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8 Location Planning and Analysis L E A R N I N G O B J E C T I V E S After completing this chapter, you should be able to:

LO8.1 Identify some of the main reasons organizations need to make location decisions.

LO8.2 Explain why location decisions are important.

LO8.3 Discuss the options that are available for location decisions.

LO8.4 Discuss key considerations related to global location decisions.

LO8.5 Outline the decision process for making location decisions.

LO8.6 Describe some of the key factors that guide service and retail location decisions.

LO8.7 Use the techniques presented to evaluate location alternatives.

8.1 The Need for Location Decisions, 343

8.2 The Nature of Location Decisions, 344 Strategic Importance of Location Decisions, 344 Objectives of Location Decisions, 345 Supply Chain Considerations, 345 Location Options, 345

8.3 Global Locations, 346 Facilitating Factors, 346 Benefits, 346 Disadvantages, 347

Risks, 347 Managing Global Operations, 348 Automation, 348

8.4 General Procedure for Making Location Decisions, 348

8.5 Identifying a Country, Region, Community, and Site, 349 Identifying a Country, 350 Identifying a Region, 351 Identifying a Community, 352 Identifying a Site, 353 Multiple Plant Manufacturing Strategies, 354

Geographic Information Systems, 355

8.6 Service and Retail Locations, 356

8.7 Evaluating Location Alternatives, 358 Locational Cost-Profit-Volume Analysis, 358 The Transportation Model, 360 Factor Rating, 360 The Center of Gravity Method, 361 Case: Hello, Walmart?, 370

C H A P T E R O U T L I N E

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When a well-known real estate broker was asked what the three most important determinants of the value of a property are, he said, “That’s easy. Location, location, and location.”

In the residential real estate market, location is an important factor. Although the style of house, number of bedrooms and bathrooms, level of maintenance, and modernity of the kitchen undoubtedly enter into the picture, some locations are just more desirable than others.

In many respects, the choice of location for a business organization is every bit as important as it is for a house, although for different reasons.

Location decisions represent a key part of the strategic planning process of virtually every organization. And, although it might appear that location decisions are one-time problems pertaining to new organizations, existing organizations often have a bigger stake in these kinds of decisions than new organizations.

This chapter examines location analysis. It begins with a brief overview of the reasons firms must make location decisions, the nature of these decisions, and a general procedure for developing and evaluating location alternatives.

© Tom Salyer/Alamy

8.1 THE NEED FOR LOCATION DECISIONS

Existing organizations may need to make location decisions for a variety of reasons. Firms such as banks, fast-food chains, supermarkets, and retail stores view locations as part of marketing strategy, and they look for locations that will help them to expand their markets. Basically, the location decisions in those cases reflect the addition of new locations to an existing system.

A similar situation occurs when an organization experiences a growth in demand for its products or services that cannot be satisfied by expansion at an existing location. The addition of a new location to complement an existing system is often a realistic alternative.

Some firms face location decisions through depletion of basic inputs. For example, fishing and logging operations are often forced to relocate due to the temporary exhaustion of fish or forests at a given location. Mining and petroleum operations face the same sort of situation, although usually with a longer time horizon.

LO8.1 Identify some of the main reasons orga- nizations need to make location decisions.

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For other firms, a shift in markets causes them to consider relocation, or the costs of doing business at a particular location reach a point where other locations begin to look more attractive.

8.2 THE NATURE OF LOCATION DECISIONS

Location decisions for many types of businesses are made infrequently, but they tend to have a significant impact on the organization. In this section we look at the importance of location decisions, the usual objectives managers have when making location choices, and some of the options that are available to them.

Strategic Importance of Location Decisions Location decisions are closely tied to an organization’s strategies. For example, a strategy of being a low-cost producer might result in locating where labor or material costs are low, or locating near markets or raw materials to reduce transportation costs. A strategy of increasing profits by increasing market share might result in locating in high-traffic areas, and a strategy that emphasizes convenience for the customer might result in having many locations where customers can transact their business or make purchases (e.g., branch banks, ATMs, service stations, fast-food outlets).

Location choices can impact capacity and flexibility. Certain locations may be subject to space constraints that limit future expansion options. Moreover, local restrictions may restrict the types of products or services that can be offered, thus limiting future options for new products or services.

Location decisions are strategically important for other reasons as well. One is that they entail a long-term commitment, which makes mistakes difficult to overcome. Another is that location decisions often have an impact on investment requirements, operating costs and reve- nues, and operations. A poor choice of location might result in excessive transportation costs, a shortage of qualified labor, loss of competitive advantage, inadequate supplies of raw mate- rials, or some similar condition that is detrimental to operations. For services, a poor location could result in lack of customers and/or high operating costs. For both manufacturing and ser- vices, location decisions can have a significant impact on competitive advantage. And another reason for the importance of location decisions is their strategic importance to supply chains.

LO8.2 Explain why location decisions are important.

An aerial view of an oil plant along the Kill Van Kull, Bayonne, New Jersey. Sea transportation was a key consideration in its location. The Kill Van Kull has been one of the most important channels in commerce throughout the region, providing a passage for marine traffic between Manhattan and the industrial towns of New Jersey. It currently provides the principal access for oceangoing container ships to Port Newark–Elizabeth Marine Terminal, the busiest port facility in the eastern United States and the principal marine terminal for New York Harbor.

Source: U.S. Coast Guard photo by Petty Officer 2nd Class Jetta H. Disco.

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Objectives of Location Decisions As a general rule, profit-oriented organizations base their decisions on profit potential, whereas nonprofit organizations strive to achieve a balance between cost and the level of cus- tomer service they provide. It would seem to follow that all organizations attempt to identify the “best” location available. However, this is not necessarily the case.

In many instances, no single location may be significantly better than the others. There may be numerous acceptable locations from which to choose, as shown by the wide variety of locations where successful organizations can be found. Furthermore, the number of possible locations that would have to be examined to find the best location may be too large to make an exhaustive search practical. Consequently, most organizations do not set out with the intention of identifying the one best location; rather, they hope to find a number of acceptable locations from which to choose.

Location criteria can depend on where a business is in the supply chain. For instance, at the retail end of a chain, site selection tends to focus more on accessibility, consumer demograph- ics (population density, age distribution, average buyer income), traffic patterns, and local customs. Businesses at the beginning of a supply chain, if they are involved in supplying raw materials, are often located near the source of the raw materials. Businesses in the middle of the chain may locate near suppliers or near their markets, depending on a variety of circum- stances. For example, businesses involved in storing and distributing goods often choose a central location to minimize distribution costs.

Web-based retail businesses are much less dependent on location decisions; they can exist just about anywhere.

Supply Chain Considerations Supply chain management must address supply chain configuration. This includes determin- ing the number and location of suppliers, production facilities, warehouses, and distribution centers. The location of these facilities can involve a long-term commitment of resources, so known risks and benefits should be considered carefully. A related issue is whether to have centralized or decentralized distribution. Centralized distribution generally yields scale econ- omies as well as tighter control than decentralized distribution, but it sometimes incurs higher transportation costs. Decentralized distribution tends to be more responsive to local needs.

The importance of these decisions is underscored by the fact that they reflect the basic strategy for accessing customer markets, and the decisions will have a significant impact on costs, revenues, and responsiveness.

The quantitative techniques described in this chapter can be helpful in evaluating alter- native supply chain configurations. Also, Chapter 15, Supply Chain Management, provides additional insights.

Location Options Managers of existing companies generally consider four options in location planning.

