CHAPTER 6: ORGANIZATIONAL INNOVATIONS:
TOTAL QUALITY MANAGEMENT; JUST-IN-TIME
PRODUCTION SYSTEM
What is Quality?
The "ultimate test of quality product or service is
whether the product or service meets or exceeds
customers' expectations."
"Total quality (management) is the unyielding and
continually improving effort by everyone in an
organization to understand, meet and exceed the
expectation of customers." - Procter and Gamble
 Core Principles of TQM
1. Focus on Satisfying the Customer
- TQM begins by identifying the firms' customers,
external and internal; determining their needs,
requirements, and expectations; and then doing
whatever it takes to satisfy them. External
customers are the ultimate recipients of the firm's
products or services. Internal customers are
individuals or subunits within the firm involved in
manufacturing the product or providing the
services.
2. Strive for Continuous Improvement (Kaizen)
- "We know we will never arrive; there is no finish" -
Coca-Cola Company
- "With competitors forever trying to outperform us
and customers exhibiting ever-changing
expectations, a firm can never reach the ideal
quality standard"
- "Continuous quality improvement and cost
reduction (Kaizen) are necessary to remain
competitive in today's global marketplace"
3. Full involvement of the Entire Workplace
- Employee involvement can range from simple
information sharing, dialogue, or group problem
solving, all the way to total self-direction.
4. Active Support and Involvement of Top
Management
- Successful implementation of TQM requires
unwavering and active leadership from the CEO
and senior managers
5. Use Clear and Measurable Objectives
- Progress can easily be seen if objectives are
clear. Measurable objectives forge efforts toward
the common goal.
6. Timely Recognition of Quality Achievement
- Quality achievement of people and subunits when
recognized timely is the best way to emphasize tie
firm's continuous struggle for better quality and to
ensure efforts toward quality at every level.
7. Continuing Education and Training
- Employee training programs serves as a
communication link to convey management
commitment to total quality and provide employees
with necessary skills to achieve total quality.
 TQM Implementation Guidelines
The Institute of Management Accountants (IMA)
has devised an 11 phase process spanning three
years to establish TQM.
Year One - Preparation and Planning
*Create quality council and staff
*Conduct executive-quality training programs
*Conduct quality audits
*Prepare gap analysis
*Develop strategy on quality improvement
Year Two - Training and Implementation
*Conduct employee communication and training
program
*Establish quality teams
*Create a measurement system and set goals
Year Three - Assessment, Review & Revise
*Revise compensation and appraisal
*Launch external initiative with suppliers
*Review and revise
 Quality involves conformance with
specifications for product or services that
meet or exceed customer requirements and
expectations.
 Certification or confirmation that a goods or
services meets the requirement of
legislation, prescribed rules and regulations
and specified standards.
 Types of Conformance
1. Goalpost Conformance (zero-defects
conformance)
- To a quality specification expressed as a specified
range around the target.
- The target is the ideal or desired outcome of the
operations.
2. Absolute quality conformance (robust quality
approach)
- Requires that all product or services to meet the
target value exactly with no variation.
- Robustness in quality comes with meeting the
exact target consistently.
- Considered a better approach than zero-defects
conformance.
 Cost of Quality
Three factors underlie the quality of a
product or service. These factors are grade, quality
of design, and quality performance.
The bulk of all quality cost are associated
with quality performance and those cost can be
broken down into four broad groups.
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 1. Prevention Cost
These are costs incurred to avoid poor-quality
goods or services or reduce number of defects in
product or services. These includes:
 System development
 Quality engineering
 Quality circles
 Statistical process control activities
 Supervision of prevention activities
 Quality improvement project
2. Appraisal Cost
These costs, also called inspection costs, are
incurred to identify products before the product are
shipped to customers. These includes:
 Test and inspection of coming materials
 Test and inspection of in-process goods
 Finished product testing and inspection
 Supplies used in testing and inspection
 Depreciation of test equipment
 Maintenance of test equipment
3. Internal Failure Costs
These are costs that result from identification of
defects during the appraisal process. Examples
are:
 Net cost of scrap
 Net cost of spoilage
 Reword labor and overhead
 Reinspection of reworked products
 Retesting of reworked products
 Disposal of defective product
4. External Failure Costs
These are incurred when poor-quality goods or
services are detected after delivery to customers.
they includes:
 Warranty repair and replacements
 Repair and replacement beyond warranty
period
 Product recalls
 Liability arising from defective product
 Prevention and appraisal costs are costs of
conformance because they are incurred to
ensure that products and services meet
customers’ expectation.
 Internal failure and external failure costs are
costs of nonconformance because they are
the costs incurred and opportunity costs
because of rejection of products or services.
 Cost quality is the sum of conformance and
nonconformance costs.
 Quality cost report is a report that details
prevention costs, appraisal costs and the
cost of internal and external failures.
 Uses of Quality Cost Information
The quality cost information is used by manages in
several ways:
1.) Provide basis for establishing budgets for
quality costs to reduce total cost involved
2.) Helps managers fee the financial
significance of quality
3.) Helps managers identify relative importance
of the quality problem forced by the firm
4.) Helps managers see whether their quality
costs are poorly distributed and when
needed, it helps them distribute the costs
better
 Limitations of Quality Cost Information
1.) Some important quality costs are typically
committed from the quality cost report.
2.) Simply measuring and reporting quality
costs does not solve quality programs. Only
management can solve them.
3.) A log may exist between when quality
improvement programs are put into effort
and when the result are seen.
 Nonfinancial Measures of Quality and
Customer Satisfaction
Nonfinancial measures of quality are leading
indicators of future long-run performance, unlike
financial measures of quality that focus on the short
run.
Nonfinancial Measures of Customer Satisfaction
1. On-time delivery rate
2. Delivery delays
3. Percentage of products that fail soon or
often
4. Number of customer complaints
5. Number of defective units shipped to
customers as a percentage of total units
shipped
6. Market research information on customer
preferences and customer satisfaction with
specific product features
Nonfinancial Measures of Internal Performance
1. Number of defects for each product line
2. Employee turnover
3. Process yield
 Just in time production
Just in time (JIT) is the philosophy that activities are
undertaken only as need or demanded .
It is a production system also known as pull it
through approach in which materials are purchased
and units are produced only as needed to meet
actual customer demand.
JIT production system aims to simultaneously:
1. Meet customer demand in a timely way
2. High quality products
3. At the lowest possible total cost
Key features of JIT production system:
1. Maintaining a limited number of suppliers
- Relying on a few ultra reliable suppliers who are
willing to make frequent deliveries.
- If a single part is unavailable, the entire assembly
operation may have to be shut down.
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2. Improving plant layout 5. Maintaining flexible workforce
-All machines needed to make a particular product - Companies employing JIT must have workers
are often brought together in one location. who are flexible and multiskilled .
3. Improving production scheduling
- There should be a good coordination of efforts  Financial Benefits of JIT
throughout the value chain-from the time the order
are received, from the customers, to the time the 1. Greater transparency of the
goods are manufactured up to delivery. production process
2. Heightened emphasis on eliminating
4. Targeting zero defects the specific causes of rework, scrap,
-Through “continuous monitoring” the company and waste
makes directly responsible for spotting defective 3. Lower manufacturing lead times.
units. Supervisors and other workers also
determine the cause of the defect and correcting it
before any further units are produced .

