Post on 22-Nov-2014
Chapter 4Chapter 4
Procurement and ManufacturingProcurement and Manufacturing
Copyright 2006 John Wiley & Sons, Inc. 3-2
Lecture OutlineLecture Outline
Meaning of QualityMeaning of Quality Total Quality ManagementTotal Quality Management Quality Improvement and Role of Quality Improvement and Role of
EmployeesEmployees Strategic Implications of TQMStrategic Implications of TQM Six SigmaSix Sigma
Copyright 2006 John Wiley & Sons, Inc. 3-3
Lecture Outline (cont.)Lecture Outline (cont.)
TQM in Service CompaniesTQM in Service Companies Cost of QualityCost of Quality Quality Management and ProductivityQuality Management and Productivity Identifying Quality Problems and CausesIdentifying Quality Problems and Causes Quality Awards and Setting Quality Quality Awards and Setting Quality
StandardsStandards ISO 9000ISO 9000
The Quality ImperativeThe Quality Imperative
Dimensions of Product QualityDimensions of Product Quality TQMTQM Quality StandardsQuality Standards
Copyright 2006 John Wiley & Sons, Inc. 3-5
Meaning of QualityMeaning of Quality
Webster’s DictionaryWebster’s Dictionary degree of excellence of a thingdegree of excellence of a thing
American Society for QualityAmerican Society for Quality totality of features and characteristics totality of features and characteristics
that satisfy needsthat satisfy needs Consumer’s and Producer’s Consumer’s and Producer’s
PerspectivePerspective
Copyright 2006 John Wiley & Sons, Inc. 3-6
Meaning of Quality:Meaning of Quality:Consumer’s PerspectiveConsumer’s Perspective
Fitness for useFitness for use how well product or how well product or
service does what it is service does what it is supposed tosupposed to
Quality of designQuality of design designing quality designing quality
characteristics into a characteristics into a product or serviceproduct or service
A Mercedes and a Ford are A Mercedes and a Ford are equally “fit for use,” but with equally “fit for use,” but with different design dimensionsdifferent design dimensions
Copyright 2006 John Wiley & Sons, Inc. 3-7
Dimensions of Quality:Dimensions of Quality:Manufactured ProductsManufactured Products
Performance Performance basic operating characteristics of a product; how basic operating characteristics of a product; how
well a car is handled or its gas mileagewell a car is handled or its gas mileage Features Features
““extra” items added to basic features, such as a extra” items added to basic features, such as a stereo CD or a leather interior in a carstereo CD or a leather interior in a car
ReliabilityReliability probability that a product will operate properly probability that a product will operate properly
within an expected time frame; that is, a TV will within an expected time frame; that is, a TV will work without repair for about seven yearswork without repair for about seven years
Copyright 2006 John Wiley & Sons, Inc. 3-8
ConformanceConformance degree to which a product meets pre–established degree to which a product meets pre–established
standardsstandards DurabilityDurability
how long product lasts before replacementhow long product lasts before replacement ServiceabilityServiceability
ease of getting repairs, speed of repairs, courtesy ease of getting repairs, speed of repairs, courtesy and competence of repair personand competence of repair person
Dimensions of Quality:Dimensions of Quality:Manufactured Products (cont.)Manufactured Products (cont.)
Copyright 2006 John Wiley & Sons, Inc. 3-9
AestheticsAesthetics how a product looks, feels, sounds, how a product looks, feels, sounds,
smells, or tastessmells, or tastes Safety Safety
assurance that customer will not suffer assurance that customer will not suffer injury or harm from a product; an injury or harm from a product; an especially important consideration for especially important consideration for automobilesautomobiles
PerceptionsPerceptions subjective perceptions based on brand subjective perceptions based on brand
name, advertising, and the likename, advertising, and the like
Dimensions of Quality:Dimensions of Quality:Manufactured Products (cont.)Manufactured Products (cont.)
Copyright 2006 John Wiley & Sons, Inc. 3-10
Dimensions of Quality:Dimensions of Quality:ServiceService
Time and TimelinessTime and Timeliness How long must a customer wait for service, How long must a customer wait for service,
and is it completed on time?and is it completed on time? Is an overnight package delivered overnight?Is an overnight package delivered overnight?
Completeness:Completeness: Is everything customer asked for provided?Is everything customer asked for provided? Is a mail order from a catalogue company Is a mail order from a catalogue company
complete when delivered?complete when delivered?
Copyright 2006 John Wiley & Sons, Inc. 3-11
Dimensions of Quality:Dimensions of Quality:Service (cont.)Service (cont.)
Courtesy:Courtesy: How are customers treated by employees?How are customers treated by employees? Are catalogue phone operators nice and are Are catalogue phone operators nice and are
their voices pleasant?their voices pleasant? ConsistencyConsistency
Is the same level of service provided to each Is the same level of service provided to each customer each time?customer each time?
Is your newspaper delivered on time every Is your newspaper delivered on time every morning?morning?
