Operations management converts resources into goods and services

Question 1 : When should companies develop strategic sourcing partnerships? What are key points of that strategy?

Question 2 : How should a company evaluate its suppliers’ performance? What should it do with non-performing suppliers?

Question 3 : Make to Stock, Assemble to Order, Make to Order and Engineer to Order are different operations strategies. Provide an example of a company or product that would use each one.

Question 4 : Describe five (5) key elements of a Lean Strategy.

Fundamentals of Supply Chain Management – McLaury/Spiegle

Operations Management refers to the design, execution, and control of the operations that convert resources into desired goods and services, aligned with the company's business strategy.

Managing the process to create goods and services.

The goal is to convert materials and labor into goods and services as efficiently and effectively as possible, while also controlling costs to maximize profits.

Operations Management

The nature of how Operations Management is carried out varies by company and depends on the nature of the products or services in the portfolio.

Discussion Outline

Manufacturing Strategies

LEAN Manufacturing and Six Sigma

Origins and historical developments of LEAN Manufacturing and Six Sigma

Major elements of LEAN Manufacturing and Six Sigma

LEAN Six Sigma Supply Chain

Compare LEAN Manufacturing and Six Sigma

Statistical tools of Six Sigma

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Management

Supply Chain

Manufacturing Strategies

Companies must develop a manufacturing strategy that suits the type(s) of products that they produce, their customer’s expectations, and their strengths.

Manufacturing strategies can vary significantly depending on the product and/or the customer requirements.

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Manufacturing Strategies

Developing a manufacturing strategy that suits a company's strengths is essential for establishing and maintaining an effective supply chain.

In this section we will review the manufacturing strategies:

Make-to-Stock (MTS)

Assemble-to-Order (ATO)

Make-to-Order (MTO)

Engineer-to-Order (ETO)

We will also review the implications to customer delivery lead time with each of these manufacturing strategies

Manufacturing Strategies (continued)

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Make-to-Stock (MTS) - literally means to manufacture products for stock based on demand forecasts, which is a push system.

Since accuracy of the forecasts will prevent excess inventory and opportunity loss due to stockout, the critical issue is how to forecast demands accurately.

MTS is like a train schedule (supply schedule) for which the number of passengers (forecast demand) for each time period can be determined from the past data.

Most daily necessities such as processed foods, sundries, and textiles are MTS-type products.

One issue of MTS is to avoid having excess inventory. Companies today that operate with an MTS model struggle to make the correct product at the correct time in the correct quantities.

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Make-to-Stock (MTS)

Fundamentals of Supply Chain Management – McLaury/Spiegle

Assemble-to-Order (ATO) is a manufacturing strategy where products ordered by customers are produced quickly and are customizable to a certain extent.

The ATO strategy requires that the basic parts for the product are already manufactured but not yet assembled.

Once an order is received, the parts are assembled quickly and sent to the customer.

ATO is a hybrid strategy between a Make-to-Stock strategy where products are fully produced in advance, and the Make-to-Order strategy where products are manufactured once the order has been received.

The ATO strategy attempts to combine the benefits of both strategies - getting products into customers' hands quickly while allowing for the product to be customizable.

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Assemble-to-Order (ATO)

Fundamentals of Supply Chain Management – McLaury/Spiegle

Make-to-Order (MTO) is a manufacturing strategy that typically allows customers to purchase products that are customized to their specifications.

The MTO strategy only manufactures the end product once the customer places the order, creating additional wait time for the consumer to receive the product but allowing for more flexible customization.

It is like an elevator because MTO starts by receiving an order as an elevator starts by pressing a button

The MTO strategy relieves the problems of excessive inventory that is common with the traditional Make-to-Stock strategy.

MTO is not appropriate for all types of products. It is appropriate for highly configured products such as computer servers, aircraft, ocean vessels, bridges, automobiles, or products that are very expensive to keep in inventory.

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Make-to-Order (MTO)

Fundamentals of Supply Chain Management – McLaury/Spiegle

Engineer-to-Order (ETO) is a manufacturing process in which the component is designed, engineered, and built to specifications only after the order has been received.

It is a more dramatic evolution of a Make-to-Order supply chain.

The essence of ETO is building a unique product every time.

