Module 3: Total Quality Management - Learning Outcomes and Costs | MGT6

**MODULE 3 -- TOTAL QUALITY MANAGEMENT** **INTRODUCTION** The challenge for businesses today is to satisfy their customers through the exceptional performance of their processes. Quality and performance should be everybody's concern. Knowing how to assess whether the process is performing well and...

**MODULE 3 -- TOTAL QUALITY MANAGEMENT** **INTRODUCTION** The challenge for businesses today is to satisfy their customers through the exceptional performance of their processes. Quality and performance should be everybody's concern. Knowing how to assess whether the process is performing well and when to take action are key skills managers must have. Good quality pays off in higher profits. High quality services and products can be priced higher and yield a greater return. Poor quality erodes the firm's ability to compete in the marketplace and increases the costs of producing its service or product. In this module, we first address the costs of quality and then focus on Total Quality Management and Six Sigma, two philosophies and supporting tools that many companies embrace to evaluate and improve quality and performance **LEARNING OUTCOMES:** After reading this module, the learner should be able to: 1. Define the four major costs of quality. 2. Explain the basic principles of TQM programs. 3. Explain the basic principles of Six Sigma programs. 4. Describe how to construct control charts and use them to determine whether a process is out of statistical control 5. Describe how to determine whether a process is capable of producing a service or product to specifications. **TIME:** The time allotted for this module is three hours. **LEARNER DESCRIPTION** The participants in this module are 3^rd^ Year BSA students. **MODULE CONTENTS:** Attaining quality in all areas of a business is a difficult task. To make things even more difficult, consumers change their perceptions of quality. In general, a business's success depends on the accuracy of its perceptions of consumer expectations and its ability to bridge the gap between those expectations and operating capabilities. **LESSON 3.1: Costs of Quality** Many companies spend significant time, effort, and expense on systems, training, and organizational changes to improve the quality and performance of their processes. Gaps reflect potential dissatisfied customers and additional costs for the firm. Most experts estimate that the costs of quality range from 20 to 30 percent of gross sales. These costs can be broken down into four major categories: 1. **Prevention costs** are associated with preventing defects before they happen. They include the costs of redesigning the process to remove the causes of poor performance, redesigning the service or product to make it simpler to produce, training employees in the methods of continuous improvement, and working with suppliers to increase the quality of purchased items or contracted services. 2. **Appraisal costs** are incurred when the firm assesses the level of performance of its processes. As the costs of prevention increase and performance improves, 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** result from defects that are discovered during the production of a service or product. Defects fall into two main categories: (1) rework, which is incurred if some aspect of a service must be performed again or if a defective item must be rerouted to some previous operation(s) to correct the defect; and (2) scrap, which is incurred if a defective item is unfit for further processing. 4. **External failure costs** arise when a defect is discovered after the customer receives the service or product. Dissatisfied customers talk about bad service or products to their friends, who in turn tell others. External failure costs also include warranty service and litigation costs. A warranty is a written guarantee that the producer will replace or repair defective parts or perform the service to the customer's satisfaction. **LESSON 3.2: Total Quality Management** Total quality management (TQM) is a philosophy that stresses three principles for achieving high levels of process performance and quality. These principles are related to (1) customer satisfaction, (2) employee involvement, and (3) continuous improvement in performance. These principles are included in the TQM Wheel which is presented below. Figure 1. TQM Wheel (Krajewski, Ritzman, and Malhotra 2016) **Customer Satisfaction** Customers, internal or external, are satisfied when their expectations regarding a service or product have been met or exceeded. Often, customers use the general term quality to describe their level of satisfaction with a service or product. Quality has multiple dimensions in the mind of the customer. One or more of the following five definitions apply at any one time. 1. **Conformance to Specifications** - In this case, a process failure would be the process's inability to meet certain advertised or implied performance standards. Conformance to specifications may relate to consistent quality, on-time delivery, or delivery speed. 2. **Value** - Another way customers define quality is through value, or how well the service or product serves its intended purpose at a price customers are willing to pay. How much value a service or product has in the mind of the customer depends on the customer's expectations before purchasing it. 3. **Fitness for Use** - When assessing how well a service or product performs its intended purpose, the customer may consider the convenience of a service, the mechanical features of a product, or other aspects such as appearance, style, durability, reliability, craftsmanship, and serviceability. 