Total Quality

Management
G. Pavan Kumar
BITS Pilani Lecturer
Mechanical Engineering Department
Hyderabad Campus
 BITS Pilani
Hyderabad Campus

Chapter 7: Performance Measures

 Topics to be covered

 Introduction

 Basic Concepts

 Strategy

 Performance Measure Presentation

 Quality Costs

 Malcolm Baldridge National Quality Award

 Scoring

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 Problems MM ZG522 - Total Quality Management BITS Pilani, Hyderabad Campus
 Introduction
Managing an organization without performance measures
is like a captain of a ship navigating without instrumentation
Measures play a vital role in the success or failure of an
organization
Objectives
– Establish baseline measures and reveal trends
– Determine which processes need to be improved
– Indicate process gains and losses
– Compare goals with actual performance
– Provide information for individual and team evaluation
– Provide information to make informed decisions
– Determine the overall performance of the organization
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 Typical measurements
Human resources
– Lost time due to accidents, absenteeism, turnover,
employee satisfaction index, number of suggestions for
improvement, number of suggestions implemented,
number of training hours per employee, training cost
per employee, number of active teams number of
grievances etc.
Customers
– Number of complaints, number of on-time deliveries,
warranty data such as parts replacement, customer
satisfaction index, time to resolve complaints,
telephone data such as response time, mean time to
repair, dealer satisfaction, report cards etc.
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 Typical measurements – contd..
Production
– Inventory turns, SPC charts, Cp / Cpk, amount of
scrap / rework, non conformities per million untis,
software errors per 1000 lines of code, percent of
flights that arrive on time, process yield, machine
downtime, actual performance to goal, number of
products returned, cost per unit etc.
Research and development
– New product time to market, design change orders,
R&D spending to sales, average time to process
proposal, recall data, cost estimating errors etc.

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 Typical measurements – contd..
Suppliers
– SPC charts, Cp / Cpk, on-time delivery, service rating,
quality performance, billing accuracy, average lead
time, percent of suppliers that are error free, just-in-
time delivery target etc.
Marketing / Sales
– Sales expense to revenue, order accuracy, introduction
cost to development cost, new product sales to total
sales, new customers, gained or lost accounts, sales
income to number of sales people, number of
successful calls per week etc.

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 Typical measurements – contd..
Administration
– Revenue per employee, expense to revenue, cost of
poor quality, percent of payroll distributed on time,
number of days accounts receivable past due, number
of accounts payable past due, office equipment up-
time, purchase order errors, vehicle fleet data, order
entry / billing accuracy etc.
A good metric compares the measurement of interest to
the total possible outcomes such as rework hours to total
hours.

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 Criteria
All organizations have some measurements in place that can
be adapted for TQM. New measurements can also be added
To evaluate the existing as well as new measures, following
criteria can be used:
Simple
– Measures should be understandable by those who will
use them
Few in number
– Important measures must be distinguished from the
unimportant ones so that all users can concentrate on just
a few
– Two or three for any work group with the number
increasing for department, plant, corporations etc.
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 Criteria – contd..
– Quality council may wish to use composite measures
such as customer satisfaction index, which contains
several weighted measures like cost, product quality,
delivery etc.
Developed by users
– Measures dictated by a higher authority will not receive
support from downstream units
Relevance to customer
– Must be relevant to the needs of internal or external
customers
Cost
– Should reflect the cost and profit like cost of poor
quality, cost of measurement
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 Criteria – contd..
Improvement
– Measures should be used to promote improvement, not
to identify poor performance and penalize low
performers
– Though used for correcting non conformances and
making current decisions are important, should focus on
improvement
Visible
– Facility wide measures should be posted in a central
location such that everybody can see them
– Unit measures should be posted at the machine or work
centre
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 Criteria – contd..
Timely
– Financial and accounting data are presented too late to
be actionable
– Significant portion of measurements should be
operational rather than financial
Aligned
– Measures and indicators tied to customer and
organizational performance requirements provide a
way to align activities with organizational goals
Results
– Measures need to be guided and balanced by the
interest of all stakeholders – customers, employees,
suppliers etc.
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 Characteristics
One or more seven basic characteristics are used to
measure the performance of a process, product or service
Quantity
– This characteristic is one of the most common
measures. Eg. How many units a production process
produces
Cost
– This characteristic measures the amount of resources
required to produce a given output
Time
– This answers the question, “was the output on time?”
Eg. % of beds in a hospital that were made on time
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 Characteristics – contd..
Accuracy
– This characteristics measures the number of non-
conformances in the output, such as three
nonconforming labels per million
Function
– This characteristic answers the question “does the
output perform the function as specified?” Eg. Braking
distance for an automobile
Service
– This characteristic measures the performance of the
service activity. A typical measure is the no.of complaints
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about service personnel
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 Characteristics – contd..
Aesthetics
– This characteristic measures how the product looks,
feels, sounds, tastes, smells and is quite subjective. Eg.
% of people who like the interior design