There may be components that are common from one product to another, but not in the same quantity as in repetitive manufacturing.

In the ETO world, the cost of poor quality can be very high.

The warranty costs and the cost of rework to replace an item in a complex assembly can have a serious negative effect on profit margins.

Quality must be part of the entire process, and not just part of purchasing and manufacturing—the typical focus of a repetitive manufacturer.

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Engineer to Order (ETO)

Fundamentals of Supply Chain Management – McLaury/Spiegle

The choice of strategy determines which lead time the customer experiences

ETO Strategy

MTO Strategy

ATO Strategy

MTS Strategy

Lead Times Experienced by Customers

Product Design

Lead Time

Procurement

Lead Time

Manufacturing

Lead Time

Customer Delivery

Lead Time

Make to Stock (MTS) features economies of scale, large volumes, long production runs, low variety, and multiple distribution channels

Assemble to Order (ATO) is when base components are made, stocked to forecast, but products are not assembled until customer order is received

Make to Order (MTO) relies on relatively small quantities, but more complexity

Engineer to Order (ETO) is used when products are unique and extensively customized for the specific needs of individual customers

Manufacturing Strategies

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Manufacturing Strategy for Manufacturing Process

Manufacturing processes:

Job Shop creates a custom product for each customer. High customization

Batch process manufactures a small quantity of an item in a single production run

Line Flow process has standard products with a limited number of variations moving on an assembly line through stages of production

Continuous Flow process is used to manufacture such items as gasoline, laundry detergent and chemicals. Inflexible processes. High capital investment

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Total Cost of Manufacturing (TCM) is the complete cost of producing and delivering products to your customers.

It incorporates both fixed and variable costs used in the manufacturing, storage, and delivery of the product.

It includes all costs associated with:

Production and Procurement activities

Inventory and Warehousing activities

Transportation activities

TCM is generally expressed as a cost per unit for each product.

Manufacturing Strategies and TCM

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Management

Supply Chain

LEAN and Six Sigma

LEAN and Six Sigma

LEAN – is an operating philosophy of waste reduction and value enhancement and was originally created as the Toyota Production System (TPS) by key Toyota executives.

Six Sigma – is an enterprise and supply chain-wide philosophy that emphasizes a commitment toward excellence, encompassing suppliers, employees, and customers. Identification and reduction of defects (errors).

LEAN and Six Sigma complement one another;

LEAN focuses on eliminating wastes and improving efficiency

Six Sigma focuses on reducing defects and variations

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LEAN + Six Sigma  Faster (speed) and Better (accuracy)

Both are philosophies - mindsets

Fundamentals of Supply Chain Management – McLaury/Spiegle

Management

Supply Chain

LEAN Manufacturing

LEAN History

Starting 1910’s, Henry Ford’s mass production line was a first breakthrough by using continuous assembly and flow systems that made parts find their way into finished products Video: Ford Model T – 100 Years Later (5 mins)

In the 1940’s, Taichii Ohno and Shigeo Shingo created the Toyota Production System (TPS), which incorporated Ford’s production system and other techniques to form the basis of what is now known as LEAN.

The term LEAN was first coined by John Krafcik in 1988 and the definition was expanded in the 1990 book, The Machine that Changed the World.

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Introduction

In the 1990s, Supply Chain Management combined:

Quick Response - the rapid replenishment of a customer's stock by a supplier with direct access to data from the customer's point of sale.

Efficient Consumer Response (ECR) - a strategy to increase the level of services to consumers through close cooperation among retailers, wholesalers, and manufacturers.

Just-in-Time (JIT) - an inventory strategy to decrease waste by receiving materials only when and as needed in the production process, thereby reducing inventory costs.

Keiretsu Relationships - involves companies both upstream and downstream of a manufacturing process, remaining independent but working closely together for mutual benefit

The combination of these approaches and concepts have emerged as the philosophies and practices known as Lean Manufacturing

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LEAN . . .

LEAN is NOT a tool box of methods, ideas, or methodologies

LEAN is a culture

LEAN provides value for customers through the use of the most efficient resources possible

LEAN is standard in many industries

LEAN often results in:

Large cost reductions

Improved quality

Increased customer service

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Understand “Value”

Value is the inherent worth of a product as judged by the customer, and reflected in its selling price and market demand.

