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:
- 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: measures like revenue growth and operating income-> affect quality
- 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
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.
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.
- 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
- 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
- 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
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