Page 91 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes comparable businesses around the world. Organizations need to work with an ongoing sense of
renewal. This is not easy. Many things occur whenever an organization tries to accomplish
significant, meaningful improvement. However, these obstacles have to be overcome and quality
has to be an area of focus. Increasing focus on quality and improving the quality of products
usually results in lower costs and this very often provides a competitive advantage to the firm.

5.1 Quality Management Principles

Sumantra Ghoshal in his book Managing Radical Change talks about the Indian mentality of
‘chalta hai’ or ‘satisfactory underperformance’. This type of company could expect as much as
7 per cent of the goods it received and an equal percentage of products it shipped out to be
defective. This type of company, when asked what poor quality costs them, their guess would be
about 3-5 per cent of sales. But expert opinions actually calculate the costs of poor quality more
like 20-30 per cent.

Table 5.1: Cost of Quality Assurance

Prevention Costs Appraisal Costs Internal Failure Costs External Failure
Costs
QC administration and Quality audits Scrap, at full shop cost Complaints and loss of
systems planning In-process testing Rework, at full shop customer goodwill
Quality training Checking labour cost Warranty costs
Quality planning Laboratory or other Scrap and rework. Fault Field maintenance and
Special processes measurement services of vendor product service
planning Calibration & Set up for Material procurement Returned material
Quality data analysis test and inspection Factor contact processing and repair
Procurement planning Test and inspection engineering Replacement
Vendor surveys material QC investigations (of inventories
failures) Strained distributor
Reliability studies Outside endorsements relations
Maintenance and Material review activity
Quality measurement Trade Concessions
and control equipment calibration Repair and
Field testing troubleshooting
Qualification of material
New Product review Incoming, in process,
final inspection
Process control

Can such companies compete with today’s value driven companies? They would find it very
difficult to compete. Today, the best companies do not count their defects per hundred but per
million! Philip Crosby states that the correct cost for a well run quality management program
should be under 2.5 per cent. This is happening with a large number of professionally run
quality conscious firms.

Example: When Matsushita bought over the TV plant run by Motorola at Quasar, the
plant had been running at a rate of 150-180 defects per 100 TV sets. Three years later, under the
new management, Matsushita was running the plant at a rate of 3-4 defects per 100 sets. The cost
of poor quality dropped from $ 22 million to less than $ 4 million annually, making the loss-
making plant profitable. All this did not cost much. Quality improvement was achieved through
marginal investments but primarily by innovative employee relations and workplace
reorganization.
Though customers consider quality a trade-off, companies that offer low prices with high quality,
do not see the trade-off. This is because they do not attribute cost to quality. The consensus is that
quality increases profits and reduces costs.
The typical activities of quality assurance that cost the organization are shown in Table above.
Costs of poor quality are generally classified into four broad categories. Juran defines three

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