Week 7

Week 7Chapter 19 (I)

Balanced Scorecard: Quality

1

Big Picture

2

What is the reality of the balanced scorecard?

• Companies pay for consulting on parts of the BSC

• Video – Employee Value Proposition (Parker)

5

1. Familiarization

2. Learning Objectives

3. Game Objectives

17 Quarters

Highest profit

Diary One-Page summary of learning

Chapter

12 14 19Accounting Customer Internal

Strategy

Systems Thinking

Measurement

6

7

NON-FINANCIAL MEASURES

BIG DECISIONS—ALLOCATE RESOURCES

FEEDBACK

CEO CFOCIO

P C

F

CUSTOMER INTERNAL

PROCESSLEARNING + GROWTH

FINANCIAL MEASURES

TRAININGGET

ATTENTION

Big PictureDecision Relevance of Financial and Non-Financial

Measures inside the Firm

INVESTMENT

Introduction Quality-Definition Quality-Measurement BSC Time-Related Measures Theory of ConstraintsTime-related Measures

8

Week 7-8 Learning Outcome Summary

Introduction Quality-Definition Quality-Measurement

Learning objective 1: Explain the four cost categories in a costs-of-quality program

Learning objective 2: Develop Nonfinancial measures and methods to improve quality

Learning objective 3: Use cost of quality measures to make decisions Learning objective 4: Use financial and nonfinancial measures to

evaluate quality Time-related Measurement

Learning objective 5: Describe customer-response time and on-time performance

Learning objective 6: Describe why delay occurs and their costs Learning objective 7: Use financial and nonfinancial measures of time Learning objective 8: Theory of Constraints


9

Why quality and time?

Quality and time-based competition are often critical parts of any competitive strategy

Quality based competition

Attributes of quality 1. Design and Conformance quality

who is our customer?

2. Drivers of quality (Casual influences)

How to execute?

Prevention Appraisal Internal failure External failure

SCA

Com

petit

ors

Customer


How important is Quality?

• Needle in Teddy Bear• Quality and Cost are not Tradeoffs

10

CS1000

11

CHINA SUPPLIERS’ CHALLENGES AND RESPONSES – Electronic Components - 2014 CHINA SUPPLIERS’ CHALLENGES

What is your number one challenge?

23%

18%

10%8%7%

Competition

Cost Control

HR & Productivity

Lower Price & Profit

Market Development

Others

Interviews were conducted with 98 Electronic Suppliers on April 2014 at Asia World Expo and International ICT Expo in Hong Kong.

Battery and Power17%

Materials16%

Generic Compoents14%Passive Components

12%

Connector10%

Transformers6%

Printed Circuit Board6%

Others(Apparatus)6%

Switches5%

Optical4%

Light Emitting Diodes2%

Sample Distribution by Component Type(n=98)

April 2014, 98 suppliers were interviewed at the Hong Kong Trade Expo. 33 suppliers provided high complexity components (integrated components (ICs), liquid crystal display modules (optical) and touch panel modules, printed circuit board, battery and power and transformers). 65 suppliers provided components that are low in complexity to the extent that they are more likely to be mass-produced and require little coordination with the transacting party.

14%

12%

8%

6%5%5%5%

Responses by Suppliers(Low Complexity ,n=65)

Automation(9)Product differentiation(8)Brand building(5)Develop overseas marketImprove serv iceInternet marketing

21%

18%

12%9%

9%

6%

6%

No 1. Challenge -- Suppliers with High Complexity (n=33)

CompetitionCost ControlHR & Productiv ityGo InternationalMarket DevelopmentLower Price & ProfitProduct DevelopmentOthers

1. Strategy/Marketing

2. Scale Economies

3. Management

4. Relationship

25%

4%

4%

4%

0.5

0.0833

Responses to Competition(n=24)

Most frequent response Others

Develop Close relationship (4%)

Improve Quality (4%)

Product Differentiation (25%), Improve Service (13%)Advertising&Promotion (8%)