Value is further defined as anything for which the customer is willing to pay.

Value Added Process

Process steps that transform or shape a product or service which is eventually sold to a customer.

Non-Value Added Process

Process steps that take time, resources, or space, but do not add value to the product or service

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The Seven Elements of LEAN Manufacturing

Waste Reduction

LEAN Layouts

Inventory, Setup Time, & Changeover Time Reduction

Small Batch Scheduling and Uniform Plant Loading

LEAN Supply Chain Relationships

Workforce Empowerment

Continuous Improvement

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The Elements of LEAN Manufacturing (continued)

(1) Waste Reduction

Firms reduce costs and add value by eliminating waste from the production system.

Waste encompasses wait times, inventories, material and people movement, processing steps, variability, any other non-value-adding activity.

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Before Waste is removed, processes are often scattered, which can negatively affect your customers

After Waste is removed, processes are more streamlined, resulting in more satisfied customers. You’ll also save your organization time and money

Fundamentals of Supply Chain Management – McLaury/Spiegle

The Eight Wastes (remember the acronym “DOWN TIME”) :

Waste Description
Defects Anything that does not meet the acceptance criteria
Overproduction Production before it is needed, or in excess of customer requirements. Providing a service that is not needed.
Waiting Elapsed time between processes when no work is being done
Non-Utilized Talent Underutilizing people’s talents, skills or knowledge. De-motivating the workforce by not asking for input or recognizing success
Transportation Unnecessary movement of materials or products
Inventory Excess products or materials not being processed
Motion/Movement Unnecessary movement of people. Multiple hand-offs
Extra-Processing Unnecessary steps in a process. Redundancies between processes. More work or higher quality than required by the customer
The Elements of LEAN Manufacturing (continued)

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(2) LEAN Layouts

Move people and materials when and where needed, and as soon as possible

Are very visual (lines of visibility are unobstructed) with operators at one processing center able to monitor work at another

Manufacturing cells

Process similar parts or components saving duplication of equipment and labor

Are often U-shaped to facilitate easier operator and material movements

The Elements of LEAN Manufacturing (continued)

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LEAN Layout

Before LEAN Layout

After LEAN Layout

(Example Sandwich Shop)

Fundamentals of Supply Chain Management – McLaury/Spiegle

Japanese S-Term English S-Term
1. Seiri Sort – Keep only necessary items in the workplace, eliminate the rest
2. Seiton Straighten – Organize and arrange items to promote an efficient workflow
3. Seiso Shine – Clean the work area so it is neat and tidy
4. Seiketsu Standardize – Schedule regular cleaning and maintenance
5. Shitsuke Sustain – Stick to the rules. Maintain and review the standards
The Five-S’s

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These were originally Japanese words relating to industrial housekeeping

5-S, or the five pillars of the visual workplace, is a systematic process of workplace organization.

“There is a place for everything, and everything should be in its’ place”

Fundamentals of Supply Chain Management – McLaury/Spiegle

(3) Inventory, Setup Time, & Changeover Time Reduction

The Elements of LEAN Manufacturing (continued)

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Some inventory may be necessary, but excess inventory is a waste

Reducing inventory levels can free up capital and reduce holding costs.

There is less likelihood of waste being created by obsolescence, expiry, spoilage, or damage with lower inventory levels.

Excess inventory takes up space, and costs money to hold, maintain, protect, secure, and insure.

It ties up financial capital which could be used for other aspects of the business.

Fundamentals of Supply Chain Management – McLaury/Spiegle

What do you see? . . .

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The water represents inventory. When the water level is high, you don’t see the rocks beneath the water, so you may not know that they are there.

The rocks represent hidden obstacles, problems, and issues.

Inventory can hid the underlying problems, but they are still there and can potentially create major issues in the supply chain.

Lowering inventory will help to expose the hidden problems. Once the problems are detected, they can be solved. The end result will be a smoother running supply chain with less inventory investment.

Fundamentals of Supply Chain Management – McLaury/Spiegle

Water level is high

Water level is low

Setup Time and Changeover Time Reduction

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Setup Time and Changeover Time are both considered a waste as they are times when the equipment is not performing its intended function; producing product.

Setup Time is the time taken to prepare and format the manufacturing equipment and systems for production.