Illustrative : Problem - Implementing a JIT Production System

Nelson corporation, a manufacturer of copper fittings is considering implementing a JIT production system. The following
data are gathered to implement JIT production.
a) P100,000 annual costing cost to reduce setup times must be incurred.
b) Average inventory will be reduced by 500,000
c) Relevant cost of insurance, storage, materials handling, and set up will decline by P30,000 per year
d) Required rate of return on inventory investment is 10% per year
e) Quality will be improved and rework will reduced on 500 units per year resulting in savings of P50 per unit.
f) Better quality and faster delivery will enable the company to charge P2 more per unit on the 20,000 units each
year.
Required: Should Nelson implement the JIT production system?
Answer:
Total annual relevant benefits and cost savings
Carrying costs[(10% x P500,000)+30,000] P80,000
Rework savings (500 x P50) 25,000
105,000
Incremental contribution margin (20.000 x P2). 40,000
Total benefits 145,000
Less: Additional annual tooling cost 100,000
Net benefit P45,000
Note: Since the total annual benefits and cost savings exceeds the annual JIT Implementation cost by P45,000, Nelson
should implement a JIT production system.
 Performance Measures and control in JIT production
1.) Financial performance measures such as inventory turnover ratio which is expected to increase

2.) Non-Financial performance measures of time, inventory and quality, such as:

 Manufacturing lead time expected to decrease

 Units producer per hour expected to increase
 Number of days of inventory on hand expected to decrease
 Total set up time for machines
Total Manufacturing Time expected to decrease
 Number of units requiring rework or scrap
Total number of units started and completed expected to decrease

Prepared by : GROUP 1

Leader: Mary Jane Leongson

Members :

Rizza Ayson Jerwin Pimentel

Charlene Delfinado Georgia Reyta

Mikaela Lyka Junio Vince Villaraza

Aaron Justin Loreto Janelle Villasana

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