Material Management

Cost reduction techniques

9/27/2008

Nan0
qwertyuiopasdfghjklzxcvbnmqw
ertyuiopasdfghjklzxcvbnmqwert
yuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopa
sdfghjklzxcvbnmqwertyuiopasdf
ghjklzxcvbnmqwertyuiopasdfghj
klzxcvbnmrtyuiopasdfghjklzxcvb
nmqwertyuiopasdfghjklzxcvbnm
qwertyuiopasdfghjklzxcvbnmqw
ertyuiopasdfghjklzxcvbnmqwert
yuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopa
sdfghjklzxcvbnmqwertyuiopasdf
ghjklzxcvbnmqwertyuiopasdfghj
klzxcvbnmqwertyuiopasdfghjklz
xcvbnmqwertyuiopasdfghjklzxcv
bnmqwertyuiopasdfghjklzxcvbn
 TABLE OF CONTENTS :

Table of Contents
Type chapter title (level 1)..................................................................1
Type chapter title (level 2).................................................................................2
Type chapter title (level 3)..............................................................................3
Type chapter title (level 1)..................................................................4
Type chapter title (level 2).................................................................................5
Type chapter title (level 3)..............................................................................6
INVENTORIES
Inventories imply stocks and as such all materials, boughtout parts,
works made parts, tools, packing materials, dead stock items and finished
goods held by a store are termed as inventories.

Inventories are broadly classified as under:

1. Production inventories:
They represents raw material, parts and components that are used
in the process of production. Production inventories include

• Standard industrial items purchased from outside (also called

boughtouts)
• Non-standard items (purchase items)
• Special items manufactured in the factory itself (also called
works made parts or piece parts.)

2. MRO inventories
They refer to the maintenance, repairs and operation supplies which
are consumed during process of manufacture but do not become
part of the product.

3. In-process inventories
They represent items in the semi-finished condition (i.e. items in the
partially completed stage)

4.Goods-In-Transit
They represent such materials which have been paid for but have
not yet been received by the stores.

INVENTORY REDUCTION TACTICS

Managers always are eager to find cost-effective ways to reduce

inventory. Later in this chapter, we examine various ways for finding
optimal lot sizes (see also the Special Inventory Models supplement).
Here, we discuss something more fundamental- the basic tactics (which
we call levers) for reducing inventory. A primary lever is one that must be
activated if inventory is to be reduced. A secondary lever reduces the
penalty cost of applying the primary lever and the need for having
inventory in the first place.
• CYCLE INVENTORY. The primary lever is simply to reduce the lot
size. Methods of just – in – time production ( see the Lean System
chapter ) use extremely small lots, compared to traditional lots sizes
equaling several week’s (or even months’) supply . However,
making such reductions in Q without making any other changes can
be devastating. For example, setup costs can skyrocket, which leads
to use of the two secondary levers.
1. Streamline methods for placing orders and making setups, which
reduces ordering and costs and allows Q to be reduced.
2. Increase repeatability to eliminate the need for changeovers.
Repeatability is the degree to which the same work can be
done again. It can be increased through high product demand;
use of specialization; devoting resources exclusively to a product;
using the same part in many different products; flexible
automation; the one-worker, multiple-machines concepts; or
groups technology (see the Process Management and Layout
chapters). Increased repeatability may justify new setup
methods, reduce transportation costs, and allowed quantity
discounts from suppliers.

• ANTICIPATION INVENTORY. The primary lever for

reducing anticipating inventory is simply to match demand rate with
production rate. Secondary levers are used to lever customers
demand in one of the following ways:
1. Add new products with different demand cycles so that a peak in
the demand for one product compensates for the seasonal low
for another.
2. Provide off-season promotional campaigns.
3. Offer seasonal pricing plans.

• SAFETY STOCK INVENTORY. The primary lever for reducing

safety stock inventory is to place orders closers to the time when
they must be received. However, this approach can lead to
unacceptable customer service- unless demand, supply and delivery
uncertainties can be minimized. Four secondary levers can be used.
1. Improve demand forecasts so that there are fewer surprises from
customers. Perhaps customers can even be encouraged to order
items before they need them.
2. Cut lead times of purchased or produced items to reduce
demand uncertainty during the lead time. For example, local
suppliers with short lead times could be selected whenever
possible.
3. Reduce supply uncertainties. Suppliers may be more reliable if
production plans are shared with them, permitting them to make
more realistic forecasts. Surprises from unexpected scrape or
rework can be reduced by improving manufacturing processes.
 Preventive maintenance can minimize unexpected downtime
caused by equipment failure.
4. Rely more on equipment and labour buffers, such as capacity
cushions and cross-trained workers. These are the only buffers
available to business in the service sector because they can’t
inventory their services.

• PIPELINE INVENTORY. An operations manager has direct

control over lead time but not demand rate. Because pipeline
inventory is a function of demand during lead time, the primary
lever is to reduce the lead time. Two secondary levers can help
managers cut lead times.
1. Find more responsive suppliers and select new carriers for
shipments between stocking locations or improve material
handing within the plant. Introducing a computer system could
overcome information delays between a distribution center and
retailer.
2. Decrease Q, at least in those cases where lead time depends on
lot size. Smaller jobs generally require less time to complete.

PLACEMENT OF MANUFACTURING INVENTORIES

Just as distribution managers decide where to place finished goods

inventory, manufacturing managers make similar decisions for raw
materials and work-in-process within the plant. In general,
managers make inventory placement decisions by designating an
item as either a special or a standard. A special is an item made to
order, or if purchased, it is bought or order. Just enough are ordered
to cover the latest customer request. A standard is an item that is
made to stock and normally is available when needed. When a
company makes more of its items as standards, particularly at the
finished goods level, it places inventory closer to the customer.

Inventory held toward the finished goods level means short

delivery times- but a higher dollar investment in inventory.
Inventory placement at Shamrock Chemicals, a Newark, New Jersey,
manufacture of material used in printing inks, illustrates this trade-
off. Shamrock enjoys annual sales of more than $15 million because
finished goods are treated as standard rather than specials,
Shamrock is forced to maintain a large inventory. Holding inventory
at the raw materials level would reduce the cost of carrying
inventory – but at the expense of the quick customer response time
that gives Shamrock its competitive advantages. R. R. Donnelley, a
large manufacturer of books and other printed materials, chooses
an opposite strategy by positioning inventory back at the raw
 material level (e.g. in rolled paper stock and ink) . The reason is that
the products Donnelley produces are made to order and therefore
considered specials. Stocking them based on a forecast would be
very expensive. Placing inventories closer to the raw materials level
gives Donnelley great flexibility in meeting a variety of customer
demands.

ABC ANALYSIS

Thousands of items are held in inventory by a typical organization,

but only small percentage of them deserve management’s closest
attention and tightest control. ABC analysis is the process of
dividing items into three classes according to their dollar usage so
that managers can focus on items that the highest dollar value. This
method is the equivalent of creating a Pareto chart except that it is
applied to inventory rather than quality. As Figure shows, class A
items typically represent only about 20% of the items but account
for 80% of the dollar usage. Class B items account for another 30%
of the items but 15% of the dollar usage. Finally, 50% of the items
fall in class C, representing a mere 5% of the dollar usage.

The goal of ABC analysis is to identify the inventory level of

class A items and enable management to control then tightly by
using the levers just discussed, the analyst begins by multiplying
the annual demand rate for one item by dollar value (cost) of the
unit to determine its dollar usage. After ranking the items on the
basis of dollar usage and creating lines in Figure between classes
are inexact. Class A items could be somewhat higher or lower than
20% of all items, but normally account for the bulk of the dollar
usage.

A manager can direct that class A items be reviewed

frequently to reduce the average lot size and keep inventory records
current. If the records show an on-hand balance of 100 units but the
actual balance is 200 units, costly inventory is being carried
needlessly. If a class A item is brought outside the firms, purchasing
may be able to reduce its cost through centralized buying, switching
suppliers, or more effective contract negotiation.

