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Material Management

Cost reduction techniques

9/27/2008

Nan0

TABLE OF CONTENTS :

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INVENTORIES

Inventories imply stocks and as such all materials, boughtout parts, works made parts, tools, packing materials, dead stock items and finished goods held by a store are termed as inventories.

Inventories are broadly classified as under:

1. Production inventories: They represents raw material, parts and components that are used in the process of production. Production inventories include

Standard industrial items purchased from outside (also called boughtouts) Non-standard items (purchase items) Special items manufactured in the factory itself (also called works made parts

or piece parts.)

2. MRO inventories They refer to the maintenance, repairs and operation supplies which are consumed during process of manufacture but do not become part of the product.

3. In-process inventories They represent items in the semi-finished condition (i.e. items in the partially completed stage)

4.Goods-In-Transit They represent such materials which have been paid for but have not yet been received by the stores.

INVENTORY REDUCTION TACTICS

Managers always are eager to find cost-effective ways to reduce inventory. Later in this chapter, we examine various ways for finding optimal lot sizes (see also the Special Inventory Models supplement). Here, we discuss something more fundamental- the basic tactics (which we call levers) for reducing inventory. A primary lever is one that must be activated if inventory is to be reduced. A secondary lever reduces the penalty cost of applying the primary lever and the need for having inventory in the first place.

CYCLE INVENTORY. The primary lever is simply to reduce the lot size. Methods of just – in – time production ( see the Lean System chapter ) use extremely small lots,

compared to traditional lots sizes equaling several week’s (or even months’) supply . However, making such reductions in Q without making any other changes can be devastating. For example, setup costs can skyrocket, which leads to use of the two secondary levers. 1. Streamline methods for placing orders and making setups, which reduces

ordering and costs and allows Q to be reduced. 2. Increase repeatability to eliminate the need for changeovers. Repeatability is the

degree to which the same work can be done again. It can be increased through high product demand; use of specialization; devoting resources exclusively to a product; using the same part in many different products; flexible automation; the one-worker, multiple-machines concepts; or groups technology (see the Process Management and Layout chapters). Increased repeatability may justify new setup methods, reduce transportation costs, and allowed quantity discounts from suppliers.

ANTICIPATION INVENTORY. The primary lever for reducing anticipating inventory is simply to match demand rate with production rate. Secondary levers are used to lever customers demand in one of the following ways: 1. Add new products with different demand cycles so that a peak in the demand for

one product compensates for the seasonal low for another. 2. Provide off-season promotional campaigns. 3. Offer seasonal pricing plans.

SAFETY STOCK INVENTORY. The primary lever for reducing safety stock inventory is to place orders closers to the time when they must be received. However, this approach can lead to unacceptable customer service- unless demand, supply and delivery uncertainties can be minimized. Four secondary levers can be used. 1. Improve demand forecasts so that there are fewer surprises from customers.

Perhaps customers can even be encouraged to order items before they need them.

2. Cut lead times of purchased or produced items to reduce demand uncertainty during the lead time. For example, local suppliers with short lead times could be selected whenever possible.

3. Reduce supply uncertainties. Suppliers may be more reliable if production plans are shared with them, permitting them to make more realistic forecasts. Surprises from unexpected scrape or rework can be reduced by improving manufacturing processes. Preventive maintenance can minimize unexpected downtime caused by equipment failure.

4. Rely more on equipment and labour buffers, such as capacity cushions and cross-trained workers. These are the only buffers available to business in the service sector because they can’t inventory their services.

PIPELINE INVENTORY. An operations manager has direct control over lead time but not demand rate. Because pipeline inventory is a function of demand during lead

time, the primary lever is to reduce the lead time. Two secondary levers can help managers cut lead times. 1. Find more responsive suppliers and select new carriers for shipments between

stocking locations or improve material handing within the plant. Introducing a computer system could overcome information delays between a distribution center and retailer.

2. Decrease Q, at least in those cases where lead time depends on lot size. Smaller jobs generally require less time to complete.

PLACEMENT OF MANUFACTURING INVENTORIES

Just as distribution managers decide where to place finished goods inventory, manufacturing managers make similar decisions for raw materials and work-in-process within the plant. In general, managers make inventory placement decisions by designating an item as either a special or a standard. A special is an item made to order, or if purchased, it is bought or order. Just enough are ordered to cover the latest customer request. A standard is an item that is made to stock and normally is available when needed. When a company makes more of its items as standards, particularly at the finished goods level, it places inventory closer to the customer.

Inventory held toward the finished goods level means short delivery times- but a higher dollar investment in inventory. Inventory placement at Shamrock Chemicals, a Newark, New Jersey, manufacture of material used in printing inks, illustrates this trade-off. Shamrock enjoys annual sales of more than $15 million because finished goods are treated as standard rather than specials, Shamrock is forced to maintain a large inventory. Holding inventory at the raw materials level would reduce the cost of carrying inventory – but at the expense of the quick customer response time that gives Shamrock its competitive advantages. R. R. Donnelley, a large manufacturer of books and other printed materials, chooses an opposite strategy by positioning inventory back at the raw material level (e.g. in rolled paper stock and ink) . The reason is that the products Donnelley produces are made to order and therefore considered specials. Stocking them based on a forecast would be very expensive. Placing inventories closer to the raw materials level gives Donnelley great flexibility in meeting a variety of customer demands.

ABC ANALYSIS

Thousands of items are held in inventory by a typical organization, but only small percentage of them deserve management’s closest attention and tightest control. ABC analysis is the process of dividing items into three classes according to their dollar usage so that managers can focus on items that the highest dollar value. This method is the equivalent of creating a Pareto chart except that it is applied to

inventory rather than quality. As Figure shows, class A items typically represent only about 20% of the items but account for 80% of the dollar usage. Class B items account for another 30% of the items but 15% of the dollar usage. Finally, 50% of the items fall in class C, representing a mere 5% of the dollar usage.

The goal of ABC analysis is to identify the inventory level of class A items and enable management to control then tightly by using the levers just discussed, the analyst begins by multiplying the annual demand rate for one item by dollar value (cost) of the unit to determine its dollar usage. After ranking the items on the basis of dollar usage and creating lines in Figure between classes are inexact. Class A items could be somewhat higher or lower than 20% of all items, but normally account for the bulk of the dollar usage.

A manager can direct that class A items be reviewed frequently to reduce the average lot size and keep inventory records current. If the records show an on-hand balance of 100 units but the actual balance is 200 units, costly inventory is being carried needlessly. If a class A item is brought outside the firms, purchasing may be able to reduce its cost through centralized buying, switching suppliers, or more effective contract negotiation.

For class C items, much looser control is appropriate. A stock out of a class C item can be crucial as for a class A items, but the inventory holding cost of class C items trends to be low. These features suggest that higher inventory levels can be tolerated and that more safety stock, larger lot sizes, and perhaps even a visual system, which we discuss later, may suffice for class C items.

IMPORTANT CONSIDERATIONS IN ABC ANALYSIS

Few important points to be considered in connection with ABC analysis are:

1. ABC curve is a lopsided distribution wherein a small percentage of items account for a major expenditure on material. Therefore, ABC curve is similar in shape for different industries.

2. All items that the company consumes should be considered together while making ABC analysis. Separate classification for materials, finished parts, tools, supplies, spares etc. is meaningless. Similarly, a company manufacturing more than one product should also make only one ABC analysis. Separate ABC analysis for each product is error prone. This is because quite likely, a “A” item in product wise ABC analysis may become a “C” item in the total ABC analysis.

