Integrating the quality cost report and TQM tools to achieve competitive

advantage
Ever since entered the WTO at the end of 2001, chinese firms have faced severe
competition from other multinational companies. Many chinese firms have
realized that the implementation of total quality management (TQM) is one of
the key success factors in international competition. The core principle of TQM
follows a simple customer-focused line of reasoning: because customers value
high quality, businesses producing high quality products and services can raise
product price and expand market shares. High value and market share foster
high sales revenue. Quality improvement helps a firm to reduce sales returns and
allowances, lower manufacturing costs, and shorten the production cycle.
Reduction in sales returns decrease warrantly costs and repair expenses.
Reduction in the production cycle speeds product output, which in turn increase
customer satisfication, generates new demand, and expands market share.
Increase in sales revenue and decreases in cost raise the net income and return
on investment.
The business that explores its market opportunities through quality management
enters the international quality playing field and may achieve a competitive
advantage practices incur upfront costs. Advantages come only through
increasing product quality while decreasing non-value-added operation quality
costs. Therefore, a study on quality costs control under TQM becomes a great
challenge in contemporary businesses, especially for chinas businesses firms.
This article reports on how one chinese healthcare product-manufactur-ing firm
in the shanghai area increased the benefits and core competencies of its
business by increasing product quality while effectively decreasing the
percentage of total product quality costs to sales revenue.
Integrating quality costs and TQM tools
SK shanghai company is a large-scale healthcare product-manufacturing firm
that is located in china. During the past five years, the firm benefited from
implementing TQM by gradually increasing product quality, fully satisfying
customer demand, and continually expanding its market share. Both the firms
CEO and other top management have fully committed to supporting and
participating in various TQM activities. The responsibilities of quality cost data
collection are led by the quality assurance department but shared by the sales
department, purchasing department, and production department.
From a value-chain perspective, the firm has only middle-and-down stream
production, marketing and after-sale service with no design or R & D stages. The
process analysis method was used to determine key quality activities. Exhibit 1
shows a detailed quality cost report with the total quality costs of three
successive years in category 5 of exhibit 1. The firms management focuses on
controlling costs of nonconformance, i.e., internal failure costs and external
failure costs. The firms quality cost report shows that the internal failure cot has
a higher percentage than the external failure costs. Pareto charts and causes-

and-effect diagrams were used to analyze internal failure costs of the SK

shanghai company.
Internal failure cost anlysis for year one
Of RMB63, 800 total internal failure costs in u=year one, more than seventy-five
percen were incurrred during disposal of defective products with the remaining
costs distributed evenly between rework and work interruptions. Therefore, it
was imperative to characterize the disposal of the detective products to control
internal failure costs. Data on disposal of defective products to control internal
failure costs. Data on disposal of defective products in year one revealed the
different defect causes and rates of defects for each cause. Pareto charting and
cause-and-effect mapping was used to analyze the internal failure cost.
As shown in exhibit 2, the key factor is dyeing defect which accounts for 8.91
percent of the total defects. The cause and effect map shows that five factors
lead to dyeing defects are: people, equipment, material, mixture, and
environment. However, due to high automation and closure of the dying
operation, many of the impacts from people and the environment could be
ignored. Equipment related defects are determined by temperature, timing, and
dosage of dyeing solution. The firm estimated the cost of correction and
verification of the dyeing machine and dosing equipment to be RMB4, 935.60.
dye and catalyzer are material factors that influence defect rates. The cost of
inspection both to dye and catalyzer was estimated to be RMB246.80. mixture
defects can be influenced by mix proportion and timing, but they could be
addressed through proper training. The costs of quality management training for
mixing processes was estimated as RMB1, 200. The total estimated additional
prevention cost was RMB6, 382.40. after implementing prevention measures, the
costs of dyeing defects were reduced from RMB24, 502 in year one to RMB3, 038
in year two with the increased benefit of RMB21, 464. The cost control appears
to be effective because the benefit from the cost reduction exceeded the
additional prevention cost.