Poka yoke examples in hotel industry

~~

162

Managing Quality

Chapter outline

8.1 Quality as customer judgments 8.2 Manufacturing quality 8.3 Service quality 8.4 Quality planning, control, and improvement 8.5 Ensuring quality in the supply chain 8.6 Quality, cost of quality, and financial performance 8.7 Quality pioneers. r

8.8 ISO 9000 standards 8.9 Malcolm Baldrige Award 8.10 Why some quality improvement efforts fail

8.11 Key points and terms

Quality is one of the four key objectives of operations, along with cost, flexibility, and delivery. While quality management is cross-functional in nature and involves the entire organization, operations has a special responsibility to produce a quality product for the customer. This requires the cooperation of the entire organization and careful attention to the management and control of quality. This chapter dis- cusses the management of quality, and the next chapter deals with quality control and improvement.

There has been tremendous interest in managing quality in recent years. One can hardly pick up a newspaper without reading about the Baldrige Award, ISO 9000, Six Sigma, or the approach used by a particular company to improve its quality. These topics are treated here along with other aspects of managing for quality.

Quality management has had many different meanings over the years. In the early 1900s, managing for quality meant inspection, which was the primary method used to ensure quality products. In the 1940s, managing for quality took on a statistical connotation as statistical methods began to be used to control qual- ity within the natural variation of the transformation process. Statistics pioneer Walter Shewhart developed statistical control charts to maintain a transformation process within a state of statistical control and thus reduce the amount of inspec- tion required. In the 1960s, the meaning of the term quality management was ex- panded to include the entire organization as all functions helped in designing and producing quality. Quality was seen not as just an act of production; rather, it was something the entire organization should strive to provide for the customer. Now,

Chapter 8 Managing Quality 163

Operations Leader The Ritz~Carlton Hotel Company, LLC., Malcolm 1 Baldrige Award Winner

- h e Ritz-Carlton Hotel Company, L.L.C., is a premier otel management company that develops and oper-

a es 77 five-star resorts and luxury hotels in 25 coun- tries. The company targets primarily industry executives,

~4-1':? meeting planners, and presti- ~ gious travelers. It employs 38,000

- -u: Rn z-C.A.RI:n_>N '• people who are highly trained = d motivated to provide quality service. The Ritz- :.arlton Hotel Company, now owned by Marriott, has

n many recognitions and is the only hotel company - w in two Malcolm Baldrige awards. Many of its :·operties have been recognized as "best hotels" by :_ch magazines as Travei + Leisure, Conde Nast Trav- = er, and US News & World Report.

Ritz-Carlton translates customer requirements into :rployee requirements through its Gold Standards =- its strategic planning process. They have taken the -- 'lgs their customers want most and come up with --= simplest ways to provide them . Ritz-Carlton's data - .v that its employees' understanding of the Gold

:-= dards is directly correlated with guest satisfaction. ::mployees respond to a customer' requirements

- ::K>th the team and individual levels. They provide ly personal, individual service. Customer likes and

_ es are captured and entered into a computerized

guest history that provides information on the personal preferences of hundreds of thousands of repeat Ritz-Carlton guests. When a customer re- turns, the information is provided to the employees serving that customer. Service is then delivered at the lowest possible levels in the organization.

If an employee detects a dislike or problem, the employee is empowered to make the customer happy immediately, or the employee can call on any other employee to assist. This is called lateral service. Such a system depends on well-trained, perceptive, and motivated employees along with a well-defined service delivery system. With more than a million customer contacts on a busy day, Ritz-Carlton under- stands that its customer and quality requirements must be driven by each individual employee at the lowest level of the organization.

Results indicate that the Ritz-Carlton hotels are doing an exceptional job of translating customer requirements into employee behavior and excellent systems. Ninety-seven percent of Ritz-Carlton's cus- tomers report having a "memorable experience" while staying in one of their hotels.

Source: Adapted from Stephen George and Arnold Weimerskirch (1998); and www.ritzcarlton.com, 2012 . Logo reprinted with permission. All rights reserved.

quality management is taking on a broader meaning, including continuous improvement, competitive advantage, and a customer focus. The Operations Leader box shows how Ritz-Carlton Hotel, a two-time winner of the Malcolm Baldrige National Quality Award, is implementing modern quality management principles.