For class C items, much looser control is appropriate. A stock

out of a class C item can be crucial as for a class A items, but the
inventory holding cost of class C items trends to be low. These
features suggest that higher inventory levels can be tolerated and
 that more safety stock, larger lot sizes, and perhaps even a visual
system, which we discuss later, may suffice for class C items.

IMPORTANT CONSIDERATIONS IN ABC ANALYSIS

Few important points to be considered in connection with ABC analysis

are:

1. ABC curve is a lopsided distribution wherein a small percentage of

items account for a major expenditure on material. Therefore, ABC
curve is similar in shape for different industries.
2. All items that the company consumes should be considered together
while making ABC analysis. Separate classification for materials,
finished parts, tools, supplies, spares etc. is meaningless. Similarly,
a company manufacturing more than one product should also make
only one ABC analysis. Separate ABC analysis for each product is
error prone. This is because quite likely, a “A” item in product wise
ABC analysis may become a “C” item in the total ABC analysis.
3. Though generally annual consumption figures are considered for
ABC analysis yet it is not necessary. If convenient, quarterly or six
monthly consumption figures can be considered.
4. Though classification of items into three categories A, B and C is
adequate for control, yet if required, the items may be classified
into more than three categories. At times, to rationalize control, the
author has classified “C” items into sub group ; C1, C2 and C3.

HML ANALYSIS
H-M-L Analysis is similar to ABC analysis except for the difference that
instead of “usage value”, “price” criterion is used. The items under this
analysis are classified into three groups which are called “High”,
“Medium” and “Low”. To classify, the items are listed in the descending
order of their unit price. The cut –off-lines then fixed by the management
for deciding three categories. For example, the management may decide
that all items if unit price above Rs. 1000 will be of ‘H’ category, those
with unit price between Rs. 100 to Rs. 1000 will be of ‘M’ category and
those having unit price below Rs. 100 will be of ‘L’ category.

HML Analysis helps to-

• Assess storage and security requirements (e.g. high priced

items like bearings, worm shafts, worm wheels, etc require to be
kept in the cupboards.)
• To keep control over consumption at the departmental head
level (e.g. indents of high and medium priced items are
authorized by the departmental head after careful scrutiny of the
consumption figures).
• Determine the frequency of stock verification. e.g. high priced
items are checked more frequently than low priced items.
• To evolve buying policies to control purchases e.g. excess
supply than the order quantity may not be accepted for “H” and
“M” groups while it may be accepted for “L” group.
• To delegate authorities to different buyers to make petty cash
purchase e.g. “H” and “M” category of items may be purchased
by senior buyers and “L” category of items by junior buyers.

XYZ ANALYSIS

X-Y-Z Analysis is based on value of the stocks on hand ( i.e. inventory

investments). Items whose inventory values are high are called X items
while those whose inventory values are low are called Z items. And Y
items are those which have moderate inventory stocks.

Usually X-Y-X analysis is used in conjunction with either ABC

analysis or HML analysis.

X-Y-Z analysis when combined with ABC analysis is used as under:

Class of A B C
Items
X Efforts to be Efforts to be Steps to be taken
made reduce made to convert to dispose off
stocks to Z them to Y surplus stocks
category category
Y Efforts to be * Control may be
made convert future tightened.
these to Z
category
Z * Stock levels may *
be reviewed twice
a year.
* items are within control .No further action is necessary.

ECONOMIC ORDER QUANTITY (EOQ):

One of the important decisions in stock control system is that of

determining the ordering/manufacturing quantities of different items.
Investment in inventories largely depends upon the quantities in which
the items are ordered/ manufactured for replenishment. Ordering
/manufacturing large lots in frequently reduces administrative work but
makes investment in large stock. Ordering / manufacturing small lots
frequently keeps investment low but increases administrative work.The
reasons are obvious. Small lots imply high order frequency ,more
purchase requisition need to be raised ,more frequently material required
to be received and inspected , more progressing requires to be done more
posting need to be done , more bills required to be handle .All this
increased activities call for more staff and higher administrative costs. A
rational approach is therefore needed to fix the order quantities of the
items.

COST TO BE OPTIMISED:

To major cost associated with inventory decision are

1.Procurement Cost
2.Inventory carrying cost
Procurement costs are also termed as preparation costs and are incurred
in connection with the replenishment of the item. It includes cost of
printing and stationery , telephone and telegram telex postages and
traveling charges. Other expenses such as salaries and indirect wages,
gratuity, bonus , P.F., E.S.I., canteen expenses ,etc are fixed and hence
should be excluded from the analysis. It is expressed as cost per order,
obtained by dividing variable expenses of the purchase department in a
period by the number of orders placed in that period .

Inventory carrying costs also called inventory holding costs , are the costs
incurred in connection with the holding of stocks it includes capital costs
(interest on capital invested ),storage and handing charges , taxes and
insurances etc .It varies from plant to plant and generally ranges between
20 to 30%.

MATHEMATICAL FORMULA FOR EOQ:

EOQ can be calculated from the following formula

Economic Order Quantity (EOQ) = 2.S.Cp

Cu.i

S = Annual consumption of the item (units)

Cu = Unit price (Rs.)

Q = Order quantity (units)

Cp = Procurement cost / order( Rs)

i = Inventory carrying cost expressed as a percentage of average

inventory .
LEAN PRODUCTION
Lean manufacturing or lean production, which is often known simply
as "Lean", is the practice of a theory of production that considers the
expenditure of resources for any means other than the creation of value
for the presumed customer to be wasteful, and thus a target for
elimination. Lean manufacturing is a generic process management
philosophy derived mostly from the Toyota Production
System (TPS). It is renowned for its focus on reduction of the original
Toyota seven wastes in order to improve overall customer value, but
there are varying perspectives on how this is best achieved. The steady
growth of Toyota, from a small company to the world's largest
automaker, has focused attention on how it has achieved this.
Lean is about doing more with less: less time, inventory, space, labour,
and money. "Lean manufacturing", a shorthand for a commitment to
eliminating waste, simplifying procedures and speeding up production.
Lean principles come from the Japanese manufacturing industry. The
term was first coined by Professor James P. Womack and consultant
Daniel T. Jones who spent years analysing the success of Japanese
companies after WWII and summarising their learning in a book called
‘Lean Thinking’ (1989).

For many, Lean is the set of "tools" that assist in the identification and
steady elimination of waste (muda). As waste is eliminated quality
improves while production time and cost are reduced. Examples of such
"tools" are Value Stream Mapping, Five S, Kanban (pull systems),
and poka-yoke (error-proofing).

Lean Production Overview

• Non-value added activities or waste are eliminated through

continuous improvement efforts
• Focus on continuous improvement of processes - rather than results
- of the entire value chain
• The lean manufacturing mindset: concept, way of thinking - not
techniques; culture - not the latest management tool
• Continuous product flow is achieved through physical
rearrangement and system structure & control mechanisms
• Single-piece flow / small lot production: achieved through
equipment set up time reduction; attention to machine
maintenance; and orderly, clean work place
• Pull reduction / Just-in-time inventory control

Basic Elements of Lean Manufacturing

The basic elements are waste elimination, continuous one piece
workflow, and customer pull. When these elements are focused in the
areas of cost, quality and delivery, this forms the basis for a lean
production system.
The lean production concept was to a large extent inspired by the Kaizen
- the Japanese strategy of continuous improvement. Employee
empowerment and promotion among them of a way of thinking oriented
at improving processes, imitation of customer relationships, fast product
development and manufacturing, and collaboration with suppliers are
the key strategies of leading lean companies.

Benefits of Lean Production

Establishment and mastering of a lean production system would allow
you to achieve the following benefits:
• Waste reduction by 80%
• Production cost reduction by 50%
• Manufacturing cycle times decreased by 50%
 • Labour reduction by 50% while maintaining or increasing
throughput
• Inventory reduction by 80% while increasing customer service levels
• Capacity in current facilities increase by 50%
• Higher quality
• Higher profits
• Higher system flexibility in reacting to changes in requirements
improved
• More strategic focus
• Improved cash flow through increasing shipping and billing
frequencies
However, by continually focusing on waste reduction, there are truly no
end to the benefits that can be achieved.