3. Though generally annual consumption figures are considered for ABC analysis yet it is not necessary. If convenient, quarterly or six monthly consumption figures can be considered.

4. Though classification of items into three categories A, B and C is adequate for control, yet if required, the items may be classified into more than three categories. At times, to rationalize control, the author has classified “C” items into sub group ; C1, C2 and C3.

HML ANALYSIS

H-M-L Analysis is similar to ABC analysis except for the difference that instead of “usage value”, “price” criterion is used. The items under this analysis are classified into three groups which are called “High”, “Medium” and “Low”. To classify, the items are listed in the descending order of their unit price. The cut –off-lines then fixed by the management for deciding three categories. For example, the management may decide that all items if unit price above Rs. 1000 will be of ‘H’ category, those with unit price between Rs. 100 to Rs. 1000 will be of ‘M’ category and those having unit price below Rs. 100 will be of ‘L’ category.

HML Analysis helps to-

Assess storage and security requirements (e.g. high priced items like bearings, worm shafts, worm wheels, etc require to be kept in the cupboards.)

To keep control over consumption at the departmental head level (e.g. indents of high and medium priced items are authorized by the departmental head after careful scrutiny of the consumption figures).

Determine the frequency of stock verification. e.g. high priced items are checked more frequently than low priced items.

To evolve buying policies to control purchases e.g. excess supply than the order quantity may not be accepted for “H” and “M” groups while it may be accepted for “L” group.

To delegate authorities to different buyers to make petty cash purchase e.g. “H” and “M” category of items may be purchased by senior buyers and “L” category of items by junior buyers.

XYZ ANALYSIS

X-Y-Z Analysis is based on value of the stocks on hand ( i.e. inventory investments). Items whose inventory values are high are called X items while those whose inventory values are low are called Z items. And Y items are those which have moderate inventory stocks.

Usually X-Y-X analysis is used in conjunction with either ABC analysis or HML analysis.

X-Y-Z analysis when combined with ABC analysis is used as under:

Class of Items A B CX Efforts to be made

reduce stocks to Z category

Efforts to be made to convert them to Y category

Steps to be taken to dispose off surplus stocks

Y Efforts to be made convert these to Z category

* Control may be future tightened.

Z * Stock levels may be reviewed twice a year.

*

* items are within control .No further action is necessary.

ECONOMIC ORDER QUANTITY (EOQ):

One of the important decisions in stock control system is that of determining the ordering/manufacturing quantities of different items. Investment in inventories largely depends upon the quantities in which the items are ordered/ manufactured for replenishment. Ordering /manufacturing large lots in frequently reduces administrative work but makes investment in large stock. Ordering / manufacturing small lots frequently keeps investment low but increases administrative work.The reasons are obvious. Small lots imply high order frequency ,more purchase requisition need to be raised ,more frequently material required to be received and inspected , more progressing requires to be done more posting need to be done , more bills required to be handle .All this increased activities call for more staff and higher administrative costs. A rational approach is therefore needed to fix the order quantities of the items.

COST TO BE OPTIMISED:

To major cost associated with inventory decision are

1.Procurement Cost2.Inventory carrying costProcurement costs are also termed as preparation costs and are incurred in connection with the replenishment of the item. It includes cost of printing and stationery , telephone and telegram telex postages and traveling charges. Other expenses such as salaries and indirect wages, gratuity, bonus , P.F., E.S.I., canteen expenses ,etc are fixed and hence should be excluded from the analysis. It is expressed as cost per order, obtained by dividing variable expenses of the purchase department in a period by the number of orders placed in that period .

Inventory carrying costs also called inventory holding costs , are the costs incurred in connection with the holding of stocks it includes capital costs (interest on capital invested ),storage and handing charges , taxes and insurances etc .It varies from plant to plant and generally ranges between 20 to 30%.

MATHEMATICAL FORMULA FOR EOQ:

EOQ can be calculated from the following formula

Economic Order Quantity (EOQ) = 2.S.Cp

Cu.i

S = Annual consumption of the item (units)

Cu = Unit price (Rs.)

Q = Order quantity (units)

Cp = Procurement cost / order( Rs)

i = Inventory carrying cost expressed as a percentage of average inventory .

LEAN PRODUCTIONLean manufacturing or lean production, which is often known simply as "Lean", is the practice of a theory of production that considers the expenditure of resources for any means other than the creation of value for the presumed customer to be wasteful, and thus a target for elimination. Lean manufacturing is a generic process management

philosophy derived mostly from the Toyota Production System (TPS). It is renowned for its focus on reduction of the original Toyota seven wastes in order to improve overall customer value, but there are varying perspectives on how this is best achieved. The steady growth of Toyota, from a small company to the world's largest automaker, has focused attention on how it has achieved this.

Lean is about doing more with less: less time, inventory, space, labour, and money. "Lean manufacturing", a shorthand for a commitment to eliminating waste, simplifying procedures and speeding up production.

Lean principles come from the Japanese manufacturing industry. The term was first coined by Professor James P. Womack and consultant Daniel T. Jones who spent years analysing the success of Japanese companies after WWII and summarising their learning in a book called ‘Lean Thinking’ (1989).

For many, Lean is the set of "tools" that assist in the identification and steady elimination of waste (muda). As waste is eliminated quality improves while production time and cost are reduced. Examples of such "tools" are Value Stream Mapping, Five S, Kanban (pull systems), and poka-yoke (error-proofing).

Lean Production Overview

Non-value added activities or waste are eliminated through continuous improvement efforts

Focus on continuous improvement of processes - rather than results - of the entire value chain

The lean manufacturing mindset: concept, way of thinking - not techniques; culture - not the latest management tool

Continuous product flow is achieved through physical rearrangement and system structure & control mechanisms

Single-piece flow / small lot production: achieved through equipment set up time reduction; attention to machine maintenance; and orderly, clean work place

Pull reduction / Just-in-time inventory control

Basic Elements of Lean Manufacturing

The basic elements are waste elimination, continuous one piece workflow, and customer pull. When these elements are focused in the areas of cost, quality and delivery, this forms the basis for a lean production system.

The lean production concept was to a large extent inspired by the Kaizen - the Japanese strategy of continuous improvement. Employee empowerment and promotion among them of a way of thinking oriented at improving processes, imitation of customer relationships, fast product development and manufacturing, and collaboration with suppliers are the key strategies of leading lean companies.

Benefits of Lean Production

Establishment and mastering of a lean production system would allow you to achieve the following benefits:

Waste reduction by 80% Production cost reduction by 50% Manufacturing cycle times decreased by 50% Labour reduction by 50% while maintaining or increasing

throughput Inventory reduction by 80% while increasing customer service

levels Capacity in current facilities increase by 50% Higher quality Higher profits Higher system flexibility in reacting to changes in requirements

improved More strategic focus Improved cash flow through increasing shipping and billing

frequencies

However, by continually focusing on waste reduction, there are truly no end to the benefits that can be achieved.

Just-In-Time (JIT) Manufacturing Just-In-time manufacturing, or JIT, is a management philosophy aimed at eliminating manufacturing wastes by producing only the right amount and combination of parts at the right place at the right time. This is based on the fact that wastes result from any activity that adds cost without adding value to the product, such as transferring of inventories from one place to another or even the mere act of storing them. The goal of JIT, therefore, is to minimize the presence of non-value-adding operations and non-moving inventories in the production line. This will result in shorter throughput times, better on-time delivery performance, higher equipment utilization, lesser space requirement, lower dpm’s, lower costs, and greater profits.

