returned as a percentage of total shipments.

7. Many measures of the costs of quality and several of the nonfinancial measures of quality apply directly to services and can be used by any type of service organization. For example, a service business can measure customer satisfaction by tracking the number of services accepted or rejected, the number of customer complaints, and the number of returning customers.

Objective 3: Use measures of quality to evaluate operating performance.

8. In analyzing the costs of quality, managers examine the costs of conformance to customer standards, including prevention costs and appraisal costs, and the costs of nonconformance to customer standards, including internal failure costs and external failure costs. By analyzing the costs of quality, as well as nonfinancial measures of quality, managers help a firm meet its goal of continuously improving the production process and product or service quality.

Objective 4: Discuss the evolving concept of quality.

9. Over the years, to meet customers’ needs and the demands of a changing business environment, the concept of quality has been constantly evolving. Among the concepts that preceded TQM was return on quality (ROQ). ROQ is the trade-off between the costs and benefits of improving quality; the high costs of consistent quality are weighed against the expected higher returns. In the 1980s, companies emphasized kaizen, the continual improvement of quality and processes and the reduction of costs. By the end of the 1980s, companies that applied these concepts had achieved high levels of product reliability.

10. Among the techniques that evolved to help managers understand and measure quality improvements are benchmarking and process mapping. Benchmarking is the measurement of the gap between the quality of a company’s process and the quality of a parallel process at the best-in-class company. Process mapping is a method of diagramming process inputs, outputs, constraints, and flows to help managers identify unnecessary efforts and inefficiencies in a business process.

Objective 5: Recognize the awards and organizations that promote quality.

11. Many awards have been established to recognize and promote the importance of quality. In 1951, the Japanese Union of Scientists and Engineers created the Deming Prize to honor individuals or groups who contribute to the development and dissemination of total quality control. The organization awards several Deming prizes to companies and individuals that achieve distinctive results by carrying out total quality control. In 1987, the U.S. Congress established the Malcolm Baldrige Quality Award to recognize U.S. organizations for their achievements in quality and business performance and to raise awareness about the importance of these factors.

12. The International Organization for Standardization (ISO) promotes standardization with a view to facilitating the international exchange of goods and services. To standardize quality management and quality assurance, the ISO developed ISO 9000, a set of guidelines covering the design, development, production, final inspection and testing, installation, and servicing of products, processes, and services. To become ISO-certified, an organization must pass a rigorous audit of its manufacturing and service processes.

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