4. **Support** - Often the service or product support provided by the company is as important to customers as the quality of the service or product itself. Good support once the sale has been made can reduce the consequences of quality failures. 5. **Psychological Impressions -** People often evaluate the quality of a service or product on the basis of psychological impressions: atmosphere, image, or aesthetics **Employee Involvement** One of the important elements of TQM is employee involvement. A program in employee involvement includes changing organizational culture and encouraging teamwork. 1. **Cultural Change** - One of the main challenges in developing the proper culture for TQM is to define customer for each employee. In general, customers are internal or external. a. **Internal customers** are employees in the firm who rely on the output of other employees. 2. **Teams** - 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 and approaches, and hold themselves accountable for success. The three approaches to teamwork most often used are: b. **Problem-solving teams** - First introduced in the 1920s, problem-solving teams, also called quality circles, became popular in the late 1970s after the Japanese used them successfully. Problem-solving teams are small groups of supervisors and employees who meet to identify, analyze, and solve process and quality problems. c. **Special-purpose teams** address issues of paramount concern to management, labor, or both. Essentially, this approach gives workers a voice in high-level decisions. d. **Self-managed Teams** - The self-managed team approach takes worker participation to its highest level: A small group of employees work together to produce a major portion, or sometimes all, of a service or product. Members learn all the tasks involved in the operation, rotate from job to job, and take over managerial duties such as work and vacation scheduling, ordering supplies, and hiring. **Continuous Improvement** Continuous improvement, based on a Japanese concept called kaizen, is the philosophy of continually seeking ways to improve processes. Continuous improvement involves identifying benchmarks of excellent practice and instilling a sense of employee ownership in the process. The focus of continuous improvement projects is to reduce waste. The idea is not to wait until a massive problem occurs before acting. Most firms actively engaged in continuous improvement train their work teams to use the plan-do-study-act cycle for problem solving. The cycle comprises the following steps: 1. **Plan.** The team selects a process (an activity, method, machine, or policy) that needs improvement. The team then documents the selected process, usually by analyzing related data; sets qualitative goals for improvement; and discusses various ways to achieve the goals. 2. **Do.** The team implements the plan and monitors progress. Data are collected continuously to measure the improvements in the process. 3. **Study**. The team analyzes the data collected during the do step to find out how closely the results correspond to the goals set in the plan step. 4. **Act.** If the results are successful, the team documents the revised process so that it becomes the standard procedure for all who may use it. **Six Sigma** Six Sigma, which relies heavily on the principles of TQM, is a comprehensive and flexible system for achieving, sustaining, and maximizing business success by minimizing defects and variability in processes. It is driven by a close understanding of customer needs; the disciplined use of facts, data, and statistical analysis; and diligent attention to managing, improving, and reinventing business processes. Six Sigma is a rigorous approach to align processes with their target performance measures with low variability. The Six Sigma Improvement Model, however, is heavily reliant on statistical process control. The following steps comprise the model: 1. **Define.** Determine the characteristics of the process's output that are critical to customer satisfaction and identify any gaps between these characteristics and the process's capabilities. Get a picture of the current process by documenting it using flowcharts and process charts. 2. **Measure.** Quantify the work the process does that affects the gap. Select what to measure, identify data sources, and prepare a data collection plan 3. **Analyze.** Use the data on measures to perform process analysis, applying tools such as Pareto charts, scatter diagrams, and cause-and-effect diagrams and the statistical process control (SPC) tools in this chapter to determine where improvements are necessary. 4. **Improve.** Modify or redesign existing methods to meet the new performance objectives. Implement the changes. 5. **Control.** Monitor the process to make sure that high performance levels are maintained. Once again, data analysis tools such as Pareto charts, bar charts, scatter diagrams, as well as the statistical process control tools can be used to control the process. **LESSON 3.3: Acceptance Sampling** **Acceptance sampling**, which is the application of statistical techniques to determine if a quantity of material from a supplier should be accepted or rejected based on the inspection or test of one or more samples, limits the buyer's risk of rejecting good-quality materials (and unnecessarily delaying the production of goods or services) or accepting bad-quality materials (and incurring downtime due to defective materials or passing bad products to customers). Relative to the specifications for the material the buyer is purchasing, the buyer specifies an acceptable quality level (AQL), which is a statement of the proportion of defective items (outside of specifications) that the buyer will accept in a shipment. The basic procedure is straightforward. 1. A random sample is taken from a large quantity of items and tested or measured relative to the specifications or quality measures of interest. 