TO A T L

QU L Y A IT

MA A E E T N G MN
Prof. Dr. Khawaja Amjad Saeed* Email: [email protected]

Challenges & A Case Analysis

The rise of TQM during 1990s in the world extended gains to enterprises. This management tool worked nicely and was instrumental for a healthy impact on bottom line. Moreover, optimal utilization of the four Ms. namely Men Material Machines and Money has been facilitated. Stakeholders in general and customers in particular have been great beneficiaries. Quality of life has achieved a new favorable color and the whole management system has been synergized. While the developed West and the developed East have reaped significant benefits, we in South Asia in general and in Pakistan in particular have yet to obtain benefits accruing from the application of TQM. Nothing success like succeeds. Motivated by this guideline, this article has been developed based on case study in which American Company succeeded in facing the challenges posed by Japanese Company in USA by using TQM. II: TQM Main Issues Basically the following are the main issues in operationalizing TQM in an enterprise: 1. Will to Implement TQM This requires awareness about TQM and self belief that TQM tools will eventually benefit an enterprise. Besides, benefits get extended to other stakeholders. If the will is lacking, TQM will not work as the top management will not be committed for taking all steps which eventually pave the way for implementing TQM in real life.
*Principal, Hailey College of Banking & Finance, University of the Punjab, Lahore Pakistan, Email: [email protected] Website: www.kamjadsaeed.edu.pk Mob: 03334363363 Member Governing Council, International Federation of Accountants (IFAC) (1997-2000), President, South Asian Federation of Accountants (SAFA) (1997), President, Institute of Cost and Management Accountants of Pakistan (1997-2000), President, Association of Management Development Institutions of South Asia (AMDISA) (1993-96), Pro ViceChancellor University of the Punjab, Lahore (1994-1996), Founder Director, Institute of Business Administration (IBA), University of the Punjab, Lahore (1973-1996).

I: PRELUDE

2. Institutionalized Approach Quality management Institutions must be established, properly manned with professionally qualified TQM experts and finally the enterprise must develop total TQM Policy. If this approach is not initiated whole heartedly, the whole exercise of TQM will become incrustations and is likely to end up in disaster. A patch work for giving additional duties to the existing staff will not produce any productive results. Any expenditure incurred in institutionalizing of TQM will be a big investment and will give tangible support in achieving the goals of an organization into a high performing enterprise. 3. Identifying Cost of Quality Cost of quality are of four types. These need to be properly understood, comprehended and quantified. Basically the types of cost of quality can be logically identified in each of the two categories. These various types of costs are as under: A: Cost of Conformance: Cost of Appraisal Cost of Prevention B: Cost of Conformance Failures: Cost of Internal Failure Cost of External Failure Effort should be made to properly identify various components of each of the above costs of quality. A comprehensive effort may result in an increase in some categories of costs while it may result in decrease in some components of the cost. On the whole, it is highly important that the final total cost of quality must exhibit significant reduction. This will result in obtaining tangible gains to the enterprise and the management will be happy over the achieved results of operationalizing TQM. 4. TQM Tools Several statistical tools and process measures are used for application as part of total TQM efforts. List is very long. However, some suggested invaluable techniques from which TQM can benefit are: statistical tools (check sheets cause and effect diagram, histograms, pareto diagrams, control charts, scatter diagrams, graphs etc.). stratification, statistical process control (SPC), statistical quality control (SQC), randum variation, process capability

management, six sigma quality, and 10 X improvement. As further research continues, this list will be greatly enlarged. 5. Format for Cost of Quality Report No standard format for the cost of quality has yet been developed. Efforts are being made to use analytical methodologies to develop a standard format for cost of quality report. However, any developed proforma must be meaningful and should reflect consequential results of application of TQM tools. III: Case Analysis In the enclosed case analysis, there is a manufacturing environment in which Company is operating in USA. The environment is highly competitive. The Company is facing pressure of competition from a new Japanese entrant. The US Company has been in great dilemma as to how to compete against the Japanese Company operating in USA. They had consultation, with experts and concluded that TQM Tool should be used to face the competitive challenge. Based on foregoing four costs of quality and with the help of TQM experts, a comprehensive TQM system was developed and final cost of quality was cut down by 26 percent. However, the application of TQM resulted in an increase of 45 percent in prevention cost. Similarly, appraisal cost also registered an increase of 55 percent. However, significant gains were achieved in external failure front and external failure cost manifested 31 percent decrease and an external failure costs showed a decline of 45 percent. On the whole, total quality cost recorded a decline of 26 percent. This percentage enabled the Company (US based) to compete the Japanese Company. Cost of quality report prepared is enclosed (Annex A). This report provides a guideline for identifying some major components of each of the quality cost. The important guideline is that customer losses should be visualized and delivery system of the enterprise must result in delight to the customers. This will beef up the bottom line and will convince the management for achieving productive and profitable results on account of application of TQM.
Note: This case has been taken from material available in IFAC Technical Handbook.