Vertical Integration(4%)


3. Management

17%

39%

17%

28%

Responses to Cost Control(n=18)Most frequent response Others

Automation (39%),R&D (11%), Improve efficiency (6%)

Develop oversea market (17%)


3. Management

10%

40% 50%

Responses to HR & Productivity(n=10)Most frequent response Others

Automation (40%), Recruitment (10%), Reduce Prod Cost (10%)Employee training (10%)

Increase Investment (10%)

9%

9%

9%

6%

6%6%6%6%

Responses by suppliers(High Complexity, n=33)

Improve Quality(3)Automation(3)Improve Service(3)RecruitmentR & DTarget Market Needs & TrendsProduct Differentiation

25%

18%

9%9%

No1. Challenge --Suppliers with Low Complexity (n=65)

CompetitionCost ControlHR & Productiv ityLower Price & ProfitCurrency Depreciation/AppreciationMarket DevelopmentManagementGo InternationalBrand BuildingQuality CustomersOthers

Dr Neale G. O’Connor © 2014 | www.Chinasupplier1000.com

China Sourcing Academy | 29

2. Three Circle Control Framework3. Structure your negotiation Need something to negotiate over

CHINA SUPPLIERS’ CHALLENGES AND RESPONSES – Electronics Exhibition - 2014 Oct

SUPPLIERS’ CHALLENGESWhat is your number one challenge?

October 2014, 143 Chinese suppliers were interviewed at the Hong Kong Global Sourcing-Electronics Exhibition. 65 of them provide simple components-earphone, power bank, speaker, connector and etc. 78 suppliers provide complex components-car multimedia, mirror GPS, Bluetooth product and etc. The top 3 first challenges for Chinese suppliers now are Competition, Product quality and Cost control.

car mul-timedia

22%earphone

8%

car accessories8%

GPS7%connector

7%power bank

5%

tablet4%

bluetooth product

4%

electronics accessories

3%

DVD3%

holder3%

speaker3%

others24%

Sample Distribution by Component Type (n=143)61%

11%

8%

8%6%5%

1%competitionproduct qualitycost controlhr & productivityindustry pene-trationmacroeconomic and policyenterprises ex-tension

Relationship

Market

Product

Technology

2%

25%

21%

43%

2%

8%

2%

2%

Response to Competition (n=87)R & D (43%)

Improve Quality (21%) Lower Cost (8%) product differentiation (2%)

Attend Expo (25%) Market Research (2%) product promotion (2%)

Customer Retention (2%)

Stategy

Technology

Product

22%

22%

22%

11%

11%0.11111111111

1111

Response to Cost Control (n=12)Improve Quality (22%) Lower Cost (11%) product differentiation (11%)

Automation (22%) Improve Technology (11%)

Decrease Profit (22%) Rela-tionship

Strategy

Product

Market

Technology

6%

6%

13%

19%

44%

6%

6%

Response to Product Quality(n=16)

Attend expo (19%)

Customer Retention (6%)

Find potential partnership (6%) Online Recruitment (6%)

Improve quality (12%) Product differentiation (6%)

R & D (44%)

65%13%

6%5%

5%4%

No1. Challenge --Suppliers with High Complexity (n=78)

competitionproduct qualityindustry penetrationcost controlhr & productivitymacroeconomic and policyenterprises extension

55%

12%

11%

9%6%6%

No1. Challenge --Suppliers with Low Complexity (n=65)

competitioncost controlhr & productivityproduct qualityindustry pene-tration

38%

24%

12%

11%5%

9%

Responses by Suppliers( Low Complexity n=65)

R&Dattend expolower costimprove qualitycustomer retentionothers

35%

23%17%

8%5%

4%9%

Responses by Suppliers(HIGH Complexity n=78)

