Modern Business Environment

Modern Business Environment Management Level – Paper P2 Advanced Management Accounting Lecture - 04 Vidya Rajawasam ACMA CGMA MBA

Modern Business Environment In our previous lecture we have discussed • Modern business environment • World class manufacturing • Just in Time systems

Modern Business Environment In this lecture we will discuss • Total Quality Management (TQM) • Costs related to quality • Recognizing the importance of quality • Quality chains

Modern Business Environment Total Quality Management (TQM) Total Quality Management (TQM) is a comprehensive and structuredapproach to organizational management that seeks to improve the quality of products and services. Originated in Japaneseorganizations and one of the importantsuccess factors of Japans’ global businesssuccess.

Modern Business Environment Total Quality Management (TQM) There are two basic principles of TQM, • Get it right first time, TQM consider that the cost of correction is more important than cost of prevention. One of main aims of the TQM is to have zerorejects and 100%quality. Basically, the Japanese management was focusing on zero-defects target.

Modern Business Environment Total Quality Management (TQM) There are two basicprinciples of TQM, • Continuous improvement, This is the second basic principle of TQM. One of the main issues related to TQM is dissatisfaction with the statusquo. Realistically, the zero-defectstargets are not achievable. But provides a base for continuousimprovementtargets.

Modern Business Environment The costs related to the quality The Failure to satisfy customers' needs/ expectations or failing to do so for the first time, costs an average company between 15 and 30 per cent of sale revenue. Therefore, it is vital to understand the variouscosts associated with quality in order to control them.

Modern Business Environment The costs related to the quality The qualitycosts are divided into; • Compliance costs (conformancecosts) • Costs of failure to comply (non-conformancecosts).

Modern Business Environment The costs related to the quality

Modern Business Environment The costs related to the quality Conformancecosts are further divided into; • Preventioncosts, (incurred to prevent mistakes from happening). • Appraisalcosts, (incurred to look for mistakes before the product is manufactured).

Modern Business Environment Prevention costs These costs ensure that the defects do not occur in the firstinstance; The examples are; • Routine repairs and maintenance to the equipment. • Quality training for operatives to improve skills and efficiency. Training of employees can occur bothinside and outside of the firm.

Modern Business Environment Prevention costs • Building quality into design and manufacturing process. When products are designed, the designers should consider the factors that will minimize the futurerectification costs. The productionmethods should be simple as possible and should use the existing skills and resources of the firm.

Modern Business Environment Prevention costs • Determine whether the qualityfactors have been properlyengineered into product design. These issues are only apparent when the costs are reported and analyzed during product lifecycles. Effective performancemanagement system should involve in monitoringproductcosts through out product life cycle.

Modern Business Environment Appraisal costs Concerns with the measuringconformity with requirements. These costs include; • Costs of incominginspections( if suppliers adapt a total quality approach, the costs related to inspections can be eliminated) • Cost of setup inspection. • Cost of acquiring and operating the processcontrol and measuringequipment.

Modern Business Environment Non-conformance costs The Costs incurred related to failure to meet the product quality requirements. The cost of nonconformance is extremely hard to quantify. It has been noted that on an average, for every customer complaint, there are 3 other customers who do not complain, but who simply will not buy your product/service

Modern Business Environment Non-conformance costs The internalfailure include; • Costs of scrap • Reworking costs • Manufacturing and process engineering required to correct the failedprocess. Generally the costs of internal failures are sogreat that the entire TQM programs can be financed by those costs.

Modern Business Environment Non-conformance costs The externalfailure include; • Marketing costs associated with failedproducts and loss of goodwill • Manufacturing and processengineering costs related to the failedproducts. • Compensation / replacement costs for unitsreturned by customers due to poor quality.

Modern Business Environment Non-conformance costs The externalfailure include; • Travel costs related to site visits for rectification of faulty products. • Repaircosts related faulty or defective products. • Liabilityclaims.

Modern Business Environment Non-conformance costs

Modern Business Environment Review MCQs The total quality management system focuses on? • Get it right first time approach • Continuous improvement principles. • Cost management & reduction • Employee incentive schemes

Modern Business Environment Review MCQs The costs related to the quality are ? • Only related to the design stages of production. • Evaluates employee bonuses • Consists of conformance and non conformance costs. • Does not require any analysis.

Modern Business Environment Recognizing the importance of quality • Recognizing the customer priorities, It is important to understand the customerpriorities are important for every business. The only way to remain in business is to focus on customerpriorities.