This case has been released by International Federation of Accountants 1999, in their IFAC Technical Handbook PP 779-837. The author of this article served on the Governing Council of IFAC during 1997-2000 and earlier served on its specialized committee dealing with Financial and Management Accounting during 1988-90. Material was available on the basis of which this article has been developed relating focused on case study.

Case Study It is impossible to provide a general model of quality costing for all companies. Since a standard format for Cost of Quality reporting has yet to be developed, managers may not be aware of the analytical methodologies. Various types of analysis, reports and graphs can be developed once the data has been gathered, surveyed by questionnaires, or estimated by knowledgeable personnel. As case study in a manufacturing environment is described below to highlight the analytical methodologies used to identify the areas of quality improvement. Manufacturing company X operates in a high competitive environment and has been experiencing increasing cost and quality pressures from new Japanese entrants. By year 1, the external failure costs as measured by warranty claims, customer dissatisfaction, and share loss had increased 60% of the total Cost of Quality. Realizing this, the company instituted a corporate-wide quality program, using a three year TQM process, to win customers back. This required considerable investments in voluntary prevention and appraisal cost. In the first year, the company increased the voluntary prevention and appraisal costs by approximately 50%. In the second year, the investment began to pay dividends. The manager gathered and summarized the quality costs in the following Cost of Quality report. The purpose of the report was communicate to management the magnitude of the Cost of Quality and provide a baseline for measuring the impact of future improvement activities. The report indicated that prevention and appraisal investments had begun to pay off in year 2. The internal failure, external failure, and total costs had all decreased.

Cost Components Increase/Decrease +45% Prevention Costs +55% Appraisal Costs -31% Internal Failure Costs -47% External Failure Costs -267% Total Quality Cost A decreased in the warranty costs resulted from a decrease in defective products delivered to customers. The market share, however, did not yet show a gain. This can be expected when a company first begins to emphasize quality. It takes time for quality work its way through to the market share. Increased quality should show up later as the customers experience it and the company re-established itself.

Year 1 and 2 quality costs were further summarized. This graph showed the magnitude of the quality costs and compared the current periods costs with the prior years. As TQM is fully implemented by company X, total quality costs will decline. Prevention and appraisal costs, however, will increase in proportion. Cost of Quality Report Particulars Prevention Cost Training Processes/Procedures Quality Planning Other Quality Improvement Efforts Data Analysis Total Appraisal Cost Testing Performance Management Supplier Monitoring Customer Surveys Total Internal Failure Costs Rework and Reject Reinspection and Testing Equipment Failure Customer Losses (est.) Total Total Quality Cost Year 2 $ 90,000 50,000 86,000 60,000 40,000 $ 326,000 $ 140,000 75,000 65,000 30,000 $ 310,000 $ 55,000 35,000 30,000 600,000 $770,000 $ 1,546,000 Year 1 $ 50,000 35,000 +6,000 45,000 30,000 $ 225,000 $ 90,000 50,000 40,000 20,000 $ 200,000 $ 100,000 40,000 35,000 1,140,000 $ 1,460,000 $ 2,090,000 % Change +80 +42 +32 +33 +33 +45 +55 +50 +62 +50 +55 -45 -13 -14 -47 -47 -26

1.

IFAC

Handbook

Selected Bibliography 1999: Technical Pronouncements,

New

York:

International Federation of Accountants, 1999, pp.779 to 837. Specific reference should be made to: Chapter 5 of Management Accounting Sector dealing with managing Quality Improvements. Muhlemann, Alan, Oakland, John, Lockyer, Keith, Production and Operations Management, London: Pitman Publishing, 1992, with following details: Chapter 8: Quality, pp. 97-138 Chapter 19: Controlling Quality through Measurement, pp. 263282 Chapter 20: controlling Quality through Counting pp. 283-300

2.