History

The technique was first used by the Ford Motor Company as described explicitly by Henry

Ford's My Life and Work (1922): "We have found in buying materials that it is not worth

while to buy for other than immediate needs. We buy only enough to fit into the plan of

production, taking into consideration the state of transportation at the time. If

transportation were perfect and an even flow of materials could be assured, it would not be

necessary to carry any stock whatsoever. The carloads of raw materials would arrive on

schedule and in the planned order and amounts, and go from the railway cars into

production. That would save a great deal of money, for it would give a very rapid turnover

and thus decrease the amount of money tied up in materials. With bad transportation one

has to carry larger stocks." This statement also describes the concept of "dock to factory

floor" in which incoming materials are not even stored or warehoused before going into

production. This paragraph also shows the need for an effective freight management system

(FMS) and Ford's Today and Tomorrow (1926) describes one.

The technique was subsequently adopted and publicised by Toyota Motor Corporation of

Japan as part of its Toyota Production System (TPS).

It was developed and perfected by Taiichi Ohno of Toyota, who is now referred to as the father of JIT. Taiichi Ohno developed this philosophy as a means of meeting customer demands with minimum delays. Thus, in the olden days, JIT is used not to reduce manufacturing wastage, but primarily to produce goods so that customer orders are met exactly when they need the products. Effects JIT is also known as lean production or stockless production, since the key behind a successful implementation of JIT is the reduction of inventory levels at the various stations of the production line to the absolute minimum. This necessitates good coordination between stations such that every station produces only the exact volume that the next station needs. On the other hand, a station pulls in only the exact volume that it needs from the preceding station. The JIT system consists of defining the production flow and setting up the production floor such that the flow of materials as they get manufactured through the line is smooth and unimpeded, thereby reducing material waiting time. This requires that the capacities of the various work stations that the materials pass through are very evenly matched and balanced, such that bottle necks in the production line are eliminated. This set-up ensures that the materials will undergo manufacturing without queueing or stoppage.

Another important aspect of JIT is the use of a 'pull' system to move inventories through the production line. Under such a system, the requirements of the next station is what modulates the production of a particular station. It is therefore necessary under JIT to define a process by which the pulling of lots from one station to the next is facilitated. JIT is most applicable to operations or production flows that do not change, i.e., those that are simply repeated over and over again. An example of this would be an automobile assembly line, wherein every car undergoes the same production process as the one before it. JIT has likewise been practiced successfully by some semiconductor companies. Still, there are some semiconductor companies that don’t practice JIT for the simple reason that their operations are too complex for JIT application. On the other hand, that’s precisely the challenge of JIT – creation of a production set-up that is simple enough to allow JIT.

Problems

Just in Time production allows companies to reduce both inventory and the entire

production chain. It encourages the removal of all surplus, including surplus factories. Under

normal business conditions this is not a problem. However, if there is any disruption at any

given point in the supply chain, then all production grinds to a halt.

Hurricane Katrina and Hurricane Rita both hit the US Gulf coast in August and September of

2005. At that time, no new oil refineries had been built in the US since 1976. Between 1976

and 2005, companies actually shut down several refineries to reduce excess capacity. The

remaining refineries still operating ran at full capacity, so no new refineries were needed

since they would only produce surplus gasoline. However, most of these refineries were

clustered around the Gulf coast. When Katrina hit, 15 oil refineries in Mississippi and

Louisiana, representing 20% of US refining capacity, were shut down. Rita damaged another

16 refineries in Texas, accounting for 2.3 million barrels per day of capacity shut down.

US regular grade gasoline prices spiked at $3.09 on September 19 in the immediate

aftermath of Hurricane Katrina and retreated to $2.154 per gallon by November 28, 2005.

Mathematical Expression - EOQ

Consider a (highly) simplified mathematical model of the ordering process. Let:

K = the incremental cost of placing an order

kc = the annual cost of carrying one unit of inventory

D = annual demand in units

Q = optimal order size in units

TC = total cost over the year

We want to know Q.

We assume that demand is constant and that the company runs down the stock to zero and

then places an order, which arrives instantly. Hence the average stock held (the average of

zero and Q, assuming constant usage) is Q / 2. Also, the annual number of orders placed is D

/ Q.

TC consists of two components. The first is the cost of carrying inventory, which is given by

Q * kc / 2, i.e. the average inventory times the carrying cost per unit. The second cost is the

cost of placing orders, given by D * K / Q, the annual number of orders, D / Q. times the cost

per order, K.

Thus total annual cost is

.

We differentiate TC with respect to Q and set it equal to 0 to find the Q for minimum total

cost, giving

which is known as the Economic Order Quantity or EOQ formula.

The key Japanese breakthrough was to reduce K to a very low level and to resupply

frequently instead of holding excess stocks. In practice JIT works well for many businesses,

but it is not appropriate if K is not small. The theory above can be fairly easily adapted to

take into account realistic features such as delays in delivery times and fluctuations in

demand. Both of these are usually modelled by normal distributions. The delay in delivery,

in particular, means that additional 'safety stocks' need to be held if a stockout is to be

rendered very unlikely.

Techniques for achieving JIT –

KAIZEN

Kaizen ( 改 善 , Japanese for "change for the better" or "improvement", the English translation is "continuous improvement", or "continual improvement.") is an approach to productivity improvement originating in applications of the work of American experts such as Frederick Winslow Taylor, Frank Bunker Gilbreth, Walter Shewhart, W. Edwards Deming and of the War Department's Training Within Industry program by Japanese manufacturers after World War II. The development of Kaizen went hand-in-hand with that of quality control circles, but it was not limited to quality assurance.

The goals of kaizen include the elimination of waste (defined as "activities that add cost but do not add value"), just-in-time delivery, production load leveling of amount and types, standardized work, paced moving lines, right-sized equipment, etc. In this aspect it describes something very similar to the assembly line used in mass production. A closer definition of the Japanese usage of Kaizen is "to take it apart and put back together in a better way." What is taken apart is usually a process, system, product, or service.

Kaizen is a daily activity whose purpose goes beyond improvement. It is also a process that, when done correctly, humanizes the workplace, eliminates hard work (both mental and physical), and teaches people how to do rapid experiments using the scientific method and how to learn to see and eliminate waste in business processes.

"Kaizen" is the correct usage. "Kaizen event" or "kaizen blitz" are incorrect usage.

Kaizen is often misunderstood and applied incorrectly, resulting in bad outcomes including, for example, layoffs. This is called "kaiaku" - literally, "change for the worse." Layoffs are not the intent of kaizen. Instead, kaizen must be practiced in tandem with the "Respect for People" principle. Without "Respect for People," there can be no continuous improvement. Instead, the usual result is one-time gains that quickly fade.

Importantly, kaizen must operate with three principles in place: process and results (not results-only); systemic thinking (i.e. big picture, not solely the narrow view); and non-judgmental, non-blaming (because blaming is wasteful).

Everyone participates in kaizen; people of all levels in an organization, from the CEO on down, as well as external stakeholders if needed. The format for kaizen can be individual, suggestion system, small group, or large group.

The only way to truly understand the intent, meaning, and power of kaizen is through direct participation, many, many times.

Applications

The Toyota Production System is known for kaizen, where all line personnel are expected to stop their moving production line in the case of any abnormality, and suggestions for improvement are rewarded.

Kaizen often takes place one small step at a time, hence the English translation: "continuous improvement", or "continual improvement." Yet radical changes for the sake of goals, such as just in time and moving lines, also gain the full support of upper level management. Goals for kaizen workshops are intentionally set very high because there are countless examples of drastic reductions in process lead time to serve as proof of their practicality. Kaizen is one of the most commonly used words in Japan. In the newspapers and on radio and TV, we are bombarded daily with statements by government officials and politicians regarding the Kaizen of our trade balance with the United States,the Kaizen of diplomatic relations with country X, and the Kaizen of the social welfare system. Both labour and management speak of the Kaizen of industrial relations.