R&Dimprove qual-ityattend expolower costrely on policy

Dr Neale G. O’Connor © 2014 | www.Chinasupplier1000.com

Simple Factory Audit in Asia

Extensive factory audit (ISO 9001) in China and Asia

Corporate Social Audits (SA 8000) in China and Asia

Pre Production Inspection

First Article Inspection

Production Monitoringin China & Asia

During Production Inspection

Defect Sorting Service

Pre Shipment Inspection

Container Loading Supervision

Lab Testing & Certification


2. Three Circle Control Framework3. Measurement and Verification (e.g. Asia Quality Focus)

Quality Control Serviceshttp://www.asiainspection.com/?xtor=SEC-5&sc=ppc&lang=en&gclid=Cj0KEQiAgMKmBRDMjo_F9OfUubABEiQAp8Ky1-DJ8SplYlLrgurk6w4_S_NbRa5qvliubFhbSQtoYKwaApLz8P8HAQ

InTouch Manufacturing Serviceshttps://www.youtube.com/watch?v=PjG8UAJEoBk Tour of tablet factoryhttps://www.youtube.com/watch?v=Zjv06bikuhw Tour of Apple Factoryhttps://www.youtube.com/watch?v=F03kFZvdUjE

18

Introduction Quality-Definition Quality-Measurement Theory of Constraints Theory of ConstraintsTime-related Measures

http://www.youtube.com/watch?v=3rOtS7wsZCo








https://www.youtube.com/watch?v=Zjv06bikuhw

https://www.youtube.com/watch?v=Zjv06bikuhw

https://www.youtube.com/watch?v=F03kFZvdUjE

https://www.youtube.com/watch?v=F03kFZvdUjE

ALWAYS BE WATCHFUL

Product arrives on time

Product is as ordered

Product works

CAN THEY REPLICATE THE EXPERIENCE?

Summary


Competingon

Quality20

21

Define it Product quality dimensions

Design Conformance

Service quality Measure it

Financial Customer Internal Learning and Growth

Use it

Competing on Quality


22

Quality – 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

Quality as a Competitive Tool


23

ActualPerformance

DesignSpecifications

CustomerSatisfaction

ConformanceQualityFailure

DesignQualityFailure

1. 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

Two Basic Aspects of Quality (Define it!)Quality and Failure (Define it!)


25

Performance Refers to the efficiency with which a product achieves its intended purpose.

Features Attributes of a product that supplement a product’s basic performance.

Reliability The propensity for a product to perform consistently over its useful design life.

Conformance Numerical dimensions for a product’s performance, such as capacity, speed, size,

durability, color, or the like.

Product Quality Dimensions (Define it!)


26

Durability The degree to which a product tolerates stress or trauma without failing.

Serviceability Ease of repair.

Aesthetics Subjective sensory characteristics such as taste, feel, sound, look, and smell.

Perceived Quality Based on customer opinion. Customers imbue products and services with their

understanding of their goodness.

Product Quality Dimensions (Define it!)


28

Service Quality Dimensions (Define it!)• Tangibles

• Include the physical appearance of the service facility, the equipment, the personnel, and the communication material.

• Service Reliability• Differs from product reliability in that it relates to the ability of the service

provider to perform the promised service dependably and accurately.

• Responsiveness• The willingness of the service provider to be helpful and prompt in providing

service.

• Assurance• The knowledge and courtesy of employees and their ability to inspire trust

and confidence.

• Empathy• Caring, individual attention paid to customers by the service firm.


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1. Financial2. Customer3. Internal Business Process4. Learning and Growth

Four Perspectives of the Balanced Scorecard (Measure it!)


30

The Financial Perspective: Cost of Quality (COQ) (Measure it!)


BSC Time-Related Measures Theory of ConstraintsTime-related Measures

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 Learning Outcome 1:

Explain the four cost categories in a costs-of-quality program…prevention, appraisal, internal failure, and external failure costs(P. 757)

1

What is the reality of the Cost of Quality Report?

• Nose Job• Where do the quality costs come from?

31

Elements of Costs of Quality Reports (Measure it!)