Expand an existing facility. This option can be attractive if there is adequate room for expansion, especially if the location has desirable features that are not readily available elsewhere. Expansion costs are often less than those of other alternatives. Add new locations while retaining existing ones. This is done in many retail opera- tions. In such cases, it is essential to take into account what the impact will be on the total system. Opening a new store in a shopping mall may simply draw customers who already patronize an existing store in the same chain, rather than expand the market. On the other hand, adding locations can be a defensive strategy designed to maintain a market share or to prevent competitors from entering a market. Shut down at one location and move to another. An organization must weigh the costs of a move and the resulting benefits against the costs and benefits of remaining in an existing location. A shift in markets, exhaustion of raw materials, and the cost of opera- tions often cause firms to consider this option seriously.

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Do nothing. If a detailed analysis of potential locations fails to uncover benefits that make one of the previous three alternatives attractive, a firm may decide to maintain the status quo, at least for the time being.

8.3 GLOBAL LOCATIONS

Globalization has opened new markets, and it has meant increasing dispersion of manufactur- ing and service operations around the world. In addition, many companies are outsourcing operations to other companies in foreign locations. In the past, companies tended to operate from a “home base” that was located in a single country. Now, companies are finding strategic and tactical reasons to globalize their operations. As they do, some companies are profiting from their efforts, while others are finding the going tough, and all must contend with issues involved in managing global operations.

In this section, we examine some of the reasons for globalization, the benefits, disadvan- tages, risks, and issues related to managing global operations.

Facilitating Factors There are a number of factors that have made globalization attractive and feasible for business organizations. Two key factors are trade agreements and technological advances.

Trade Agreements. Barriers to international trade such as tariffs and quotas have been reduced or eliminated with trade agreements such as the North American Free Trade Agree- ment (NAFTA), the General Agreement on Tariffs and Trade (GATT), and the U.S.–China Trade Relations Act. Also, the European Union has dropped many trade barriers, and the World Trade Organization is helping to facilitate free trade.

Technology. Technological advances in communication and information sharing have been very helpful. These include faxing capability, e-mail, cell phones, teleconferencing, and the Internet.

Benefits Companies are discovering a wide range of benefits in globalizing their operations. Here is a list of some of the benefits, although it is important to recognize that not all benefits apply to every situation:

Markets. Companies often seek opportunities for expanding markets for their goods and services, as well as better serving existing customers by being more attuned to local needs and having a quicker response time when problems occur. Cost savings. Among the areas for potential cost saving are transportation costs, labor costs, raw material costs, and taxes. High production costs in Germany have contributed to a number of German companies locating some of their production facilities in lower- cost countries. Among them are industrial products giant Siemens, AG (a semiconductor plant in Britain), drug makers Bayer, AG (a plant in Texas), and Hoechst, AG (a plant in China), and automakers Mercedes (plants in Spain, France, and Alabama) and BMW (a plant in Spartanburg, South Carolina). Legal and regulatory. There may be more favorable liability and labor laws, and less- restrictive environmental and other regulations. Financial. Companies can avoid the impact of currency changes that can occur when goods are produced in one country and sold in other countries. Also, a variety of incen- tives may be offered by national, regional, or local governments to attract businesses that will create jobs and boost the local economy. For example, state incentives, and workforce and land availability and cost, helped convince Nissan to build a huge assembly plant in

LO8.3 Discuss the options that are available for location decisions.

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Canton, Mississippi, and Mercedes to build an assembly plant in Vance, Alabama. An added benefit came when suppliers for these plants also set up facilities in the region. Other. Globalization may provide new sources of ideas for products and services, new perspectives on operations, and solutions to problems.

Disadvantages There are a number of disadvantages of having global operations. These can include the following:

Transportation costs. High transportation costs can occur due to poor infrastructure or having to ship over great distances, and the resulting costs can offset savings in labor and materials costs. Security costs. Increased security risks and theft can increase costs. Also, security at international borders can slow shipments to other countries. Unskilled labor. Low labor skills may negatively impact quality and productivity, and the work ethic may differ from that in the home country. Additional employee training may be required. Import restrictions. Some countries place restrictions on the importation of manufac- tured goods, so having local suppliers avoids those issues. Criticisms. Critics may argue that cost savings are being generated through unfair prac- tices such as using sweatshops, in which employees are paid low wages and made to work in poor conditions; using child labor; and operating in countries that have less stringent environmental requirements. Productivity. Low labor productivity may offset low labor costs or other advantages.

Risks Risks with global operations can be substantial.   Among the most troublesome are the following:

Political. Political instability and political unrest can create risks for personnel safety and the safety of assets. Moreover, a government might decide to nationalize facilities, taking them over.

LO8.4 Discuss key considerations related to global location decisions.

A worker inspects cans of Coca-Cola on the production line at a plant in the Middle East. Coke production overseas expands markets and serves local customers.

© Richard J Greenman/Alamy

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Terrorism. Terrorism continues to be a threat in many parts of the world, putting person- nel and assets at risk and decreasing the willingness of domestic personnel to travel to or work in certain areas. Economic. Economic instability might create inflation or deflation, either of which can negatively impact profitability. Legal. Laws and regulations may change, reducing or eliminating what may have been key benefits. Ethical. Corruption and bribery, common in some countries, may be illegal in a com- pany’s home country (e.g., illegal in the United States). This poses a number of issues. One is how to maintain operations without resorting to bribery. Another is how to prevent employees from doing this, especially when they may be of local origin and used to trans- acting business in this way. Cultural. Cultural differences may be more real than apparent. Walmart discovered that fact when it opened stores in Japan. Although Walmart has thrived in many countries on its reputation for low-cost items, Japanese consumers associated low cost with low qual- ity, so Walmart had to rethink its strategy for the Japanese market. Quality. Lax quality controls can lead to recalls and liability issues.

Managing Global Operations Although global operations offer many benefits, these operations often create new issues for management to deal with. For example, language and cultural differences increase the risk of miscommunication and may also interfere with developing trust that is important in busi- ness relationships. Management styles may be quite different, so tactics that work well in one country may not work in another. Increased travel distances and related travel times and costs may result in a decreased tendency for face-to-face meetings and management site visits. Also, coordination of far-flung operations can be more difficult. Managers may have to deal with corruption and bribery as well as differences in work ethic. The level of technology may be lower, and the resistance to technological change may be higher than expected, making the integration of new technologies more difficult. Domestic personnel may resist relocating, even temporarily.

Automation Automation is having a major influence on the decision of where to produce goods, particu- larly if the main markets are domestic. Low labor costs in foreign locations have long been cited as a key reason for using foreign locations for production. However, rising labor costs in some developing countries and poor safety records, the benefits of short transportation times with domestic locations, and advances in automation are causing many companies to take a new look at the question of where production should be done.

8.4 GENERAL PROCEDURE FOR MAKING LOCATION DECISIONS

The way an organization approaches location decisions often depends on its size and the nature or scope of its operations. New or small organizations tend to adopt a rather infor- mal approach to location decisions. New firms typically locate in a certain area simply because the owner lives there. Similarly, managers of small firms often want to keep operations in their backyard, so they tend to focus almost exclusively on local alternatives. Large established companies, particularly those that already operate in more than one location, tend to take a more formal approach. Moreover, they usually consider a wider range of geographic locations. The discussion here pertains mainly to a formal approach to location decisions.

LO8.5 Outline the deci- sion process for making location decisions.

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The general procedure for making location decisions usually consists of the following steps:

1. Decide on the criteria to use for evaluating location alternatives, such as increased rev- enues, decreased cost, or community service.

2. Identify important factors, such as location of markets or raw materials. The factors will differ depending on the type of facility. For example, retail, manufacturing, distribu- tion, healthcare, and transportation all have differing factors that guide their location decisions.

3. Develop location alternatives:

a. Identify a country or countries for location. b. Identify the general region for a location. c. Identify a small number of community alternatives. d. Identify site alternatives among the community alternatives.

4. Evaluate the alternatives and make a selection.

Step 1 is simply a matter of managerial preference. Steps 2 through 4 are discussed on the following pages.