The cycle of kaizen activity can be defined as: standardize an operation -> measure the standardized operation (find cycle time and amount of in-process inventory) -> gauge measurements against requirements -> innovate to meet requirements and increase productivity -> standardize the new, improved operations -> continue cycle ad infinitum. This is also known as the Shewhart cycle, Deming cycle, or PDCA.

The "zen" in Kaizen emphasizes the learn-by-doing aspect of improving production. This philosophy is focused in a different direction from the "command-and-control" improvement programs of the mid-twentieth century. Kaizen methodology includes making changes and looking at the results, then adjusting. Large-scale preplanning and extensive project scheduling are replaced by smaller experiments in improvement, which can be rapidly adapted as new improvements are suggested. Kaizen means improvement. Morever, Kaizen means ongoing improvement involving everyone, including both managers and workers. The Kaizen philosophy assumes that our way of life be it our working life, our social life, or our home life deserves to be constantly improved.

Masaaki Imai made the term famous in his book, Kaizen: The Key to Japan's Competitive Success. An appendix to that book includes a reference to the 5S strategy of disciplined cleanup

KANBAN

Kanban (in kanji 看板 also in katakana カンバン, where "kan 看 カン" means visual, and "ban 板 バン" means card or board) is a concept related to the Lean or Just In Time (JIT)

production, but these two concepts are not the same thing. (The Chinese word "kanban" is a common everyday term meaning "sign" or "card" and utterly lacks the specialized meaning which this loanword has acquired in English.) According to Taiichi Ohno, the man credited with developing JIT, kanban is the means through which JIT is managed.

Kanban is a signaling system. As its name suggests, Kanban uses cards to signal the need for an item. Other devices such as plastic markers (Kanban squares) or balls (often golf balls) can also be used to trigger the movement, production, or supply of a unit in a factory.

For example, in the production of a widget, the operator has two shelves, one on either side of the workplace. The raw materials arrive on one shelf and the finished article on the other. These shelves act as kanbans. The outgoing kanban signals the customer's need so that when it is empty, the operator must produce one more widget.

The Kanban is sized so that it can only hold however many the customer needs (usually one). When the operator begins work, he takes the raw material from the incoming kanban, thus signalling to the supplier that he needs more.

Kanban is frequently known as a "pull" system, as everything is pulled in response to past demand. Demand forecasts are not used in kanban systems. This is the opposite of the traditional "push" manufacturing philosophy, in which everything is made to forecasted future needs.

With this in mind, it is not surprising that an important determinant of the relative merits of "push" and "pull" is the quality of the demand forecast. If forecasts are good, then the kanban system will effectively waste useful information, whereas a good "push" system will produce just the right quantities at the right times. In contexts where demand is difficult to forecast, on the other hand, the best one can do is to quickly respond to observed demand. This is exactly what a kanban system does, as a demand signal immediately propagates through the entire chain. "Push" systems often encounter serious difficulties when demand forecasts turn out to be inaccurate.

The Kanban system might be visualised as a "Three bin system" for the brought out parts ( where there is no inhouse manufacturing)- one bin on the factory floor, one bin in the factory store and one bin at the Suppliers' store. The bins usually have a removable card that contains the product details and other relevant information - the Kanban card. When the bin on the shop floor is empty, the Kanban card is removed and given to the store. The store then replaces the bin on the factory floor with a full bin which also contains a

removable Kanban card. The store then contacts the Supplier and indicates the need to replenish the Kanban card. The product also containing a Kanban card is delivered into the factory store completing the final step to the system. So it will never run out of product, providing of course, the cards are reliably collected from empty containers. It is a perfect "push-pull" that could also be described as a "loop", providing the exact amount required, with only "one" spare so there will never be an issue of "over-supply". The secret to a good Kanban system is to calculate how many Kanban cards are required for each product. Most factories use the coloured board system (Heijunka Box). This consists of a board created especially for the purpose of holding the Kanban cards.

SIX SIGMA

Process Improvement is the accepted methodology for improving businesses. The principal quality systems -- Total Quality Management (TQM), Six Sigma, ISO9000, QS9000 -- are all focused on process improvement. ISO9000 and QS9000 focus on the quality system. TQM and Six Sigma (in the broad sense) address the whole business. The greatest Value (return for invested effort) from any quality system is obtained when the processes being improved align with the strategic and financial plans for the business.

The Brecker Six Sigma Improvement Methodology combines the team-based Process Improvement methodology of TQM with the process measurement strengths of Six Sigma. The customer requirements analysis of Quality Function Deployment (QFD) and the cost analysis and team brainstorming of Value Analysis (VA) are integrated into the Brecker Six Sigma Methodology to yield better results, faster.

Brecker Six Sigma Improvement Methodology

The four-phase Brecker Six Sigma Improvement Methodology incorporates elements of Value Analysis (VA), Quality Function Deployment (QFD), and QS9000 (ISO900-2000 is now similar) into the Six Sigma Improvement System to provide better results with less effort and Implementation can be undertaken at 3 levels

Process (Phase 3) Product Line / Plant (Phases 2-3)

Business (Phases 1-3).

Organizations can pilot this methodology at the product line / plant level (Phases 2-3) before committing to company wide implementation and training. Traditional Six Sigma training addresses Phase 3.

Phase 1: Key problem areas are identified and quantified.

Senior personnel analyze customer, financial, operational, and quality data to identify improvement opportunities and quantify possible improvements. An Activity-Based Costing

approach is frequently taken. Improvement goals are aligned with strategic business objectives. This is akin to DMAIC at the business level with the Critical to Quality (CTQ) and Critical to Business (CTB) parameters being passed down from Phase 1 to Phase 3 (similar to QFD or Hoshin planning).

Phase 2: Potential product / process improvement solutions are quantified.

Product line / plant teams use value analysis style workshops to develop and evaluate specific product / service and process improvements needed to meet quality, productivity, and cost objectives. Lean thinking, Six Sigma, and other quality and productivity concepts are considered.

Phase 3: Multi-functional teams improve key processes.

Multi-functional teams analyze products and processes in depth and develop detailed implementation plans for improvements. Lean thinking, Six Sigma, Kaizen, and other quality and productivity tools are used as appropriate.

Phase 4: Improvements are implemented and monitored.

Strong management support is essential in making significant and lasting improvements. Decision-making needs to be crisp. Follow-up needs to be relentless. Improvement goals and the implementation schedule must be met to achieve the projected returns.

Product Line - Location Pilot

The complete improvement process above can be piloted at the product / service line or location (plant, HQ) level. Facilitated Six Sigma Value Analysis Workshops with teams including potential Six Sigma Leaders would identify and prioritize specific improvement projects. The potential Six Sigma Leaders would be coached in leading multi-functional teams addressing the high potential solutions. The Six Sigma Leaders and teams would apply the Six Sigma Process Improvement, QFD, Value Analysis, and productivity improvement methodologies in implementing product / service and process improvements (Phase 3).

Smaller businesses or smaller units of large corporations can continue to obtain the benefits of Six Sigma in this manner without the expense of large scale black belt training. Team leaders would gradually acquire the skills of Six Sigma Leaders. Low cost supplemental training would be used to train a limited number of Six Sigma Leaders as additional projects are undertaken.