Copyright 2006 John Wiley & Sons, Inc. 3-12
Accessibility and convenienceAccessibility and convenience How easy is it to obtain service?How easy is it to obtain service? Does a service representative answer you calls quickly?Does a service representative answer you calls quickly?
AccuracyAccuracy Is the service performed right every time?Is the service performed right every time? Is your bank or credit card statement correct every month?Is your bank or credit card statement correct every month?
ResponsivenessResponsiveness How well does the company react to unusual situations?How well does the company react to unusual situations? How well is a telephone operator able to respond to a How well is a telephone operator able to respond to a
customer’s questions?customer’s questions?
Dimensions of Quality:Dimensions of Quality:Service (cont.)Service (cont.)
Garvin’s Eight Dimensions of Product Quality is an industry Garvin’s Eight Dimensions of Product Quality is an industry standard when a company wants to sell a product that has standard when a company wants to sell a product that has excellence in value. The Honda Civic is a good example of excellence in value. The Honda Civic is a good example of Garvin’s standard. The standards and Honda’s claims per its own Garvin’s standard. The standards and Honda’s claims per its own website are as follows:website are as follows:
1. Performance – It’s 2.0 liter aluminum alloy engine kicks out 197 1. Performance – It’s 2.0 liter aluminum alloy engine kicks out 197 horses, but still offers an estimated 29 mpg highway.horses, but still offers an estimated 29 mpg highway.
2. Features - Slip inside, and you’re immediately in performance 2. Features - Slip inside, and you’re immediately in performance mode. Grab the 6 speed shifter, step on the drilled aluminum mode. Grab the 6 speed shifter, step on the drilled aluminum pedals and take off. Find it fast; the available Honda Satellite-pedals and take off. Find it fast; the available Honda Satellite-Linked Navigation System features Bluetooth Handsfreelink, so Linked Navigation System features Bluetooth Handsfreelink, so you can call ahead without taking your hands off the wheel.you can call ahead without taking your hands off the wheel.
3. Reliability – The Civic features safety technologies designed 3. Reliability – The Civic features safety technologies designed not only to help you stay out of trouble, but also to help protect not only to help you stay out of trouble, but also to help protect you in the unlikely event of an accident. The Advanced you in the unlikely event of an accident. The Advanced Compatibility Engineering body structure is a Honda exclusive Compatibility Engineering body structure is a Honda exclusive body design that enhances occupant protection and crash body design that enhances occupant protection and crash compatibility in frontal collisions.compatibility in frontal collisions.
4. Conformance – Even while boasting of its unique chrome 4. Conformance – Even while boasting of its unique chrome exhaust finisher and exclusive SI badging that tell the world this is exhaust finisher and exclusive SI badging that tell the world this is no ordinary sedan; the Civic looks like every other sedan in its no ordinary sedan; the Civic looks like every other sedan in its price range. This car offers the comfort and reassurance to price range. This car offers the comfort and reassurance to someone who is looking for this “middle of the road” type car, that someone who is looking for this “middle of the road” type car, that it is neither flashy not plain.it is neither flashy not plain.
Copyright 2006 John Wiley & Sons, Inc. 3-14
5 Durability – The Advance Compatibility Engineering body 5 Durability – The Advance Compatibility Engineering body structure is a Honda exclusive body design that enhances structure is a Honda exclusive body design that enhances occupant protection and crash compatibility in frontal collisions. occupant protection and crash compatibility in frontal collisions.
6 Serviceability -The Honda Warranty includes:6 Serviceability -The Honda Warranty includes: · · Bumper-to-Bumper Limited Warranty (years/miles) = Bumper-to-Bumper Limited Warranty (years/miles) =
3/36,0003/36,000 ·· Powertrain Limited Warranty (years/miles) = 5/60,000 Powertrain Limited Warranty (years/miles) = 5/60,000 ·· Corrosion Limited Warranty (years/miles) = 5/unlimited Corrosion Limited Warranty (years/miles) = 5/unlimited · · Accessory Limited Warranty—All Honda accessories are Accessory Limited Warranty—All Honda accessories are
covered up to 3 years or 36,000 miles, depending on time of covered up to 3 years or 36,000 miles, depending on time of installationinstallation
Copyright 2006 John Wiley & Sons, Inc. 3-15
7. Aesthetics – One glance at the racing-inspired Civic Si Sedan 7. Aesthetics – One glance at the racing-inspired Civic Si Sedan and you can tell that this car was born to perform. Its aerodynamic and you can tell that this car was born to perform. Its aerodynamic shape is accentuated by 17 inch alloy wheels and integrated fog shape is accentuated by 17 inch alloy wheels and integrated fog lights. Its racy rear wing spoiler enhances the rear deck appeal and lights. Its racy rear wing spoiler enhances the rear deck appeal and provides enhanced performance while a bold front grille flaunts the provides enhanced performance while a bold front grille flaunts the Si badge.Si badge.