8.5 IDENTIFYING A COUNTRY, REGION, COMMUNITY, AND SITE

Many factors influence location decisions. However, it often happens that one or a few fac- tors are so important that they dominate the decision. For example, in manufacturing, the potentially dominating factors usually include availability of an abundant energy and water supply and proximity to raw materials. Thus, nuclear reactors require large amounts of water for cooling, heavy industries such as steel and aluminum production need large amounts of electricity, and so on. Transportation costs can be a major factor. In service organizations, possible dominating factors are market related and include traffic patterns, convenience, and

Cargo trucks carry containers in and out of the Port of Singapore. The terminal is the world’s second busiest (now surpassed by the Port of Shanghai), handling about one- fifth of the world’s total container transshipments. It connects with 200 shipping lines with connections to 600 ports in 123 countries. This includes daily sailings to every major port in the world.

William Cho/Creative Commons

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Government a. Policies on foreign ownership of production facilities Local content requirements Import restrictions Currency restrictions Environmental regulations Local product standards Liability laws b. Stability issues

Cultural differences Living circumstances for foreign workers and their dependents Ways of doing business Religious holidays/traditions

Customer preferences Possible “buy locally” sentiment

Labor Level of training and education of workers Wage rates Labor productivity Work ethic Possible regulations limiting number of foreign employees Language differences

Resources Availability and quality of raw materials, energy, transportation infrastructure

Financial Financial incentives, tax rates, inflation rates, interest rates

Technological Rate of technological change, rate of innovations

Market Market potential, competition

Safety Crime, terrorism threat

TABLE 8.1 Factors relating to foreign locations

competitors’ locations, as well as proximity to the market. For example, car rental agencies locate near airports and midcity, where their customers are. Note, too, that many of the factors discussed pertain to supply chain facilities as well as operations facilities.

Once an organization has determined the most important factors, it will try to narrow the search for suitable alternatives to one geographic region. Then a small number of community- site alternatives are identified and subjected to detailed analysis. Human factors can be very important, as the following reading reveals. These might include the “culture shock” that is often experienced when employees are transferred to an environment that differs significantly from the current location—for instance, a move from a large city to a rural area, or from a rural area to a large city, or a move to an area that has a dramatically different climate.

Identifying a Country Each country carries its own set of potential benefits and risks, and decision makers need to be absolutely clear on what those benefits and risks are as well as their likelihood of occur- rence so that they can make an informed judgment on whether locating in that country is desirable. Some important issues have been noted in the previous section on global opera- tions. Table 8.1 provides a listing of factors to consider.

In a report by the Council on Competitiveness and Deloitte Touche Tohmatsu that sur- veyed 400 global CEOs on their views on manufacturing competitiveness, the top three fac- tors in determining where to locate manufacturing facilities were talent, labor costs, and energy costs.1 And, in fact, many companies have outsourced some of their operations to foreign suppliers to take advantage of relatively low wage rates. Some U.S. manufacturing companies set up foreign subsidiaries to not only take advantage of low labor rates but also to avoid or delay paying taxes on their profits. With foreign-based subsidiaries, manufacturing companies can ship their products to the United States and pay low tariffs. Furthermore, they can avoid taxes altogether by recording the profits overseas and not returning the earnings to

1Newsweek, July 19, 2010, p. 15.

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the United States. They can do this through transfer pricing rules that allow U.S. companies to establish a price for transfer into the United States that keeps most of the profit in the for- eign subsidiary. Those earnings are not subject to U.S. taxes unless or until they are returned as dividends to the U.S. parent corporation.

It is important to take all factors into account when contemplating the advantage of low labor costs. Other costs may negate that advantage. For example, low wage rates may also be accompanied by low labor productivity, resulting in a net cost per unit that is actually higher than what could be achieved domestically. Another consideration is transportation costs, which are generally higher for longer distances. Again, that could offset some or all of the low wage benefit. Then, too, longer transport time results in increased supply chain inventory and reduced agility.

Another factor to consider is the currency and exchange rate risk that occurs when produc- ing in one country and buying or selling in another country. Companies must transact business in the currency of the country they are involved in. However, because the value of a country’s currency fluctuates, exchange rates fluctuate, affecting the cost of supplies and the profits of sales in other countries when converting back to the country the company is located in.

Companies can obtain information about countries of interest from a variety of sources. Here are two useful websites:

CIA—https://www.cia.gov/library/publications/the-world-factbook/index.html World Bank—http://www.doingbusiness.org/ExploreEconomies/?economyid=2

Identifying a Region The primary regional factors involve raw materials, markets, and labor considerations.

Location of Raw Materials. Firms locate near or at the source of raw materials for three primary reasons: necessity, perishability, and transportation costs. Mining operations, farm- ing, forestry, and fishing fall under necessity. Obviously, such operations must locate close to the raw materials. Firms involved in canning or freezing of fresh fruits and vegetables, processing of dairy products, baking, and so on, must consider perishability when consider- ing location. Transportation costs are important in industries where processing eliminates much of the bulk connected with a raw material, making it much less expensive to transport the product or material after processing. Examples include aluminum reduction, cheese mak- ing, and paper production. When inputs come from different locations, some firms choose to locate near the geographic center of the sources. For instance, steel producers use large quantities of both coal and iron ore, and many are located somewhere between the Appala- chian coal fields and iron ore mines. Transportation costs are often the reason that vendors locate near their major customers. Moreover, regional warehouses are used by supermarkets and other retail operations to supply multiple outlets. Often the choice of new locations and additional warehouses reflects the locations of existing warehouses or retail outlets.

Location of Markets. Profit-oriented firms frequently locate near the markets they intend to serve as part of their competitive strategy, whereas nonprofit organizations choose loca- tions relative to the needs of the users of their services. Other factors include distribution costs or the perishability of a finished product.

Competitive pressures for retail operations can be extremely vital factors. In some cases, a market served by a particular location may be too small to justify two or more competitors (e.g., one hamburger franchise per block), so that a search for potential locations tends to concentrate on locations without competitors. The opposite also might be true; it could be desirable to locate near competitors. Large department stores often locate near each other, and small stores like to locate in shopping centers that have large department stores as anchors. The large stores attract large numbers of shoppers who become potential customers in the smaller stores or in the other large stores.

Some firms must locate close to their markets because of the perishability of their prod- ucts. Examples include bakeries, flower shops, and fresh seafood stores. For other types of

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firms, distribution costs are the main factor in closeness to market. For example, sand and gravel dealers usually serve a limited area because of the high distribution costs associated with their products. Still other firms require close customer contact, so they too tend to locate within the area they expect to serve. Typical examples are tailor shops, home remodelers, home repair services, cabinetmakers, rug cleaners, and lawn and garden services.

Locations of many government services are near the markets they are designed to serve. Hence, post offices are typically scattered throughout large metropolitan areas. Police and emergency health care locations are frequently selected on the basis of client needs. For instance, police patrols often concentrate on high crime areas, and emergency health care facilities are usually found in central locations to provide ready access from all directions.

Many foreign manufacturing companies have located manufacturing operations in the United States, because it is a major market for their products. Chief among them are automo- bile manufacturers, most notably Japanese, but other nations are also represented. Another possible reason that Japanese producers decided to locate in the United States was to offset possible negative consumer sentiment related to job losses of U.S. workers. Thousands of U.S. auto workers are now employed in U.S. manufacturing plants of Japanese and other for- eign companies.

Labor Factors. Primary labor considerations are the cost and availability of labor, wage rates in an area, labor productivity and attitudes toward work, and whether unions are a seri- ous potential problem.

Labor costs are very important for labor-intensive organizations. The shift of the textile industry from the New England states to southern states was due partly to labor costs.

