QUALITY MANAGEMENT

1. OM2 CHAPTER 15 QUALITY MANAGEMENT DAVID A. COLLIER AND JAMES R. EVANS

2. Chapter 15 Learning Outcomes l e a r n i n g o u t c o m e s LO1Explain the concepts and definitions of quality. LO2Describe the quality philosophies and principles of Deming, Juran, and Crosby. LO3Explain the GAP model and its importance. LO4Describe the concepts and philosophy of ISO 9000:2000. LO5Describe the philosophy and methods of Six Sigma. LO6Explain the categories of cost of quality measurement. LO7Describe how to apply the 7 QC Tools. LO8Explain the concepts of kaizen and poka-yoke.

3. ow!” exclaimed Lauren when she saw the ski runs at Deer Valley Resort in Park City, Utah. Deer Valley has been called “The Ritz- Carlton” of ski resorts, and Lauren’s dad was expectingexceptional services and a superior ski vacation experience after all he had read in ski magazines. He wasn’t disappointed. When he drove up to the slopes, a curbside ski valet took their equipment from his car, parking lot attendants directed him to the closest available parking, and a shuttle transported them from the lot to Snow Park Lodge. From the shuttle, he and his daughter walked to the slopes on heated pavers that prevent freezing and assist in snow removal. Staff provided complimentary mountain tours to familiarize them with the slopes. At the end of the day, they were able to store their skis without charge at the lodge and easily retrieve them the next morning. The resort limits the number of skiers on the mountain to reduce lines and congestion. Everyone is committed to ensuring that each guest has a wonderful experience. Even the food is consistently rated number one by ski-enthusiast magazines. Chapter 15 Quality Management What do you think?What satisfying service experiences similar to the Deer Valley episode have you personally encountered?

4. What is Quality Management? Quality management refers to systematic policies, methods, and procedures used to ensure that goods and services are produced with appropriate levels of quality to meet the needs of customers. Organizations today integrate quality principles into their management systems using tools such as Total Quality Management (TQM), Six Sigma, and Lean Operating Systems (Chapter 17). Chapter 15 Quality Management

5. A Brief History of Quality Management Historical uses of quality management include the precision involved in building of Egyptian pyramids, interchangeable parts during Industrial Revolution, and statistical tools used for quality control during World War II. Dr. Joseph Juran and Dr. W. Edwards Deming were pioneers in the field (more later on these two quality gurus). The Japanese integrated quality ideas and methods throughout their organizations and developed a culture of continuous improvement. Chapter 15 Quality Management

6. Understanding Quality Quality can be a confusing concept, partly because people view quality in relation to differing criteria based on their individual roles in the value chain, such as: perfection, delighting or pleasing the customer, eliminating waste, doing it right the first time, and/or consistency. Chapter 15 Quality Management

7. Chapter 15 Quality Management • Understanding Quality • Fitness for useisthe ability of a good or service to meet customer needs. • Quality of conformanceis the extent to which a process is able to deliver output that confirms to design specifications. • Specificationsaretargets and tolerances determined by designers of goods and services.

8. Chapter 15 Quality Management • Understanding Quality • Quality Controlmeans ensuring consistency in processes to achieve conformance. • Service Qualityisconsistently meeting or exceeding customer expectations (external focus) and service delivery system performance criteria (internal focus) during all service encounters.

9. Chapter 15 Quality Management • Understanding Quality • Principles of Total Quality • A focus on customers and stakeholders, • A process focus supported by continuous improvement and learning, and • Participation and teamwork by everyone in the organization.

10. Chapter 15 Quality Management • W. Edwards Deming • Focus on bringing about improvements in product and service quality by reducing uncertainty and variability in goods and services design and associated processes (the beginning of his ideas in 1920s and 1930s). • Higher quality leads to higher productivity and lower costs. • “14 Points” management philosophy. • Deming Cycle – Plan, Do, Study, and Act.

11. Chapter 15 Quality Management W. Edwards Deming 14 Points Point 1:Create a Vision and Demonstrate Commitment Point 2:Learn the Philosophy Point 3:Understand Inspection Point 4:Stop Making Decisions Purely on the Basis of Cost Point 5:Improve Constantly and Forever Point 6: Institute Training Point 7:Institute Leadership

12. Chapter 15 Quality Management W. Edwards Deming 14 Points Point 8:Drive Out Fear Point 9: Optimize the Efforts of Teams Point 10: Eliminate Exhortations Point 11: Eliminate Numerical Quotas Point 12:Remove Barriers to Pride in Work Point 13: Encourage Education and Self- Improvement Point 14:Take Action

13. The Deming Cycle Exhibit Extra • Plan: study current situation • Do: implement plan on trial basis • Study: determine if trial is working correctly • Act: standardize improvements

14. Chapter 15 Quality Management • Joseph Juran • WroteQuality Control Handbook in 1951, a comprehensive quality manual. • Defined quality as “fitness for use.” • Advocated use of quality cost measurement. • Quality Trilogy: quality planning, quality control, and quality improvement.