QUALITY AS CUSTOMER JUDGMENTS

Quality is defined here as "meeting, or exceeding, customer requirements now and in the future." This means that the product or service is fit for the customer's use. Fit- ness for use is related to the benefits received by the customer and to customer satis- faction . Only the customer, not the producer, can determine it.

Customer satisfaction is a relative concept that varies from one customer to another. Also, a customer may be satisfied with products that are offered today but may not be satisfied with them in the future. For example, while one customer may consider a Ford pickup truck perfectly satisfactory, another may not. But if the Ford customer were to win the lottery or become more environmentally

164 Part Three Quality

conscious, the Ford pickup truck may no longer be satis =- tory; now the customer may prefer a Mercedes or a Le SUV. Each person defines quality in relation to his or her O' expectations at a particular point in time.

RITZ-CARLTON. Any of the "Ladies and Gentlemen of the Ritz-Carlton" can spend up to $2,000 to immediately correct a guest's problem or handle a complaint. Its employees are the key factor in Ritz-Carlton's receipt of two Malcolm Baldrige National Quality awards and the highest guest satisfaction level in the luxury hotel industry.

Quality, in addition, is not just defined based on the p ro.:- uct or the service itself. Whether or not a person will be sa::= fied depends on how the product or a service is to ::-.:: consumed today and in the future. Customer satisfaction != also affected by what the customer was led to expect befo:-=: purchasing the product or service. Does the customer unde:- stand how to use the product or the service that is being o:- fered for sale? This is an important question since the wror.~ expectations can lead the customer to use the product or se::-- vice incorrectly. In the best case, the product may work or t:h.? service may be delivered. In the worst case, the product rna.~ be damaged or the service may lead to personal injury. The producer may control how good the product or service inher-

ently is but it also has to be aware of what information to provide and what expec- tations to set so that usage does not lead to dissatisfied customers.

From the viewpoint of the producer, variation from specifications cannot be tolerated. The producer must specify the quality attributes of the product or th e service as carefully as possible and then st,rive to meet those specifications while improving the production and delivery process over time. Whether the result- ing product or service meets the customer's requirements will be judged ultimately by the customer.

8.2 MANUFACTURING QUALITY

~~ In the next section we define service quality more formally; here we focus on de- fining product quality. For a manufactured good, the following dimensions of quality can be useful in understanding product quality:

• Quality of design • Quality of conformance • The "abilities" • Field service

Quality of design is determined before a product is produced. This determina- tion is usually the primary responsibility of a cross-functional product design team, including members from marketing, engineering, operations, and other functions.

Quality of design is determined by market research, the design concept, and specifications. Market research ordinarily is aimed at assessing customer needs. Since there are different ways to meet those needs, a particular design concept must be developed. For example, the customer may need inexpensive and energy- efficient transportation-a need that can be met by a large number of different automobiles, each representing a different design concept. The design concept then results in a set of specifications for the product, for example, a digital blueprint and bill of materials.

Quality of conformance means producing a product to meet the specifications. When the product conforms to specifications, operations considers it a quality

Chapter 8 Managing Quality 165

product regardless of the quality of the design specifications. For example, inexpen- sive shoes will have high quality of conformance if they are made according to specifications and low quality of conformance if they do not meet specifications. Quality of design and quality of conformance thus represent two different uses of the term quality.

Another aspect of quality involves the so-called abilities: availability, reliability, and maintainability. Each of these terms has a time dimension and thus extends the meaning of quality beyond the beginning or starting quality level. The addi- tion of time to the definition of quality is, of course, necessary to reflect continued satisfaction by the customer.

Availability defines the continuity of service to the customer. A product is available if it is in an operational state and not down for repairs or maintenance. In the military, availability is equated with operational readiness. Availability can be measured quantitatively as follows :

Uptime Availability = ------- -

Uptime + Downtime

Reliability refers to the length of time a product can be used before it fails. For- mally speaking, reliability is the probability that a product will function for a speci- fied period of time without failure. The reliability of a lightbulb for 1000 hours may, for example, be 80 percent. In this case, if many lightbulbs are tested for 1000 hours, 80 percent of them will remain lighted the entire time and 20 percent will fail within the 1000 hours. The reliability of a product is also related to mean time between fail- ure (MTBF), which is just the average time the product functions from one failure to the next. The longer the MTBF, the more reliable the product.