Skills of potential employees may be a factor, although some companies prefer to train new employees rather than rely solely on previous experience. Increasing specialization in many industries makes this possibility even more likely than in the past. Although most companies concentrate on the supply of blue-collar workers, some firms are more interested in scientific and technical people as potential employees, and they look for areas with high concentrations of those types of workers.

Worker attitudes toward turnover, absenteeism, and similar factors may differ among potential locations—workers in large urban centers may exhibit different attitudes than work- ers in small towns or rural areas. Furthermore, worker attitudes in different parts of the coun- try or in different countries may be markedly different.

Some companies offer their current employees jobs if they move to a new location. How- ever, in many instances, employees are reluctant to move, especially when it means leaving families and friends. Furthermore, in families with two wage earners, relocation would require that one wage earner give up a job and then attempt to find another job in the new location.

Other Factors. Climate and taxes sometimes play a role in location decisions. For example, a string of unusually severe winters in northern states may cause some firms to seriously consider moving to a milder climate, especially if delayed deliveries and work disruptions caused by inability of employees to get to work have been frequent. Similarly, the business and personal income taxes in some states reduce their attractiveness to companies seeking new locations. Many companies have been attracted to some Sun Belt states by ample sup- plies of low-cost energy or labor, the climate, and tax considerations. Also, tax and monetary incentives are major factors in attracting or keeping professional sports franchises.

Identifying a Community Many communities actively try to attract new businesses, offering financial and other incen- tives, because they are viewed as potential sources of future tax revenues and new job opportu- nities. However, communities do not, as a rule, want firms that will create pollution problems or otherwise lessen the quality of life in the community. Local groups may actively seek to exclude certain companies on such grounds, and a company may have to go to great lengths to convince local officials that it will be a “responsible citizen.” Furthermore, some organi- zations discover that even though overall community attitude is favorable, there may still be

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considerable opposition to specific sites from nearby residents who object to possible increased levels of noise, traffic, or pollution. Examples of this include community resistance to airport expansion, changes in zoning, construction of nuclear facilities, and highway construction.

From a company standpoint, a number of factors determine the desirability of a community as a place for its workers and managers to live. They include facilities for education, shop- ping, recreation, transportation, religious worship, and entertainment; the quality of police, fire, and medical services; local attitudes toward the company; and the size of the commu- nity. Community size can be particularly important if a firm will be a major employer in the community; a future decision to terminate or reduce operations in that location could have a serious impact on the economy of a small community.

Other community-related factors are the cost and availability of utilities, environmental regulations, taxes (state and local, direct and indirect), and often a laundry list of enticements offered by state or local governments that can include bond issues, tax abatements, low-cost loans, grants, and worker training.

Another trend is just-in-time manufacturing techniques (see Chapter 14), which encourage suppliers to locate near their customers to reduce supplier lead times. For this reason, some U.S. firms are reconsidering decisions to locate offshore. Moreover, in light manufacturing (e.g., electronics), low-cost labor is becoming less important than nearness to markets; users of electronics components want suppliers that are close to their manufacturing facilities. One off- shoot of this is the possibility that the future will see a trend toward smaller factories located close to markets. In some industries, small, automated microfactories with narrow product focuses will be located near major markets to reduce response time.

It is likely that advances in information technology will enhance the ability of manufacturing firms to gather, track, and distribute information that links purchasing, marketing, and distribution with design, engineering, and manufacturing. This will reduce the need for these functions to be located close together, thereby permitting a strategy of locating production facilities near major markets.

Ethical Issues. Ethical issues can arise during location searches, so it is important for companies and governments to have policies in place before that happens, and to keep ethical aspects of decisions in mind while negotiating favorable treatment. For example, govern- ments may offer a variety of incentives to companies to locate in their area, usually to obtain promised benefits from the companies. Companies should be careful to not promise more (e.g., jobs, longev- ity) or less (e.g., noise, traffic) than they can reasonably expect to deliver. Similarly, government negotiators should strive for an agree- ment that will ultimately benefit taxpayers, and use extreme caution in negotiating long-term arrangements that risk leaving taxpayers “holding the bag.” Also at issue are behind-the-scenes payments or favors to make a decision that would otherwise not be rated as highly.

Identifying a Site The primary considerations related to sites are land, transportation, and zoning or other restrictions.

Evaluation of potential sites may require consulting with engi- neers or architects, especially in the case of heavy manufacturing or the erection of large buildings or facilities with special requirements. Soil conditions, load factors, and drainage rates can be critical and often necessitate certain kinds of expertise in evaluation.

Because of the long-term commitment usually required, land costs may be secondary to other site-related factors, such as room for future expansion, current utility and sewer capacities—and any limitations on these that could hinder future growth—and sufficient

Microfactory Small factory with a narrow product focus, located near major markets.

© McGraw-Hill Companies/Jill Braaten, photographer

Apple establishes its stores in key locations with above-average household income and plenty of retail traffic. This store is located on Michigan Avenue in Chicago.

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parking space for employees and customers. In addition, for many firms access roads for trucks or rail spurs are important.

Industrial parks may be worthy alternatives for firms involved in light manufacturing or assembly, warehouse operations, and customer service facilities. Typically, the land is already developed—power, water, and sewer hookups have been attended to, and zoning restrictions do not require special attention. On the negative side, industrial parks may place restrictions on the kinds of activities that a company can conduct, which can limit options for future development of a firm’s products and services as well as the processes it may consider. Some- times stringent regulations governing the size, shape, and architectural features of buildings limit managerial choice in these matters. Also, there may not be an adequate allowance for possible future expansion.

For firms with executives who travel frequently, the size and proximity of the airport or train station as well as travel connections can be important, although schedules and connec- tions are subject to change.

Table 8.2 provides a summary of the factors that affect location decisions.

Multiple Plant Manufacturing Strategies When companies have multiple manufacturing facilities, they can organize operations in several ways. One is to assign different product lines to different plants. Another is to assign different market areas to different plants. And a third is to assign different processes to different plants. Each strategy carries certain cost and managerial implications, as well as competitive advantages.

Product Plant Strategy. With this strategy, entire products or product lines are produced in separate plants, and each plant usually supplies the entire domestic market. This is essen- tially a decentralized approach, with each plant focusing on a narrow set of requirements that entails specialization of labor, materials, and equipment along product lines. Specialization often results in economies of scale and, compared with multipurpose plants, lower operating costs. Plant locations may be widely scattered or clustered relatively close to one another.

Market Area Plant Strategy. With this strategy, plants are designed to serve a particular geographic segment of a market (e.g., the West Coast, the Northeast). Individual plants pro- duce most if not all of a company’s products and supply a limited geographical area. Although

TABLE 8.2 Factors affecting location decisions

Level Factors Considerations

Regional Location of raw materials or supplies

Location of markets

Labor

Proximity, modes and costs of transportation, quantity available

Proximity, distribution costs, target market, trade practices/restrictions

Availability (general and for specific skills), age distri- bution of workforce, work attitudes, union or non- union, productivity, wage scales, unemployment compensation laws

Community Quality of life

Services Attitudes Taxes Environmental regulations Utilities Development support

Schools, churches, shopping, housing, transportation, entertainment, recreation, cost of living

Medical, fire, and police Pro/con State/local, direct and indirect State/local Cost and availability Bond issues, tax abatement, low-cost loans, grants

Site Land

Transportation Environmental/legal

Cost, degree of development required, soil character- istics and drainage, room for expansion, parking

Type (access roads, rail spurs, air freight) Zoning restrictions

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operating costs tend to be higher than those of product plants, significant savings on shipping costs for comparable products can be made. This arrangement is particularly desirable when shipping costs are high due to volume, weight, or other factors. Such arrangements have the added benefit of rapid delivery and response to local needs. This approach requires central- ized coordination of decisions to add or delete plants, or to expand or downsize current plants due to changing market conditions.