2. If the sample passes the test (low number of defects), the entire quantity of items is accepted. 3. If the sample fails the test, either (a) the entire quantity of items is subjected to 100 percent inspection and all defective items repaired or replaced or (b) the entire quantity is returned to the supplier.  Figure 2. Interface of Acceptance Sampling and Process Performance Approaches (Krajewski, Ritzman, and Malhotra 2016) **LESSON 3.4: Statistical Process Control (SPC)** Statistical process control (SPC) is the application of statistical techniques to determine whether a process is delivering what customers want. In SPC, tools called control charts are used primarily to detect defective services or products or to indicate that the process has changed and that services or products will deviate from their design specifications, unless something is done to correct the situation. Performance can be evaluated in two ways. One way is to measure **variables**---that is, service or product characteristics, such as weight, length, volume, or time, that can be measured. The advantage of using performance variables is that if a service or product misses its performance specifications, the inspector knows by how much. The disadvantage is that such measurements typically involve special equipment, employee skills, exacting procedures, and time and effort. Another way to evaluate performance is to measure **attributes**; service or product characteristics that can be quickly counted for acceptable performance. This method allows inspectors to make a simple "yes/no" decision about whether a service or product meets the specifications. Attributes often are used when performance specifications are complex and measurement of variables is difficult or costly. The most thorough approach to inspection is to inspect each service or product at each stage of the process for quality. This method, called **complete inspection**, is used when the costs of passing defects to an internal or external customer outweigh the inspection costs. On the other hand, a **sampling plan** specifies a sample size, which is a quantity of randomly selected observations of process outputs, the time between successive samples, and decision rules that determine when action should be taken. **Control Charts** To determine whether observed variations are abnormal, we can measure and plot the performance measure taken from the sample on a time-ordered diagram called a control chart. A control chart has a nominal value, or central line, which can be the process's historic average or a target that managers would like the process to achieve, and two control limits based on the sampling distribution of the quality measure. The control limits are used to judge whether action is required. The larger value represents the upper control limit (UCL), and the smaller value represents the lower control limit (LCL). Managers or employees responsible for evaluating a process can use control charts in the following way: 1. Take a random sample from the process and calculate a variable or attribute performance measure. 2. If the statistic falls outside the chart's control limits or exhibits unusual behavior, look for an assignable cause 3. Eliminate the cause if it degrades performance; incorporate the cause if it improves performance. Reconstruct the control chart with new data. 4. Repeat the procedure periodically. Sometimes, problems with a process can be detected even though the control limits have not been exceeded. In the figure below, Chart (a) shows a process that is in statistical control. No action is needed. However, chart (b) shows a pattern called a run or a sequence of observations with a certain characteristic. A typical rule is to take remedial action when five or more observations show a downward or upward trend, even if the points have not yet exceeded the control limits. Here, nine sequential observations are below the mean and show a downward trend. Chart (c) shows that the process takes a sudden change from its normal pattern. The last four observations are unusual: The first drops close to the LCL, the next two rise toward the UCL, and the fourth remains above the nominal value. Finally, chart (d) indicates that the process went out of control twice because two sample results fell outside the control limits. Figure 3. Control Chart Examples (Krajewski, Ritzman, and Malhotra 2016) **Types of Control Charts** 1. Control charts for variables are used to monitor the mean and the variability of the process distribution. a. A range chart, or **R-chart**, is used to monitor process variability. To calculate the range of a set of sample data, the analyst subtracts the smallest from the largest measurement in each sample. If any of the ranges fall outside the control limits, the process variability is not in control. b. An **X-bar Chart** is used to see whether the process is generating output, on average, consistent with a target value set by management for the process or whether its current performance, with respect to the average of the performance measure, is consistent with its past performance. 2. Control charts for attributes are: c. The **p-chart** is used for controlling the proportion of defects generated by the process. d. The **c-chart** is used for controlling the number of defects when more than one defect can be present in a service or product. **LESSON 3.5: International Quality Documentation Standards** The **International Organization for Standardization** devised a family of standards called ISO 9000 for companies doing business in the European Union. Subsequently, ISO 14000 was devised for environmental management systems and ISO 26000 for guidance on social responsibility. 