8. Perceived Quality – The Civic Si Sedan is a 197-hp beast that’s 8. Perceived Quality – The Civic Si Sedan is a 197-hp beast that’s designed to attack the road. The Si’s engine boasts an impressive designed to attack the road. The Si’s engine boasts an impressive torque curve from idle all the way to its race car-like 8000-rpm torque curve from idle all the way to its race car-like 8000-rpm redline. A helical limited-slipredline. A helical limited-slip
differential channels power to the pavement. And vehicle stability differential channels power to the pavement. And vehicle stability assist with traction control enhances vehicle stability when cornering assist with traction control enhances vehicle stability when cornering in a vehicle that you can trustin a vehicle that you can trust
Copyright 2006 John Wiley & Sons, Inc. 3-16
Copyright 2006 John Wiley & Sons, Inc. 3-17
Meaning of Quality:Meaning of Quality:Producer’s PerspectiveProducer’s Perspective
Quality of ConformanceQuality of Conformance Making sure a product or service is Making sure a product or service is
produced according to designproduced according to design if new tires do not conform to specifications, they if new tires do not conform to specifications, they
wobblewobble if a hotel room is not clean when a guest checks if a hotel room is not clean when a guest checks
in, the hotel is not functioning according to in, the hotel is not functioning according to specifications of its designspecifications of its design
Copyright 2006 John Wiley & Sons, Inc. 3-18
Meaning of Quality:Meaning of Quality:A Final PerspectiveA Final Perspective
Consumer’s and producer’s Consumer’s and producer’s perspectives depend on each otherperspectives depend on each other
Consumer’s perspective: PRICE Consumer’s perspective: PRICE Producer’s perspective: COSTProducer’s perspective: COST Consumer’s view must dominateConsumer’s view must dominate
Copyright 2006 John Wiley & Sons, Inc. 3-19
Fitness forConsumer Use
Fitness forConsumer Use
Producer’s PerspectiveProducer’s Perspective Consumer’s PerspectiveConsumer’s Perspective
Quality of ConformanceQuality of Conformance
• Conformance to specifications
• Cost
Quality of DesignQuality of Design
• Quality characteristics• Price
MarketingMarketingProductionProduction
Meaning of Quality Meaning of Quality
Meaning of QualityMeaning of Quality
Total Quality Management
Why TQM?Why TQM?
Ford Motor Company had operating losses Ford Motor Company had operating losses of $3.3 billion between 1980 and 1982. of $3.3 billion between 1980 and 1982.
Xerox market share dropped from 93% in Xerox market share dropped from 93% in 1971 to 40% in 1981.1971 to 40% in 1981.
Attention to quality was seen as a way to Attention to quality was seen as a way to combat the competition. combat the competition.
Total Quality Management
TQM: A “Buzzword” Losing TQM: A “Buzzword” Losing PopularityPopularity
For many companies, the term TQM is associated For many companies, the term TQM is associated with corporate programs (mid 1980s ~ early 1990s) with corporate programs (mid 1980s ~ early 1990s) aimed at implementing employee teams and aimed at implementing employee teams and statistical process control.statistical process control.
Unfortunately, many companies were dissatisfied Unfortunately, many companies were dissatisfied with the perceived results of these programs, with the perceived results of these programs, concluding TQM does not work.concluding TQM does not work.
Question: Why were they dissatisfied?Question: Why were they dissatisfied? Were they justified? Were they justified?
Total Quality Management
TQMTQM
Total - made up of the wholeTotal - made up of the whole Quality - degree of excellence a product or Quality - degree of excellence a product or
service providesservice provides Management - act, art or manner of planning, Management - act, art or manner of planning,
controlling, directing,….controlling, directing,….
Therefore, TQM is the art of managing the Therefore, TQM is the art of managing the whole to achieve excellencewhole to achieve excellence..
Total Quality Management
What does TQM mean?What does TQM mean?
Total Quality Management means that the Total Quality Management means that the organization's culture is defined by and organization's culture is defined by and supports the constant attainment of supports the constant attainment of customer satisfaction through an integrated customer satisfaction through an integrated system of tools, techniques, and training. system of tools, techniques, and training. This involves the continuous improvement This involves the continuous improvement of organizational processes, resulting in of organizational processes, resulting in high quality products and services.high quality products and services.
Total Quality Management
What’s the goal of TQM?What’s the goal of TQM?What’s the goal of TQM?What’s the goal of TQM?
““Do the right things Do the right things right right the first time, every time.”the first time, every time.”
Total Quality Management
Another way to put itAnother way to put itAnother way to put itAnother way to put it
At it’s simplest, TQM is all managers At it’s simplest, TQM is all managers leading and facilitating all contributors in leading and facilitating all contributors in everyone’s two main objectives:everyone’s two main objectives:
(1) (1) total client satisfactiontotal client satisfaction through through quality products and services; andquality products and services; and
(2) (2) continuous improvementscontinuous improvements to to processes, systems, people, suppliers, processes, systems, people, suppliers, partners, products, and services.partners, products, and services.
