Operations Management and Quality: Instructor Lecture Powerpoints

7
chapter Operations Management and

Quality
Business Essentials, 7th Edition

Ebert/Griffin
Instructor Lecture PowerPoints

PowerPoint Presentation prepared by
© 2009 Pearson Education, Inc. Carol Vollmer Pope Alverno College
What Does Operations Mean Today?
• Operations (Production)
– All the activities involved in making products—
goods and services—for customers
• Service Operations (Service Production)
– Provide intangible and tangible service products
• Goods Operations (Goods Production)
– Produce tangible products
• Operations managers create utility for customers
through production, inventory and quality control.
© 2009 Pearson Education, Inc.

Creating Value Through Operations
• Utility
– The ability of a product to satisfy a want or need
• Form utility
• Time utility
• Place utility
• Operations (Production) Management

– The systematic direction and control of processes that
transform resources into finished services and goods that
create value for and provide benefits to customers

Differences Between Service and Goods
Manufacturing Operations
• Goods are produced, services are performed
• Service operations differ from manufacturing
operations in that service operations:
1. Involve interacting with consumers.
2. Are sometimes intangible and unstorable.
3. Involve a customer’s presence in the process.
4. Involve certain service quality considerations.

Operations Processes
• Operations Process
– A set of methods and technologies used to produce
a good or a service
• Goods Production Processes
– Make-to-order processes
– Make-to-stock processes
• Service Production Processes
– Extent of Customer Contact
• Low-contact systems: low customer involvement
• High-contact systems: high customer involvement
Business Strategy as the
Driver of Operations
• Businesses with contrasting business

strategies choose different operations
capabilities—the activities or processes that
production must perform especially well, with
high proficiency

TABLE 7.1 Business Strategies That Win
Customers for Four Companies

Operations Planning
• Capacity Planning
– Capacity: The amount of a product that a
company can produce under normal conditions
– Planning deals with determining how much can
be produced
• Location Planning
– Location affects production costs and flexibility
– Planning deals with determining where it will be
produced

Operations Planning (cont’d)
• Layout Planning
– The layout of machinery, equipment, and supplies
determines whether a company can respond
efficiently to demand for more and different
products or whether it finds itself unable to match
competitors’ speed and convenience
– Planning deals with determining how the product
will be produced
• Process layouts
• Product layouts

FIGURE 7.1 Operations Planning and Control

Quality Planning
• What Is Quality?
– The combination of “characteristics of a product or
service that bear on its ability to satisfy stated or
implied needs” (American Society for Quality)
– Quality planning begins when products are
designed: goals are set for performance and
consistency
– Quality planning includes deciding what
constitutes a high-quality product and determining
how to measure these quality characteristics

Cost of Poor Quality
 Prevention
Cost of Attaining
 Appraisal: Quality
Prediction
Audit
 Appraisal:
Detection
 Failure: Internal
External
Cost of Poor Quality 12 .PPT

Total Quality Cost
I
want
my
mon
ey
back!
Internal External
Prevention Appraisal Failure Failure
$
Cost of Quality (COQ)
Quality Costs and Profit
Features Lowest Deficiencies
Price Share Cycle Time Warranty Waste
Income Profit Cost

A. Quality costs can mean two
things:
A. Cost of attaining quality
B. Cost of poor quality
B. Can run 10 - 30% of sales or 25
– 40% of operating expenses
Cost of Quality
“We need to communicate to

management the impact of
quality in language they
understand which is often in
terms of dollars.”
“Quality cost measurement and

publication does not solve quality
problems.”
Cost of Quality
Cost Failure
per
goo Cost
d
Costs of
unit appraisal
of and
prod Total
Prevention
uct Cost
0 10
Quality of 0
Conformance, %
Preventing Poor Quality
Pays
Prevention Costs
Appraisal Costs
Bene
fit
$ Repair Costs Prevention Costs
Failure Costs Appraisal Costs

• Internal Repair Costs
• External
Failure Costs
Before After
Quality Quality
Dr Lionel Boxer
Intergon 2004 Cost Cost of Quality
Page 18 Cost
Traditional Cost of Poor Quality
(4-5% of Sales)
When quality costs are initially determined,

the categories included are the visible
ones as depicted in the iceberg below.
Waste Customer Returns
Rejects
Testing Costs Inspection Costs
Rework Recalls