32



The items in Exhibit 19-1 come from all business functions of the value chain, and they are broader than the internal failure costs of spoilage, rework, and scrap described in Chapter 18.

36

Example - Photon: Determining COQ Using Activity-Based Costing (Measure it!)

1. Identify the Chosen Cost Object (Photocopying machines)

2. Identify the Direct Costs of Quality of the Product (Employees such as inspectors and workers in repair areas who are dedicated to a product line)

3. Select the Activities and Cost-Allocation Bases to Use for Allocating Indirect Costs of Quality to the Product (Photon indentifies the number of inspection-hours as the cost-allocation base for the inspection activity)

4. Identify the Indirect Costs of Quality Associated with Each Cost-Allocation Base (e.g. photocopying machines use 240,000 inspection-hours)

5. Compute the Rate per Unit of Each Cost-Allocation Base (Column 2 of Exhibit 19-2, Panel A, shows these rates)

6. Compute the Indirect Costs of Quality Allocated to the Product (Quality – related inspection costs for the photocopying machines are $9,600,000 ($40 per hr * 240,000 inspection-hours))

7. Compute the Total Costs of Quality by Adding All Direct and Indirect Costs of Quality Assigned to the Product (Photon’s total costs of quality in the COQ report for photocopying machines is $40.02 million (bottom of column 4, panel A), or 13.3% of current revenues (bottom of column 5)



We illustrate the issues in managing quality – computing the cost of quality, identifying quality problem, and taking actions to improve quality, - using Photon Corporation. Photon makes many products; however, we’ll focus on Photon’s photocopying machines, which earned an operating income of $24 million on revenues of $300 million in 2013.

Example - Photon: Activity-Based COG Analysis

37



Photon makes many products; however, we’ll focus on Photon’s photocopying machines, which earned an operating income of $24 million on revenues of $300 million in 2013.

44

38

Opportunity Costs as a result from poor quality: Contribution Margin and Income forgone from lost sales Lost Production Lower Prices

Excluded due to estimation difficulties and being unrecorded as to the financial accounting records

Cost of Quality Exclusions (Measure it!)



39



FEEDBACK

CEO CFOCIO

P C

F

CUSTOMER INTERNAL


FINANCIAL MEASURES

TRAININGGET

ATTENTION

Evaluating StrategyDecision Relevance of Financial and Non-Financial


INVESTMENT

40

Example - Osborn, Inc. Exercise 19-16 – Cost of Quality Analysis (rep old ex)

Osborn, Inc., produces cell phone equipment. Amanda Westerly, Osborn’s president, decided to devote more resources to the improvement of product quality after learning that her company had been ranked fourth in product quality in a 2011 survey of cell phone users. Osborn’s quality-improvement program has now been in operation for 2 years, and the cost report shown here has recently been issued.



41

Example - Osborn, Inc. Exercise 19-16 – Cost of Quality Analysis (rep old ex)

1. For each period, calculate the ratio of each COQ category to revenues and to total quality costs

2. Based on the results of requirement 1, would you conclude that Osborn’s quality program has been successful? Prepare a short report to present your case.

3. Based on the 2011 survey, Amanda Westerly believed that Osborn had to improve product quality. In making her case to Osborn management, how might Westerly have estimated the opportunity cost of not implementing the quality improvement program?



Example - Osborn, Inc. 19-16. The ratios of each COQ category to revenues and to total quality costs for each period are as follows: Osborn, Inc. : Semi-annual Costs of Quality Report (in thousands)