When an organization decides to commit to a full-scale Six Sigma Improvement System, the system and training can be customized to fit the needs of the specific business. The general approach is the same, but the Six Sigma statistical tools, additional statistical tools, QFD and productivity methodologies, and team approach are adapted to business and personnel

needs. Combining training with implementation of improvements leads to virtual self-funding -- there is no need for costly up-front training.

The full benefits of the Brecker Six Sigma Improvement Methodology are obtained through the application of the Value methodology to the business. The contribution to Value-Added of all products / services and processes including business processes is determined and analyzed using Re-engineering techniques. Improvement areas are selected and objectives are set.

Six Sigma Leaders

Six Sigma Leaders training is combined with the implementation of coordinated Six Sigma improvement projects. Potential Six Sigma Leaders experience the general improvement methodology in the Six Sigma - Value Analysis Workshop (Phase 2). They are coached in applying Six Sigma, Value Analysis, QFD, and productivity techniques in Product / Process Re-Design Workshops (Phase 3). In addition, Leaders are trained in Six Sigma and other statistical techniques as they lead their assigned teams through the analysis and improvement of a specific product / service and processes. Training is customized to the needs of the particular business, process, and personnel.

Continuous Improvement

The quality journey is continuous -- never-ending. Over time, products / services change, customers change, processes change, people change, suppliers change. Quality may change suddenly or deteriorate slowly. Serious problems need to be addressed as soon as they become evident. ISO9000 and QS9000 (automotive) both require Corrective Action Systems to document and resolve serious quality problems. QS9000 (and now ISO9000-2000) requires a Continuous Improvement system to eliminate waste and to prevent small problems from becoming big problems.

Cost and productivity also need to be evaluated periodically. New materials, new suppliers, new processes, new scheduling techniques to accommodate volume and product mix changes, etc. may make cost and productivity improvements possible. Therefore, a Continuous Improvement (CI) system that not only resolves quality problems but also evaluates potential cost and productivity improvements is desired. Periodic Six Sigma Value Analysis workshops accomplish this quality, productivity, cost review.

ISO9000-2000

The Continuous Improvement (CI) requirements of QS9000 and ISO9000-2000 can be satisfied with a system incorporating Six Sigma - Value Analysis workshops and including techniques used in DFM and QFD workshops. For example, the monitoring of Critical to Quality variables (CTQs) -- determined in QFD / DFM workshops -- allows early detection of deteriorating process quality. Process Failure Mode and Effects Analysis (FMEA) is useful in identifying the sources of variation and reducing their effect.

The more definitive QS9000 system requirements can be incorporated into manufacturing CI systems.

Identification of special characteristics (CTQs) Design and Process FMEAs

Measurement systems analysis

Control plans for CTQs

Service industries would usually focus more on QFD and CTQs and less on statistical control plans. The techniques incorporated into the CI system would be customized to fit the business.

The implementation of a CI system requires the training of personnel to lead the continuous improvement efforts. Leaders for Six Sigma - Value Analysis workshops would be trained in Value Analysis, TQM, and basic Six Sigma techniques. More in depth statistical application training can be acquired in Six Sigma Leaders training. The Brecker Six Sigma Improvement Methodology described above would more than satisfy the requirements for a CI system.

Six Sigma Process Quality

In 1985, Bill Smith at Motorola demonstrated a correlation between how often a product was repaired during manufacture and its life in the field. Defect levels in the parts per million (ppm) rather than in parts per hundred (%) were needed to improve the reliability of semiconductors and electronic products in order to compete with the Japanese. Hence, the development of the Motorola Six Sigma quality program with its landmark quality level of 3 ppm defects.

Six sigma was intended to improve the quality of processes that are already under control major special causes of process problems have been removed. The output of these process usually follows a Normal distribution with the process capability defined as ± 3 sigma.

The process mean will vary each time a process is executed using different equipment , different personnel , different materials , etc. The observed variation in the process mean was ± 1.5 sigma. Motorola decided a design tolerance (specification width) of ± 6 sigma was needed so that there will be only 3.4 ppm defects -- measurements outside the design tolerance. This was defined as Six Sigma quality.

Six Sigma Process Improvement -- (D)MAIC

A more quantitative version of Deming's PDCA (Plan-Do-Check-Act) Process Improvement methodology was developed to implement this statistical approach -- it is commonly referred to as MAIC.

Measure Analyze

Improve

Control

Key product-process performance variables are measured, analyzed, improved, and controlled using statistical methods. The simple "statistical" quality tools that were popularized in the Total Quality era are reinforced with Design of Experiments (DOE) and more sophisticated Statistical Process Control techniques.

Process sigma is the primary unit of measure. It is determined from an analysis of the number of defects observed in a process. Performance is compared to the Best-In-Class sigma for that process to determine whether the process needs to be improved or the product / service needs to be re-designed. When improvement is necessary, Design of Experiments (DOE) are used to determine which product or process parameters are most important and specific parameter values that will give the best performance. SPC is used to continually monitor product and process performance.

Similar to the problem-solving models where an initial step to define the problem was frequently added, some practitioners prefer to precede MAIC with a Define step. They feel that selecting and defining the right process is critical. Effort can easily be wasted working on poorly selected, ill-defined processes -- as illustrated by many TQM failures.

Six Sigma Improvement System

Many Total Quality improvement efforts did not achieve their objectives because there was a lack of commitment to the specific improvement actions and to their effective implementation. Six Sigma, as a system, overcomes that weakness by

focusing on the common commitment to meeting customer requirements, developing a consensus set of improvement actions,

prioritizing those actions, and

establishing measures that assure accountability in implementation.

Many companies today are achieving dramatic results with a company-wide Six Sigma Improvement System based on the previously described Six Sigma Process Improvement methodology -- MAIC. Large numbers of technical personnel are trained as "black belts" to lead teams in applying the statistically-based methodology. Most black belt training programs focus heavily on these advanced statistical techniques.

High level executives are appointed as "champions" to drive the Six Sigma Program within their segment of the company. Master Black Belts coach black belts and coordinate Six Sigma projects. Some companies provide basic process improvement training to Six Sigma project team members and refer to them as "green belts." Black belts and / or teams are assigned process improvement projects with specific performance improvement goals.

To reduce the workload on their key personnel, to lessen the need for extensive training, and to minimize costs, small organizations (and some large ones, too) obtain external facilitation and statistical methods support.

Balanced Score Card

Kaplan's Balanced Score Card (Harvard Business School) lends support to the importance of approaching business in a total systems manner such as TQM or Six Sigma in the broad sense. Employee skills are the base of Kaplan's business model. Employees work to improve quality and reduce cycle time (improve processes) so that deliveries can be made on-time. This creates customer loyalty which in turn generates profits for the company (Return on Capital Employed). Kaplan suggests using measures of employee skills, process quality, process cycle time, and on-time performance to monitor

business performance in addition to the usual financial measures (which lag performance.)

LINEAR PROGRAMMING.

Learning aspects: Explain the characteristics & assumptions of linear programming models. Formulate models for various problems. Perform graphic analysis for two variable problems & find the algebraic solution for

the corner point found to be optimal. Describe the meaning of slack & surplus variables. Discuss the maening of sensitivity analysis on the objective function coefficients &

right-hand-side parameters. Interpret the computer output of a linear programming solution.

INTRODUCTION:In many business situation, resources are limited &demand for them is great.For e.g.a limited number of vehicles may have to be scheduled to make multiple trips to customers,or staffing plan may have to be developed to cover expected variable demand with the fewest employees.By this we describe a technique called LINEAR PROGRAMMING.It is useful for allocating scarce resources among competing demands.Linear programming can help managers find the best allocation solution & provide information about the value of addtional resources.