Process Plant Strategy. With this strategy, different plants concentrate on different aspects of a process. Automobile manufacturers often use this approach, with different plants for engines, transmissions, body stamping, and even radiators. This approach is best suited to products that have numerous components; separating the production of components results in less confusion than if all production were carried out at the same location.

When an organization uses process plants, coordination of production throughout the system becomes a major issue and requires a highly informed, centralized administration to achieve effective operation. A key benefit is that individual plants are highly specialized and generate volumes that yield economies of scale. However, this approach usually involves additional shipping costs.

General-Purpose Plant Strategy. With this strategy, plants are flexible and capable of handling a range of products. This allows for quick response to product or market changes, although it can be less productive than a more focused approach.

Multiple plants have an additional benefit: the increase in learning opportunities that occurs when similar operations are being done in different plants. Similar problems tend to arise, and solutions to those problems as well as improvements in general in products and processes made at one plant can be shared with other plants.

Geographic Information Systems A geographic information system (GIS) is a computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps. A GIS relies on an integrated system of computer hardware, software, data, and trained personnel to make available a wide range of geographically referenced information. Internet mapping programs used to obtain travel directions are an example of a GIS.

Many countries have an abundance of GIS data that can be accessed. For location analysis, a GIS makes it relatively easy to obtain detailed information on factors such as population density, age, incomes, ethnicity, traffic patterns, competitor locations, educational institu- tions, shopping centers, crime statistics, transportation resources, utilities, recreational facili- ties, maps and images, and a wealth of other information associated with a given location. Local governments use a GIS to organize, analyze, plan, and communicate information about community resources. And job seekers can use GISes for their searches.

Here are some of the ways businesses use geographic information systems:

• Logistics companies use GIS data to plan fleet activities such as routes and schedules based on the locations of their customers.

• Publishers of magazines and newspapers use a GIS to analyze circulation and attract advertisers.

• Real estate companies rely heavily on a GIS to make maps available online to prospec- tive home and business buyers.

• Banks use a GIS to help decide where to locate branch banks and to understand the composition and needs of different market segments.

• Insurance companies use a GIS to determine premiums based on population distribu- tion, crime figures, and likelihood of natural disasters such as flooding in various loca- tions, and to manage risk.

• Retailers are able to link information about sales, customers, and demographics to geographic locations in planning locations. They also use a GIS to develop marketing

Geographic information system (GIS) A computer- based tool for collecting, stor- ing, retrieving, and displaying demographic data on maps.

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strategies and for customer mapping, site selection, sales projections, promotions, and other store portfolio management applications.

• Utility companies use a GIS to balance supply and demand, and identify problem areas. • Emergency services use a GIS to allocate resources to locations to provide adequate

coverage where they are needed.

8.6 SERVICE AND RETAIL LOCATIONS

Service and retail are typically governed by somewhat different considerations than manufac- turing organizations in making location decisions. For one thing, nearness to raw materials is usually not a factor, nor is concern about processing requirements. Customer access is some- times a prime consideration, as it is with banks and supermarkets, but not a consideration in others, such as call centers, catalog sales, and online services. Manufacturers tend to be cost-focused, concerned with labor, energy, and material costs and availability, as well as dis- tribution costs. Service and retail businesses tend to be profit or revenue focused, concerned with demographics such as age, income, and education, population/drawing area, competi- tion, traffic volume/patterns, and customer access/parking.

Retail sales and services are usually found near the center of the markets they serve. Examples include fast-food restaurants, service stations, dry cleaners, and supermarkets. Quite often their products and those of their competitors are so similar that they rely on convenience to attract customers. Hence, these businesses seek locations with high population densities or high traffic. The competition/convenience factor is also important in locating banks, hotels and motels, auto repair shops, drugstores, newspaper kiosks, and shopping centers. Similarly, doctors, dentists, lawyers, barbers, and beauticians typically serve clients who reside within a limited area.

Retail and service organizations typically place traffic volume and convenience high on the list of important factors. Specific types of retail or service businesses may pay more atten- tion to certain factors due to the nature of their business or their customers. If a business is unique, and has its own drawing power, nearness to competitors may not be a factor. However, retail businesses generally prefer locations that are near other retailers because of the higher traffic volumes and convenience to customers. For example, automobile dealerships often tend to locate near each other, and restaurants and specialty stores often locate in and around malls. When businesses locate near similar businesses it is referred to as clustering.

Medical services are often located near hospitals for the convenience of patients. Doctors’ offices may be located near hospitals, or grouped in other, centralized areas with other doc- tors’ offices. Available public transportation is often a consideration.

Good transportation and/or parking facilities can be vital to retail establishments. Down- town areas have a competitive disadvantage in attracting shoppers compared to malls because malls offer ample free parking and nearness to residential areas.

Customer safety and security can be key factors, particularly in urban settings, for all types of services that involve customers coming to the service location (as opposed, say, to in-home services such as home repair and rug cleaning).

Many retail firms have multiple outlets (locations). Among the questions that should be considered in such cases are the following:

1. How can sales, market share, and profit be optimized for the entire set of locations? Solutions might include some combination of upgrading facilities, expanding some sites, adding new outlets, and closing or changing the locations of some outlets.

2. What are the potential sales to be realized from each potential solution? 3. Where should outlets be located to maximize market share, sales, and profits without

negatively impacting other outlets? This can be a key cause of friction between the operator of a franchise store and the franchising company.

4. What probable effects would there be on market share, sales, and profits if a competitor located nearby?

LO8.6 Describe some of the key factors that guide service and retail decisions.

Clustering Similar types of businesses locate near each other.

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A recent trend for online retailers is to locate warehouses close to the market in order to facilitate rapid deliveries. This is especially true for apparel that is ordered online.

Table 8.3 briefly compares service/retail site selection criteria with manufacturing criteria.

KERRY PIPES, FRANCHISING.COM There was a time when franchise site selection was as simple (not to mention as rudimentary and often random) as pushing pins in a map on a wall. Maybe they turned out to be good sites, maybe they didn’t. But as technology continues to evolve and the tools are recalibrated to further refine the site selection process, the art is becoming a science.

Today, companies like SRC, geoVue, and ESRI offer state- of-the-art tools, analysis, and the most current market data to franchise clients everywhere. SRC offers a product called Demo- graphicsNow, which can be customized for any franchise client. Arby’s, Yum! Brands, Chipotle Mexican Grill, and California Kitchen are just a few of their franchise clients.

Integrating Disparate Data Dean Stoecker, SRC’s CEO and president, says the company’s web-based application helps customers locate strong prospective locations by providing in-depth market research data from 19 dif- ferent databases analyzing traffic volumes, concentration of other retail businesses, and even the franchises’ own proprietary data. Simply plug in the site characteristics criteria (based on responses to a series of questions) and a proposed location, and push a but- ton. It’s all crunched and compiled in maps, reports, and models, depending on how you want the data reported.

“DemographicsNow.com  [see: www.alteryx.com] offers fran- chisees a complete and accurate resource for property data and the ability to quickly visualize and analyze retail locations and competitor sites,” says Stoecker. Ultimately, the tool allows fran- chisees to create more insightful development plans and be better equipped to make strategic decisions on new locations.

Although he doesn’t rule out the need to visit potential sites in person, Stoecker says today’s technology not only shows how a pro- posed site shapes up on paper, but also allows franchisees to view aerial photographs of proposed sites and surrounding areas. “Tech- nology can now provide an analysis that’s both faster and scalable, yet provide answers in ways everybody can understand,” says Stoecker.

READING SITE SELECTION GROWS UP: IMPROVED TECH TOOLS MAKE THE PROCESS FASTER, BETTER

Getting Better All The Time “There’s no question that technology now allows franchisors and franchisees to identify the strongest markets,” says David Powell, vice president of sales and marketing for geoVue. “There was a time when you didn’t have much choice but to rely on the local real estate agent on the ground.” No more.