Maintainability refers to the restoration of a product or service once it has failed. All cust omers consider maintenance or repairs a nuisance. Thus, a high degree of maintainability is desired so that a product can be restored to use quickly. For example, the Caterpillar Company supports excellent maintainability by supplying spare parts anywhere in the world within 48 hours. Maintainability can be measured by the mean time to repair (MTTR) the product.

Availability, then, is a combination of reliability and maintainability. If a product is high in both reliability and maintainability, it will also be high in availability. The above relationship for availability can be restated in terms of MTBF and MTTR:

. . . MTBF A va1lab1hty = MTBF + MTTR

For example, if a product has an MTBF of eight hours and an MTTR of two hours each time it fails, its availability will be 80 percent.

Field service, the last dimension of quality, represents warranty and repair or replacement of the product after it has been sold. Field service is also called cus- tomer service, sales service, or just service. Field service is intangible, since it is related to variables such as promptness, competence, and integrity. The customer expects that any problems will be corrected quickly, in a satisfactory manner, and with a high degree of honesty and courtesy.

The four different dimensions of quality are summarized in Figure 8.P As can be seen there, quality is more than just good product design; it extends to quality

1 These dimensions are closel y related t o Ga rv in 's (1987) w ell-know n dimensions of quality.

/

166 Part Three Quality

FIGURE 8.1 Different types of quality.

Quality of market research

Quality of design Quality of concept

Quality of specification

Technology

Quality of conformance Employees

Management Customer satisfaction

Reliability

Availability Maintainability

Logistical support

Promptness

Field service Competence

Integrity

control of production, quality over the life of the product, and quality of fiel service after the sale.

8.3 SERVICE QUALITY

~ "OM Featuring

St. Alexius," Vol. X

The definition and measurement of service quality is quite different from that of manufacturing quality. Service quality has dimensions of the facilitating good, tangible (explicit) service, and psychological (implicit) service. While the facilitating- good quality can be measured by using the dimensions of manufacturing, tangible service and psychological service require different measurements.

Manufacturing measurements can be largely objective while many service mea- sures are perceptual or subjective. For example, manufacturing design quality can be measured by the product features offered, such as the speed of acceleration of an automobile and its normal braking distance. The conformance quality can be measured by the cost of scrap and rework in the factory. While not everything is measured objectively in manufacturing, with service quality the very opposite is the case- almost all the measures are subjective.

The most popular approach to evaluating service quality is called SERVQUAL.2

SERVQUAL assesses customer perceptions about five dimensions of a provided service:

1. Tangibles. The appearance of the physical facilities, equipment, and personnel from the service firm. For example, if a restaurant is dirty and not presentable and the employees are disheveled looking, the tangible quality will be low.

2. Reliability. The ability of the service firm to perform the promised service de- pendably and accurately without errors. For example, if a restaurant takes a

2 Parasuraman et al. (1991, 1988).

Chapter 8 Managing Quality 167

reservation for 7:00p.m. and the customer is not seated promptly or the waiters bring the wrong meal, the reliability will be low. Note that reliability for service (which is more accurately called conformance) is defined differently from reliability for manufacturing.

3. Responsiveness. The willingness of the service firm to provide service that is prompt and helpful to the customer. In the restaurant, for example, the meal should be provided in a timely fashion and with help when needed to under- stand the menu.

' 4. Assurance. The knowledge and courtesy exhibited by employees of the service firm and their ability to convey trust and confidence. In the restaurant example, does the server know the menu and is the server courteous in providing the service?

5. Empathy. The caring, individualized attention that the service firm provides to its customers. Does the server in the restaurant help each customer and show concern for the customers?

As can be seen, these dimensions of service are very different from manufacturing and reflect the close interaction the employees have with the customer in service delivery.

SERVQUAL uses a questionnaire consisting of 22 items (or questions) that in aggregate measure these five dimensions. Service quality is based on the gap (or mathematical difference) between what the customer expects on each dimension and what is provided. For example, if the customer does not expect a lot of empa- thy, the quality can be high even though not much empathy is provided. The use of gaps as a measure of service quality has been debated vigorously. While some argue that the perceived level of service provided should simply measure service quality, others claim that the gap between what is provided and what is expected is a better measure of service quality. Although the five dimensions of SERVQUAL have a high level of acceptance for overall quality measurement, the specifics of SERVQUAL measurement have been hotly debated in the literature.3 Neverthe- less, SERVQUAL is used widely in practice to measure retail services such as banking, telephone service, retail stores, and repair services.