Just-In-Time (JIT) Manufacturing

Just-In-time manufacturing, or JIT, is a management philosophy aimed

at eliminating manufacturing wastes by producing only the right amount
and combination of parts at the right place at the right time. This is based
on the fact that wastes result from any activity that adds cost without
adding value to the product, such as transferring of inventories from one
place to another or even the mere act of storing them.

The goal of JIT, therefore, is to minimize the presence of non-value-adding

operations and non-moving inventories in the production line. This will
result in shorter throughput times, better on-time delivery performance,
higher equipment utilization, lesser space requirement, lower dpm’s,
lower costs, and greater profits.

History

The technique was first used by the Ford Motor Company as described
explicitly by Henry Ford's My Life and Work (1922): "We have found in
buying materials that it is not worth while to buy for other than immediate
needs. We buy only enough to fit into the plan of production, taking into
consideration the state of transportation at the time. If transportation
were perfect and an even flow of materials could be assured, it would not
be necessary to carry any stock whatsoever. The carloads of raw
materials would arrive on schedule and in the planned order and amounts,
and go from the railway cars into production. That would save a great deal
of money, for it would give a very rapid turnover and thus decrease the
amount of money tied up in materials. With bad transportation one has to
carry larger stocks." This statement also describes the concept of "dock to
factory floor" in which incoming materials are not even stored or
warehoused before going into production. This paragraph also shows the
need for an effective freight management system (FMS) and Ford's Today
and Tomorrow (1926) describes one.

The technique was subsequently adopted and publicised by Toyota Motor

Corporation of Japan as part of its Toyota Production System (TPS).

It was developed and perfected by Taiichi Ohno of Toyota, who is now

referred to as the father of JIT. Taiichi Ohno developed this philosophy as
a means of meeting customer demands with minimum delays. Thus, in
the olden days, JIT is used not to reduce manufacturing wastage, but
primarily to produce goods so that customer orders are met exactly when
they need the products.

Effects

JIT is also known as lean production or stockless production, since the key
behind a successful implementation of JIT is the reduction of inventory
levels at the various stations of the production line to the absolute
minimum. This necessitates good coordination between stations such that
every station produces only the exact volume that the next station needs.
On the other hand, a station pulls in only the exact volume that it needs
from the preceding station.

The JIT system consists of defining the production flow and setting up the
production floor such that the flow of materials as they get manufactured
through the line is smooth and unimpeded, thereby reducing material
waiting time. This requires that the capacities of the various work
stations that the materials pass through are very evenly matched and
balanced, such that bottle necks in the production line are eliminated.
This set-up ensures that the materials will undergo manufacturing without
queueing or stoppage.

Another important aspect of JIT is the use of a 'pull' system to move

inventories through the production line. Under such a system, the
requirements of the next station is what modulates the production of a
particular station. It is therefore necessary under JIT to define a process
by which the pulling of lots from one station to the next is facilitated.

JIT is most applicable to operations or production flows that do not

change, i.e., those that are simply repeated over and over again. An
example of this would be an automobile assembly line, wherein every car
undergoes the same production process as the one before it.

JIT has likewise been practiced successfully by some semiconductor

companies. Still, there are some semiconductor companies that don’t
practice JIT for the simple reason that their operations are too complex for
JIT application. On the other hand, that’s precisely the challenge of JIT –
creation of a production set-up that is simple enough to allow JIT.

Problems

Just in Time production allows companies to reduce both inventory and

the entire production chain. It encourages the removal of all surplus,
including surplus factories. Under normal business conditions this is not a
problem. However, if there is any disruption at any given point in the
supply chain, then all production grinds to a halt.

Hurricane Katrina and Hurricane Rita both hit the US Gulf coast in August
and September of 2005. At that time, no new oil refineries had been built
in the US since 1976. Between 1976 and 2005, companies actually shut
down several refineries to reduce excess capacity. The remaining
refineries still operating ran at full capacity, so no new refineries were
needed since they would only produce surplus gasoline. However, most of
these refineries were clustered around the Gulf coast. When Katrina hit,
15 oil refineries in Mississippi and Louisiana, representing 20% of US
refining capacity, were shut down. Rita damaged another 16 refineries in
Texas, accounting for 2.3 million barrels per day of capacity shut down.
US regular grade gasoline prices spiked at $3.09 on September 19 in the
immediate aftermath of Hurricane Katrina and retreated to $2.154 per
gallon by November 28, 2005.

Mathematical Expression - EOQ

Consider a (highly) simplified mathematical model of the ordering

process. Let:

K = the incremental cost of placing an order

kc = the annual cost of carrying one unit of inventory

D = annual demand in units

Q = optimal order size in units

TC = total cost over the year

We want to know Q.

We assume that demand is constant and that the company runs down the
stock to zero and then places an order, which arrives instantly. Hence the
average stock held (the average of zero and Q, assuming constant usage)
is Q / 2. Also, the annual number of orders placed is D / Q.

TC consists of two components. The first is the cost of carrying inventory,

which is given by Q * kc / 2, i.e. the average inventory times the carrying
cost per unit. The second cost is the cost of placing orders, given by D *
K / Q, the annual number of orders, D / Q. times the cost per order, K.

Thus total annual cost is

 .

We differentiate TC with respect to Q and set it equal to 0 to find the Q for

minimum total cost, giving

which is known as the Economic Order Quantity or EOQ formula.

The key Japanese breakthrough was to reduce K to a very low level and to
resupply frequently instead of holding excess stocks. In practice JIT works
well for many businesses, but it is not appropriate if K is not small. The
theory above can be fairly easily adapted to take into account realistic
features such as delays in delivery times and fluctuations in demand. Both
of these are usually modelled by normal distributions. The delay in
delivery, in particular, means that additional 'safety stocks' need to be
held if a stockout is to be rendered very unlikely.
Techniques for achieving JIT –

KAIZEN

Kaizen (改善, Japanese for "change for the better" or "improvement", the
English translation is "continuous improvement", or "continual
improvement.") is an approach to productivity improvement originating in
applications of the work of American experts such as Frederick Winslow
Taylor, Frank Bunker Gilbreth, Walter Shewhart, W. Edwards Deming and
of the War Department's Training Within Industry program by Japanese
manufacturers after World War II. The development of Kaizen went hand-
in-hand with that of quality control circles, but it was not limited to quality
assurance.

The goals of kaizen include the elimination of waste (defined as "activities

that add cost but do not add value"), just-in-time delivery, production load
leveling of amount and types, standardized work, paced moving lines,
right-sized equipment, etc. In this aspect it describes something very
similar to the assembly line used in mass production. A closer definition of
the Japanese usage of Kaizen is "to take it apart and put back together in
a better way." What is taken apart is usually a process, system, product,
or service.

Kaizen is a daily activity whose purpose goes beyond improvement. It is

also a process that, when done correctly, humanizes the workplace,
eliminates hard work (both mental and physical), and teaches people how
to do rapid experiments using the scientific method and how to learn to
see and eliminate waste in business processes.

"Kaizen" is the correct usage. "Kaizen event" or "kaizen blitz" are incorrect
usage.

Kaizen is often misunderstood and applied incorrectly, resulting in bad

outcomes including, for example, layoffs. This is called "kaiaku" - literally,
"change for the worse." Layoffs are not the intent of kaizen. Instead,
kaizen must be practiced in tandem with the "Respect for People"
principle. Without "Respect for People," there can be no continuous
improvement. Instead, the usual result is one-time gains that quickly fade.
Importantly, kaizen must operate with three principles in place: process
and results (not results-only); systemic thinking (i.e. big picture, not solely
the narrow view); and non-judgmental, non-blaming (because blaming is
wasteful).

Everyone participates in kaizen; people of all levels in an organization,

from the CEO on down, as well as external stakeholders if needed. The
format for kaizen can be individual, suggestion system, small group, or
large group.