Optimal use of these tools, says Powell, requires a collabora- tive effort between his company and its franchise clients, which include Dunkin’ Brands and Del Taco. “Most franchises know the habits and characteristics of their customers, and that’s critical information for identifying top locations.”

As the technology continues to evolve, it has moved from basic site selection to a more detailed market analysis that integrates ever more information from formerly separate databases. “It’s much more complex and offers a clearer insight,” says Powell. For example, geoVue provides a “market ranking and potential analy- sis” that essentially tells users which markets would be best to pursue based on their set of criteria. The firm’s “market optimiza- tion” tool sheds light on how best to carve out territories, help- ing to eliminate encroachment and cannibalization. And its “site screening” tool helps evaluate locations based on demographic and competitive data.

The end result, says Powell, is that franchises are opening up more sites more quickly—and they are higher quality locations.

Based on their “perfect store” profile, franchisors can also use geoVue and similar tools to evaluate performance at existing units, says Powell. “They can help you decide where you might need to close a store because of changing demographics or other factors revealed through site analysis,” he says.

Questions 1. In what ways have tech tools improved the process of site

selection? 2. Describe how those same tools can lead to store closings or

store relocations.

TABLE 8.3 A comparison of service/ retail considerations and manufacturing considerations

Manufacturing/Distribution Service/Retail

Cost focus Revenue focus

Transportation modes/costs Demographics: age, income, education

Energy availability/costs Population/drawing area

Labor cost/availability/skills Competition

Building/leasing costs Traffic volume/patterns

  Customer access/parking

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8.7 EVALUATING LOCATION ALTERNATIVES

There are a number of techniques that are helpful in evaluating location alternatives: locational cost-profit-volume analysis, factor rating, and the center of gravity method.

Locational Cost-Profit-Volume Analysis The economic comparison of location alternatives is facilitated by the use of cost-profit- volume analysis. The analysis can be done numerically or graphically. The graphical approach will be demonstrated here because it enhances understanding of the concept and indicates the ranges over which one of the alternatives is superior to the others.

The procedure for locational cost-profit-volume analysis involves these steps:

1. Determine the fixed and variable costs associated with each location alternative. 2. Plot the total-cost lines for all location alternatives on the same graph. 3. Determine which location will have the lowest total cost for the expected level of output.

Alternatively, determine which location will have the highest profit.

This method assumes the following:

1. Fixed costs are constant for the range of probable output. 2. Variable costs are linear for the range of probable output. 3. The required level of output can be closely estimated. 4. Only one product is involved.

For a cost analysis, compute the total cost for each location:

Total cost = FC + v × Q (8–1)

where

FC

=

Fixed cost

v = Variable cost per unit Q

=

Quantity or volume of output

LO8.7 Use the techniques presented to evaluate location alternatives.

Locational cost-profit-volume analysis Technique for evalu- ating location choices in eco- nomic terms.

S O L U T I O N

Finding the Lowest-Cost Range for Multiple Alternatives Fixed and variable costs for four potential plant locations are shown as follows.

Location Fixed Cost per Year Variable Cost per Unit

A $250,000  $11

B 100,000  30 

C 150,000  20 

D 200,000  35 

a. Plot the total-cost lines for these locations on a single graph. b. Identify the range of output for which each alternative is superior (i.e., has the lowest

total cost). c. If expected output at the selected location is to be 8,000 units per year, which location

would provide the lowest total cost?

mhhe.com/stevenson13e

E X A M P L E 1

a. To plot the total-cost lines, select an output that is approximately equal to the expected output level (e.g., 10,000 units per year). Compute the total cost for each location at that level:

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  Fixed Cost + Variable Cost = Total Cost

A $250,000 +   $11(10,000) = $360,000

B 100,000 +   30(10,000) =   400,000

C 150,000 +   20(10,000) =   350,000

D 200,000 +   35(10,000) =   550,000

Plot each location’s fixed cost (at Output = 0) and the total cost at 10,000 units; and con- nect the two points with a straight line. (See the accompanying graph.)

700

600

500

400

300

200

100

2 6 8 10 12 144 16

B superior C superior A superior

T o

ta l a

n n

u a

l c o

st ($

0 0

0 )

0 Annual output (000 units)

D

B

C A

b. The approximate ranges for which the various alternatives will yield the lowest costs are shown on the graph. Note that location D is never superior. The exact ranges can be determined by finding the output level at which lines B and C and lines C and A cross. To do this, set their total cost equations equal and solve for Q, the break-even output level. Thus, for B and C:

(B)

(C) $100, 000 + $30Q = $150, 000 + $20Q

Solving, you find Q =

5,000 units per year.

For C and A:

(C)

(A) $150, 000 + $20Q = $250, 000 + $11Q

Solving, Q =

11,111 units per year.

c. From the graph, you can see that for 8,000 units per year, location C provides the low-

est total cost.

For a profit analysis, compute the total profit for each location:

Total profit = Q(R − υ) − FC ( 8−2 )

where

R = Revenue per unit

Solved Problem 2 at the end of the chapter illustrates profit analysis. Where the expected level of output is close to the middle of the range over which one

alternative is superior, the choice is readily apparent. If the expected level of output is very close to the edge of a range, it means that the two alternatives will yield comparable annual costs, so management would be indifferent in choosing between the two in terms of total cost.

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However, it is important to recognize that, in most situations, other factors besides cost must also be considered. Later in this section, a general scheme for including a broad range of factors is described. First, let’s look at another kind of cost often considered in location deci- sions: transportation costs.

The Transportation Model Transportation costs sometimes play an important role in location decisions. These can stem from the movement of either raw materials or finished goods. If a facility will be the sole source or destination of shipments, the company can include the transportation costs in a locational cost–volume analysis by incorporating the transportation cost per unit being shipped into the variable cost per unit. (If raw materials are involved, the transpor- tation cost must be converted into cost per unit of output in order to correspond to other variable costs.)

When a problem involves shipment of goods from multiple sending points to multiple receiving points, and a new location (sending or receiving point) is to be added to the system, the company should undertake a separate analysis of transportation. In such instances the transportation model of linear programming is very helpful. It is a special-purpose algorithm used to determine the minimum transportation cost that would result if a potential new location were to be added to an existing system. It also can be used if a number of new facilities are to be added or if an entire new system is being developed. The model is used to analyze each of the configurations considered, and it reveals the minimum costs each would provide. This information can then be included in the evaluation of location alternatives. Solved Problem 1 illustrates how the results of a transportation analysis can be combined with the results of a locational cost–volume analysis.

The website for this book contains a module that provides complete coverage of the trans- portation model, including methods such as northwest corner, steppingstone, and Vogel’s aproximation method.

Factor Rating Factor rating is a technique that can be applied to a wide range of decisions ranging from personal (buying a car, deciding where to live) to professional (choosing a career, choosing among job offers). Here it is used for location analysis.

A typical location decision involves both qualitative and quantitative inputs, which tend to vary from situation to situation depending on the needs of each organization. Factor rating is a general approach that is useful for evaluating a given alternative and comparing alternatives. The value of factor rating is that it provides a rational basis for evaluation and facilitates com- parison among alternatives by establishing a composite value for each alternative that sum- marizes all related factors. Factor rating enables decision makers to incorporate their personal opinions and quantitative information in the decision process.

The following procedure is used to develop a factor rating:

1. Determine which factors are relevant (e.g., location of market, water supply, parking facilities, revenue potential).

2. Assign a weight to each factor that indicates its relative importance compared with all other factors.

3. Decide on a common scale for all factors (e.g., 1 to 100), and set a minimum acceptable score if necessary.

4. Score each location alternative. 5. Multiply the factor weight by the score for each factor, and sum the results for each loca-

tion alternative. 6. Choose the alternative that has the highest composite score, unless it fails to meet the

minimum acceptable score.

