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ADMS 3510 (18)


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York University
Administrative Studies
ADMS 3510
Jamison Aldcorn

CHAPTER 19. COST MANAGEMENT: QUALITY, TIME AND THE THEORY OF CONSTRAINTS Manager’s responsibility: remove obstructions to achieving on time deliveries of outputs at the quality customers expect to receive. BSC requires integration of customer long-term demand for desirable attributes with the achievement of performance standards in the strategic management of internal business processes. Improve rate of learning and growth – competitive advantage Quality as a competitive tool Quality management – KSF - good quality means low cost -> cost leadership strategy. - Product differentiation based on quality.-> selection of substitutes. International standards Organization (ISO) : management quality measurement : certification registers companies that conform to a specific level of quality . E.g. - ISO 9004 Global quality systems management, - ISO 14001 Environmental management , - ISO 26000 CSR - ISO 31000 Enterprise Risk management The BSC – four perspectives to measure the costs of quality: Quality : - fitness for use, degree to which a product satisfies the needs of customers - degree to which a product conforms to design specification and engineering requirements. Two aspects of quality: - quality of design : value chain: measures how closely the characteristics of products or services match the needs and wants of customers ( more in terms of what it can offer) - conformance quality: production process: performance of a product or service according to the design and production specifications. ( more in terms of it should be able to do)-> repair, reworked, scrapped etc. uncorrected non conformance errors through changes in design, production, and inspection lead to product or service failure in the customer’s hands. Framework for quality of conformance and design: Actual performance_________________Design specifications_________________Customer satisfaction -------------- Conformance Quality---------------- -----------------Quality of design--------------------- Quality management involves task: - identifying quality problems - estimating cost of quality failures, repairs, reworks , reputation etc. - estimating the cost of different actions taken to improve quality - Overall it a part of ERM ( enterprise risk management ) Use of BSC in quality management and control: Financial perspective - Financial perspective: measures like revenue growth and operating income-> affect quality improvement programs - Costs of quality (COQ) : costs incurred to prevent or rectify the production of a low quality product.-> affects manager’s decisions and actions required to achieve conformance targets Cost of quality: Prevention costs Appraisal costs Internal failure costs External failure costs Incurred to preclude the Incurred to detect Costs incurred to detect Incurred to detect a production of products which of the individual a nonconforming nonconforming product that do not conform to units of products do not product before it is after it is shipped to specifications conform to shipped to customers customers specifications Design engineering Inspection Spoilage Customer support Process engineering Online product Rework Manufacturing/ process Supplier evaluations manufacturing and Scrap engineering for external Preventive equipment process inspection Machine repairs failures maintenance Product testing Manufacturing/ process Warranty repair costs Quality training engineering on internal Liability claims Testing of new materials failures Note : there is no direct costs of quality - would have a cost driver(shows cause effect relationship / allocation rates . - nature of cost: fixed or variable usually ABC and BSC goes together – both require understanding of the interdependence among the business functions in the value chain. Pg. 758. Calculate rate, allocation base quantity, total cost of quality and percentage of revenue for each. - typical COQ reports exclude a “ difficult to estimate “ opportunity cost. Nonetheless, it’s important and substantial. Customer service perspective: BSC measure provide advance warning of potential costs of internal and external failure Products and services need to be defect free and fully satisfy conformance quality and design quality-> satisfy customer needs. Measures include: - market research, market share, customer satisfaction ratings, number of customer complaints, defect rate, customer response time, on-time delivery rate etc Internal production process failure : frequently measured as defect rate/ mean time between failures (MTBF) Customer surveys: - deeper perspective into customer experiences and preferences - what do customers want learning and growth perspective Learning curve that flows from a low level at the initial stage to a higher degree when producing a relatively larger number of outputs reflect progress in producing outputs - Large scale production - Standardization - Fewer mistakes - Increase efficiency - Overall, reduce cost of processing customer returns. - Output : reliable and of quality due to learning curve Learning curve: curvilinear mathematical production function that shows how to the ratio of quanity produced increases at a faster rate than the rate at which the time spent in activities of production decreases (Q output/ Q DMLH) Experience curve: cost function that shows how full product costs per unit decrease as total quantity produced increases. Information systems : cloud computing at $72/hour Advantage of a first mover: growth as per demand, unit cost decrease as errors are understood and fixed more quickly than average. - Strategic benefits of the learning curve only arise if the learning stays within the company and the company passes on cost reductions to the customers to stimulate growth in demand. - Underlying assumptions : Direct manufacturing labour hour necessary to complete a unit of production will decrease by a constant percentage each time the production quantity is doubled. - Quantity must double for the l
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