The only way to truly understand the intent, meaning, and power of
kaizen is through direct participation, many, many times.

Applications

The Toyota Production System is known for kaizen, where all line
personnel are expected to stop their moving production line in the case of
any abnormality, and suggestions for improvement are rewarded.

Kaizen often takes place one small step at a time, hence the English
translation: "continuous improvement", or "continual improvement." Yet
radical changes for the sake of goals, such as just in time and moving
lines, also gain the full support of upper level management. Goals for
kaizen workshops are intentionally set very high because there are
countless examples of drastic reductions in process lead time to serve as
proof of their practicality. Kaizen is one of the most commonly used words
in Japan. In the newspapers and on radio and TV, we are bombarded daily
with statements by government officials and politicians regarding the
Kaizen of our trade balance with the United States,the Kaizen of
diplomatic relations with country X, and the Kaizen of the social welfare
system. Both labour and management speak of the Kaizen of industrial
relations.

The cycle of kaizen activity can be defined as: standardize an operation ->
measure the standardized operation (find cycle time and amount of in-
process inventory) -> gauge measurements against requirements ->
innovate to meet requirements and increase productivity -> standardize
the new, improved operations -> continue cycle ad infinitum. This is also
known as the Shewhart cycle, Deming cycle, or PDCA.
The "zen" in Kaizen emphasizes the learn-by-doing aspect of improving
production. This philosophy is focused in a different direction from the
"command-and-control" improvement programs of the mid-twentieth
century. Kaizen methodology includes making changes and looking at the
results, then adjusting. Large-scale preplanning and extensive project
scheduling are replaced by smaller experiments in improvement, which
can be rapidly adapted as new improvements are suggested. Kaizen
means improvement. Morever, Kaizen means ongoing improvement
involving everyone, including both managers and workers. The Kaizen
philosophy assumes that our way of life be it our working life, our social
life, or our home life deserves to be constantly improved.

Masaaki Imai made the term famous in his book, Kaizen: The Key to
Japan's Competitive Success. An appendix to that book includes a
reference to the 5S strategy of disciplined cleanup
KANBAN
Kanban (in kanji 看 板 also in katakana カ ン バ ン , where "kan 看 カ ン "
means visual, and "ban 板 バン" means card or board) is a concept related
to the Lean or Just In Time (JIT) production, but these two concepts are not
the same thing. (The Chinese word "kanban" is a common everyday term
meaning "sign" or "card" and utterly lacks the specialized meaning which
this loanword has acquired in English.) According to Taiichi Ohno, the man
credited with developing JIT, kanban is the means through which JIT is
managed.

Kanban is a signaling system. As its name suggests, Kanban uses cards to

signal the need for an item. Other devices such as plastic markers
(Kanban squares) or balls (often golf balls) can also be used to trigger the
movement, production, or supply of a unit in a factory.

For example, in the production of a widget, the operator has two shelves,
one on either side of the workplace. The raw materials arrive on one shelf
and the finished article on the other. These shelves act as kanbans. The
outgoing kanban signals the customer's need so that when it is empty, the
operator must produce one more widget.

The Kanban is sized so that it can only hold however many the customer
needs (usually one). When the operator begins work, he takes the raw
material from the incoming kanban, thus signalling to the supplier that he
needs more.
Kanban is frequently known as a "pull" system, as everything is pulled in
response to past demand. Demand forecasts are not used in kanban
systems. This is the opposite of the traditional "push" manufacturing
philosophy, in which everything is made to forecasted future needs.

With this in mind, it is not surprising that an important determinant of the

relative merits of "push" and "pull" is the quality of the demand forecast.
If forecasts are good, then the kanban system will effectively waste useful
information, whereas a good "push" system will produce just the right
quantities at the right times. In contexts where demand is difficult to
forecast, on the other hand, the best one can do is to quickly respond to
observed demand. This is exactly what a kanban system does, as a
demand signal immediately propagates through the entire chain. "Push"
systems often encounter serious difficulties when demand forecasts turn
out to be inaccurate.

The Kanban system might be visualised as a "Three bin system" for the
brought out parts ( where there is no inhouse manufacturing)- one bin on
the factory floor, one bin in the factory store and one bin at the Suppliers'
store. The bins usually have a removable card that contains the product
details and other relevant information - the Kanban card. When the bin on
the shop floor is empty, the Kanban card is removed and given to the
store. The store then replaces the bin on the factory floor with a full bin
which also contains a removable Kanban card. The store then contacts the
Supplier and indicates the need to replenish the Kanban card. The product
also containing a Kanban card is delivered into the factory store
completing the final step to the system. So it will never run out of product,
providing of course, the cards are reliably collected from empty
containers. It is a perfect "push-pull" that could also be described as a
"loop", providing the exact amount required, with only "one" spare so
there will never be an issue of "over-supply". The secret to a good Kanban
system is to calculate how many Kanban cards are required for each
product. Most factories use the coloured board system (Heijunka Box).
This consists of a board created especially for the purpose of holding the
Kanban cards.
SIX SIGMA

Process Improvement is the accepted methodology for improving

businesses. The principal quality systems -- Total Quality Management
(TQM), Six Sigma, ISO9000, QS9000 -- are all focused on process
improvement. ISO9000 and QS9000 focus on the quality system. TQM and
Six Sigma (in the broad sense) address the whole business. The greatest
Value (return for invested effort) from any quality system is obtained
when the processes being improved align with the strategic and financial
plans for the business.

The Brecker Six Sigma Improvement Methodology combines the team-

based Process Improvement methodology of TQM with the process
measurement strengths of Six Sigma. The customer requirements analysis
of Quality Function Deployment (QFD) and the cost analysis and team
brainstorming of Value Analysis (VA) are integrated into the Brecker Six
Sigma Methodology to yield better results, faster.

Brecker Six Sigma Improvement Methodology

The four-phase Brecker Six Sigma Improvement Methodology incorporates

elements of Value Analysis (VA), Quality Function Deployment (QFD), and
QS9000 (ISO900-2000 is now similar) into the Six Sigma Improvement
System to provide better results with less effort and Implementation can
be undertaken at 3 levels

• Process (Phase 3)
• Product Line / Plant (Phases 2-3)
• Business (Phases 1-3).
Organizations can pilot this methodology at the product line / plant level
(Phases 2-3) before committing to company wide implementation and
training. Traditional Six Sigma training addresses Phase 3.

Phase 1: Key problem areas are identified and quantified.

Senior personnel analyze customer, financial, operational, and quality

data to identify improvement opportunities and quantify possible
improvements. An Activity-Based Costing approach is frequently taken.
Improvement goals are aligned with strategic business objectives. This is
akin to DMAIC at the business level with the Critical to Quality (CTQ) and
Critical to Business (CTB) parameters being passed down from Phase 1 to
Phase 3 (similar to QFD or Hoshin planning).

Phase 2: Potential product / process improvement solutions are

quantified.

Product line / plant teams use value analysis style workshops to develop
and evaluate specific product / service and process improvements needed
to meet quality, productivity, and cost objectives. Lean thinking, Six
Sigma, and other quality and productivity concepts are considered.

Phase 3: Multi-functional teams improve key processes.

Multi-functional teams analyze products and processes in depth and

develop detailed implementation plans for improvements. Lean thinking,
Six Sigma, Kaizen, and other quality and productivity tools are used as
appropriate.

Phase 4: Improvements are implemented and monitored.

Strong management support is essential in making significant and lasting

improvements. Decision-making needs to be crisp. Follow-up needs to be
relentless. Improvement goals and the implementation schedule must be
met to achieve the projected returns.