As an Cost of Poorgains
organization Quality a broader
definition of poor quality,
the hidden portion of the
Waste
Rejects
iceberg
Customer Returns becomes
Testing Costs apparent.Inspection Costs
Rework Recalls
Excessive Overtime
Pricing or Late Paperwork High Costs
Billing Errors
Excessive Field Incorrectly Completed
Services ExpensesLack of Follow-up Sales Order
on Current Programs
Excessive
Employee TurnoverPlanning Delays Excess Inventory
Customer Allowances
Unused Capacity
Complaint
Handling
Premium Freight Costs
Time with
Dissatisfied Customer
Excessive
Overdue ReceivablesSystem Costs
Development Cost of Failed Product Hidden COPQ:

COPQ ranges The costs
from 15-25% incurred to
of Sales deal with
these chronic
Cost of Poor Quality 20 .PPT problems
What Does Reality Look Like?
The ratio of the individual category costs
to total costs varies widely. Many
companies exhibit ratios which look like
the following:
Quality Cost CategoryPercent of Total

Internal Failure 25 to 40
External Failure 25 to 40
Appraisal 10 to 50
Prevention .05 to 5
What's Wrong With This

Picture?
Examples of Prevention Expense
 Quality Planning  Purchase Cost Targets

 Training and Education  Process Capability
 Process Definition  Studies
 Customer Surveys  Preventive Maintenance
 Preproduction Reviews  Supplier Qualification
 Technical Manuals  Job Descriptions
 Detailed Product  Housekeeping
Engineering  Zero-Defect Program
 Early Approval of
Product
Examples of Appraisal Expense
 Test  Supplier Certification

 Inspection  Employee Surveys
 Process Controls  Security Checks
 Train QA Personnel  Safety Checks
 Product Audits  Reviews:
 Quality Systems Audits – Operating Expenditures
 Customer Satisfaction – Product Costs
– Financial Reports
 Surveys and Audits
– Capital Expenditures
 Prototype Inspection
 Accumulating
Cost of Poor Quality 23 .PPT Cost Data
Examples of Internal Failure Costs
 Substandard Product  Supplier Problems

 Scrap or Rework – Scrap and rework
 Re-inspection – Late deliveries
– Excess inventory
 Redesign/Engineering
Change  Equipment Downtime
 Process Modifications  Accidents, Injuries
 Payroll Errors  Absenteeism
 All Expediting Costs  Unused Reports
 Off-Spec/Waiver  Missed Schedule Cost
Cost Abandoned Programs  Lost Sales (any cause)
of Poor Quality 24 .PPT
Wiwik-2010 25
Definition
There are many alternative definitions, but broadly
defined…
EMA is the identification, collection, analysis, and use
of two types of information for internal decision-
making:
 Physical information on the use, flows, and fates of energy,
water, and materials (including wastes)
 Monetary information on environment-related costs, earnings,
and savings
EMA Expert Working Group of the
United Nations Division for Sustainable Development
26
Definition
EMA combines financial and physical data and
calculates the environmental costs of companies
A. Physical data on material and energy input, material

flows, products, waste and emissions  PEMA
B. financial data on expenditures, costs, earnings,
savings related to company activities with potential
environmental aspects or impacts  MEMA
27
Wiwik-2010 28
29
Why was EMA Developed?
A. EMA was conceived in recognition of some of the
limitations of conventional practices for informing
environmental management decisions
A. insufficient tracking of energy, materials, and
wastes
B. “hiding” of costs in overhead accounts and
elsewhere in the accounting records
C. lack of data on future and less tangible costs in the
accounting records at all
D. Insufficient communications between the
accounting and other departments/staff, e.g.,
production, environmental, research…
30
31
Why is it important to
measure environmental
costs?
Awareness of environmental costs

is important because
environmental regulations &
fines have increased.
32
The Benefits of Ecoefficiency
A.Ecoefficiency essentially maintains that

organizations can produce more useful goods
and services while simultaneously reducing
negative environmental impacts, resource
consumption, and costs.
33
Customer Demand
For Cleaner Products
Cost Reduction Better Employees

and Competitive and Greater
Advantage Productivity
ECOEFFICENCY
Innovations and Lower Cost of