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 Strategy
Quality council has the overall responsibility for the
performance measures and they ensures that all
measures are integrated into a total system of measures
To develop the system, it will obtain information from
all stakeholders
They will utilize the goals, values, mission, objectives
and criteria
An example of system that emphasizes percent
improvement might contain the functions and metrics as
shown below:

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 Strategy – contd..
– Quality
• Percent reduction in cost of poor quality
• Percent reduction in non conformities
• Percent of certified suppliers, supplier base
• Percent reduction in corrective action cycle time
– Cost
• Percent increase in inventory turnover
• Percent reduction in data transactions
• Percent increase in materials shipped direct to
work-in-process by the supplier
• Percent increase in output dollars per employee
• Percent reduction in shop floor space
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 Strategy – contd..
An example of system – contd..
– Flexibility
• Percent reduction in cycle time
• Percent reduction in lot / batch size
• Percent increase in number of jobs mastered per
employee
• Percent increase in common materials used per
product
– Reliability
• Percent reduction in downtime, warranty costs
• Percent reduction in design changes, on-time
delivery
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 Strategy – contd..
– Innovation
• Percent reduction in new product introduction time
• Percent increase in new product sales revenue as a
percent of total sales revenue
• Percent increase in new patents granted
• Percent of management time spent on or leading
innovation
Above metrics are tracked to show trends, identify
problem etc.
Once strategic measurement system is developed,
functional areas can develop their systems by involving their
work groups
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 Performance measures presentation

Six basic techniques for presenting performance measures

– Time series graph: used to benchmark the process and
shows favourable and unfavourable trends in the
measure
– Control chart
– Capability index
• ratio of tolerance to the capability
• There are two measures, one indicates the ability of
the process to meet specifications and the other
indicates the centring of the process on the target
– Taguchi’s loss function
• This technique combines target, cost, and
specifications into one measurement
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 Performance measures presentation

– Cost of poor quality

• Money is the best way to attract the attention of
senior management
– Malcolm Baldrige National Quality Award
• Criteria for this award quite effectively measure the
performance of the TQM effort on an annual basis

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 Quality costs
Value of quality must be based on its ability to contribute to the
profit as business is measured in terms of dollars
Cost of poor quality or quality costs can be added to other costs
used in decision making like design, production, sales etc.
This cost can be programmed, budgeted, measured and
analysed
Quality costs cross department lines by involving all activities of
the organization and some costs like rework, inspector salary etc,
can be easily identified, while costs associated with lost sales and
goodwill may be impossible to measure

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 Quality costs – contd..
 It is defined as those costs associated with the non-
achievement of product or service quality as defined by
the requirements established by the organization and its
contracts with customers and society
Considered as management technique
– It is the economic common denominator that forms
the basic data for TQM. When quality costs are high, it
is a sign of ineffectiveness
– A quality cost program provides warning against
oncoming, dangerous situations
– It quantifies the magnitude of the quality problem in
the language best known to management - dollars
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 Quality costs – contd..
– Cost of poor quality can exceed 20% of the sales dollar
in manufacturing, while it is about 35% in case of
services
– Quality cost can be used to identify quality
improvement activities and prioritize the same by
pareto analysis and can even measure the
effectiveness of action taken
– Quality improvement is synonymous with reduction in
the cost of poor quality and one the advantage is the
identification of hidden and buried costs in depts.

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 Categories and Elements
Four categories: Prevention, Appraisal, Internal failure and
External failure
Prevention cost
– The experience gained from the identification and
elimination of specific causes of failure and their costs
is utilized to prevent the recurrence of the same or
similar failures in other products by developing specific
activities and cost of all such activities is defined as
prevention cost
– Marketing: costs incurred in accumulation and
evaluation of customer needs - marketing research /
survey, contract etc.
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 Categories and Elements – contd..