Product Line - Location Pilot

The complete improvement process above can be piloted at the product /

service line or location (plant, HQ) level. Facilitated Six Sigma Value
Analysis Workshops with teams including potential Six Sigma Leaders
would identify and prioritize specific improvement projects. The potential
Six Sigma Leaders would be coached in leading multi-functional teams
addressing the high potential solutions. The Six Sigma Leaders and teams
would apply the Six Sigma Process Improvement, QFD, Value Analysis,
and productivity improvement methodologies in implementing product /
service and process improvements (Phase 3).
Smaller businesses or smaller units of large corporations can continue to
obtain the benefits of Six Sigma in this manner without the expense of
large scale black belt training. Team leaders would gradually acquire the
skills of Six Sigma Leaders. Low cost supplemental training would be used
to train a limited number of Six Sigma Leaders as additional projects are
undertaken.

When an organization decides to commit to a full-scale Six Sigma

Improvement System, the system and training can be customized to fit
the needs of the specific business. The general approach is the same, but
the Six Sigma statistical tools, additional statistical tools, QFD and
productivity methodologies, and team approach are adapted to business
and personnel needs. Combining training with implementation of
improvements leads to virtual self-funding -- there is no need for costly
up-front training.

The full benefits of the Brecker Six Sigma Improvement Methodology are
obtained through the application of the Value methodology to the
business. The contribution to Value-Added of all products / services and
processes including business processes is determined and analyzed using
Re-engineering techniques. Improvement areas are selected and
objectives are set.

Six Sigma Leaders

Six Sigma Leaders training is combined with the implementation of

coordinated Six Sigma improvement projects. Potential Six Sigma Leaders
experience the general improvement methodology in the Six Sigma -
Value Analysis Workshop (Phase 2). They are coached in applying Six
Sigma, Value Analysis, QFD, and productivity techniques in Product /
Process Re-Design Workshops (Phase 3). In addition, Leaders are trained
in Six Sigma and other statistical techniques as they lead their assigned
teams through the analysis and improvement of a specific product /
service and processes. Training is customized to the needs of the
particular business, process, and personnel.

Continuous Improvement

The quality journey is continuous -- never-ending. Over time, products /

services change, customers change, processes change, people change,
suppliers change. Quality may change suddenly or deteriorate slowly.
Serious problems need to be addressed as soon as they become evident.
ISO9000 and QS9000 (automotive) both require Corrective Action Systems
to document and resolve serious quality problems. QS9000 (and now
ISO9000-2000) requires a Continuous Improvement system to eliminate
waste and to prevent small problems from becoming big problems.

Cost and productivity also need to be evaluated periodically. New

materials, new suppliers, new processes, new scheduling techniques to
accommodate volume and product mix changes, etc. may make cost and
productivity improvements possible. Therefore, a Continuous
Improvement (CI) system that not only resolves quality problems but also
evaluates potential cost and productivity improvements is desired.
Periodic Six Sigma Value Analysis workshops accomplish this quality,
productivity, cost review.

ISO9000-2000

The Continuous Improvement (CI) requirements of QS9000 and ISO9000-

2000 can be satisfied with a system incorporating Six Sigma - Value
Analysis workshops and including techniques used in DFM and QFD
workshops. For example, the monitoring of Critical to Quality variables
(CTQs) -- determined in QFD / DFM workshops -- allows early detection of
deteriorating process quality. Process Failure Mode and Effects Analysis
(FMEA) is useful in identifying the sources of variation and reducing their
effect.

The more definitive QS9000 system requirements can be incorporated

into manufacturing CI systems.

• Identification of special characteristics (CTQs)

• Design and Process FMEAs
• Measurement systems analysis
• Control plans for CTQs

Service industries would usually focus more on QFD and CTQs and less on
statistical control plans. The techniques incorporated into the CI system
would be customized to fit the business.

The implementation of a CI system requires the training of personnel to

lead the continuous improvement efforts. Leaders for Six Sigma - Value
Analysis workshops would be trained in Value Analysis, TQM, and basic Six
Sigma techniques. More in depth statistical application training can be
acquired in Six Sigma Leaders training. The Brecker Six Sigma
Improvement Methodology described above would more than satisfy the
requirements for a CI system.

Six Sigma Process Quality

In 1985, Bill Smith at Motorola demonstrated a correlation between how

often a product was repaired during manufacture and its life in the field.
Defect levels in the parts per million (ppm) rather than in parts per
hundred (%) were needed to improve the reliability of semiconductors and
electronic products in order to compete with the Japanese. Hence, the
development of the Motorola Six Sigma quality program with its landmark
quality level of 3 ppm defects.
Six sigma was intended to improve the quality of processes that are
already under control major special causes of process problems have
been removed. The output of these process usually follows a Normal
distribution with the process capability defined as ± 3 sigma.

The process mean will vary each time a process is executed using
different equipment , different personnel , different materials , etc. The
observed variation in the process mean was ± 1.5 sigma. Motorola
decided a design tolerance (specification width) of ± 6 sigma was needed
so that there will be only 3.4 ppm defects -- measurements outside the
design tolerance. This was defined as Six Sigma quality.

Six Sigma Process Improvement -- (D)MAIC

A more quantitative version of Deming's PDCA (Plan-Do-Check-Act)

Process Improvement methodology was developed to implement this
statistical approach -- it is commonly referred to as MAIC.

 Measure
 Analyze
 Improve
 Control

Key product-process performance variables are measured, analyzed,

improved, and controlled using statistical methods. The simple
"statistical" quality tools that were popularized in the Total Quality era are
reinforced with Design of Experiments (DOE) and more sophisticated
Statistical Process Control techniques.

Process sigma is the primary unit of measure. It is determined from an

analysis of the number of defects observed in a process. Performance is
compared to the Best-In-Class sigma for that process to determine
whether the process needs to be improved or the product / service needs
to be re-designed. When improvement is necessary, Design of
Experiments (DOE) are used to determine which product or process
parameters are most important and specific parameter values that will
give the best performance. SPC is used to continually monitor product and
process performance.

Similar to the problem-solving models where an initial step to

define the problem was frequently added, some
practitioners prefer to precede MAIC with a Define step. They
feel that selecting and defining the right process is critical.
Effort can easily be wasted working on poorly selected, ill-defined
processes -- as illustrated by many TQM failures.

Six Sigma Improvement System

Many Total Quality improvement efforts did not achieve their objectives
because there was a lack of commitment to the specific improvement
actions and to their effective implementation. Six Sigma, as a system,
overcomes that weakness by

• focusing on the common commitment to meeting

customer requirements,
• developing a consensus set of improvement actions,
• prioritizing those actions, and
• establishing measures that assure accountability in
implementation.

Many companies today are achieving dramatic results with a company-

wide Six Sigma Improvement System based on the previously described
Six Sigma Process Improvement methodology -- MAIC. Large numbers of
technical personnel are trained as "black belts" to lead teams in applying
the statistically-based methodology. Most black belt training programs
focus heavily on these advanced statistical techniques.

High level executives are appointed as "champions" to drive the Six Sigma
Program within their segment of the company. Master Black Belts coach
black belts and coordinate Six Sigma projects. Some companies provide
basic process improvement training to Six Sigma project team members
and refer to them as "green belts." Black belts and / or teams are
assigned process improvement projects with specific performance
improvement goals.

To reduce the workload on their key personnel, to lessen the need for
extensive training, and to minimize costs, small organizations (and some
large ones, too) obtain external facilitation and statistical methods
support.

Balanced Score Card

Kaplan's Balanced Score Card (Harvard Business School) lends support to

the importance of approaching business in a total systems manner such
as TQM or Six Sigma in the broad sense. Employee skills are the base of
Kaplan's business model. Employees work to improve quality and reduce
cycle time (improve processes) so that deliveries can be made on-time.
This creates customer loyalty which in turn generates profits for the
company (Return on Capital Employed). Kaplan suggests using measures
of employee skills, process quality, process cycle time, and on-time
performance to monitor business performance in addition to the usual
financial measures (which lag performance.)

LINEAR PROGRAMMING.

Learning aspects:
• Explain the characteristics & assumptions of linear programming
models.
• Formulate models for various problems.
• Perform graphic analysis for two variable problems & find the
algebraic solution for the corner point found to be optimal.
• Describe the meaning of slack & surplus variables.
• Discuss the maening of sensitivity analysis on the objective function
coefficients & right-hand-side parameters.
• Interpret the computer output of a linear programming solution.