New Capital and
Opportunities Lower Insurance
Significant Special Benefits

Leading to Improved Image
34
Environmental Quality Cost
A.Environmental costs are costs that are

incurred because poor environmental
quality exists or may exist.
Environmental costs can be classified in

four categories: prevention costs, detection
costs, internal failure costs, and external
failure costs.
35
Environmental Costs
Are Often Underestimated
A. Research Findings:
A. For every dollar of waste cost that companies
actually measure, another 2 to 3 dollars of cost are”
hidden” in the accounting records, or are not on the
books at all
B. Companies typically underestimate how much waste
really costs them, sometimes by several orders of
magnitude
C. This applies even to big, well-managed companies
36
The Cost of Waste Ink
at the Southwire Company
A. The cost of a drum of hazardous waste ink was

estimated as $50 - the average disposal cost per
drum
B. Upon closer inspection, the true cost of waste was
discovered to be $1300 per drum, including:
A. $819 in lost raw materials (ink, thinner)
B. $369 for corporate waste management activities
C. $50 for disposal
D. $47 for internal waste handling activities
E. $16 to pay a hazardous waste tax
37
Environmental Costs At A Refinery
(As a percentage of operating costs,
excluding crude oil input)
Original Estimate Actual Situation
3%
22%
78%
97%
Source: Green Ledgers: Case Studies in Corporate

Environmental38Accounting. World Resources Institute, May, 1995.
The Cost Iceberg
Environmental costs can be like an iceberg, with only a small part of the cost visible
THE HIDDEN COST
Adapted from: Bierma, TJ., F.L. Waterstaraat, and J. Ostrosky. 1998. “Chapter 13: Shared Savings and Environmental
Management Accounting,” from The Green Bottom Line. Greenleaf Publishing:England.
39
EMA “End-uses”
EMA can provide the data needed for many
environmental management initiatives
A. Cleaner Production/Pollution Prevention/Green
Productivity
B. Design for Environment
C. Environmentally Preferable Purchasing
D. Environmental Supply Chain Management
E. Extended Producer Responsibility
F. Performance Meas. & Benchmarking
G. Corporate Environmental Reporting
H. etc.
40
EMA for Improved
Capital Budgeting
A. Better identification, allocation, and analysis of
environmental costs improves the process by which
the profitability of potential investment projects are
assessed.
B. Such investments include any capital project that
has the major objective of controlling, reducing or
preventing pollution.
41
UNDSD Expert Working Group on
EMA …
UNDSD = United Nations Division for Sustainable
Development
 EMA Working Group established in 1999
 Core members are government representatives from
30+ countries
 Other members include invited representatives of
accounting associations, academia, business, etc.
 Group has met 8 times, each time in a different
country
 Group has discussed many international topics of
debate surrounding EMA
42
EMA in North America and Europe
Examples of initiatives in North America and

Europe that promote EMA as a tool for many
environmental programs
A. US EPA’s Environmental Accounting Project
B. Environmental Canada-Quebec Regional Office’s
Private Sector P2 Initiative
C. Graz (Austria) Department of Environmental
Protection’s Eco Profit Initiative
D. UK Environment Agency’s EMA for Financial
Accountants Project
43
EMA in Asia
Examples of EMA and EMA-related

projects and activities in Asia
A. Philippine Training Course on EMA and CP supported
the US-Asia Environmental Partnership (USAEP)
B. Environmental Accounting Guideline published by the
Ministry of Environment in Japan
C. UNEP’s CP Finance’s Profiting from CP Course in
Vietnam
D. Taiwan Environmental Management Association’s EMA
Training Project
E. Thailand Environment Institute’s Workshop on EMA
44
STOP GLOBAL WARMING
- The End -
45
Methods Planning
• Managers identify each production step and
methods for performing it.
• They reduce waste and inefficiency by examining
procedures in an approach called methods
improvement.
• They reduce waste and inefficiency by improving
process flows.
– A detailed description, often a process flowchart, helps
managers organize and record information.
• They attempt to improve customer service.