BASIC CONCEPTS:

How to solve operations management with linear programming ;by following programming models.1.Objective function.2.Decision variables.3.Constraints.4.Feasible region.5.Parameters.6.Linearity.

7.Nonnegativity.

Explanation:1.Objective function: An expression in linear programming models that states mathematically what is being maximised or minimized.

2.Decisions variables: The variables that represent choices the decision maker can control.

3.Constraints: The limitations that restrict the permissible choices for the decision variables.

4.Feasible region: A region that represents all permissible combinations of the decision variables in a linear programming model.

5.Parameters: A value that the decision maker cannot control & that does not change when the solution is implemented.

6.Linearity: A characteristics of linear programming models that implies proportionality & additvity -there can be no powers of decisions variables.

7.Nonnegativity: An assumption that the decisions variables must be either positive or zero. The process of building the model forces managers to identify the important decision variables &constraints,a useful step in its own right .

FORMULATING A PROBLEM:

Linear programming applications begin with the formulation of a models of the problem with the general chracteristics just described.A product mix problem -a one period type aggregate planning problem the solution of which yields optimal output quantities of a group product or services,subject to resource capacity & market demand constraints.Thus by using 3 step sequence,is the most creative &perhaps the most difficult part of linear programming.

1.Define the decisions variables -define each decisions vraiables specifically,remembering that the definitions used in the objective function must be equally useful in the constraints .2. Write out the objective function -what is to be maximised or minimised?if it is next month profits,write out an objective function that makes next months profits a linear function of the decision variables.

3. Write out the constraints -identify the constraints & the parameters for each decisions variable in them.

GRAPHIC ANALYSIS:Graphic method of linear programming:A type of graphic analysis involving the following 5 steps :plotting the constraints,identifying the feasible region,plotting an objective function line,finding a visual solution & finding the algebric solution.

PLOT THE CONSTRAINTS:We begin by plotting the constraints equations,disregarding the inequality portion of the constraints (<or>).Making each constraints an equality(=) transforms it into straight line .For e.g.the equation of the line for the process is 4x1 +6x2=48for the x1 axis intercept ,x2=0 &so4x1+6(0)=48x1=12to find the x2 axis intercept ,set x1 =0 &solve for x2:4(0)+6x2=48x2=8we connect points (0,8)&(12,0)with a straight line,

IDENTIFY THE FEASIBLE REGION:The feasible region is the area on the graph that contains the solution that satisfy all the constraints simultaneously,including the nonnegativity restrictions.Generally the following 3 rules identify the feasible points for a given constraints 1.For the (=)constraints,only the points on the line are feasible solution.2.For the (<_)constraints, the points on the line &the points below or to the left are feasible solutions

3.For the (>_)constraints,the points on the line & the points above or to the right are feasible solutions.

PLOT AN OBJECTIVE FUNCTION LINE:A point that lies at the intersection of two constraints lines on the boundary of the feasible region.No interior point in the feasible region need beconsidered because at least one corner point is better than any interior point. Similarly, other points on the boundary of the feasible region can be ignored because there is a corner point that is at least as good as any of them.Alegraically solving two linear equation for each corner points also is inefficient when there are many constraints &thus many corner points.From these objective function lines we can spot the best solution visually.If the objective function is profit,each line is called an "iso profit line"& every point on that line will yeild the same profit .

FIND THE VISUAL SOLUTION: We now eliminate corner points A &E from consideration as the optimal solution because better points lie above & to the right of the Z=272 iso-profit line.Our goal is to maximise

profits,so the best solution is a point on the iso-profit line.A linear programming problem have more than one optimal solution. This situation occurs when the objective function is parallel to one the faces of the feasible region.

FIND THE ALGEBRAIC SOLUTION:To find an exact solution,we must use algebra.By identifying the pair of constraints that define the corner points at intersection.simultaneously equation can be solved several ways.for problem there are 2 ways as follows:

1.Develop an equation with just one unknown.Start by multiplying both sides of one equation by a constant so that the co-eficient for one of the two decisions variables is identical in both equations .2.Insert this decisions variables value into either one of the original constraints &solve for the other decisions variable.

CO-EFFICIENT SENSITIVITY:The measurement of how much the objective function coefficient of a decisions must improve before the optimal solution changes &the decision variables become some positive number.The coefficient sensitivity for c1 can be found in the following manner.

1.Identify the direction of rotation of the iso profit line that improve c1.Rotate the iso profit line in this direction until it reaches a new optimal corner points that makes x1greater than 0.2.Determine which binding constraints has the same slope as the rotated iso profit line at this new point.Solve for the value of c1 that makes the objective function slope equal to the slope of this binding constraints.3.Set the coefficient sensitivity equalto the difference between this value &the current value of c1.

SHADOW PRICES:The marginal improvement in Z caused by relaxing the one unit.The change in Z per unit of change in the value of the right hand side parameter of the constraints is called "shadow price''. Relaxation means making the constraints less restrictive.

RANGE OF FEASIBILITY:A lower limit & upper limit define the range of feasibility,which is the interval over which the right hand side parameter can vary while its shadow price remains valid.

These two limits are establised when,as the constraints line is relaxed, a new corner point on the feasible region is reached that makes a different constraint binding.

COMPUTER SOLUTION :Most of the real world linear programming problems are solved on computer.The solution procedure in computer codes is some form of the SIMPLEX METHOD,an algebic procedure for solving linear programming problems.

SIMPLEX METHOD:The graphic analysis gives insight into the logic of the simplex method,with the focus on corner points. One corner points will always be the optimum,even when there are multiple optimal solutions. The simplex method starts with an inital corner point & then systematically evaluates other corner points in such a way that the objective at each iteration.The simplex method also helps generate the sensitvity analysis information that we developed graphically.

COMPUTER OUTPUT:Computer programs dramatically reduce the amount of time required to solve linear programming problems.Special purpose programs can be developedfor applications that must be repeated frequently.Such programs simplify datainput &generate the objective function &the problem.

APPLICATIONS:Many problems in operations management & in the other functional areas,have been modeled as linear programming problems.The following list identifies some problems that can be solved with linear program.

Aggregate planning :Production. find the minimum cost production schedule,taking into account hiring & layoff,inventory carrying,overtime & sub contracting costs,subject to various capacity & policy constraints .

Distribution:Shipping.find the optimal shiping assignments from factories to distribution centers or from warehouse to retailers.

Inventory :Stock control. determine the optimal mix of product to hold in inventory ina warehouse.Supplier slection.find the optimal combination of suppliers tominimise the amount of unwanted inventory.

Location :Plants or warehouse.determine the optimal location of a plant or warehouse with respect to total transportation costs between various alternative locations & existing supply & demand sources.

Process management :Stock cutting.given the dimensions of a roll or sheet of raw material,find the cutting pattern that minimises the amount of scrap material.

Scheduling :Shifts.determine the minimum cost assignment of workers to shifts,subject to varying demand.Routing.find the optimal routing of a product or service

through several process,each having its own capacity & other characteristics.