QUALITY PLANNING, CONTROL, AND IMPROVEMENT

In this section we will explain how the dimensions of product quality or service quality can be part of a process to manage quality. The process of quality planning, control, and improvement requires continual interaction between the customer, the operations function, and other parts of a business. Figure 8.2 illustrates how these interactions occur through a quality cycle. The customer needs are determined, usu- ally through the marketing function . These needs are either expressed directly by the customer or discovered through a process of market research. Engineering, in conjunction with other departments, designs a product to meet those needs or works with the customer 6n design specifications that fit within current or future production capabilities. Quality' function deployment is a useful technique for align- ing the voice of the customer (customer needs) with the engineering specifications.

Once the design concept and specifications have been completed, the quality of design has been established. Operations, as part of the quality team, then produces

3 L. J. Morrison Coult hard (2004).

I.

I I I I

I

168 Part Three Quality

FIGURE 8.2 The quality cycle.

FIGURE 8.3 The quality cycle in a mass transit system.

Needs CUSTOMER Quality needs

',,'',,,

Product

MARKETING Interprets customer

needs Works with customer

to design product

',,',,,'',,,

Interpretation of needs

ENGINEERING

-------------------, I I I

OPERATIONS

Produces the product

I I I I I I

Defines design concept . . . or service Prepares specifications Spenflcahons 1 1 1 • Defines quality QUALITY CONTROL

characteristics Plans and monitors quality

I I I I I I I I

1----------------------------- Concurrent Engineering Team -- 1

the product as specified. Operations must continually ensure that the product i5 produced as specified by insisting on quality of conformance. This ordinarily i5 done through proper training, supervision, machine maintenance, and operator inspections. In addition to meeting specifications, operations should strive to re- duce the variance of its processes and products over time. In this way continuous improvement occurs.

Figure 8.3 is a description of the quality cycle for a mass transit system. In this case, a planning agency, in place of marketing, interprets customer needs. Another

County planning Regional planning Riders'

State transportation agency needs

Operations office )) ~

Planner Routes Method Evaluation

Scheduler Schedules Facilities Inspections

Public .... Budgets Equipment Audits f-.. ""'- Surveys ~ ~ ~

Hearings

~

Chapter 8 Managing Q uality 169

planner, working in greater detail, then determines the design concept and the specifications for service . The operations function delivers the service, and the public then restates its needs or confirms that the present service is satisfactory. The quality cycle should exist in every organization to ensure that all aspects of quality are planned, controlled, and continually improved. Feedback from the cus- tomer is essential to produce quality products and services.

The implementation of planning, control, and improvement of quality through the quality cycle requires this sequence of steps:

1. Define quality attributes on the basis of customer needs. 2. Decide how to measure each attribute.

3. Set quality standards. 4. Establish appropriate tests for each standard. 5. Find and correct causes of poor quality.

6. Continue to make improvements.

Planning for quality must always start with the product attributes. The qual- ity planner determines which attributes are important to customer satisfaction and which are not. For example, the manufacturer of L'eggs panty hose has determined three important quality attributes for its product: (1) a comfortable fit, (2) an attractive appearance, and (3) a wear life that is considered reason- able by the customer. It has also decided that the correct amount of material in various parts of the panty hose will provide a comfortable fit, fabric that is dyed in popular colors and is free from defects will provide an attractive ap- pearance, and choice yarns and selected stitch formations will provide accept- able wear life .

A method must then be devised to test and measure quality for each of the product' attributes. For example, the manufacturer of L'eggs has developed a spe- cial cross-stretcher that can test the strength of its product, and it is used on a cer- tain percentage of all its panty hose. L' eggs are also inspected visually for fabric defects, seaming defects, and shade variations.

After deciding on the measurement techniques to use, the quality planner should set standards that describe the amount of quality required on each attri- bute. Usually these standards are stated as tolerances(± quantities), or minimum and maximum acceptable limits. Standards can also be set as desired targets. For example, a standard on L' eggs panty hose is the amount of pressure that the gar- ment must withstand on the cross-stretcher.

After standards have been set, a testing program should be established. In the case of L' eggs, this program is based on sampling procedures since it would be far too costly to test and inspect each of the millions of pairs of panty hose produced each year.