Operations Scheduling
• Operations Scheduling
– Identifying times when specific production
activities will occur
• Kinds of Planning Schedules
– Master schedule: Shows which products will be
produced, and when, in upcoming time periods
– Detailed schedule: Shows day-to-day activities
that will occur in production
– Staff schedules: Show who and how many
employees will be working, and when
– Project schedules: Coordinate completion of
large-scale projects
Project Scheduling
• Gantt Chart
– Breaks down projects into steps to be performed
– Specifies the time required to complete each step
– A Project Manager uses the Gantt chart to:
• List all activities to be performed
• Estimate the time required for each step
• Record the progress on the chart
• Check the progress against the time scale on the report

Figure 7.4 Gantt Chart

Operations Control
• Operations Control
– Requires managers to monitor performance by
comparing results with detailed plans and
schedules.
– Follow-up: Checking to ensure that production
decisions are being implemented—is a key and
ongoing facet of operations.

Materials Management
• Materials Management
– The process by which managers plan, organize,
and control the flow of materials from sources of
supply through distribution of finished goods
• Materials Management Activities
– Supplier selection
– Purchasing
– Transportation
– Warehousing
– Inventory control

Lean Production Systems: Just-
in-Time Operations
• Lean Production Systems Goals

– Smooth production flows avoid inefficiencies
– Elimination of unnecessary inventories
– Continuous improvement in production processes
• Just-in-Time (JIT) Production
– Bringing together all needed materials only when
they are required, creating fast and efficient
responses to customer orders
Benefits of Just-in-Time Production
1. Reduces the number of goods in process

(goods not yet finished)
2. Minimizes inventory costs
3. Reduces inventory storage space requirements
4. Replaces stop-and-go production with
smooth movement
5. Disruptions are more visible and get resolved
more quickly
6. Continuous improvement of the process
Quality Control
• Quality Control
– Taking action to ensure that operations produces
products that meet specific quality standards
– Requires establishment of specific standards and
measurements

Quality Improvement and Total Quality
Management
• Quality Improvement
– Building quality into products and services rather than
trying to control quality by inspection
• Total Quality Management (TQM)
– All of the activities necessary for getting high-quality goods
and services into the marketplace
• Quality Ownership
– Quality belongs to each person who creates it while
performing a job and it requires a focus on quality by all
parts of an organization

Total Quality Management
• Always Delivering High Quality

– Planning for quality
– Organizing for quality
– Directing for quality
– Controlling for quality

Tools for Total Quality Management
• Competitive Product Analysis
– Analyzing competitors’ products to identify improvements
• Value-Added Analysis
– Eliminating wasteful and unnecessary activities
• Quality Improvement Teams
– Adopting quality circles
• Getting Closer to the Customer
– Identifying internal and external customers
• ISO 9000 and ISO 14000
– Ensuring certification of quality management in processes
• Business Process Reengineering
– Starting over from scratch to improve processes

 Prevention
Cost of Attaining
 Appraisal: Quality
Prediction
Audit
 Appraisal:
Detection
 Failure: Internal
External

Total Quality Cost I
want
my
mon
ey
back!
Internal External
Prevention Appraisal Failure Failure
$
Cost of Quality (COQ)
Quality Costs and Profit
Features Lowest Deficiencies
Price Share Cycle Time

Warranty Waste
Income Profit Cost

A. Quality costs can mean two
things:
A. Cost of attaining quality
B. Cost of poor quality
B. Can run 10 - 30% of sales or 25
– 40% of operating expenses
Cost of Quality
Cost Failure
per
good Cost
unit Costs of
of appraisal and
prod Prevention
uct Total
Cost
0 10
Quality of 0
Conformance, %
Preventing Poor Quality
Pays
Prevention Costs
Appraisal Costs
Bene
fit
$ Repair Costs Prevention Costs
Failure Costs Appraisal Costs

• Internal Repair Costs
• External
Failure Costs
Before After
Quality Quality
Cost Cost
Alignment Alignment
Traditional Cost of Poor Quality
(4-5% of Sales)
When quality costs are initially determined,

the categories included are the visible
ones as depicted in the iceberg below.
Waste Customer Returns
Rejects
Testing Costs Inspection Costs
Rework Recalls