6/30/2012 12/31/2012 6/30/2013 12/31/2013

Actual% of

Revenues

% of Total Quality Costs Actual

% of Revenu

es


% of Revenues


% of Revenues

% of Total Quality Costs

(1) (2) = (3) = (4) (5) = (6) = (7) (8) = (9) = (10) (11) = (12) =

(1) ÷

$8,240(1) ÷

$2,040 (4) ÷

$9,080(4) ÷

$2,159 (7) ÷

$9,300(7) ÷

$1,605 (10) ÷ $9,020

(10) ÷ $1,271

Prevention costs

Machine maintenance$

440 $ 440 $ 390 $ 330 Supplier training 20 100 50 40

Design reviews

50 214 210 200 Total prevention costs

510 6.2% 25.0% 754 8.3% 34.9% 650 7.0% 40.5% 570 6.3% 44.9%

Appraisal costs Incoming inspection 108 123 90 63

Final testing

332 332 293 203

Total appraisal costs

440 5.3% 21.6% 455 5.0% 21.1% 383 4.1% 23.9% 266 3.0% 20.9%Internal failure costs Rework 231 202 165 112

Scrap

124 116 71 67 Total internal failure costs

355 4.3% 17.4% 318 3.5% 14.7% 236 2.5% 14.7% 179 2.0% 14.1%

External failure costs Warranty repairs 165 85 72 68

Customer returns

570 547 264 188 Total external failure costs

735 8.9% 36.0% 632 7.0% 29.3% 336 3.6% 20.9% 256 2.8% 20.1%

Total quality costs$2,04

0 24.7% 100.0%$2,159 23.8% 100.0%$1,605 17.2% 100.0%$1,271 14.1% 100.0%Total production and revenues

$8,240 $9,080 $9,300 $9,020

42



43

Example - Osborn, Inc. Exercise 19-16 – Cost of Quality Analysis

2. Has Osborn’s quality program been successful?

• Total quality costs as a percentage of total revenues have declined from 24.7% to 14.1%.

• External failure costs, those costs signaling customer dissatisfaction, have declined from 8.9% of total revenues to 2.8% of total revenues and from 36% of all quality costs to 20.1% of all quality costs. These declines in warranty repairs and customer returns should translate into increased revenues in the future.

• Internal failure costs as a percentage of revenues have been halved from 4.3% to 2%.

• Appraisal costs have decreased from 5.3% to 3% of revenues. Preventing defects from occurring in the first place is reducing the demand for final testing.



44


2. Has Osborn’s quality program been successful?

• Quality costs have shifted to the area of prevention where problems are solved before production starts: total prevention costs (maintenance, supplier training, and design reviews) have risen from 25% to 44.9% of total quality costs. The $60,000 increase in these costs is more than offset by decreases in other quality costs.

• Because of improved designs, quality training, and additional pre-production inspections, scrap and rework costs have almost been halved while increasing sales by 9.5%.

• Production does not have to spend an inordinate amount of time with customer service since they are now making the product right the first time and warranty repairs and customer returns have decreased.



45


3. How might you estimate the opportunity cost of not implementing the quality improvement program?

• Sales and market share would continue to decline if the quality program was not implemented and then calculated the loss in revenue and contribution margin.

• The company would have to compete on price rather than quality and calculated the impact of having to lower product prices.

• Opportunity costs are not recorded in accounting systems because they represent the results of what might have happened if the company had not improved quality. Nevertheless, opportunity costs of poor quality can be significant. It is important for Osborn to take these costs into account when making decisions about quality.



46

The Customer Perspective (Measure it!)

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



Learning Outcome 2:Develop nonfinancial measures and methods to improve quality…customer satisfaction measures, internal-business process measures and learning-and-growth measures.(P. 761)

2

47

Three techniques for identifying and analyzing quality problems:

Control Charts

Pareto Diagrams

Cause-and-Effect Diagrams

Internal Business Perspective (Measure it!)



Internal Business Perspective -Control Charts (Measure it!)

Example - Photon’s copier problem

48



This Pareto diagram shows quality problem with respect to Photon’s photocopying machines and also indicates how frequently each type of defect occurs.

49

Internal Business Perspective Pareto Diagrams (Measure it!)




Multiple suppliersIncorrect specificationVariation in purchased

components

Flawed part designIncorrect

manufacturingsequence

Inadequate toolsIncorrect speed

Poormaintenance

Inadequatesupervision

Poor trainingNew operator

Internal Business Perspective Cause-and-Effect Diagrams (Measure it!)