It is not enough simply to inspect the products for defects. As the saying goes, "You cannot inspect quality into a product, you must build it in." Upon discover- ing defects, quality personnel and workers should find the underlying causes and correct them. Causes 'of poor quality can include improper raw materials, lack of training, unclear procedures, a faulty machine, and so on. When the causes of poor quality are regularly found and corrected, the production system will be under constant control and improvement will be possible.

An even better approach is to prevent errors from occurring in the first place. This requires designing products and internal procedures that are mistake-proof,

170 Part Three Quality

~ "Process System Improvement:

Implementation," Vol. XI

FIGURE 8.4 Examples of mistake proofing (poka-yoke).

working with suppliers to prevent errors, training employees before problems occur, and performing preventive machine maintenance. Nevertheless, when er- rors do occur, they need to be corrected quickly and the system itself changed to prevent errors of the same type from recurring.

The concept of mistake-proofing was developed in the 1960s by Shigeo Shingo, who worked for Toyota Motors in Japan. It was called Poka-yoke (pronounced poh-kah-yoh-kay), which means "mistake-proofing" in Japanese. The idea of Poka-yoke is to design the product and process so that it is impossible for humans to make mistakes or for mistakes to be easily d etected by humans when they do occur. A Poka-yoke device is thus any mechanism that prevents mistakes from oc- curring during the production, delivery, or consumption of a good or service or that allows mistakes to b e identified easily, often at a glance. For example, your microwave will not start if the door is open, and your car doors will not lock when the key is in the ignition. Parts should be designed that cannot be put on backward or left off the product by mistake. Service should be designed so that the customer gets exactly what he or she ordered. For example, many rides in a children's amusement park have height requirements. To prevent a child who does not meet the height requirement from getting on a ride, riders have to walk past a measur- ing post at the entrance to the ride, with the height requirement clearly marked on the post. A ride operator can quickly gauge whether a child meets the height re- quirement before allowing the child to get on the ride . If the error cannot be pre- vented from occurring, it should be made easy to detect. This is the Poka-yoke approach. For more examples of mistake-proofing, s~e Figure 8.4.

Medical gas outlets are designed so proper valves fit in only one outlet.

ATM - :~.- : = !. .•

New generation ATMs perform transactions without the card leaving your hand.

Scald protectors close water flow if the water temperature becomes too hot.

These school buses have a wire loop on the bumpe r that swings out to insure no children are hidden under the hood.

Chapter 8 M anaging Quality 171

8.5 ENSURING QUALITY IN THE SUPPLY CHAIN

Recall that product quality or service quality should be defined by the customer and that the cycle of quality planning, control, and improvement is driven by customer needs. Therefore, the customer is an important part of not only the operations function but also the entire supply chain in driving quality perfor- mance in a firm. Below, we focus on ensuring quality in the supply chain and the role that suppliers play.

For many products and services, more than 50 percent of the product is pur- chased from suppliers. Indeed, with outsourcing 100 percent of the product can be sourced from suppliers. For example, the iPod and iPhone are completely out- sourced by Apple, Inc., except for the design, which is done in-house.

In working with suppliers there are several principles that should be followed. First, the supplier should be involved in the design of the product to maximize the prevention of design defects from the start (Poka-yoke). Suppliers often can recom- mend important materials or services that can improve quality or prevent defects from occurring within transformation processes that suppliers have responsibility for and control over.

When a product is complex, it is important that the suppliers maintain very high levels of quality to ensure that the final product has the required quality. A concept called rolled yield accounts for the cumulative defect rate observed by the final customer. For example, suppose a product or service has 100 components or parts and each part has a yield of 99 percent (1 percent defective). Then the overall yield of the final product is obtained by multiplying the yields of all the individual producers. Since there are 100 producers with the same yield (.99), in this case the rolled yield is .99 X .99 X .99 . .. X .99 (100 times):

Rolled yield = (.99) 100 = .366

As can be seen, the rolled yield is only 36.6 percent for the final product. Therefore, the quality provided by the suppliers must be much higher to ensure a rolled yield of, say, 99 percent in the final product or service. For a 99 percent rolled yield, supplier quality must be 99.99 percent for each of the 100 suppliers.