This procedure is illustrated in Example 2.

Factor rating General approach to evaluating loca- tions that includes quantitative and qualitative inputs.

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Alternative 2 is better because it has the higher composite score. In some cases, managers may prefer to establish minimum thresholds for composite

scores. If an alternative fails to meet that minimum, they can reject it without further con- sideration. If none of the alternatives meets the minimum, this means that either additional alternatives must be identified and evaluated or the minimum threshold must be reevaluated.

S O L U T I O N

Using Factor Rating to Compare Alternatives A photo-processing company intends to open a new branch store. The following table con- tains information on two potential locations. Which is the better alternative?

    Scores (Out of 100) Weighted Scores

Factor Weight Alt. 1 Alt. 2 Alternative 1 Alternative 2

Proximity to existing store .10  100  60  .10(100) = 10.0 .10(60) = 6.0 Traffic volume .05  80  80  .05(80) = 4.0 .05(80) = 4.0 Rental costs .40  70  90  .40(70) = 28.0 .40(90) = 36.0 Size .10  86  92  .10(86) = 8.6 .10(92) = 9.2 Layout .20  40  70  .20(40) = 8.0 .20(70) = 14.0 Operating costs .15    80  90  .15(80) = 12.0 .15(90) = 13.5         70.6 82.7

E X A M P L E 2

The Center of Gravity Method The center of gravity method is a method to determine the location of a facility that will min- imize shipping costs or travel time to various destinations. For example, community planners use the method to determine the location of fire and public safety centers, schools, community centers, and such, taking into consideration locations of hospitals, senior living centers, popu- lation density, highways, airports, and retail businesses. The goal for police and firefighters is often to minimize travel time to answer emergency calls. The center of gravity method is also used for location planning for distribution centers, where the goal is typically to minimize distribution costs. The method treats distribution cost as a linear function of the distance and the quantity shipped. The quantity to be shipped to each destination is assumed to be fixed (i.e., will not change over time). An acceptable variation is that quantities are allowed to change, as long as their relative amounts remain the same (e.g., seasonal variations).

The method includes the use of a map that shows the locations of destinations. The map must be accurate and drawn to scale. A coordinate system is overlaid on the map to determine relative locations. The location of the (0,0) point of the coordinate system, and its scale, is unimportant. Once the coordinate system is in place, you can determine the coordinates of each destination. (See Figure 8.1, parts A and B.)

If the quantities to be shipped to every location are equal, you can obtain the coordinates of the center of gravity (i.e., the location of the distribution center) by finding the average of the x coordinates and the average of the y coordinates (see Figure 8.1). These averages can be easily determined using the following formulas:

̄ x

=

∑ x i ____

n

̄ y =

∑ y i ____

n

(8–3)

where xi = x coordinate of destination i yi = y coordinate of destination i n = Number of destinations

Center of gravity method Method for locating a distri- bution center that minimizes distribution cost.

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When the number of units to be shipped is not the same for all destinations (usually the case), a weighted average must be used to determine the center of gravity, with the weights being the quantities to be shipped. In some cases, the number of trips can be more important than quantities, so that metric would be used instead of quantities.

The appropriate formulas are:

x ¯ =

∑ x i Q i ______ ∑ Q i

y ¯ = ∑ y i Q i ______ ∑ Q i

(8–4)

where Qi = Quantity to be shipped to destination i xi = x coordinate of destination i yi = y coordinate of destination i

FIGURE 8.1 Center of gravity method

6

4

2

4 62 80 10

y

x

D2

D3

D4

D1

(3, 5)

(5, 4)

(8, 5)

(2, 2)

x

y Center of gravity

6

4

2

4 62 80 10

y

x

D2

D3

D4

D1

(3, 5)

(5, 4)

(8, 5)

(2, 2)

Coordinates of D3

D2

D3

D4

D1 N

S

W E

Destination 2 Map

N

S

W E

N

S

W E

A. Map showing destinations B. Add a coordinate system C. Center of gravity

S O L U T I O N

Finding the Center of Gravity Determine the coordinates of the center of gravity for the problem depicted in Figure 8.1C. Assume that the shipments from the center of gravity to each of the four destinations will be equal quantities.mhhe.com/stevenson13e

E X A M P L E 3

The coordinates of the destinations can be obtained from Figure 8.1B:

Destination   x    y

D1   2,    2

D2   3,    5

D3   5,    4

D4   8,    5

18 16

Hence, the center of gravity is at (4.5, 4), which places it just west of destination D3 (see Figure 8.1C).

x ¯ = ∑ x i ____ n =

18 __ 4 y ¯ = ∑ y i ____ n =

16 __ 4

= 4.5

= 4

See Figure 8.3 for a graph of the solution to Example 4. The problem can also be solved using the appropriate Excel template that is available on the text website.

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Finding the Center of Gravity Suppose that the shipments for the problem depicted in Figure 8.1A are not all equal, but instead are the following:

Destination x y Weekly Quantity

D1 2, 2 800

D2 3, 5 900

D3 5, 4 200

D4 8 5 100

2,000    

Determine the center of gravity.

mhhe.com/stevenson13e

E X A M P L E 4

S O L U T I O NBecause the quantities to be shipped differ among destinations, you must use the weighted average formulas.

x ¯ =

∑ x i Q i _____ ∑ Q i

=

2(800 ) +3(900 ) +5(200 ) +8(100 ) ____________________________

2, 000

=

6, 100 _____

2, 000 = 3.05 [ round to 3 ]

y ¯ =

∑ y i Q i _____ ∑ Q i

=

2(800 ) +5(900 ) +4(200 ) +5(100 ) ____________________________

2, 000

=

7, 400 _____

2, 000 = 3.7

Hence, the coordinates of the center of gravity are approximately (3,3.7). This would place it south of destination D2, which has coordinates of (3,5). (See Figure 8.2.)

FIGURE 8.3 Solution for Example 4

7

6

5

4

3

2

1

0 0 2 4 6

Destinations Center of Gravity

8 10

FIGURE 8.2 Center of gravity for Example 4

6

4

2

4 62 80 10

y

x

D2

D3

D4

D1

(3,5)

(5,4)

(8,5)

(2,2)

(3,3.7) N

S

W E

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Location decisions confront both new and existing organizations. Growth, market shifts, depletion of raw materials, and the introduction of new products and services are among the reasons organizations are concerned with location decisions. The importance of these decisions is underscored by the long- term commitment they typically involve and by their potential impact on the operating system.

The primary location options available to existing organizations are to expand an existing location, move to a new location, maintain existing facilities while adding another facility in a new location, or do nothing.

In practice, the major influences on location decisions are location of raw materials, labor supply, market considerations, community-related factors, site-related factors, and climate. Foreign locations may be attractive in terms of labor costs, abundance of raw materials, or as potential markets for a firm’s products or services. Problems organizations sometimes encounter in foreign countries include language differences, cultural differences, bias, and political instability.

A common approach to narrowing the range of location alternatives is to first identify a country or region that seems to satisfy overall needs and then identify a number of community-site alternatives for more in-depth analysis. A variety of methods are used to evaluate location alternatives. Those described in the chapter include locational cost-profit-volume analysis, factor rating, and the center of gravity method. The transportation model was mentioned briefly; your instructor can provide you with a mod- ule that covers the topic in detail.

There are numerous commercial software packages available for location analysis. In addition to the models described, many packages employ linear programming or mixed integer programming algo- rithms. In addition, some software packages use heuristic approaches to obtain reasonable solutions to location problems.

SUMMARY

1. Location decisions are strategic; they can have a significant impact on the success or failure of a business.

2. Very often, location decisions are long term and involve substantial cost, so it is important to devote an appropriate amount of effort to selecting a location.