– Design: costs incurred to translate user needs into

quality standards and to manage the quality of new
product prior to production – design qualification tests,
field trials etc.
– Purchasing: costs incurred to assure conformance to
requirements of supplier parts, processes etc. –
supplier rating, supplier quality planning
– Operations: Costs incurred in assuring the capability
and readiness of operations to meet quality standards
and the quality education of operating personnel –
operation process validation, development of quality
measurement and control equipment
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 Categories and Elements – contd..

 Other prevention costs incldue quality amdinistration

costs, rent, travel, telephone etc.
Appraisal cost
– Defined to include all costs incurred in the planned
conduct of product or service appraisals to determine
compliance of requirements
– Purchasing appraisal costs: costs incurred for the
inspection or test of purchased supplies to determine
acceptability of use – receiving inspections and tests,
measurement equipment etc.
– Operations appraisal costs: Costs incurred for the
inspections, tests, or audits required to determine and
assure the acceptability of product or service to
continue into each discrete step in the operations plan
from start of production to delivery
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 Categories and Elements – contd..
– Setup inspections, process control measurements,
outside endorsement etc.
– External appraisal costs: costs incurred when there is
need for field setup or installation prior to official
acceptance by customer – field trials of new products
Internal failure cost
– Defined to include all costs required to evaluate,
dispose of, or correct or replace nonconforming
products or services prior to delivery to customer and
includes labour and material expenses that are lost due
to unacceptable work affecting the quality of end
products

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 Categories and Elements – contd..

Internal failure cost

– Product design failure costs: consists of unplanned
costs that are incurred because of inherent design
inadequacies in released documentation for
operations. It will not include product improvement or
product upgrading
– Purchasing failure costs: costs incurred due to
purchase items rejects – purchased material
replacement costs, rework of supplier rejects etc.
– Operations failure costs: Costs associated with
nonconforming product discovered during the
operations process – categorized into three areas:
material review and corrective action, rework or repair
costs, and scrap costs
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 Categories and Elements – contd..

External failure cost

– Costs incurred due to actual or suspected
nonconforming product after delivery to the customer
– Complaint investigation or user service: Total cost of
investigating, resolving and responding to user
complaints, inquiries and field service
– Returned goods: total costs of evaluating and repairing
or replacing goods due to quality problems
External failure cost
– Retrofit and recall costs: costs required to modify or
update product facilities to a new design change level
or major redesign due to design deficiency

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 Categories and Elements – contd..

– Warranty claims: include the total cost of claim paid to the

user after acceptance to cover expenses like repair, cleaning
or price reduction etc.
– Liability costs: organization paid costs due to liability claims
and includes product liability insurance
– Penalties: cots incurred because less than full product
performance is achieved as required by contracts by
government rules or regulations
– User goodwill, lost sales: these costs are difficult to
measure

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 Collection and reporting
Collection system design
– Measurement of actual quality costs is accounting
function, but requires close interaction with quality
department
– This system should be designed using the organizations
present systems and modifying it where appropriate
– Existing sources for reporting system are expense
reports, credit and debit memos etc.
– Since quality costs cross departmental lines, special
forms may be needed to collect the same and in some
cases, proper estimating technique like work sampling
should be used
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 Collection and reporting
– Accounting office must be involved in design as they
have the ability to create a new system that integrate
quality costs into existing accounting system
– Major problem is allocating costs to the proper
element. For example,
• Incoming inspection would be appraisal, while
supplier certification is appraisal
• Cost of team meeting might be due to failure, but
cost of the solution might be appraisal or prevention
– Costs should be collected by product line, department,
work etc.

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 Quality cost bases
Quality cost by themselves present insufficient information
for analysis and hence base line is required that will relate
quality costs to some aspect of the business that is sensitive
to change
Typical bases are labour, production, sales and unit
Labour base index
– Quality cost per hour of direct labour
– Direct labour information is readily available, but
automation affects the based over an extended period
of time and hence should be used for comparison for
short period of time
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 Quality cost bases – contd..
Production base index
– Quality cost per dollar of production cost
– Production cost composed of direct labour, material and
overhead and this information is readily available
Sales base index
– Quality cost per dollar of net sales
– Some times sales lag behind production and are
frequently subject to seasonal variations and hence
cannot be used for short term analysis