Total Quality Management
Productivity and TQMProductivity and TQM
Traditional view:Traditional view: Quality cannot be improved without Quality cannot be improved without
significant losses in productivity.significant losses in productivity.
TQM view:TQM view: Improved quality leads to improved Improved quality leads to improved
productivity.productivity.
Total Quality Management
Basic Tenets of TQMBasic Tenets of TQM
1. The customer makes the ultimate determination of 1. The customer makes the ultimate determination of quality.quality.
2. Top management must provide leadership and 2. Top management must provide leadership and support for all quality initiatives.support for all quality initiatives.
3. Preventing variability is the key to producing high 3. Preventing variability is the key to producing high quality.quality.
4. Quality goals are a moving target, thereby requiring 4. Quality goals are a moving target, thereby requiring a commitment toward continuous improvement.a commitment toward continuous improvement.
5. Improving quality requires the establishment of 5. Improving quality requires the establishment of effective metrics. We must speak with data and facts effective metrics. We must speak with data and facts not just opinions.not just opinions.
Total Quality Management
The three aspects of TQMThe three aspects of TQM
Counting
Customers
Culture
Counting
Customers
Culture
Tools, techniques, and training in their use for analyzing, understanding, and
solving quality problems
Quality for the customer as a driving force and central concern.
Shared values and beliefs, expressed by leaders, that define and support
quality.
Total Quality Management
Total Quality ManagementTotal Quality Managementand Continuous Improvementand Continuous Improvement
TQM is the management process used to make TQM is the management process used to make continuous improvements to all functions.continuous improvements to all functions.
TQM represents an ongoing, continuous TQM represents an ongoing, continuous commitment to improvement.commitment to improvement.
The foundation of total quality is a management The foundation of total quality is a management philosophy that supports meeting customer philosophy that supports meeting customer requirements through continuous improvement.requirements through continuous improvement.
Total Quality Management
Continuous Improvement versus Continuous Improvement versus Traditional ApproachTraditional Approach
Market-share focusMarket-share focus IndividualsIndividuals Focus on ‘who” and “why”Focus on ‘who” and “why” Short-term focusShort-term focus Status quo focusStatus quo focus Product focusProduct focus InnovationInnovation Fire fightingFire fighting
Customer focusCustomer focus Cross-functional teamsCross-functional teams Focus on “what” and “how”Focus on “what” and “how” Long-term focusLong-term focus Continuous improvementContinuous improvement Process improvement Process improvement
focusfocus Incremental improvementsIncremental improvements Problem solvingProblem solving
Traditional Approach Continuous ImprovementContinuous ImprovementContinuous ImprovementContinuous Improvement
Total Quality Management
Quality ThroughoutQuality Throughout
““A Customer’s impression of quality begins with the A Customer’s impression of quality begins with the initial contact with the company and continues initial contact with the company and continues through the life of the product.”through the life of the product.” Customers look to the total package - sales, service during Customers look to the total package - sales, service during
the sale, packaging, deliver, and service after the sale.the sale, packaging, deliver, and service after the sale. Quality extends to how the receptionist answers the Quality extends to how the receptionist answers the
phone, how managers treat subordinates, how courteous phone, how managers treat subordinates, how courteous sales and repair people are, and how the product is sales and repair people are, and how the product is serviced after the sale.serviced after the sale.
““All departments of the company must strive to All departments of the company must strive to improve the quality of their operations.”improve the quality of their operations.”
Total Quality Management
Value-based ApproachValue-based Approach
Manufacturing Manufacturing DimensionsDimensions PerformancePerformance FeaturesFeatures ReliabilityReliability ConformanceConformance DurabilityDurability ServiceabilityServiceability AestheticsAesthetics Perceived qualityPerceived quality
Service DimensionsService Dimensions ReliabilityReliability ResponsivenessResponsiveness AssuranceAssurance EmpathyEmpathy TangiblesTangibles
Total Quality Management
The TQM SystemThe TQM System
CustomerFocus
ProcessImprovement
TotalInvolvement
LeadershipEducation and Training Supportive structureCommunications Reward and recognitionMeasurement
ContinuousImprovement
Objective
Principles
Elements
Copyright 2006 John Wiley & Sons, Inc. 3-34
Total Quality ManagementTotal Quality Management
Commitment to quality throughout organizationCommitment to quality throughout organization
Principles of TQMPrinciples of TQM Customer-orientedCustomer-oriented LeadershipLeadership Strategic planningStrategic planning Employee responsibilityEmployee responsibility Continuous improvementContinuous improvement CooperationCooperation Statistical methodsStatistical methods Training and educationTraining and education