Changeover Time is the time taken to adapt and modify the manufacturing equipment and systems to produce a different product or a new batch of the same product.

While setting up the equipment is a necessary function, if the set up time can be minimized, the difference will be more time available to produce. Both setup and changeover are non-value added operations and should be minimized as much as possible.

Fundamentals of Supply Chain Management – McLaury/Spiegle

The Elements of LEAN Manufacturing (continued)

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Fundamentals of Supply Chain Management – McLaury/Spiegle

(4) Small Batch Scheduling and Uniform Plant Loading

The ideal schedule is to produce every product as quickly as possible and at the same rate as customer demand.

In the real world, material availability, labor availability, and setup or changeover time influences the scheduling of large batches

Large batches can exacerbate the Bullwhip Effect as production in large batches creates an uneven workload

Production is not synchronized with customer demand making a pull system impossible.

Throughput times in manufacturing go up and work-in-process inventory goes up, creating more waste in the system.

Think of a snake trying to swallow a large meal.

Problem:

Demand exceeds capacity at points in the planning horizon.

Matching the production plan to follow demand exactly can contribute to inefficiency and waste.

Uniform Plant Loading:

Planning up to capacity in earlier time periods to meet demand in later time periods.

Also called “front-loading” the plan or “leveling” the plan.

Production schedule is frozen in the up-front time period (i.e., month)

Helps suppliers better plan production.

Uniform Plant Loading (i.e., level-loading the plan)

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Fundamentals of Supply Chain Management – McLaury/Spiegle

Over-capacity

Under-capacity

Production

shifted forward

(5) LEAN Supply Chain Relationships

Suppliers and customers work to remove waste, reduce cost, and improve quality and customer service

JIT purchasing includes delivering smaller quantities, at right time, delivered to the right location, in the right quantities

Firms develop lean supply chain relationships with key customers. Mutual dependency and benefits occur among these partners.

The Elements of LEAN Manufacturing (continued)

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Respect for all people must exist for an organization to be at its best

Flatter hierarchy than traditional organizations.

Ordinary workers given great responsibility.

Supply chain members work together in cross functional teams.

The Role of Workers, Management, and Suppliers (refer to the 3 slides which follow).

The goal is NOT to reduce the number of people in an organization, it is to use people resources more wisely.

Respect for People

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(6) Workforce Commitment

Managers must support LEAN Manufacturing by providing subordinates with the skills, tools, time, and other necessary resources to identify problems and implement solutions

(7) Continuous Improvement (Kaizen)

Continuous approach to reduce process, delivery, and quality problems, such as machine breakdown problems, setup problems, and internal quality problems

The Elements of LEAN Manufacturing (continued)

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LEAN Manufacturing and the Environment

LEAN Green Practices

Reduce the cost of environmental management

Lead to improved environmental performance.

Increase the possibility that firms will adopt more advanced environmental management

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Carbon-neutral

offsetting the carbon footprint of a firm’s operations

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TOYOTA PLANT TOUR (KENTUCKY)

Management

Supply Chain

Six Sigma

What is Six Sigma?

A quality management process:

Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes.

The goal of Six Sigma is to attain less than 3.4 Defects Per Million Opportunities (DPMO)

Six Sigma is a structured and data-driven approach to drive a near-perfect quality goal, i.e., “Zero Defects”

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Classical versus Six Sigma Quality

The Classical View of Quality “99% Good” (3.8s) The Six Sigma View of Quality “99.99966% Good” (6s)
20,000 lost articles of mail per hour 7 lost articles of mail per hour
15 minutes of unsafe drinking water each day 1 minute of unsafe drinking water every 7 months
5,000 incorrect surgical operations per week 1.7 incorrect surgical operations per week
2 unsafe landings at most major airports each day 1 unsafe landing at most major airports every 5 years
200,000 incorrect drug prescriptions per year 68 incorrect drug prescriptions per year
7 hours without electricity each month 1 hour without electricity every 34 years
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There are three main foundational aspects of Six Sigma:

Quality is defined by the customer: Customers expect performance, reliability, competitive prices, on-time delivery, good service, clear and correct transaction processing and more.

It is vital to provide what the customers need to achieve customer satisfaction.