Supplier management requires more than simply selecting suppliers and mea- suring quality compliance. Operations must also manage risk and ensure ongoing process control by suppliers. The U.S. Consumer Product Safety Commission launched 473 recalls on 110 million units produced in 2007. Those recalls included unsafe toys, household products, and recreational items. The toys drew the most attention with warnings about the hazards of lead paint, choking, swallowing, cuts, and strangulation. Much attention was focused on defective toys and other products outsourced to China. The attention to toy recalls led to the passage of the U.S. Consumer Product Safety Improvement Act of 2008. This law sets new re- quirements for products aimed primarily at children below the age of 12, includ- ing third-party testing by laboratories approved by the Consumer Product Safety Commission. In 2007 there were also 400 drug, food, and pet food recalls by the Food and Drug Administration and 600 motor vehicle safety recalls. In many cases, these were quality failures b y suppliers of the product, not by the selling firm . Nevertheless, the selling firm was legally responsible for the recall.

Supplier quality management thus requires a system not only to select suppli- ers but to manage them on an ongoing basis. Managing suppliers is more than a

I I I I i

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172 Part Three Quality

Operations Leader Boeing's Supplier Rating System Focuses on Quality Improvement

In 2010, Boeing, the world's largest aerospace company, spent $36 billion on 17,525 sup- pliers located in 52 countries to support the manufacture of complex, advanced-technology products ranging from com - mercial and military aircraft to satellites to weaponry systems to electronic and defense systems to launch sys- tems to advanced information and communication sys- tems. Suppliers play a critical role in helping Boeing meet customer product requirements and delivery man- dates. With so many suppliers involved, how does Boe- ing manage to keep track of supplier performance, especially those who may not be performing as well as they should and are in need of help?

The answer lies with its enterprise-wide supplier performance rating system, a system that emerged in 1998 to standardize what Boeing expects, in terms of performance, from its suppliers. In 2008, the Aero- space Industries Association designated this system with the recognition of being the industry's best sup- plier rating system.

Boeing grades its suppliers in three performance categories-quality performance, delivery perfor- mance, and general performance. Supplier perfor- mance in each category is tracked on a monthly basis and compared to thresholds that then determine which of five colors a supplier receives: Red (Unsatis- factory), Yellow (Improvement Needed), Bronze (Satis- factory), Silver (Very Good), and Gold (Exceptional). Take delivery performance, for example. A supplier who has a "below 90 percent" average for on-time delivery for a 12-month period receives a Red flag, a "90 percent" average for on-time delivery for a 12-month period receives a Yellow flag, a "96 percent"

average on delivery for a 12-month period receives a Bronze flag, a "98 percen t " average for on-time delive ry for a 12-month period re - ceives a Silver flag, and a "1 00 percent" average on-

time delivery for a 12-month period receives a Go ld flag. With the quality performance category, similar thresholds for the various colored flags are: Re d ( < 98 percent acceptance rate, on average), Yellow (98 percent acceptance rate, on average), Bronze (99.55 percent acceptance rate, on average), Silver (99.8 percent acceptance rate, on average), an d Gold (1 00 percent acceptance rate, on average).

The supplier ratings are available at three level s of visibility: the site level, the business-group level, and the company level. More importantly, consistent with the concept o f 360-degree feedback, suppliers get to see their performance ratings and learn from them. Suppliers can access not only the evaluations by performance category but also detailed reports at the incident level (e.g., an incident involving a non- conforming shipment of supplier products).

Boeing uses its supplier rating performance sys- tem not only to encourage and help its suppliers im- prove but also to help various Boeing units select and partner with capable suppliers. Exceptionally per- forming suppliers are eligible to be recognized with the annual Boeing Performance Excellence award, which makes them candidates for the Supplier of the Year award from Boeing.

Source: Kirsten Parks and Timothy Connor, "The Way to Engage," Quality Progress 44, no. 1 (April 2011}, pp. 20-27; www.boeing.com, 2012; www.boeingsupplier.com/index. html, 2010.

matter of ensuring compliance to standards through incoming inspection. Control over the outsourced process is also required. Certifying the supplier can accom- plish this. Supplier certification means the supplier has control over its processe and can pass an ISO 9000 type of audit, at the very least. The audit ensures that there is a quality system in place, including documented procedures, training, and ongoing statistical control of the process to prevent defects from occurring . A certification audit is done by the customer or an ISO 9000 auditor and can als o be obtained for the new-product design process .