Copyright 2006 John Wiley & Sons, Inc. 3-35
Deming Wheel: PDCA Deming Wheel: PDCA CycleCycle
1. PlanIdentify problem and develop plan for improvement.
2. DoImplement plan on a test basis.
3. Study/CheckAssess plan; is it working?
4. ActInstitutionalize improvement; continue cycle.
Copyright 2006 John Wiley & Sons, Inc. 3-36
TQM and…TQM and…
… … PartneringPartnering a relationship between a company and a relationship between a company and
its supplier based on mutual quality its supplier based on mutual quality standardsstandards
… … CustomersCustomers system must measure customer system must measure customer
satisfactionsatisfaction … … Information TechnologyInformation Technology
infrastructure of hardware, networks, infrastructure of hardware, networks, and software necessary to support a and software necessary to support a quality programquality program
Copyright 2006 John Wiley & Sons, Inc. 3-37
Quality Improvement Quality Improvement and Role of Employeesand Role of Employees
Participative Participative problem solvingproblem solving employees involved in employees involved in
quality management quality management every employee has every employee has
undergone extensive undergone extensive training to provide quality training to provide quality service to Disney’s guestsservice to Disney’s guests
Copyright 2006 John Wiley & Sons, Inc. 3-38
PresentationImplementation
Monitoring
SolutionProblem results
Problem Analysis
Cause and effectData collection and analysis
Problem IdentificationList alternatives
ConsensusBrainstorming
TrainingGroup processes
Data collectionProblem analysis
Organization8-10 members
Same areaSupervisor/moderator
Quality CircleQuality Circle
Copyright 2006 John Wiley & Sons, Inc. 3-39
Strategic Implications of Strategic Implications of TQMTQM
Strong leadershipStrong leadership GoalsGoals, , visionvision, or , or missionmission Operational plans and policiesOperational plans and policies Mechanism for feedbackMechanism for feedback
Copyright 2006 John Wiley & Sons, Inc. 3-40
Six SigmaSix Sigma
A process for developing and delivering A process for developing and delivering near perfect products and servicesnear perfect products and services
Measure of how much a process Measure of how much a process deviates from perfectiondeviates from perfection
3.4 defects per million opportunities3.4 defects per million opportunities ChampionChampion
an executive responsible for project successan executive responsible for project success
Copyright 2006 John Wiley & Sons, Inc. 3-41
3.4 DPMO3.4 DPMO
67,000 DPMOcost = 25% of
sales
67,000 DPMOcost = 25% of
sales
DEFINEDEFINE CONTROLCONTROLIMPROVEIMPROVEANALYZEANALYZEMEASUREMEASURE
Six Sigma: DMAICSix Sigma: DMAIC
Copyright 2006 John Wiley & Sons, Inc. 3-42
Cost of QualityCost of Quality
Cost of Achieving Good QualityCost of Achieving Good Quality Prevention costsPrevention costs
costs incurred during product designcosts incurred during product design Appraisal costsAppraisal costs
costs of measuring, testing, and analyzingcosts of measuring, testing, and analyzing Cost of Poor QualityCost of Poor Quality
Internal failure costsInternal failure costs include scrap, rework, process failure, downtime, include scrap, rework, process failure, downtime,
and price reductionsand price reductions External failure costsExternal failure costs
include complaints, returns, warranty claims, include complaints, returns, warranty claims, liability, and lost salesliability, and lost sales
Copyright 2006 John Wiley & Sons, Inc. 3-43
Prevention CostsPrevention Costs
Quality planning costsQuality planning costs costs of developing and costs of developing and
implementing quality implementing quality management programmanagement program
Product-design costsProduct-design costs costs of designing costs of designing
products with quality products with quality characteristicscharacteristics
Process costsProcess costs costs expended to make costs expended to make
sure productive process sure productive process conforms to quality conforms to quality specificationsspecifications
Training costsTraining costs costs of developing and costs of developing and
putting on quality training putting on quality training programs for employees programs for employees and managementand management
Information costsInformation costs costs of acquiring and costs of acquiring and
maintaining data related maintaining data related to quality, and to quality, and development of reports on development of reports on quality performancequality performance
Copyright 2006 John Wiley & Sons, Inc. 3-44
Appraisal CostsAppraisal Costs
Inspection and testingInspection and testing costs of testing and inspecting materials, parts, and costs of testing and inspecting materials, parts, and
product at various stages and at the end of a product at various stages and at the end of a processprocess
Test equipment costsTest equipment costs costs of maintaining equipment used in testing costs of maintaining equipment used in testing
quality characteristics of productsquality characteristics of products Operator costsOperator costs
costs of time spent by operators to gar data for costs of time spent by operators to gar data for testing product quality, to make equipment testing product quality, to make equipment adjustments to maintain quality, and to stop work to adjustments to maintain quality, and to stop work to assess qualityassess quality
Copyright 2006 John Wiley & Sons, Inc. 3-45
Internal Failure CostsInternal Failure Costs
Scrap costsScrap costs costs of poor-quality costs of poor-quality
products that must be products that must be discarded, including labor, discarded, including labor, material, and indirect costsmaterial, and indirect costs
Rework costsRework costs costs of fixing defective costs of fixing defective
products to conform to products to conform to quality specificationsquality specifications
Process failure costsProcess failure costs costs of determining why costs of determining why
production process is production process is producing poor-quality producing poor-quality productsproducts