INTRODUCTION:
In many business situation, resources are limited &demand for them is
great.For e.g.a limited number of vehicles may have to be scheduled to
make multiple trips to customers,
or staffing plan may have to be developed to cover expected variable
demand with the fewest employees.By this we describe a technique called
LINEAR PROGRAMMING.
It is useful for allocating scarce resources among competing
demands.Linear programming
can help managers find the best allocation solution & provide information
about the value of addtional resources.

BASIC CONCEPTS:

How to solve operations management with linear programming ;by following

programming models.
1.Objective function.
2.Decision variables.
3.Constraints.
4.Feasible region.
5.Parameters.
6.Linearity.
7.Nonnegativity.

Explanation:
1.Objective function:
An expression in linear programming models that states
mathematically what is being maximised or minimized.

2.Decisions variables:
The variables that represent choices the decision maker can control.

3.Constraints:
The limitations that restrict the permissible choices for the decision
variables.

4.Feasible region:
A region that represents all permissible combinations of the decision
variables in a linear programming model.

5.Parameters:
A value that the decision maker cannot control & that does not change
when the solution is implemented.

6.Linearity:
A characteristics of linear programming models that implies
proportionality & additvity -there can be no powers of decisions variables.

7.Nonnegativity:
An assumption that the decisions variables must be either positive or
zero.

The process of building the model forces managers to identify the

important decision variables &constraints,a useful step in its own right .
FORMULATING A
PROBLEM:

Linear programming applications begin with the formulation of a models of

the problem with the general chracteristics just described.A product mix
problem -a one period type aggregate planning problem the solution of
which yields optimal output quantities of a group product or services,subject
to resource capacity & market demand constraints.
Thus by using 3 step sequence,is the most creative &perhaps the most
difficult part of linear programming.

1.Define the decisions variables -define each decisions vraiables

specifically,remembering that the definitions used in the objective function
must be equally useful in the constraints .
2. Write out the objective function -what is to be maximised or minimised?if
it is next month profits,write out an objective function that makes next
months profits a linear function of the decision variables.

3. Write out the constraints -identify the constraints & the parameters for
each decisions variable in them.

GRAPHIC ANALYSIS:
Graphic method of linear programming:A type of graphic analysis involving
the following 5 steps :plotting the constraints,identifying the feasible
region,plotting an objective function line,finding a visual solution & finding
the algebric solution.

PLOT THE CONSTRAINTS:

We begin by plotting the constraints equations,disregarding the inequality
portion of the constraints (<or>).Making each constraints an equality(=)
transforms it into straight line .
For e.g.the equation of the line for the process is
4x1 +6x2=48
for the x1 axis intercept ,x2=0 &so
4x1+6(0)=48
x1=12
to find the x2 axis intercept ,set x1 =0 &solve for x2:
4(0)+6x2=48
x2=8
we connect points (0,8)&(12,0)with a straight line,
IDENTIFY THE FEASIBLE REGION:
The feasible region is the area on the graph that contains the solution that
satisfy all the constraints simultaneously,including the nonnegativity
restrictions.Generally the following 3
rules identify the feasible points for a given constraints
1.For the (=)constraints,only the points on the line are feasible solution.
2.For the (<_)constraints, the points on the line &the points below or to the
left are feasible solutions

3.For the (>_)constraints,the points on the line & the points above or to the
right are feasible solutions.

PLOT AN OBJECTIVE FUNCTION LINE:

A point that lies at the intersection of two constraints lines on the boundary
of the feasible region.No interior point in the feasible region need
beconsidered because at least one corner point is better than any interior
point. Similarly, other points on the boundary of the feasible region can be
ignored because there is a corner point that is at least as good as any of
them.Alegraically solving two linear equation for each corner points also is
inefficient when there are many constraints &thus many corner points.From
these objective function lines we can spot the best solution visually.If the
objective function is profit,each line is called an "iso profit line"& every point
on that line will yeild the same profit .

FIND THE VISUAL SOLUTION:

We now eliminate corner points A &E from consideration as the optimal
solution because better points lie above & to the right of the Z=272 iso-
profit line.Our goal is to maximise profits,so the best solution is a point on
the iso-profit line.A linear programming problem have more than one
optimal solution. This situation occurs when the objective function is parallel
to one the faces of the feasible region.

FIND THE ALGEBRAIC SOLUTION:

To find an exact solution,we must use algebra.By identifying the pair of
constraints that define the corner points at intersection.simultaneously
equation can be solved several ways.for problem there are 2 ways as
follows:

1.Develop an equation with just one unknown.Start by multiplying both sides

of one equation by a constant so that the co-eficient for one of the two
decisions variables is identical in both equations .

2.Insert this decisions variables value into either one of the original
constraints &
solve for the other decisions variable.
CO-EFFICIENT SENSITIVITY:
The measurement of how much the objective function coefficient of a
decisions
must improve before the optimal solution changes &the decision variables
become some positive number.The coefficient sensitivity for c1 can be found
in the following manner.

1.Identify the direction of rotation of the iso profit line that improve
c1.Rotate the iso profit line in this direction until it reaches a new optimal
corner points that makes x1greater than 0.
2.Determine which binding constraints has the same slope as the rotated iso
profit line at this new point.Solve for the value of c1 that makes the
objective function
slope equal to the slope of this binding constraints.
3.Set the coefficient sensitivity equalto the difference between this value
&the
current value of c1.

SHADOW PRICES:
The marginal improvement in Z caused by relaxing the one unit.The change
in Z per unit of change in the value of the right hand side parameter of the
constraints is called "shadow price''. Relaxation means making the
constraints less restrictive.

RANGE OF FEASIBILITY:
A lower limit & upper limit define the range of feasibility,which is the interval
over which the right hand side parameter can vary while its shadow price
remains valid.

These two limits are establised when,as the constraints line is relaxed, a
new corner point on the feasible region is reached that makes a different
constraint binding.

COMPUTER SOLUTION :
Most of the real world linear programming problems are solved on
computer.
The solution procedure in computer codes is some form of the SIMPLEX
METHOD,an algebic procedure for solving linear programming problems.

SIMPLEX METHOD:
The graphic analysis gives insight into the logic of the simplex method,with
the focus on corner points. One corner points will always be the
optimum,even when there are multiple optimal solutions. The simplex
method starts with an inital corner point & then systematically evaluates
other corner points in such a way that the objective at each iteration.The
simplex method also helps generate the sensitvity analysis information that
we developed graphically.

COMPUTER OUTPUT:
Computer programs dramatically reduce the amount of time required to
solve
linear programming problems.Special purpose programs can be developed
for applications that must be repeated frequently.Such programs simplify
data
input &generate the objective function &the problem.

APPLICATIONS:
Many problems in operations management & in the other functional
areas,have
been modeled as linear programming problems.
The following list identifies some problems that can be solved with linear
program.

• Aggregate planning :
Production. find the minimum cost production schedule,taking into account
hiring & layoff,inventory carrying,overtime & sub contracting costs,subject
to various capacity & policy constraints .

• Distribution:
Shipping.find the optimal shiping assignments from factories to distribution
centers or from warehouse to retailers.

• Inventory :
Stock control. determine the optimal mix of product to hold in inventory in
a warehouse.Supplier slection.find the optimal combination of suppliers to
minimise the amount of unwanted inventory.

• Location :
Plants or warehouse.determine the optimal location of a plant or warehouse
with respect to total transportation costs between various alternative
locations
& existing supply & demand sources.

• Process management :
Stock cutting.given the dimensions of a roll or sheet of raw material,find the
cutting pattern that minimises the amount of scrap material.

• Scheduling :
Shifts.determine the minimum cost assignment of workers to shifts,subject
to varying demand.Routing.find the optimal routing of a product or service
through several process,each having its own capacity & other
characteristics.