15. Chapter 15 Quality Management • Philip B. Crosby • Wrote Quality is Free in 1979, which brought quality to the attention of top corporate managers in the U.S. • Crosby’s Absolutes of Quality Management include: • Quality means conformance to requirements, not elegance. • There is no such thing as a quality problem. • There is no such thing as the economics of quality; doing the job right the first time is always cheaper. • The only performance measurement is the cost of quality, which is the expense of nonconformance. • The only performance standard is Zero Defects (ZD).

16. The GAP Model The GAP model recognizes that there are several ways to misspecify and mismanage the creation and delivery of high levels of quality. These “gaps” are shown in the model in Exhibit 15.2 and explained below. Gap 1 is the discrepancy between customer expectations and management perceptions of those expectations. Gap 2 is the discrepancy between management perceptions of what features constitute a target level of quality and the task of translating these perceptions into executable specifications. Chapter 15 Quality Management

17. Gap 3 is the discrepancy between quality specifications documented in operating and training manuals and plans and their implementation. Gap 4 is the discrepancy between actual manufacturing and service delivery system performance and external communications to the customers. Gap 5 is the difference between the customer's expectations and perceptions. The fifth gap depends on the other four. Chapter 15 Quality Management

18. Gap Model of Quality Exhibit 15.2 Source: Paraguraman, A., V.A. Zeithami, and L.L. Berry. “A Conceptual Model of Service Quality and its Implecations for Future Research,” Journal of Marketing, (Fall 1985), pp. 41-50. Reprinted with permission from the American Marketing Association.

19. Chapter 15 Quality Management • ISO 9000:2000 • Quality standards were created in 1987 and revised in 1994 and 2000 to improve product quality, improve the quality of operation’s processes, and provide confidence to organizations and customers that quality system requirements are fulfilled. • Internationally recognized (and sometimes required to do business in certain countries). • Standardizes key terms in quality and provides a set of basic principles for initiating quality management systems.

20. Chapter 15 Quality Management Sears, Roebuck and Company Sears, Roebuck and Co., a wholly owned subsidiary of Sears Holdings Corp., is one of the largest retailers in North America. Sears is the largest national provider of product repair services, with more than 14 million repairs performed annually. The company wanted a consistent process for improving customer satisfaction and enhancing service capabilities. Recognizing that ISO 9000 provides a framework for large organizations to implement a consistent, cohesive program across geographic lines and throughout a multifaceted business, Sears sought ISO 9000 registration to enhance its organizational process compliance.

21. Chapter 15 Quality Management ISO 9000 became a fundamental tool that provides the company a base for continued improvements. ISO 9000 has been instrumental in helping to standardize the manner in which technicians record field observations. This is important for solving certain types of problems, such as an appliance or part malfunction and customer abuse of the equipment. To ensure consistency, technicians use a special tool kit for recording the event, including a disposable camera and standardized forms. Sears' efficiency in completing repairs has improved; in one carry-in repair facility, the average daily completion rate for repairing lawn mowers almost doubled.

22. Chapter 15 Quality Management • Six Sigma • Six Sigmais a business improvement approach that seeks to find and eliminate causes of defects and errors in manufacturing and service processes by focusing on outputs that are critical to customers and results in a clear financial return for the organization. • Used by companies including Motorola, Allied Signal, Texas Instruments, and General Electric.

23. Chapter 15 Quality Management Six Sigma Defectsare any mistakes or errors that are passed on to the customer (many people also use the term nonconformance). Defects per unit (DPU)= Number of defects discovered Number of units processed

24. Chapter 15 Quality Management • Six Sigma • A DPU measure might be lost bags per customer. However, customers may have different numbers of bags; thus the number of opportunities for error is the average number of bags per customer.

25. Chapter 15 Quality Management • Six Sigma • The Six Sigma concept characterizes quality performance by defects per million opportunities (dpmo), computed as DPU  1,000,000 opportunities for error (or, as is often used in services, errors per million opportunities – epmo). • A "six sigma" quality level corresponds to a dpmo or epmo equal to 3.4 (this is derived from some advanced statistical calculations), which represents almost perfect quality.

26. Chapter 15 Quality Management Calculatingthe Sigma Level The sigma level can easily be calculated on an Excel spreadsheet using the cell formula =NORMSINV(1 – Number of Defects/Number of Opportunities) + 1.5 or equivalently, =NORMSINV(1 – dpmo/1,000,000) + 1.5 (12.2) Using formula (12.2), we can show that a three-sigma process has a dpmo of 66,807, a four-sigma process has dpmo = 6,210, and a five-sigma process has dpmo = 233.

27. Chapter 15 Quality Management SolvedProblem Suppose that the average number of bags checked by airline passengers is 1.6, and the airline recorded three lost bags for 8,000 passengers in one month. What is epmo, and at what sigma level is this process operating?

28. Chapter 15 Quality Management Solution The average number of bags checked is calculated as (8,000 passengers × 1.6 bags/passenger) = 12,800. Therefore, using Equation (12.1), the number of defects per unit (lost bags per bags checked) is DPU = 3/12,800 = 0.000234375. By multiplying DPU by 1,000,000, we find epmo = 234.375. Using the Excel formula, the sigma level is calculated as =NORMSINV(1 – 234.375/1000000) + 1.5 = 4.99828 or about a 5-sigma level.