Process downtime costsProcess downtime costs costs of shutting down costs of shutting down
productive process to fix productive process to fix problemproblem
Price-downgrading costsPrice-downgrading costs costs of discounting poor-costs of discounting poor-
quality products—that is, quality products—that is, selling products as selling products as “seconds”“seconds”
Copyright 2006 John Wiley & Sons, Inc. 3-46
External Failure CostsExternal Failure Costs
Customer complaint costsCustomer complaint costs costs of investigating and costs of investigating and
satisfactorily responding to a satisfactorily responding to a customer complaint resulting customer complaint resulting from a poor-quality productfrom a poor-quality product
Product return costsProduct return costs costs of handling and replacing costs of handling and replacing
poor-quality products returned poor-quality products returned by customerby customer
Warranty claims costsWarranty claims costs costs of complying with costs of complying with
product warrantiesproduct warranties
Product liability costsProduct liability costs litigation costs litigation costs
resulting from product resulting from product liability and customer liability and customer injuryinjury
Lost sales costsLost sales costs costs incurred costs incurred
because customers because customers are dissatisfied with are dissatisfied with poor quality products poor quality products and do not make and do not make additional purchasesadditional purchases
Copyright 2006 John Wiley & Sons, Inc. 3-47
Quality–Cost RelationshipQuality–Cost Relationship
Cost of qualityCost of quality Difference between price of Difference between price of
nonconformance and conformancenonconformance and conformance Cost of doing things wrongCost of doing things wrong
20 to 35% of revenues20 to 35% of revenues Cost of doing things rightCost of doing things right
3 to 4% of revenues3 to 4% of revenues Profitability Profitability
In the long run, quality is freeIn the long run, quality is free
How important is procurement?How important is procurement?
We estimate that for every dollar a company We estimate that for every dollar a company earns in revenue, 50 cents to 55 cents is spent earns in revenue, 50 cents to 55 cents is spent on indirect goods and services—things like office on indirect goods and services—things like office supplies and computer equipment. supplies and computer equipment.
That half dollar represents an opportunity: By That half dollar represents an opportunity: By driving costs out of the purchasing process, driving costs out of the purchasing process, companies can increase profits without having to companies can increase profits without having to sell more goodssell more goods. Hildebrand (2002). Hildebrand (2002)
Procurement PerspectivesProcurement Perspectives
Continuous SupplyContinuous Supply Minimize Inventory InvestmentsMinimize Inventory Investments Quality ImprovementQuality Improvement Supplier DevelopmentSupplier Development Lowest Total Cost of OwnershipLowest Total Cost of Ownership
Copyright 2006 John Wiley & Sons, Inc. 3-49
TCOTCO
The four elements of cost are: The four elements of cost are: QQuality, uality, SService, ervice, DDelivery, elivery, and and PPrice (rice (QSDPQSDP))
TCOTCO =the sum of the cost elements in QSDP, or =the sum of the cost elements in QSDP, or TCOTCO = = QQuality + uality + SService ervice + + DDelivery + elivery + PPricerice
Several facts about TCO must be recognized and appreciated to Several facts about TCO must be recognized and appreciated to conduct an effective negotiation:conduct an effective negotiation:
Each element of QSDP has an impact on the TCO Each element of QSDP has an impact on the TCO The importance of each element varies with the product or service being The importance of each element varies with the product or service being
purchased purchased The relative weight of each element depends upon our assessment of the The relative weight of each element depends upon our assessment of the
TCO impact on our business.TCO impact on our business. The identity and weight of each element is an ongoing part of the continuous The identity and weight of each element is an ongoing part of the continuous
negotiation process. negotiation process.
Copyright 2006 John Wiley & Sons, Inc. 3-50
Procurement StrategiesProcurement Strategies
Volume consolidationVolume consolidation Reducing total number of suppliers while minimizing risk Reducing total number of suppliers while minimizing risk
Supplier operational integrationSupplier operational integration Building partnershipsBuilding partnerships Sharing information and knowledgeSharing information and knowledge Identifying linked processes and shared opportunities for Identifying linked processes and shared opportunities for
improvementimprovement
Value management extends beyond buyer-seller Value management extends beyond buyer-seller operations operations
Involving the supplier early in product designInvolving the supplier early in product design Reducing complexityReducing complexity Value engineering Value engineering
3-51
Copyright 2006 John Wiley & Sons, Inc. 3-52
E-procurementE-procurement
The 5 rights of e-procurementThe 5 rights of e-procurement
at the right priceat the right price delivered at the right timedelivered at the right time are of the right qualityare of the right quality of the right quantityof the right quantity from the right source.from the right source.
Baily Baily et al.et al., 1994, 1994
Figure 7.1 Key procurement activities within an organization
Figure 7.2 Electronic procurement systemSource: Tranmit plc
Figure 7.4 Use of different information systems for different aspects of thefulfilment cycle
Figure 7.5 E-mail notification of requisition approvalSource: Tranmit plc
Figure 7.6 Document management software for reconciling supplier invoice with purchase order data
Source: Tranmit plc
Figure 7.7 The three main e-procurement model alternatives for buyers
Figure 7.8 Integration between e-procurement systems and catalogue data
Important!Important!