1. **ISO 9001 standards** address quality management by specifying what the firm does to fulfill the customer's quality requirements and applicable regulatory requirements, while aiming to enhance customer satisfaction and achieve continual improvement of its performance in pursuit of these objectives. 2. **ISO 14000 standards** addresses environmental management by specifying what the firm does to minimize harmful effects on the environment caused by its activities, and to achieve continual improvement of its environmental performance. The documentation standards require participating companies to keep track of their raw materials use and their generation, treatment, and disposal of hazardous wastes. 3. **The ISO 26000 guidelines**, according to the International Organization for Standards, provide harmonized, globally relevant guidance on social responsibility for private and public sector organizations based on international consensus among experts. The seven core subjects of social responsibility covered in the guidelines are (1) human rights, (2) labor practices, (3) the environment, (4) fair operating practices, (5) consumer issues, (6) community involvement and development, and (7) the organization. In this way the international community is encouraging ethical business behavior between businesses and consumers. In August 1987 the U.S. Congress signed into law the Malcolm Baldrige National Quality Improvement Act, creating the **Malcolm Baldrige National Quality Award,** which is now entitled the **Baldrige Performance Excellence Program** (www.quality.nist.gov). Named for the late secretary of commerce, who was a strong proponent of enhancing quality as a means of reducing the trade deficit, the award promotes, recognizes, and publicizes quality strategies and achievements. The seven major criteria for the award are the following: 1. **Leadership.** Describes how senior leaders' actions guide and sustain the organization and how they communicate with the workforce and encourage high performance. 2. **Strategic Planning.** Describes how the organization establishes its strategy to address its strategic challenges, leverage its strategic advantages, and summarizes the organization's key strategic objectives and their related goals. 3. **Customer Focus.** Describes how the organization determines its service or product offerings and the mechanisms to support the customers' use of them. 4. **Measurement, Analysis, and Knowledge Management.** Describes how the organization measures, analyzes, reviews, and improves its performance through the use of data and information at all levels of the organization. 5. **Workforce Focus.** Describes how the organization engages, compensates, and rewards its workers and how they are developed to achieve high performance. 6. **Operations Focus.** Describes how the organization designs its work systems and determines its key processes to deliver customer value, prepare for potential emergencies, and achieve organizational success and sustainability. 7. **Results.** Describe the organization's performance and improvement in five categories: products and processes, customer focus, workforce focus, leadership and governance, and financial and market. **ONLINE READING MATERIALS:** - Read the article by ISixSigma about "The Complete Guide to Understanding Control Charts at - Read the article by ISixSigma about "Cost of Quality: Not Only Failure Costs" at - Read the article by Smartsheet about "Total Quality Management" at **ONLINE VIDEO LINKS AND MATERIALS:** - Watch the online video lecture of the course instructor uploaded at NEO LMS and to the class shared Google drive (if applicable). - Watch a Youtube Video by ASQ about the "Cost of Quality" at - Watch a Youtube Video by LEARN & APPLY about the "Control Charts" at and **TEST YOUR KNOWLEDGE:** **EXERCISE 3.1. ESSAY** 1. Illustrate the differences between prevention and appraisal costs using a restaurant setting as an example 2. What are any three dimensions of quality and which one accurately describes how you assess education? 3. Why is employee empowerment important in a total quality management program? 4. How does SPC help companies implement continuous improvement programs? **EXERCISE 3.2. MULTIPLE-CHOICE QUESTIONS** 1. When a process fails to satisfy a customer: a. b. c. d. 2. Psychological impressions are considered one aspect of quality because customers can get upset with: e. f. g. h. 3. Which of the following would be considered a prevention cost of quality? i. j. k. l. 4. At which of the following steps will the cost of detecting product defects be the highest? m. n. o. p. 5. Which one of the following statements is a key feature of total quality management (TQM)? q. r. s. t. 6. The TQM wheel features \_\_\_\_\_\_\_\_\_\_ at its center. u. v. w. x. 7. A firm that has embraced the notion of quality at the source is more likely to have: y. z. a. b. 8. When should complete inspection be used? c. d. e. f. 9. The Malcolm Baldrige National Quality Award: g. h. i. j. 10. The international standard that is applied to determine a company's "environmental friendliness" is: k. l. m. n. **EXERCISE 3.3. RESEARCH ACTIVITY** 1. Download a research paper (related to any topic discussed in this module) published on an online journal and prepare a reaction paper using a powerpoint presentation with the following guidelines: a. Relevance of the Article b. Objectives of the Journal Article c. Highlights of Findings, Conclusions and Recommendations d. Three Points of Agreement e. Three Points of Disagreement f. Recommendations for Further Study **MODULE REFERENCES:** Stevenson, William (2018), *Project Management; the managerial process 7^th^ ed.* Stevenson, William (2018), *Operations Management 13^th^ Edition* Zani, Rosliza (2018), *Operation management* Krajewski, Lee J. (2016) *Operation management: sustainability and supply chain management 12^th^ ed.* Verma, A.P. (2016). *Industrial Engineering and Management*