50



Human Factors Methods andDesign Factors

Machine-related Factors

Materials andComponents Factors

51

Percentage of defective products Average repair time at customer site Percentage of reworked products Number of different types of defects found

Number of design and process changes made

Internal Business Perspective Non-financial Measures (Measure it!)



53

Employee turnover ratio

Employee empowerment – number of processes in which employees have the right to make decisions without consulting supervisors

Employee satisfaction

Employee training

The Learning and Growth PerspectiveNon-financial Measures (Measure it!)



Application of relevant cost concept in Chapter 11 Example - Photon’s copier problem

Two solutions proposed (p.765) Electronically inspect and test the frames before production starts. Redesign and strengthen the frames and their shipping containers to

withstand mishandling during transportation.

See Exhibit 19-6 Estimated incremental costs Cost savings from less rework, customer support and repairs Increased contribution margin from higher sales as a result of building

a reputation for quality and performance (Exhibit 19-6, line 14).

54

Relevant costs and Benefits of Evaluating Quality Improvement



Learning Outcome 3:Use costs of quality measures to make decisions…identify relevant incremental costs and benefits and opportunity costs to evaluate tradeoffs. (P765)

3

Relevant costs and Benefits of Evaluating Quality Improvement

Exhibit 19-6 Estimated Effects of Quality-Improvement Actions on Costs of Quality for Photocopying Machines at Photon Corporation

Relevant Costs and Benefits of

Further Inspecting Incoming Frames

Redesigning Frames

Relevant cost Relevant Benefit per Unit

Quantity Total Benefits

Quantity Total Benefits

(1) (2) (3) (4) (5) (6)

Additional inspection and testing costs $(400,000)

Additional process engineering costs $(300,000)

Additional design engineering costs $(160,000)

(2)X(3) (2)X(5)

Savings in rework costs $40 per hr 24,000 hrs $960,000 32,000 hrs $1,280,000

Savings in customer-support costs $20 per hr 2,000 hrs 40,000 2,800 hrs 56,000

Savings in transportation costs for repair parts $180 per load 500 loads 90,000 700 loads 126,000

Savings in warranty repair costs $45 per hr 20,000 hrs 900,000 28,000 hrs 1,260,000

Total contribution margin from additional sales $6,000 per copier 250 copiers 1,500,000 300 copiers 1,800,000

Net cost savings and additional contribution margin $3,090,000 $3,862,000

Difference in favor of redesigning frames $772,00055



1. Estimated incremental costs

3. Increased contribution margin from higher sales as a result of building a reputation for quality and performance

2. Cost savings from less rework, customer support and repairs

56

Advantages of Financial Measures of Quality(Measure it!)

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 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



Learning Outcome 4:Use financial and nonfinancial measures to evaluate quality

…nonfinancial measures are leading indicators of future costs of quality. (P766)

4

57

Advantages of non-financial Measures of Quality (Measure it!)

Nonfinancial measures of quality are often easy to quantify and understand

Nonfinancial 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



58



FEEDBACK

CEO CFOCIO

P C

F

CUSTOMER INTERNAL


FINANCIAL MEASURES

TRAININGGET

ATTENTION

Evaluating StrategyDecision Relevance of Financial and Non-Financial


INVESTMENT

59

Summary


Learning objective 1: Explain the four cost categories in a costs-of-quality program

Learning objective 2: Develop Nonfinancial measures and methods to improve quality

Learning objective 3: Use cost of quality measures to make decisions Learning objective 4: Use financial and nonfinancial measures to

evaluate quality Time-related Measurement

Learning objective 5: Describe customer-response time and on-time performance

Learning objective 6: Describe why delay occurs and their costs Learning objective 7: Use financial and nonfinancial measures of time Learning objective 8: Theory of Constraints


Education

Week 7