Purchasing has undergone a Purchasing has undergone a transformation from merely being a transformation from merely being a necessarynecessary function to one that has function to one that has become more strategic with a focus on become more strategic with a focus on generating a competitivegenerating a competitive business business advantageadvantage
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PurposePurpose
The challenge that remains is how to The challenge that remains is how to measure the increase in efficiency (both measure the increase in efficiency (both value and risks)value and risks) of e-procurement of e-procurement implementations and simultaneous implementations and simultaneous changes in the organization and strategy.changes in the organization and strategy.
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Expected benefitsExpected benefits
The main benefits of e-procurement are an The main benefits of e-procurement are an increase inincrease in firms’ competitiveness through cost firms’ competitiveness through cost reduction and/or boosted efficiency with inboundreduction and/or boosted efficiency with inbound logisticslogistics..
Those benefits can materialize in a reduction of Those benefits can materialize in a reduction of purchasing transactions costs,purchasing transactions costs, order fulfillment and order fulfillment and cycle time, a reduction of the number of suppliers cycle time, a reduction of the number of suppliers or even a reduction inor even a reduction in the price paid and the the price paid and the number of staff to support purchase transactionsnumber of staff to support purchase transactions
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Importance of P2P processImportance of P2P process
E-procurement is the use of electronic means E-procurement is the use of electronic means (the internet, web, e-mail) to enable the (the internet, web, e-mail) to enable the purchase of products and services over the purchase of products and services over the internet internet
OOne of the major processes (global sourcing)ne of the major processes (global sourcing) BBoth savings & risks are importantoth savings & risks are important Important to study the whole process!Important to study the whole process!
P2P processP2P process
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Just-In-Time Just-In-Time SystemsSystems
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JIT/Lean ProductionJIT/Lean Production
Just-in-timeJust-in-time: : Repetitive production system in Repetitive production system in which processing and movement of materials which processing and movement of materials and goods occur just as they are needed, and goods occur just as they are needed, usually in small batchesusually in small batches
JIT is characteristic of lean production JIT is characteristic of lean production systemssystems
JIT operates with very little “fat”JIT operates with very little “fat”
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JIT GoalsJIT Goals
Eliminate disruptionsEliminate disruptions
Make system flexible by reduce Make system flexible by reduce setup and lead timessetup and lead times
Eliminate waste, especially excess Eliminate waste, especially excess inventoryinventory
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Sources of WasteSources of Waste
OverproductionOverproduction
Waiting timeWaiting time
Unnecessary transportationUnnecessary transportation
Processing wasteProcessing waste
Inefficient work methodsInefficient work methods
Product defectsProduct defects
71
Big JIT – broad focusBig JIT – broad focus Vendor relationsVendor relations Human relationsHuman relations Technology managementTechnology management Materials and inventory managementMaterials and inventory management
Little JIT – narrow focusLittle JIT – narrow focus Scheduling materialsScheduling materials Scheduling services of productionScheduling services of production
Big vs. Little JITBig vs. Little JIT
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JIT Building BlocksJIT Building Blocks
1. Product design1. Product design
2. Process design2. Process design
3. Personnel/organizational3. Personnel/organizationalelementselements
4. Manufacturing 4. Manufacturing planning and controlplanning and control
73
1. Product Design1. Product Design
Standard partsStandard parts
Modular designModular design
Highly capable production systemsHighly capable production systems
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2. Process Design2. Process Design
Small lot sizesSmall lot sizes
Setup time reductionSetup time reduction
Manufacturing cellsManufacturing cells
Limited work in processLimited work in process
Quality improvementQuality improvement
Production flexibilityProduction flexibility
Little inventory storageLittle inventory storage
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Benefits of Small Lot SizesBenefits of Small Lot Sizes
Reduces inventory
Less storage space
Less rework
Problems are more apparent
Increases product flexibility
Easier to balance operations
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Production FlexibilityProduction Flexibility
Reduce downtime by reducing Reduce downtime by reducing changeover timechangeover time
Use preventive maintenance to Use preventive maintenance to reduce breakdownsreduce breakdowns
Cross-train workers to help clear Cross-train workers to help clear bottlenecksbottlenecks
Reserve capacity for important Reserve capacity for important customerscustomers
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3. Personnel/Organizational 3. Personnel/Organizational ElementsElements
Workers as assetsWorkers as assets
Cross-trained workersCross-trained workers
Continuous Continuous improvementimprovement
Cost accountingCost accounting
Leadership/project Leadership/project managementmanagement
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4. Manufacturing Planning and 4. Manufacturing Planning and ControlControl
Level loadingLevel loading
Pull systemsPull systems
Visual systemsVisual systems
Close vendor relationshipsClose vendor relationships
Reduced transaction processingReduced transaction processing
Preventive maintenancePreventive maintenance
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Pull/Push SystemsPull/Push Systems
Pull systemPull system: System for moving work : System for moving work where a workstation pulls output from where a workstation pulls output from the preceding station as needed. (e.g. the preceding station as needed. (e.g. Kanban)Kanban)
Push systemPush system: System for moving work : System for moving work where output is pushed to the next where output is pushed to the next station as it is completedstation as it is completed
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Kanban Production Control SystemKanban Production Control System
KanbanKanban:: Card or other device that communicates demand Card or other device that communicates demand for work or materials from the preceding stationfor work or materials from the preceding station
Kanban is the Japanese word meaning “signal” or “visible Kanban is the Japanese word meaning “signal” or “visible record”record”
Paperless production control systemPaperless production control system
Authority to pull, or produce comes Authority to pull, or produce comes from a downstream process.from a downstream process.