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 Quality cost bases – contd..
Unit base index
– Quality cost per unit such as no. of boxes, kilograms of
aluminium
– Can be used when product lines are similar, but when
product lines are dissimilar, comparisons are difficult to
make and interpret
Various indices have disadvantages and hence there indices
are used
The above bases are reflected on quality cost report, which
consists of the following: category of quality costs for current
month and prior year to year values, applicable indices, ratio
etc.
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 Quality cost analysis
Objective of techniques is to determine opportunities for quality
improvement
Trend analysis
– Simply comparing present cost levels to past levels and it is
suggested that at least one year elapse before drawing any
conclusion from the data
– It provides information for long range planning and data
comes from monthly report
– Trend analysis can be accomplished by cost category, sub
category, by departments, by plants etc.
Pareto analysis
– Identify vital few problems from useful many and evaluated
based on dollar value generally
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 Quality improvement strategy
Basic concept is that failure has a root cause and causes
are preventable and prevention is cheaper
Following strategy can be used
– Reduce failure cost by problem solving
– Invest in right prevention activities
– Reduce appraisal cost where appropriate
– Continuously evaluate and redirect the prevention
effort to gain further quality improvement
Project team
– 2 types of problems are faced by organization
• Problem which a department can correct with little
or no outside help
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 Quality improvement strategy – contd..

• Problem that requires coordinated action between

several functional areas
– Team is formed based on these problem categories
– In organization, first type of problem account of 15% of
total, while 85% of the problem cross department lines
– Team requires written authority from quality council
Reducing Failure cost
– Quality improvement projects will be directed toward
reducing failure costs. Failure detected at the
beginning of operation are less costly than failure
detected at the end of operations

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 Quality improvement strategy – contd..

– External failure are frequently targeted for

improvement, because they can give the greatest ROI.
Care must be exercised to ensure that the basic cause
has been found rather than some pseudo cause
Reducing Prevention cost
– Prevention activities are related to employees attitudes
and formal techniques to eliminate problems
– Involving both employee and management as member
of project team and establish a quality council with
CEO as chair and managers as members
– Providing a system whereby employees can direct
quality improvement ideas
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 Quality improvement strategy – contd..

Reducing Prevention cost

– Using formal techniques
• New product verification program that review
comprehensively before release to production
• Supplier selection program that concentrate on
quality
• Reliability testing to prevent high field failure
Reducing Appraisal cost
– As failure costs reduced, the need of appraisal activities
will be reduced
– A project team should review the entire appraisal
activity to determine its effectiveness.
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 Program Implementation
First step is to determine if the program can be
beneficial to the organization. Small organisation need
to know that implementation time and expenses are
extensive
A review and analysis of cost data for large
organization will be high. Top management must need to
be convinced and presentation should describe the
results to expect, implementation plan.
The program will be great success, if a single product
line or department is used for trial basis

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 Program Implementation
Steps of trial program are
– Measurement of quality cost
– Determination of appropriate indexes
– Establishment of trend analysis chart
– Identification of improvement activities
– Assignment of project teams
– Reporting of results
All personnel with in the area of trial program should be
educated and trained. Concurrently, basic accounting
procedures are revised to accommodate quality costs
Trial program is complete, then it is expanded to other
departments
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 Malcolm Baldridge National Quality Award

Annual award to recognise US organization for performance

excellence
Award promotes
– Understanding the requirements for performance
excellence
– Sharing of information on successful performance
strategies
Five categories: Manufacturing, Service, Small business,
Health care, Education
These awards may be given each year in each category
Many organization who are not interested in award are
using the categories as techniques to measure their TQM
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effort
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 Malcolm Baldridge National Quality Award

Criteria purposes
– Criteria for performance excellence are the basis for
making awards and for giving feedback to applicants
– Helps to improve performance practices and capabilities
– Facilitate communication and sharing of best practices
– Serve as an working tool for understanding and
managing performance, planning, training and
assessment

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 Malcolm Baldridge National Quality Award
– contd..
Core values and concepts are embodied in seven categories:
leadership, strategic planning, customer and market focus,
information and analysis, human resource focus, process
management, business results
Characteristics of criteria
– The criteria is directed towards results
• They focus on seven key areas of business performance.
Results are composite of customer satisfaction /
retention, market share / new market development,
product and service quality, productivity, operational
effectiveness, HR performance / development, Supplier
performance / development, public responsibility /
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corporate citizenship
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 Malcolm Baldridge National Quality Award
– contd..
• Improvements in these areas contribute significantly
to organization performance including financial
performance
– The criteria are non prescriptive and adoptable
• They do not prescribe specific quality tools,
techniques, technologies, systems etc or how
organization should be organized

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 Malcolm Baldridge National Quality Award
– contd..