Total Quality Management (TQM)

Quality: A Management Philosophy

Anyone born in 1970 or later probably takes for granted consumer demand for high-quality products & services & the need for firms to improve their operations to make quality a competitive priority. However, QUALITY was not always a top priority. In International markets, the quality of products coming out of JAPAN in the 1950’s & 1960’s was very poor, owing to the destruction of Japanese industries by allied bombings during WORLD WAR II. Following the war, Japan had to rebuilt its industrial base completely so with the help of American consultants such as W.Edwards Deming & Joseph M.Juran it began making quality a competitive priority. Demings philosophy was that quality is the responsibility of the management, not the worker & that the management must foster an environment for detecting & solving quality problems. Juran believed that continuous improvement, hands-on management, & training are fundamental to achieving excellence in quality. At that time US automobiles were ruling the market as their luxury sedans were at a higher position than the small, fuel efficient Japanese cars but the energy crisis in mid 1970’s changed everything. Everyone wanted fuel efficient cars & this gave an advantage to the Japanese automobile industry to make a mark & they did just that. By 1980’s US realized if they wanted to retain their customers they needed to make some serious changes or else they would have a very serious downfall. This method of quality practices soon spilled over to all the other Japanese industries. In a short span of 30 years, Japanese manufacturers turned quality levels that was once considered a joke into global standards of excellence.

The lesson learnt by all other firms worldwide: The global economy of the 2000’s & beyond dictates that companies provide the customer with an ever-widening array of products & services having high levels of quality.

Customer Driven Definitions of Quality:

Quality is the ability of a firm to meet or exceed the expectations of the customer.

Conformance to Specifications- Customers expect the products or services they buy to meet or exceed certain advertised levels of performance. In service systems also, conformance to specifications is important, eventhough tangible outputs are not produced. Specifications for a service operation may relate to on-time delivery or response time.

Value- Another way customers define quality is through value, or how well the product or service serves its intended purpose at a price customers are willing to pay. How much value a product or service has in the mind of the customer depends on the customer’s expectations before purchasing it.

Fitness for Use- In assessing fitness for use, or how well the product or service performs its intended purpose, the customer may consider the mechanical features of a product or the convenience of a service. Other aspects of fitness for use include appearance, style, durability, reliability, craftsmanship & serviceability.

Support- Often the product or service support provided by the company is as important to customers as the quality of the product or service itself. Customers get upset with a company if financial statements are incorrect, responses to warranty claims are delayed, or advertising is misleading. Good support can reduce the consequences of quality failures in other areas.

Psychological Impressions- People often evaluate the quality of a product or service on the basis of psychological impressions: Atmosphere, Image or Aesthetics. In the provision of services, where the customer is in close contact with the provider, the appearance & actions of the provider are very important. Nicely dressed, courteous, friendly, & sympathetic employees can affect the customer’s perception of service quality.

Quality as a Competitive Weapon:

In general, a business’s success depends on the accuracy of its perception of consumer expectations & its ability to bridge the gap between those expectations & operating capabilities. Consumers are much more quality-minded now than in the past. A survey of 2000 business units conducted by the strategic planning institute of Cambridge, Massachusetts, indicated that a high-quality product has a better chance of gaining market share than does a low-quality product. In another survey by Industry Week magazine, 85% of the firms responding believed that their TQM programs were moderately or highly successful in retaining customers & building satisfaction.

Good quality can also pay off in higher profits. High-quality products & services can be priced higher than comparable lower-quality ones & yield a greater return

for the same sale. Poor quality erodes the firm’s ability to compete in the marketplace and increases the costs of producing its product or service.

The Costs of Poor Quality

Most experts on the costs of poor quality estimate losses in the range of 20-30% of gross sales for the defective or unsatisfactory products.

4 major categories of costs are associated with Quality Management:

1. Prevention2. Appraisal3. Internal Failure4. External Failure

1. Prevention Costs - They are associated with preventing defects before they happen. They include the costs of redesigning the process to remove the causes of poor quality, redesigning the product to make it simpler to produce, training employees in the methods of continuous improvement, & working with suppliers to increase the quality of purchased items or contracted services.

2. Appraisal Costs- They are incurred in assessing the level of quality attained by the operating system. Appraisal helps management identify quality problems. As preventive measures improve quality, appraisal costs decrease, because fewer resources are needed for quality inspections and the subsequent search for causes of any problems that are detected.

3. Internal Failure Costs- They result from defects that are discovered during the production of a product or service. They fall into 2 major cost categories: yield losses, which are incurred if a defective item must be scrapped, & rework costs which are incurred if the item is rerouted to some previous operations to correct the defect or if the service must be performed again.

4. External Failure Costs- They arise when a defect is discovered after the consumer has received the product or service. They also include warranty service & litigation costs. A warranty is a written guarantee that the producer will repair defective parts or perform the service to the customer’s satisfaction. Usually, a warranty is given for a specific period. Warranty costs must be considered in the design of new products or services, particularly as they relate to reliability. Defective products can injure & even kill consumers who purchase them. An increasing number of countries are adopting liability laws that force companies to pay damages---often large amounts---to injured plaintiffs or heirs, even when they have not proved that the manufacturer

was negligent in designing the product. All that needs to be shown is that a product was defective & that it caused the injury or death.

Employee Involvement:

The challenge of quality management is to instill an awareness of the importance of quality in all employees & to motivate them to improve product quality. With TQM, everyone is expected to contribute to the overall improvement of quality---from the administrator who finds cost-saving measures to the salesperson who learns of a new customer need to the engineer who designs a product with fewer parts to the manager who communicates clearly with other department heads. In other words, TQM involves all the functions that relate to a product or service.

One way to achieve employee involvement is by the use of teams, which are small groups of people who have a common purpose, set their own performance goals & approaches & hold themselves accountable for success. There are many types of teams, such as Problem solving teams, Special purpose teams & Self managing teams. On-the-Job training programs can also help improve quality. The prospect of merit pay & bonuses can give employees some incentive for improving quality. Companies may tie monetary incentives directly to quality improvements. Non-monetary awards, such as recognition in front of the co-workers can also motivate quality improvements.

Improving Quality Through TQM :

PROCESSES:

1. Purchasing Considerations :- Most businesses depend on outside suppliers for some of the materials, services or equipment used in producing their products & services. Large companies have hundreds & even thousands of suppliers some of which supply the same types of parts. The quality of these inputs can affect the quality of the firm’s work, & purchased parts of poor quality can have a devastating effect on the firm. Both the buyer’s approach & specification management are keys to controlling supplier quality. The firm’s buyer must emphasize not only the cost & speed of delivery to the supplier but also the quality of the product. A competent buyer will identify suppliers that offer high-quality products or services at a reasonable cost. After identification, the buyer should work with them to obtain essentially defect-free parts. Management needs to allow sufficient time for the purchasing department to identify several low-cost, qualified suppliers & to analyze the information. An unrealistic deadline can lead

to poor selection based on incomplete information which will further lead to a chain of problems.

2. Product & Service Design :- design changes often require changes in methods, materials, or specifications, they tend to increase defect rates. Change invariably increases the risk of making mistakes, so stable products & services can help reduce internal quality problems. However, stable designs may not be possible when a product or service is sold in markets globally. Although changed designs have the potential to increase market share, management must be aware of possible quality problems resulting from the changes. If a firm needs to make design changes to remain competitive, it should be carefully tested.

3. Process Design :- The design of the process used to produce a product or service greatly affects its quality. The purchase of new technology can help prevent or overcome quality problems. One of the keys to obtaining high quality is concurrent engineering in which operation managers & designers work closely together in the initial phases of product or service design need to ensure that production requirements & process capabilities are synchronized. The result maybe better & may need shorter time duration.