Modern Business Environment Recognizing the importance of quality 2) Recognize the nature of customer/ supplierrelationships. This include the recognition of internalcustomers who are responsible for transfer of products/components between divisions.

Modern Business Environment Recognizing the importance of quality Ultimately, irrespective of whether the customer is internal or external, the firm has to bear the qualitycosts. 3) The firm should move from relying on inspection of quality to a predetermined level of qualityassurance. The objective is to prevent the cause of defects in the firstplace.

Modern Business Environment Recognizing the importance of quality 4) Each operative or team of operatives must be personallyresponsible for defect-free production targets. These activitiesshouldnot be confined to production/operational staff. Other staff categories; sales, after sales service, accounting should ensure that the customers are happy with the firm’s service.

Modern Business Environment Recognizing the importance of quality 5) Production activities should move away from AcceptableQualityLevels (AQL) to parts per million defects level measures. 6) The firm should enforcezero-defectprograms. These are obsessive drives to get things rightfirsttime. Should also be enforcedthroughout the all departments of the firm.

Modern Business Environment Recognizing the importance of quality 7) The firm should focus on introducing qualitycertificationprograms such as ISO9002, BS5750. Some argue that the benefits and the burden of carrying out these programs are disproportionate.

Modern Business Environment Recognizing the importance of quality 8) The costs related to the qualityprograms should be clearly identified and emphasized. Quality does generatesavings such as reduction in waste materials, reduction in machinebreakdowns due to preventive maintenance, reduction of rework.

Modern Business Environment Commitment to quality The TQM programs bring efficiency and effectiveness to the firm and they must be appliedthroughout whole firm. The program implementation should start with the totalcommitment from mostsenior managers in the organization.

Modern Business Environment Commitment to quality All managers should understand the importance of TQM and should communicate the same to the individuals whom they are responsible. By providing appropriate recognition, attention and reward will secure the full involvement of everyone to successfullyimplement the TQM programs.

Modern Business Environment Quality Chains One of the centralprinciples of TQM is known as the quality chains. Every person in an organization takesoutput from someone else (their internal supplier), then addsvalue to it and passes the same onto someoneelse (their internal customer).

Modern Business Environment Quality Chains This processcontinues until the final product/service being produced and the same reaches to the external (actual) customer. The important idea behind the qualitychain is that if the externalcustomer is to be satisfied, eachone of the internalcustomers in the chain needs to be satisfied.

Modern Business Environment Quality Chains If any one of these internalcustomers who are part of the chain of activities are notsatisfied, then the chainbreaks and the chances of externalcustomer being not satisfied becomes high. Each person in the quality chain should be trained to ask following questions from customers; • Who are my internal customers?

Modern Business Environment Questions related to customers; • What are their true requirements? • How do I find out the customerrequirements? Questions related to Suppliers; • Who are my internalsuppliers? • What are my truerequirements? • How do I communicate my requirements? • Do my suppliers have the capability to meet my requirements?

Modern Business Environment Quality Circles A qualitycircle is a participatory management technique that engage the employees in solving problems related to their own job related issues. Employees working together in an operation meet at certain intervals to discuss problems of quality and to devise solutions for improvements.

Modern Business Environment Quality Circles Quality circles have uniquecharacteristics. They are usually small groups, and are led by a supervisor or a seniorworker. Employees in quality circles receivetraining related to formal problem-solving methods—such as brain-storming, pareto analysis, and cause-and-effect diagrams.

Modern Business Environment Quality Circles After the training, they are encouraged to apply these methods either to specific or general company problems. Once an analysis of the problem is completed, the employees often present their findings to management and handle the implementation of approvedsolutions.

Competitor Analysis Review MCQs Quality chains focuses on ? • Reduction of labour involvement. • Provides information related to employee incentive schemes • Provides a base for understanding customer requirements. • Providing better after sales service.

Competitor Analysis Review MCQs What is true with reference to quality circles? • Investigate, analyze and solve quality related problems. • It is a mandatory requirement to join a quality circle. • Focuses on customer profitability. • Non of the above

Competitive Advantage Lecture Summary We have discussed the • Total Quality Management (TQM) • Costs related to quality • Recognizing the importance of quality • Quality chains • Quality circles

Modern Business Environment Management Level – Paper P2 Advanced Management Accounting Lecture - 04 Vidya Rajawasam ACMA CGMA MBA

Modern Business Environment