Chapter 8 Managing Quality 173

Some suppliers still do not seem to understand the need for a system to plan, control, and improve quality. In the United States emphasis often is placed on price, and the suppliers may have poor quality systems. What is required is supplier selection that ensures that an adequate quality system is in place through supplier certification.

In selecting a supplier, the price and the product samples may look good, but is this enough? A typical item sourced from an overseas supplier encountered the following issues:

• The samples submitted to the buyer were "jewelry," that is, carefully selected items that were not being produced by a reliable production process. The sam- ples were actually carefully handmade and inspected to ensure their quality.

• In the production process, quality was actually being inspected into the product with only a 60 percent yield at final inspection. This means the production pro- cess was not capable of producing consistently good quality.

• Small lots were not feasible since production equipment had been set up for long runs, with questionable quality discovered later, after production.

• The production cycle time was long and variable, resulting in large inventories.

This example indicates why certified suppliers are necessary to ensure that suppli- ers have a good quality system behind their products and are not merely provid- ing good samples at a low price, only to produce low quality later. Read the Operations Leader Box about Boeing Company and how it uses its supplier rating system to ensure quality from suppliers .

. 6 QUALITY, COST OF QUALITY, AND FINANCIAL PERFORMANCE

Quality

Most companies have no idea how much they spend to manage quality. Those that have measured it found that the cost of quality is about 30 percent of sales, with ranges from 20 to 40 percent. Since these figures are two or three times greater than profit margins in many companies, a reduction in the cost of quality can lead to a significant improvement in profit. The best-managed companies have been able to reduce their costs of quality from 30 percent of sales to as little as 3 percent over a period of several years. This has been done while improving the quality of the products . The potential for doing this in most companies is untapped .

The cost of quality .may be divided into two components: control costs and failure costs. Control costs are related to activities that remove defects from the production stream. This can be done in two ways: by prevention and by appraisal. Prevention costs include activities such as quality planning, new-product reviews, training, and engineering analysis. These activities occur before production and are aimed at preventing defects before they occur. The other category of control

I

174 Part Three Quality

TABLE 8.1 Costs of Quality

Source: Adapted from J. M. Juran and A. B. Godfrey, eds., Juran 's Quality Handbook, 5th ed . (New York: McGraw-Hill, 1999).

Control Costs

Failure Costs

Prevention Costs

Quality planning

New product review

Training Process planning Quality data Improvement projects

Appraisal Costs

Incoming materials inspection

Process inspection

Final goods inspection

Quality laboratories

Internal Failure Costs

Scrap

Rework

Downgrading

Retest Downtime

External Failure Costs

Warranty

Returned merchandise Complaints

Allowances

Costs of preparing an overall plan, numerous specialized plans, quality manuals, procedu res.

Review or prepare quality specifications for new products, evaluation of new designs, preparaticx- of tests and experimental programs, evaluatio~ of vendors, marketing studies to determin e customers' quality requi reme nts.

Developing and conducting training programs. Designing and developing process control devices. Collecting data, data analysis, reporting. Planned failure investigations aimed at chronic

quality problems.

The cost of determining quality of incoming raw materials.

All tests, sampling procedures, and inspections done w hile the product is being made.

All inspections or tests conducted on the finish ed product in the plant or the field.

The cost of operati ng laboratories to inspect materials at all stages of production.

The cost of labQr and materials for product tha t cannot be used or sold.

The cost of redoing product that can be made to conform.

Product that must be sold at less than full value due to quality problems.

Cost of inspect ion and tests after rework. Idle facilities and people due to quality failures.

The cost of refunds, repairing, or replacing products on wa rranty.

Merchandise that is returned to the seller. The cost of settling customer complaints due to

poor quality. The cost of concessions made to customers due

to substandard quality.

costs includes appraisal or inspection aimed at eliminating defects after they occur but before the products reach the customer.

Failure costs are incurred either during the production process (internal) or af- ter the product is shipped (external). Internal failure costs include items such as scrap, rework, quality downgrading, and machine downtime. External failure costs include warranty charges, returned goods, and allowances. A more inclusive listing of all these costs is given in Table 8.1.

The cost of quality can be a confusing term. Three of the four costs in Table 8.1 can be called the cost of nonconformance or the costs of poor quality (appraisal, internal failure, or external failure). Figure 8.5 reveals how the four cost of quality categories relate to one another. As prevention costs and appraisal costs increase,