Total Quality Management (TQM)

Quality: A Management Philosophy

Anyone born in 1970 or later probably takes for granted
consumer demand for high-quality products & services & the need for
firms to improve their operations to make quality a competitive priority.
However, QUALITY was not always a top priority. In International markets,
the quality of products coming out of JAPAN in the 1950’s & 1960’s was
very poor, owing to the destruction of Japanese industries by allied
bombings during WORLD WAR II. Following the war, Japan had to rebuilt
its industrial base completely so with the help of American consultants
such as W.Edwards Deming & Joseph M.Juran it began making quality a
competitive priority. Demings philosophy was that quality is the
responsibility of the management, not the worker & that the management
must foster an environment for detecting & solving quality problems.
Juran believed that continuous improvement, hands-on management, &
training are fundamental to achieving excellence in quality. At that time
US automobiles were ruling the market as their luxury sedans were at a
higher position than the small, fuel efficient Japanese cars but the energy
crisis in mid 1970’s changed everything. Everyone wanted fuel efficient
cars & this gave an advantage to the Japanese automobile industry to
make a mark & they did just that. By 1980’s US realized if they wanted to
retain their customers they needed to make some serious changes or else
they would have a very serious downfall. This method of quality practices
soon spilled over to all the other Japanese industries. In a short span of 30
years, Japanese manufacturers turned quality levels that was once
considered a joke into global standards of excellence.

The lesson learnt by all other firms worldwide: The global economy of the
2000’s & beyond dictates that companies provide the customer with an
ever-widening array of products & services having high levels of quality.
Customer Driven Definitions of Quality:
Quality is the ability of a firm to meet or exceed the expectations of the
customer.

 Conformance to Specifications- Customers expect the products

or services they buy to meet or exceed certain advertised levels of
performance. In service systems also, conformance to specifications
is important, eventhough tangible outputs are not produced.
Specifications for a service operation may relate to on-time delivery
or response time.

 Value- Another way customers define quality is through value, or

how well the product or service serves its intended purpose at a
price customers are willing to pay. How much value a product or
service has in the mind of the customer depends on the customer’s
expectations before purchasing it.

 Fitness for Use- In assessing fitness for use, or how well the
product or service performs its intended purpose, the customer may
consider the mechanical features of a product or the convenience of
a service. Other aspects of fitness for use include appearance, style,
durability, reliability, craftsmanship & serviceability.

 Support- Often the product or service support provided by the

company is as important to customers as the quality of the product
or service itself. Customers get upset with a company if financial
statements are incorrect, responses to warranty claims are delayed,
or advertising is misleading. Good support can reduce the
consequences of quality failures in other areas.

 Psychological Impressions- People often evaluate the quality of a

product or service on the basis of psychological impressions:
Atmosphere, Image or Aesthetics. In the provision of services, where
the customer is in close contact with the provider, the appearance &
actions of the provider are very important. Nicely dressed,
courteous, friendly, & sympathetic employees can affect the
customer’s perception of service quality.

Quality as a Competitive Weapon:

 In general, a business’s success depends on the
accuracy of its perception of consumer expectations & its ability to bridge
the gap between those expectations & operating capabilities. Consumers
are much more quality-minded now than in the past. A survey of 2000
business units conducted by the strategic planning institute of Cambridge,
Massachusetts, indicated that a high-quality product has a better chance
of gaining market share than does a low-quality product. In another
survey by Industry Week magazine, 85% of the firms responding believed
that their TQM programs were moderately or highly successful in retaining
customers & building satisfaction.

Good quality can also pay off in higher profits. High-

quality products & services can be priced higher than comparable lower-
quality ones & yield a greater return for the same sale. Poor quality
erodes the firm’s ability to compete in the marketplace and increases the
costs of producing its product or service.

The Costs of Poor Quality

Most experts on the costs of poor quality estimate losses in the range of
20-30% of gross sales for the defective or unsatisfactory products.

4 major categories of costs are associated with Quality Management:

1. Prevention

2. Appraisal

3. Internal Failure

4. External Failure

1. Prevention Costs - They are associated with preventing defects

before they happen. They include the costs of redesigning the
process to remove the causes of poor quality, redesigning the
product to make it simpler to produce, training employees in the
methods of continuous improvement, & working with suppliers to
increase the quality of purchased items or contracted services.

2. Appraisal Costs- They are incurred in assessing the level of

quality attained by the operating system. Appraisal helps
management identify quality problems. As preventive measures
improve quality, 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- They result from defects that are

discovered during the production of a product or service. They fall
into 2 major cost categories: yield losses, which are incurred if a
defective item must be scrapped, & rework costs which are incurred
if the item is rerouted to some previous operations to correct the
defect or if the service must be performed again.

4. External Failure Costs- They arise when a defect is discovered

after the consumer has received the product or service. They also
include warranty service & litigation costs. A warranty is a written
guarantee that the producer will repair defective parts or perform
the service to the customer’s satisfaction. Usually, a warranty is
given for a specific period. Warranty costs must be considered in the
design of new products or services, particularly as they relate to
reliability. Defective products can injure & even kill consumers who
purchase them. An increasing number of countries are adopting
liability laws that force companies to pay damages---often large
amounts---to injured plaintiffs or heirs, even when they have not
proved that the manufacturer was negligent in designing the
product. All that needs to be shown is that a product was defective
& that it caused the injury or death.

Employee Involvement:
The challenge of quality management is to instill an
awareness of the importance of quality in all employees & to motivate
them to improve product quality. With TQM, everyone is expected to
contribute to the overall improvement of quality---from the administrator
who finds cost-saving measures to the salesperson who learns of a new
customer need to the engineer who designs a product with fewer parts to
the manager who communicates clearly with other department heads. In
other words, TQM involves all the functions that relate to a product or
service.

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 & approaches & hold
themselves accountable for success. There are many types of teams, such
as Problem solving teams, Special purpose teams & Self managing teams.
On-the-Job training programs can also help improve quality. The prospect
of merit pay & bonuses can give employees some incentive for improving
quality. Companies may tie monetary incentives directly to quality
improvements. Non-monetary awards, such as recognition in front of the
co-workers can also motivate quality improvements.

Improving Quality Through TQM :

PROCESSES:

1. Purchasing Considerations :- Most businesses depend on outside

suppliers for some of the materials, services or equipment used in
producing their products & services. Large companies have hundreds
& even thousands of suppliers some of which supply the same types
of parts. The quality of these inputs can affect the quality of the firm’s
work, & purchased parts of poor quality can have a devastating effect
on the firm. Both the buyer’s approach & specification management
are keys to controlling supplier quality. The firm’s buyer must
emphasize not only the cost & speed of delivery to the supplier but
also the quality of the product. A competent buyer will identify
suppliers that offer high-quality products or services at a reasonable
cost. After identification, the buyer should work with them to obtain
essentially defect-free parts. Management needs to allow sufficient
time for the purchasing department to identify several low-cost,
qualified suppliers & to analyze the information. An unrealistic
deadline can lead to poor selection based on incomplete information
which will further lead to a chain of problems.

2. Product & Service Design :- design changes often require changes

in methods, materials, or specifications, they tend to increase defect
rates. Change invariably increases the risk of making mistakes, so
stable products & services can help reduce internal quality problems.
However, stable designs may not be possible when a product or
service is sold in markets globally. Although changed designs have the
potential to increase market share, management must be aware of
possible quality problems resulting from the changes. If a firm needs
to make design changes to remain competitive, it should be carefully
tested.
3. Process Design :- The design of the process used to produce a
product or service greatly affects its quality. The purchase of new
technology can help prevent or overcome quality problems. One of the
keys to obtaining high quality is concurrent engineering in which
operation managers & designers work closely together in the initial
phases of product or service design need to ensure that production
requirements & process capabilities are synchronized. The result
maybe better & may need shorter time duration.

TOOLS:

1. Quality Function Development :- A key to improving quality

through TQM is linking the design of products or services to the
processes that produce them. Quality function deployment(QFD) is a
means of translating customer requirements into the appropriate
technical requirements for each stage of product or service
development & production. In 1978, YOKI AKAO & SHIGERU MIZUNO
published the first work on this subject.