Use of technical tools: such as statistical quality control, and the seven tools of quality. Six Sigma provides a statistical approach for solving any problem and thereby improves the quality level of the product as well as the company.

Six Sigma Methodology

Quality

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All employees should be trained to use technical tools.

Six Sigma is concerned with the permanent fix to quality problems and seeks to identify and correct the root cause of the problem.

People involvement: Six Sigma follows a structured methodology, and has defined roles for the participants.

A company must involve all its employees in the Six Sigma program, and provide opportunities and incentives for employees to focus their talents and ability to satisfy customers.

All employees are responsible to identify quality problems.

It is important that all Six Sigma team members have a well-defined role with measurable objectives.

The members of an organization are assigned specific Six Sigma "roles"

Six Sigma Methodology

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DMAIC Methodology

What is the customers’ expectation of the process?

What is the frequency of defects?

Why, when and where do defects occur?

How can we fix the process?

How can we make the process stay fixed?

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Six Sigma Training and Certification Levels

Levels Description
Yellow Belt Has a basic understanding of Six Sigma Methodology and the tools in the DMAIC problem solving process. A team member that reviews processes and process improvements in support of a Six Sigma process improvement project. A person who has passed the Green Belt certification exam but has not yet completed a Six Sigma project..
Green Belt A Six Sigma trained individual that can work as a team member on complex project and also lead small, carefully defined Six Sigma projects. On complex Six Sigma projects, green belts work closely with the Black Belt team leader to assist with data collection and analysis, and to keep the team functioning through all phases of the project.
Brown Belt A Six Sigma Green Belt who has passed the Black Belt certification examination but has not yet completed their second Six Sigma project
Black Belt A full-time quality professional who has a thorough knowledge of Six Sigma philosophies and principles, and possesses technical and managerial process improvement / innovation skills. Leads the Six Sigma project team and problem-solving efforts. Identifies projects and selects project team members. Trains and coaches project teams. A Black Belt is typically mentored by a master black belt
Master Black Belt Is a career path. A Master Black Belt has successfully led ten or more teams through complex Six Sigma projects. A proven change agent, leader, facilitator, and technical expert in Six Sigma. A seasoned individual with a proven mastery of process variability reduction, and waste reduction. Acts as an advisor to executives, and a coach and mentor on projects that are led by black belts and green belts. Functions as the keeper of the Six Sigma process, and can effectively provide Six Sigma training at all levels
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Six Sigma certification levels based on training, knowledge, and experience.

Total Quality Management

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Total Quality Management (TQM) is a management philosophy based on the principle that every employee must be committed to maintaining high standards of work in every aspect of a company's operations, focused on meeting customer needs and organizational objectives.

TQM is a combination of quality and management tools designed to increase business and reduce losses resulting from wasteful practices.

When implemented, Six Sigma is an integral part of Total Quality Management.

The key principles of TQM are:

Management Commitment

Employee Empowerment

Fact Based Decision Making

Continuous Improvement

Customer Focus

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Total Quality Management (continued)

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There is no single academic formalization of total quality, but noted quality gurus, i.e., experts, all contributed to the basic framework

W. Edwards Deming - is widely considered the father of TQM. He is the creator of the Plan-Do-Check-Act model.

Joseph Juran – defined quality as “fitness for use”. He developed the concept of the cost of quality.

Philip Crosby – coined the phrase “quality is free” (which is also the title of his book) as defects are costly. He introduced the concepts of zero defects, and focus on prevention and not inspection.

Kaoru Ishikawa – developed one the first tools in the quality management process, the cause and effect diagram, which is also called the "Ishikawa" or "fishbone" diagram.

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W. Edwards Deming

Create constancy of purpose to improve product and service

Adopt the new philosophy

Cease dependence on inspection to improve quality

End the practice of awarding business on the basis of price

Constantly improve the production and service system

Institute training on the job

Institute leadership

Drive out fear

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Break down barriers between departments

Eliminate slogans and exhortations

Eliminate quotas

Remove barriers to pride of workmanship

Institute program of self-improvement

Put everyone to work to accomplish the transformation

“In God we trust.

All others bring data.”

Fundamentals of Supply Chain Management – McLaury/Spiegle

He stressed management’s responsibility for quality, and he developed 14 points to guide companies in quality improvement.