TOOLS:

1. Quality Function Development :- A key to improving quality through TQM is linking the design of products or services to the processes that produce them. Quality function deployment(QFD) is a means of translating customer requirements into the appropriate technical requirements for each stage of product or service development & production. In 1978, YOKI AKAO & SHIGERU MIZUNO published the first work on this subject. This approach seeks answers to the following 6 questions.A) What do our customers want?B) In terms of our customers, how well are we doing relative to our competitors?C) What technical measures relate to our customers’ needs?D) What are the relationships between the voice of the customer & the voice of the

engineer?E) How does our product or service performance compare to that of our

competition?F) What are the potential technical trade-offs?

2. Benchmarking :- it is a continuous, systematic procedure that measures a firms products or services & processes against those of industry leaders. Companies use it to understand better how outstanding companies do things so that they can improve their own operations. Typical measures used in benchmarking include cost per unit, breakdowns per customer, processing time per unit, customer retention rates & customer satisfaction levels.It consists mainly of 4 basic steps:A) Planning - Identify the product, service, or process to be benchmarked & the firm

to be used for comparison, determine the measures of performance for analysis & collect data.

B) Analysis – Determine the gap between the firm’s current performance & that of the benchmark firm & identify the causes of significant gaps.

C) Integration – Establish goals & obtain the support of managers who must provide the resources for accomplishing the goals.

D) Action – Develop cross-functional teams of those most affected by the changes, develop action plans & team assignments, implement the plans, monitor progress, & recalibrate benchmarks as improvements are made.

3. Data Analysis Tools :- The first step in improving the quality of an operation is data collection. Data can help uncover operations requiring improvement & the extent of remedial action needed. There are nine tools for organizing & presenting data to identify areas for quality & performance improvement: flow charts, process diagrams, cause-and-effect diagrams, graphs, checklists, histograms, bar diagrams, Pareto charts, scatter diagrams & control charts.

Checklists- A checklist is a form used to record the frequency of occurrence of certain product or service characteristics related to quality.

Histograms & Bar charts- A histogram summarizes data measured on a continuous scale, showing the frequency distribution of some quality characteristics whereas a bar chart is a series of bars representing the frequency of occurrence of data characteristics measured on a yes-or-no basis.

Pareto’s Charts- It is a bar chart on which the factors are plotted in decreasing order of frequency along the horizontal axis. The chart has 2 vertical axes, the one on the left showing frequency & the one on the right showing cumulative percentage of frequency. The cumulative frequency curve identifies the few vital factors that warrant immediate managerial attention.

Scatter Diagrams – Sometimes managers suspect but are not sure that a certain factor is causing a particular quality problem. A scatter diagram, which is a plot of 2 variables showing whether they are related, can be used

to verify or negate the suspicion. Each point on the scatter diagram represents one data observation.

Cause-And-Effect Diagrams – First developed by Kaoru Ishikawa, this diagram helps management to trace customer complaints directly to the operations involved. Operations that have no direct bearing on that particular defect are’nt shown on the diagram for that defect. It is also called the fishbone diagram.

Graphs – They represent data in a variety of pictorial formats, such as line graphs & pie charts. Line graphs represent data sequentially with data points connected by line segments to highlight trends in the data. Pie charts are useful for showing data from a group of factors that can be represented as percentages totaling 100%

INTERNATIONAL QUALITY DOCUMENTATION STANDARDS.

If each country had its own set of standards, companies selling in international markets would have difficulty complying with quality documentation standards in the countries where they did business. To overcome this problem, the International Organization for Standardization devised a set of standards called ISO 9000 for companies doing business in the European Union. Subsequently, a new set of documentation standards, ISO 14000, were devised for environmental management systems.

The ISO 9000 Documentation Standards :- ISO 9000 is a set of standards governing documentation of a quality program. Companies become certified by proving to a qualified external examiner that they have complied with all the requirements. Once certified, companies are listed in a directory so that potential customers can see which companies have been certified & to what level. Compliance with ISO 9000 standards says nothing about the actual quality of a product. Rather, it indicates to customers that companies can provide documentation to support whatever claims they make about quality. ISO 9000 actually consists of 5 documents: ISO 9000-9004. ISO 9000 is an overview document, which provides guidelines for selection & use of the other standards. ISO 9001 is a standard that focuses on 20 aspects of a quality program for companies that design, produce, install, & service products. These aspects include management responsibility, quality system documentation, purchasing, product design, inspection, training & corrective action. It is the most difficult &

comprehensive standard to attain. ISO 9002 covers the same areas as ISO 9001 for companies that produce to customer’s designs or have their design & service activities at another location. ISO 9003 is the most limited in scope & addresses only the production process. ISO 9004 contains guidelines for interpreting the other standards.

ISO 14000—An Environmental Management System :- The ISO 14000 documentation standards require participating companies to keep track of their raw materials use & their generation, treatment, & disposal of hazardous wastes. Although not specifying what each company is allowed to emit, the standards require companies to prepare a plan for ongoing improvement in their environmental performance. ISO 14000 is a series of 5 standards that cover a number of areas, including the following:

Environmental Management System: requires a plan to improve performance in resource use & pollutant output.

Environmental Performance Evaluation: specifies guidelines for the certification of companies.

Environmental Labeling: defines terms such as recyclable, energy efficient & safe for the Ozone layer.

Life-Cycle Assessment: evaluates the lifetime environmental impact from the manufacture, use & disposal of a product.

To maintain their certification, companies must be inspected by outside, private auditors on a regular basis.

BENEFITS OF ISO CERTIFICATION. Completing the certification process can take as long as 18 months & involve many hours of management & employee time. Despite the expense & commitment involved in ISO certification, it bestows significant external & internal benefits. The external benefits come from the potential sales advantage that companies in compliance have. Companies looking for a supplier will more likely select a company that has demonstrated compliance with ISO documentation standards, all other factors being equal. Registered companies report an average of 48% increased profitability & 76% improvement in marketing. Consequently, more & more firms are seeking certification to gain a competitive advantage. Internal benefits relate directly to the firm’s TQM program. The British Standards Institute, a leading third party auditor, estimates that most ISO 9000 registered companies experience a 10% reduction in the cost of producing a product because of quality improvements.

TQM ACROSS ORGANISATIONS TQM is a philosophy that must permeate the entire organization if it is to be successful. The payoffs can be great; however, everyone must be involved.TQM has value for manufacturing as well as service companies. For example, Merill Lynch Credit Corporation(MLCC), a winner of the Malcolm Baldrige National Quality Excellence Award, found out that focusing on quality management & performance excellence throughout the organization has significant rewards. MLCC, which originates over $4 billion in loans a year & manages a portfolio of nearly $10 billion, has 8 core & 10 support processes, involving 830 employees, that need to be coordinated. Communication from top to bottom is critical. Each year senior managers translate the company’s strategic imperatives into a few critical objectives, which are accompanied by specific targets & measures. These objectives become the basis for determining employee performance plans, which in turn facilitate the communication loop between top management & the employees. Employees are empowered to take initiative & responsibility, especially in being flexible in responding rapidly to customer needs & in individual development. Employees receive an average of 74 hours of training a year, emphasizing the need to keep abreast of changes in technology to better serve customers. A key element of MLCC’s quality initiative is the “voice of the client” process, which identifies customer satisfaction drivers for each market segment & credit category. These priority customer requirements provide the basis for key performance measures for the 8 core processes. In addition, data snooping is used to analyze customer satisfaction data to detect trends. Negative trends & recurring problems trigger process improvement teams t develop counter measures & to prevent recurrences. Clients receive feedback on the resolution of the problem within 5 working days. MLCC’s complete organizational commitment is exemplary of the pervasiveness of TQM, & it has paid off. In the 2 years after the initiation of the TQM philosophy, net income rose 100%, return on equity increased 74% & return on assets improved 36%.