As an Cost of Poorgains
organization Quality a broader
definition of poor quality,
the hidden portion of the
Waste
Rejects
iceberg
Customer Returns becomes
Testing Costs apparent.Inspection Costs
Rework Recalls
Excessive Overtime
Pricing or Late Paperwork High Costs
Billing Errors
Excessive Field Incorrectly Completed
Services ExpensesLack of Follow-up Sales Order
on Current Programs
Excessive
Employee TurnoverPlanning Delays Excess Inventory
Customer Allowances
Unused Capacity
Complaint
Handling
Premium Freight Costs
Time with
Dissatisfied Customer
Excessive
Overdue ReceivablesSystem Costs
Development Cost of Failed Product Hidden COPQ:

COPQ ranges The costs
from 15-25% incurred to
of Sales deal with
these chronic
Cost of Poor Quality 65 .PPT problems
Examples of Prevention Expense
 Quality Planning  Purchase Cost Targets

 Training and Education  Process Capability
 Process Definition  Studies
 Customer Surveys  Preventive Maintenance
 Preproduction Reviews  Supplier Qualification
 Technical Manuals  Job Descriptions
 Detailed Product  Housekeeping
Engineering  Zero-Defect Program
 Early Approval of
Product
Examples of Appraisal Expense
 Test  Supplier Certification

 Inspection  Employee Surveys
 Process Controls  Security Checks
 Train QA Personnel  Safety Checks
 Product Audits  Reviews:
 Quality Systems Audits – Operating Expenditures
 Customer Satisfaction – Product Costs
– Financial Reports
 Surveys and Audits
– Capital Expenditures
 Prototype Inspection
 Accumulating
Cost of Poor Quality 67 .PPT Cost Data
Examples of Internal Failure Costs
 Substandard Product  Supplier Problems

 Scrap or Rework – Scrap and rework
 Re-inspection – Late deliveries
– Excess inventory
 Redesign/Engineering
Change  Equipment Downtime
 Process Modifications  Accidents, Injuries
 Payroll Errors  Absenteeism
 All Expediting Costs  Unused Reports
 Off-Spec/Waiver  Missed Schedule Cost
Cost Abandoned Programs  Lost Sales (any cause)
of Poor Quality 68 .PPT
Adding Value Through Supply Chains
• Supply Chain (or Value Chain)

– The flow of information, materials, and services
that starts with raw-materials suppliers and
continues adding value through other stages in
the network of firms until the product reaches the
end customer

FIGURE 7.5 Supply Chain for Baked Goods

The Supply Chain Strategy
• Supply Chain Management (SCM)
– Working with the supply chain as a whole to
improve overall flow through a system composed
of companies working together
• Supply Chain Reengineering
– Improving the process for better results:
• Lower costs, speedier service, and coordinated flows of
information and material
• Outsourcing and Global Supply Chains
– Paying suppliers and distributors to perform
certain business processes or to provide needed
materials or services

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7

chapter Operations Management and

Business Essentials, 7th Edition

Instructor Lecture PowerPoints

© 2009 Pearson Education, Inc.

• Operations (Production) Management

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

• Businesses with contrasting business

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

Cost of Poor Quality 12 .PPT

Features Lowest Deficiencies

Price Share Cycle Time Warranty Waste

Income Profit Cost

“We need to communicate to

“Quality cost measurement and

$ Repair Costs Prevention Costs

Failure Costs Appraisal Costs

When quality costs are initially determined,

Cost of Poor Quality 19 .PPT

Development Cost of Failed Product Hidden COPQ:

Quality Cost CategoryPercent of Total

What's Wrong With This

 Quality Planning  Purchase Cost Targets

 Test  Supplier Certification

 Substandard Product  Supplier Problems

EMA Expert Working Group of the

United Nations Division for Sustainable Development

A. Physical data on material and energy input, material

Awareness of environmental costs

A.Ecoefficiency essentially maintains that

Cost Reduction Better Employees

Innovations and Lower Cost of

Significant Special Benefits

A.Environmental costs are costs that are

Environmental costs can be classified in

A. The cost of a drum of hazardous waste ink was

Original Estimate Actual Situation

Source: Green Ledgers: Case Studies in Corporate

THE HIDDEN COST

Examples of initiatives in North America and

Examples of EMA and EMA-related

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

• Lean Production Systems Goals

1. Reduces the number of goods in process

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

• Always Delivering High Quality

© 2009 Pearson Education, Inc.

© 2009 Pearson Education, Inc.

Cost of Poor Quality 58 .PPT

Features Lowest Deficiencies

Price Share Cycle Time

Income Profit Cost