Voice of the Customer (VOC) is a term used in business to describe the in-depth process of capturing internal and external customer's stated and unstated expectations, preferences, likes, and dislikes.

TQM is all about meeting or exceeding customer expectations, so capturing the Voice of the Customer is essential for TQM to be successful.

The VOC can be captured in a variety of ways:

Customer Interviews

Market Surveys

Focus Groups

Customer Specifications

Observation

Warranty Data

Field Reports

Complaint Logs

Etc.

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Voice of the Customer (VOC)

This data is used to identify the quality attributes needed for a process or product.

Quality Planning, identify internal / external customers & needs:

Develop products satisfying those needs.

Mangers set goals, priorities, and compare results.

Quality Control, determine what to control:

Establish standards of performance.

Measure performance, interpret the difference, take action.

Quality Improvement, show need for improvement:

Identify projects for improvement.

Implement remedies

Provide control to maintain improvement.

Joseph Juran

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Cost of Quality

Cost of Quality is an approach that supports a company’s efforts to determine the level of resources necessary to prevent poor quality, and to evaluate the quality of the company’s products and services.

Any cost that would not have occurred if quality was perfect, contributes to the cost of quality.

This information will help a company to determine the benefits and savings generated by potential process improvements.

Cost of Quality can be divided into the:

Cost of Good Quality

Appraisal Costs

Prevention Costs

Cost of Poor Quality

Internal Failure Costs

External Failure Costs

Philip Crosby

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He introduced the concepts of zero defects, and focus on prevention and not inspection.

Philip Crosby demonstrated what a powerful tool the cost of quality could be to raise awareness of the importance of quality.

He referred to the measure as the “price of nonconformance” and argued that organizations choose to pay for poor quality.

He introduced the four absolutes of quality:

The definition of quality is conformance to requirements

The system of quality is prevention.

Performance standard is zero defects.

The measure of quality is the price of nonconformance

Kaoru Ishikawa

Developed one the first tools in the quality management process, the Cause and Effect Diagram, which is also called the "Ishikawa" or "fishbone" diagram.

With this tool, the user can see all possible causes of a problem to help find the root cause.

He is also known as the father of quality circles and helped bring this concept into the mainstream.

Further, he was a proponent of continuous customer service, meaning that a customer should continue receiving service even after receiving the product.

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Malcolm Baldrige National Quality Award

Objectives

Stimulate firms to improve

Recognize firms for quality achievements

Establish guidelines so that organizations can evaluate their improvement and provide guidance to others

Categories Measured

Leadership

Strategic Planning

Customer and Market Focus

Information and Analysis

Human Resource Focus

Process Management

Business Results

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Workers identify and correct quality problems.

Seven Tools of Quality Control:

Check Sheets

Cause and Effect Diagrams (aka, “Ishikawa” or "fishbone" diagram)

Control Charts

Histograms

Pareto Analysis

Scatter Diagrams

Stratification (aka, Flow Diagrams)

Quality Tools

Quality

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Statistical Tools – Check Sheets

Used to determine frequencies for specific problems

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Statistical Tools - Histograms

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Statistical Tools – Pareto Analysis

For presenting data in an organized fashion, indicating process problems from most to least severe.

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Statistical Tools - Cause and Effect Diagrams

Used to aid in brainstorming and isolating the causes of a problem.

Process out-of-control

Process out-of-control

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Firms:

Gather process performance data

Create control charts to monitor process variability

Then collect sample measurements of the process over time and plot on charts.

Natural Variations

Expected and random (can’t control)

Assignable Variations

Have a specific cause (can control)

Variable Data

Continuous (e.g., weight)

Attribute Data

Indicate some attribute such as color and satisfaction, or beauty.

Allows firms to:

Visually monitor process performance

Compare the performance to desired levels or standards

Take corrective action as necessary

Statistical Tools – Control Charts

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Customer Flow at a Movie Theater

Customer arrives and parks car

Customer buys a ticket

Customer enters theater

Customer searches for and finds a seat

Customer enters concession line

Customer buys concessions

Customer watches the movie

Customer exits the parking lot

Customer walks to the car

Customer leaves Movie Theater

Customer enters Movie Theater

Customer enters the ticket line