81
Traditional Supplier Network
BuyerBuyer
SupplierSupplierSupplierSupplierSupplierSupplier SuppilerSuppiler
SupplierSupplier
SupplierSupplier
SupplierSupplier
82
Tiered Supplier Network
SupplierSupplier
SupplierSupplier
SupplierSupplier
SupplierSupplierSupplierSupplier SupplierSupplier
BuyerBuyer
SupplierSupplierFirst Tier Supplier
Second Tier Supplier
Third Tier Supplier
83
Summary JIT Goals and Building Summary JIT Goals and Building BlocksBlocks
Product Design
ProcessDesign
PersonnelElements
Manufactur-ing Planning
Eliminate disruptionsMake the system flexible
Reduce setupand lead times
Eliminate wasteMinimize inventories
Abalancedrapid flow
UltimateGoal
SupportingGoals
BuildingBlocks
84
Converting to a JIT SystemConverting to a JIT System
Get top management commitmentGet top management commitment
Decide which parts need most effortDecide which parts need most effort
Obtain support of workersObtain support of workers
Start by trying to reduce setup timesStart by trying to reduce setup times
Gradually convert operationsGradually convert operations
Convert suppliers to JITConvert suppliers to JIT
Prepare for obstaclesPrepare for obstacles
85
Obstacles to ConversionObstacles to Conversion
Management may not be committedManagement may not be committed
Workers/management may not be Workers/management may not be cooperativecooperative
Suppliers may Suppliers may resistresist
86
JIT in ServiceJIT in Service
The basic goal of the demand flow technology in the service organization is The basic goal of the demand flow technology in the service organization is to provide optimum response to the customer with the highest quality to provide optimum response to the customer with the highest quality service and lowest possible cost.service and lowest possible cost. Eliminate disruptionsEliminate disruptions Make system flexibleMake system flexible Reduce setup and lead timesReduce setup and lead times Eliminate wasteEliminate waste Minimize WIPMinimize WIP Simplify the processSimplify the process
87
New challengesNew challenges Meeting manufacturing requirementsMeeting manufacturing requirements Changing from traditional thinking and practices – Changing from traditional thinking and practices –
frequent on-time delivery of small quantitiesfrequent on-time delivery of small quantities Long term relationships with suppliers as Long term relationships with suppliers as
partnerspartners
How about Exchange purchasing: Auctions?How about Exchange purchasing: Auctions?
JIT PurchasingJIT Purchasing
88
JIT II: the practice of allowing vendors JIT II: the practice of allowing vendors to manage some aspects of buying their to manage some aspects of buying their products or services for the buyerproducts or services for the buyer
JIT IIJIT II
89
Benefits of JIT SystemsBenefits of JIT Systems
Reduced inventory levelsReduced inventory levels
High qualityHigh quality
Flexibility Flexibility
Reduced lead timesReduced lead times
Increased productivityIncreased productivity
90
Benefits of JIT Systems (cont’d)Benefits of JIT Systems (cont’d)
Increased equipment utilizationIncreased equipment utilization
Reduced scrap and reworkReduced scrap and rework
Reduced space requirementsReduced space requirements
Pressure for good vendor relationshipsPressure for good vendor relationships
Reduced need for indirect laborReduced need for indirect labor
91
Smooth flow of work (the ultimate goal)Smooth flow of work (the ultimate goal) Elimination of wasteElimination of waste Continuous improvementContinuous improvement Eliminating anything that does not add Eliminating anything that does not add
valuevalue Simple systems that are easy to manageSimple systems that are easy to manage Use of product layouts to minimize Use of product layouts to minimize
moving materials and partsmoving materials and parts Quality at the sourceQuality at the source
Elements of JITElements of JIT
92
Poka-yoke – fail safe tools and methodsPoka-yoke – fail safe tools and methods Preventative maintenancePreventative maintenance Good housekeepingGood housekeeping Set-up time reductionSet-up time reduction
Cross-trained employeesCross-trained employees
A pull systemA pull system
Elements of JIT (cont’d)Elements of JIT (cont’d)