29. Chapter 15 Quality Management Six Sigma’s DMAIC Process Define: identify customers and their priorities; identify and define a suitable project; identify CTQs (critical to quality characteristics). 2. Measure: determine how to measure the process and how it is performing; identify key internal processes that influence CTQs and measure current defects. 3. Analyze: determine likely causes of defects and understand why defects are generated by identifying key variables that cause process variation.

30. Chapter 15 Quality Management Six Sigma’s DMAIC Process 4. Improve: identify means to remove causes of defects; confirm key variables; modify the process to stay within acceptable range. 5. Control: determine how to maintain improvements; put tools in place to ensure that key variables remain within acceptable ranges under the modified process.

31. Chapter 15 Quality Management • Cost of Quality Measurements • Thecost of qualityrefers to the costs associated with avoiding poor quality or those incurred as a result of poor quality. • Prevention costsare those expended to keep nonconforming goods and services from being made and reaching the customer. • Appraisal costsare those expended on ascertaining quality levels through measurement and analysis of data to detect and correct problems.

32. Chapter 15 Quality Management • Cost of Quality Measurements • Internal-failure costsarecosts incurred as a result of unsatisfactory quality that is found before delivery of good or service to the customer. • External-failure costsare incurred after poor-quality goods or services reach the customer.

33. Chapter 15 Quality Management TheUnfortunate Costs of Poor Quality A major news story in 2009 was the case of Peanut Corporation of America. At least 677 people were sickened and nine died after eating salmonella-contaminated products made from peanut butter paste from the Peanut Corporation of America. At least 12 times, when one of the company’s products tested positive for salmonella, the company shopped around for new tests until a laboratory certified that the product was clean. They shipped the products and continued to use the same equipment and processes. Inspectors found roaches, mold, and a leaking roof in one of its factories. It has also led to more than 2,000 product recalls, one of the largest in U.S. history. On March 12, 2009, the company issued the following statement: “As you may know, certain recent events have made it necessary for Peanut Corporation of America to seek protection under the U.S. Bankruptcy Code. Effective immediately, all corporate operations will cease.” Food safety lawyers are optimistic that victims and their families can still be compensated.

34. Chapter 15 Seven Tools of Quality Management • The “Seven QC Tools” • Flowcharts: process mapping to identify the sequence of activities or flow of materials/ information in a process. • Run Charts and Control Charts: a run chart is a line graph with data plotted over time; control charts include control limits. • Checksheets: simple tools for data collection, ensure completeness. • Histograms: graphically represent frequency of values within a specified group.

35. The Structure of a Control Chart Exhibit 15.3

36. Defective Item Checksheet Exhibit 15.4 Source: K. Ishikawa, Guide to Quality Control (Tokyo: Asian Productivity Organization, 1982), p. 33.

37. Chapter 15 Seven Tools of Quality Management • The “Seven QC Tools” • Pareto Diagrams: separate the vital few from the trivial many causes; provide direction for selecting projects for improvement. • Cause-and-Effect Diagrams: represent chain of relationships; often called a fishbone diagram. • Scatter Diagrams: graphical component of regression analysis.

38. Cause-and-Effect Diagram for Hospital Emergency Admission Exhibit 15.6

39. Chapter 15 Quality Management RootCause Analysis • The root cause is a term used to designate the source of a problem. • A useful approach to identify the root cause is called the 5-Why Technique. This approach forces one to redefine a problem statement as a chain of causes and effects to identify the source of the symptoms by asking why, ideally five times.

40. Exhibit 15.7 Use of Pareto Diagrams for Root Cause Analysis Source: Small Business Guidebook to Quality Management, Office of the Secretary of Defense, Quality Management Office, Washington, DC (1988).

41. Chapter 15 Quality Management Other Quality Improvement Strategies Kaizenfocuses on small, gradual, and frequent improvements over the long term with minimum financial investment and with participation by everyone in the organization. Poka-yoke (mistake-proofing) isan approach for mistake-proofing processes using automatic devices or methods to avoid simple human error.

42. Poka-Yoke Examples Machines have limit switches connected to warning lights that tell the operator when parts are positioned improperly on the machine. Fast food restaurants use automated french-frying machines that can only be operated one way; the french fries are prepackaged and the equipment automated to reduce the chance of human error. Chapter 15 Quality Management

43. Chapter 15 Quality Management SunshineEnterprises Case Study 1. Draw a cause-and-effect diagram for the possible causes of the $25 tip service upset. Select one possible root cause from your diagram and explain how you would investigate and fix it. 2. What is the average value of a loyal customer (VLC) at Abby’s restaurants (see Chapter 3)? What is the best way to increase revenue given your VLC analysis? 3. Critique the current quality control system. What changes and improvements do you recommend if Sunshine expands to twenty restaurants? 4. What are your short- and long-term recommendations? Explain your rationale for these recommendations.