Characteristics of criteria
– The criteria are non prescriptive because
• The focus is on results and not on procedures, tools
etc. These requirements intended to foster
incremental and major breakthrough
• Selection of tools, techniques, systems and
organization depend on business type, size,
employee capability and responsibility
– The criteria supports a systems approach to maintaining
organization wise goal alignment

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 Malcolm Baldridge National Quality Award
– contd..

• Alignment in criteria is built around connecting and

reinforcing measures derived from organization
strategy
• There measures tie directly to customer value
• Measures serve as both as communication tool and a
basis for deploying overall performance requirements
• When goals and strategies change it requires
dynamic linkage with criteria item

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 Malcolm Baldridge National Quality Award
– contd..

Characteristics of criteria
– The criteria supports goal based diagnosis
• Criteria are a set of 20 performance oriented
requirements
• Scoring guidelines spell out assessment dimensions –
approach, deployment and results
• An assessment thus provides a profile of strength and
opportunities for improvement relative to 20 basic
requirements
• Assessment leads to action that contribute to results
Criteria are classified into seven categories and consists of
50
20 action elements,MMwhich has a score for each BITS Pilani, Hyderabad Campus
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 MBNQA – Criteria
Leadership - 110 Human resource focus – 100
– Leadership system - 80 – Work system – 40
– Company responsibility and – Employee education and training
citizenship – 30 and development – 30
Strategic planning - 80 – Employee well being and
– Strategy development process – satisfaction - 30
40 Process management - 100
– Company strategy – 40 – Management of product and
Customer and market focus - service process – 60
80 – Management of support process –
– Customer and market knowledge 20
– 40 – Management of supplier and
– Customer satisfaction and partnership – 20
relationship enhancement – 40 Business result - 450
Information and analysis - 80 – Customer satisfaction results – 125
– Selection and use of information – Financial and market results – 125
and data – 25 – Human resources result – 50
– Selection and use of comparative – Supplier and partner results – 25
information and data – 15 – Company specific result - 125
– Analysis and review of company
performance - 40

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 MBNQA – Criteria – contd.
Leadership
– It examines how senior leader’s leadership and the
leadership system address values, company directions,
learning, innovation etc.
– Also addresses company’s societal responsibilities
Strategic planning
– How companies sets strategic direction and how it
develop strategies
– Also examines how plans are deployed and
performance is tracked
Customer and market focus
– How company determine expectations and preference
of customers
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 MBNQA – Criteria – contd.
– How company builds relationship with customers and
find satisfaction
Human resource focus
– How company enables employees to develop and utilize
their full potential aligned to company’s objectives
– Also analyses company’s efforts to maintain work
environment, work climate, participation etc.
Process Management
– Key aspects like customer focused design, product and
service delivery, support and supplier etc.
– How key process are aligned, implemented, managed and
improved
Business results
– Examines company performance and improvement in key
business areas
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 Scoring system
System for scoring applicant response to 20 items and for
feedback is based on 3 evaluation dimension: Approach,
Deployment, Result
Approach: How the applicant addresses the item
requirement
– Appropriateness of methods and effective use of
methods
– Degree to which it is systematic and consistently
applied, whether based on information and data
– Evidence of innovative or effective adaptations of
approaches used in other applications or types of
businesses
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 Scoring system
Deployment: Refer to the extent to which the applicants
approach is applied to all requirements of the item
– Use of approach in addressing business and item
requirements
– Use of approach by all appropriate work units
Result: Refer to outcomes in achieving the purposes given
in the item. Factors used are
– current performance and Performance relative to
Benchmarks
– Demonstration of improvement and linkage of result to
goals

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 Problem 1
6. Construct a Pareto diagram for the analysis of the following
purchasing department quality costs of a major airline:
Element Dollars (Thousands)
Supplier review 10
Supplier rating 5
Specification review 2
Supply quality planning 5
Receiving inspection 95
Measuring equipment 60
Qualification of supplier product 5
Source inspection 15
Material Inspection 120
Material replacement 180
Supplier corrective action 53
Rework of supplier 5

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 Problem 2
 10. For a hardware manufacturer, prepare graphs
and analyze the internal failure costs for the past six
months using the net sales index.
Month Cost in $ Net sales
(Thousands)
March 45300 755
April 45800 790
May 46100 840
June 4700 925
July 48600 1050
Aug 49300 1232

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 Solution
 Index:
For March
45300
 0.06
755000
For April
45800
 0.057
790000

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 Recap

 Introduction
 Basic Concepts
 Strategy
 Performance Measure Presentation
 Quality Costs
 Malcolm Baldridge National Quality Award
 Scoring
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