This approach seeks answers to the following 6 questions.

A) What do our customers want?

B) In terms of our customers, how well are we doing relative to our

competitors?

C) What technical measures relate to our customers’ needs?

D) What are the relationships between the voice of the customer &
the voice of the engineer?

E) How does our product or service performance compare to that of

our competition?

F) What are the potential technical trade-offs?

2. Benchmarking :- it is a continuous, systematic procedure that

measures a firms products or services & processes against those of
industry leaders. Companies use it to understand better how
outstanding companies do things so that they can improve their
 own operations. Typical measures used in benchmarking include
cost per unit, breakdowns per customer, processing time per unit,
customer retention rates & customer satisfaction levels.

It consists mainly of 4 basic steps:

A) Planning - Identify the product, service, or process to be

benchmarked & the firm to be used for comparison, determine
the measures of performance for analysis & collect data.

B) Analysis – Determine the gap between the firm’s current

performance & that of the benchmark firm & identify the causes
of significant gaps.

C) Integration – Establish goals & obtain the support of managers

who must provide the resources for accomplishing the goals.

D) Action – Develop cross-functional teams of those most affected

by the changes, develop action plans & team assignments,
implement the plans, monitor progress, & recalibrate
benchmarks as improvements are made.

3. Data Analysis Tools :- The first step in improving the quality of

an operation is data collection. Data can help uncover operations
requiring improvement & the extent of remedial action needed.
There are nine tools for organizing & presenting data to identify
areas for quality & performance improvement: flow charts, process
diagrams, cause-and-effect diagrams, graphs, checklists,
histograms, bar diagrams, Pareto charts, scatter diagrams & control
charts.

 Checklists- A checklist is a form used to record the frequency

of occurrence of certain product or service characteristics
related to quality.

 Histograms & Bar charts- A histogram summarizes data

measured on a continuous scale, showing the frequency
distribution of some quality characteristics whereas a bar
chart is a series of bars representing the frequency of
occurrence of data characteristics measured on a yes-or-no
basis.
  Pareto’s Charts- It is a bar chart on which the factors are
plotted in decreasing order of frequency along the horizontal
axis. The chart has 2 vertical axes, the one on the left showing
frequency & the one on the right showing cumulative
percentage of frequency. The cumulative frequency curve
identifies the few vital factors that warrant immediate
managerial attention.

 Scatter Diagrams – Sometimes managers suspect but are not

sure that a certain factor is causing a particular quality
problem. A scatter diagram, which is a plot of 2 variables
showing whether they are related, can be used to verify or
negate the suspicion. Each point on the scatter diagram
represents one data observation.

 Cause-And-Effect Diagrams – First developed by Kaoru

Ishikawa, this diagram helps management to trace customer
complaints directly to the operations involved. Operations that
have no direct bearing on that particular defect are’nt shown
on the diagram for that defect. It is also called the fishbone
diagram.

 Graphs – They represent data in a variety of pictorial formats,

such as line graphs & pie charts. Line graphs represent data
sequentially with data points connected by line segments to
highlight trends in the data. Pie charts are useful for showing
data from a group of factors that can be represented as
percentages totaling 100%

INTERNATIONAL QUALITY DOCUMENTATION

STANDARDS.

If each country had its own set of standards,

companies selling in international markets would have difficulty
complying with quality documentation standards in the countries
where they did business. To overcome this problem, the
International Organization for Standardization devised a set of
standards called ISO 9000 for companies doing business in the
European Union. Subsequently, a new set of documentation
standards, ISO 14000, were devised for environmental management
systems.

 The ISO 9000 Documentation Standards :- ISO 9000 is a

set of standards governing documentation of a quality
program. Companies become certified by proving to a
qualified external examiner that they have complied with all
the requirements. Once certified, companies are listed in a
directory so that potential customers can see which
companies have been certified & to what level. Compliance
with ISO 9000 standards says nothing about the actual quality
of a product. Rather, it indicates to customers that companies
can provide documentation to support whatever claims they
make about quality.

ISO 9000 actually consists of 5 documents: ISO

9000-9004.

ISO 9000 is an overview document, which

provides guidelines for selection & use of the other standards.
ISO 9001 is a standard that focuses on 20 aspects of a quality
program for companies that design, produce, install, & service
products. These aspects include management responsibility,
quality system documentation, purchasing, product design,
inspection, training & corrective action. It is the most difficult
& comprehensive standard to attain. ISO 9002 covers the
same areas as ISO 9001 for companies that produce to
customer’s designs or have their design & service activities at
another location. ISO 9003 is the most limited in scope &
addresses only the production process. ISO 9004 contains
guidelines for interpreting the other standards.

 ISO 14000—An Environmental Management System :-

The ISO 14000 documentation standards require participating
companies to keep track of their raw materials use & their
generation, treatment, & disposal of hazardous wastes.
Although not specifying what each company is allowed to
emit, the standards require companies to prepare a plan for
ongoing improvement in their environmental performance.
 ISO 14000 is a series of 5 standards that cover a number of
areas, including the following:

• Environmental Management System: requires a

plan to improve performance in resource use &
pollutant output.

• Environmental Performance Evaluation: specifies

guidelines for the certification of companies.

• Environmental Labeling: defines terms such as

recyclable, energy efficient & safe for the Ozone layer.

• Life-Cycle Assessment: evaluates the lifetime

environmental impact from the manufacture, use &
disposal of a product.

To maintain their certification, companies must be inspected by

outside, private auditors on a regular basis.

BENEFITS OF ISO
CERTIFICATION.
Completing the certification process can take as
long as 18 months & involve many hours of management &
employee time. Despite the expense & commitment involved in ISO
certification, it bestows significant external & internal benefits. The
external benefits come from the potential sales advantage that
companies in compliance have. Companies looking for a supplier will
more likely select a company that has demonstrated compliance
with ISO documentation standards, all other factors being equal.
Registered companies report an average of 48% increased
profitability & 76% improvement in marketing. Consequently, more
& more firms are seeking certification to gain a competitive
advantage. Internal benefits relate directly to the firm’s TQM
program. The British Standards Institute, a leading third party
auditor, estimates that most ISO 9000 registered companies
experience a 10% reduction in the cost of producing a product
because of quality improvements.
 TQM ACROSS
ORGANISATIONS

TQM is a philosophy that must permeate the

entire organization if it is to be successful. The payoffs can be great;
however, everyone must be involved.

TQM has value for manufacturing as well as service companies.

For example, Merill Lynch Credit Corporation(MLCC), a winner of the

Malcolm Baldrige National Quality Excellence Award, found out that
focusing on quality management & performance excellence
throughout the organization has significant rewards. MLCC, which
originates over $4 billion in loans a year & manages a portfolio of
nearly $10 billion, has 8 core & 10 support processes, involving 830
employees, that need to be coordinated. Communication from top to
bottom is critical. Each year senior managers translate the
company’s strategic imperatives into a few critical objectives, which
are accompanied by specific targets & measures. These objectives
become the basis for determining employee performance plans,
which in turn facilitate the communication loop between top
management & the employees. Employees are empowered to take
initiative & responsibility, especially in being flexible in responding
rapidly to customer needs & in individual development. Employees
receive an average of 74 hours of training a year, emphasizing the
need to keep abreast of changes in technology to better serve
customers. A key element of MLCC’s quality initiative is the “voice
of the client” process, which identifies customer satisfaction drivers
for each market segment & credit category. These priority customer
requirements provide the basis for key performance measures for
the 8 core processes. In addition, data snooping is used to analyze
customer satisfaction data to detect trends. Negative trends &
recurring problems trigger process improvement teams t develop
counter measures & to prevent recurrences. Clients receive
feedback on the resolution of the problem within 5 working days.
MLCC’s complete organizational commitment is exemplary of the
pervasiveness of TQM, & it has paid off. In the 2 years after the
initiation of the TQM philosophy, net income rose 100%, return on
equity increased 74% & return on assets improved 36%.