3. Decision makers must not let the attractiveness of a few factors cloud the decision-making pro- cess. There are many factors to take into account when selecting a location. It is essential to identify the key factors and their relative importance, and then to use that information to evaluate location alternatives.

4. It is important to also factor in the impact that location choices will have on the supply chain.

KEY POINTS

center of gravity method, 361 clustering, 356 factor rating, 360

KEY TERMS geographic information system

(GIS), 355 locational cost-profit-volume

analysis, 358 microfactories, 353

Cost analysis. A farm implements dealer is seeking a fourth warehouse location to complement three existing warehouses. There are three potential locations: Charlotte, NC; Atlanta, GA; and Columbia, SC. Charlotte would involve a fixed cost of $4,000 per month and a variable cost of $4 per unit; Atlanta would involve a fixed cost of $3,500 per month and a variable cost of $5 per unit; and Columbia would involve a fixed cost of $5,000 per month and a variable cost of $6 per unit. Use of the Charlotte location would increase system transportation costs by $19,000 per month, Atlanta by $22,000 per month, and Columbia by $18,000 per month. Which location would result in the lowest total cost to handle 800 units per month?

Given: Volume = 800 units per month

Problem 1

SOLVED PROBLEMS

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  FC per Month

Variable Cost per Unit, v

Transportation Cost per Month

Charlotte $4,000 $4  $19,000

Atlanta   3,500   5    22,000

Columbia   5,000   6    18,000

Monthly total cost = FC + VC + Transportation cost Charlotte: $4,000 + $4 per unit × 800 units + $19,000 = $26,200 Atlanta:       3,500 +   5 per unit × 800 units +   22,000 =   29,500 Columbia:   5,000 +   6 per unit × 800 units +   18,000 =   27,800 Hence, Charlotte would have the lowest total cost for this monthly volume.

Solution

Profit analysis. A manufacturer of staplers is about to lose its lease, so it must move to another loca- tion. Two sites are currently under consideration. Fixed costs would be $8,000 per month at site A and $9,400 per month at site B. Variable costs are expected to be $5 per unit at site A and $4 per unit at site B. Monthly demand has been steady at 8,800 units for the last several years and is not expected to deviate from that amount in the foreseeable future. Assume staplers sell for $6 per unit. Determine which location would yield the higher profit under these conditions.

Problem 2

Profit = Q(R − v) − FC

Site Revenue FC v Monthly

Profit

A $52,800 $8,000 $44,000    $800

B $52,800 $9,400 $35,200 $8,200

Hence, site B is expected to yield the higher monthly profit.

Solution

Factor rating. Determine which location has the higher factor rating given the following information.

    Location Scores

Factor Weight A B

Labor cost 5 20 40

Material cost 3 10 30

Transportation costs 2 50 10

Problem 3

Combining the weights with the location scores, we can see that location B has the higher score.

    Location Scores Weighted Scores

Factor Weight A B A B

Labor cost 5 20 40 5(20) = 100 5(40) = 200

Material cost 3 10 30 3(10)  =   30 3(30) =   90

Transportation costs 2 50 10  2(50) = 100 2(10) =   20

Note that Location A has very low labor costs compared to Location B, but that is more than offset by its relatively high transportation costs compared to those of Location B.

Solution

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Center of gravity. Determine the center of gravity location for these destinations:

Destination x, y 

Coordinates Weekly

Quantity

D1 3,5 20

D2 6,8 10

D3 2,7 15

D4 4,5  15

60

Problem 4

If the weekly quantities had all been equal, we could have used the two equations in Formula 8–3 to find the center of gravity. Because the weekly quantities are not all equal, we must use the equations in Formula 8–4.

̄ x = ∑ xQ

_____ ∑ Q

= 3 ( 20 ) + 6 ( 10 ) + 2 ( 15 ) + 4 ( 15 )

_________________________ 60

= 210

____ 60

= 3.5

̄ y = ∑ yQ

_____ ∑ Q

= 5 ( 20 ) + 8 ( 10 ) + 7 ( 15 ) + 5 ( 15 )

_________________________ 60

= 360

____ 60

= 6.0

Hence, the center of gravity has the coordinates x = 3.5 and y = 6.

Solution

1. In what ways can the location decision have an impact on the production system? 2. Respond to this statement: “The importance of the location decision is often vastly overrated; the

fact that virtually every type of business is located in every section of the country means there should be no problem in finding a suitable location.”

3. What community factors influence location decisions? 4. How are manufacturing and nonmanufacturing location decisions similar? Different? 5. What are the potential benefits of locating in foreign countries? Potential drawbacks? 6. What is factor rating, and how does it work? 7. Outline the general approach for developing location alternatives. 8. What are the basic assumptions in locational cost-profit-volume analysis? 9. Discuss recent trends in location and possible future strategies.

DISCUSSION & REVIEW QUESTIONS

TAKING STOCK 1. What trade-offs are involved in deciding to have a single large, centrally located facility instead of

several smaller, dispersed facilities? 2. Who needs to be involved in facility location decisions? 3. Name several ways that technology has had an impact on location decisions.

CRITICAL THINKING EXERCISES

1. A company is considering the relocation of its manufacturing plant and administrative offices from a small city in the Midwest to a similar-sized city in the South. Approximately 20 percent of the resi- dents of the city are employed by the company, and many others are employed in businesses such as banks, personal services, restaurants, shopping centers, and supermarkets that would suffer a decline in business if the company decides to relocate. Does the company have a social responsibility to fac- tor into its decision the impact that its move would have on the city? Explain your reasoning.

2. The owner of a fast-food franchise has exclusive rights to operate in a medium-sized metropolitan area. The owner currently has a single outlet open, which has proved to be very popular, and there are often waiting lines of customers. The owner is therefore considering opening one or more out- lets in the area. What are the key factors that the owner should investigate before making a final

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decision? What trade-offs would there be in opening one additional site versus opening several additional sites?

3. Corruption and bribery are common in some countries. Would you avoid locating in such a country, or locate there and deal with it? If the latter, how would you deal with it?

4. Give three examples of unethical behavior involving location selection, and indicate which ethical principle is violated (see Chapter 1).

1. A newly formed firm must decide on a plant location. There are two alternatives under consider- ation: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local sup- pliers. Revenue per unit will be $185 in either case. Using the following information, determine which location would produce the greater profit.

  Omaha Kansas City

Annual fixed costs ($ millions) $1.2 $1.4

Variable cost per unit $36 $47

Expected annual demand (units) 8,000 12,000

2. The owner of Genuine Subs, Inc., hopes to expand the present operation by adding one new outlet. She has studied three locations. Each would have the same labor and materials costs (food, serving containers, napkins, etc.) of $1.76 per sandwich. Sandwiches sell for $2.65 each in all locations. Rent and equipment costs would be $5,000 per month for location A, $5,500 per month for loca- tion B, and $5,800 per month for location C. a. Determine the volume necessary at each location to realize a monthly profit of $10,000. b. If expected sales at A, B, and C are 21,000 per month, 22,000 per month, and 23,000 per

month, respectively, which location would yield the greatest profits? 3. A small producer of machine tools wants to move to a larger building, and has identified two

alternatives. Location A has annual fixed costs of $800,000 and variable costs of $14,000 per unit; location B has annual fixed costs of $920,000 and variable costs of $13,000 per unit. The finished items sell for $17,000 each. a. At what volume of output would the two locations have the same total cost? b. For what range of output would location A be superior? For what range would B be superior?

4. A company that produces pleasure boats has decided to expand one of its lines. Current facilities are insufficient to handle the increased workload, so the company is considering three alternatives, A (new location), B (subcontract), and C (expand existing facilities).

Alternative A would involve substantial fixed costs but relatively low variable costs: fixed costs would be $250,000 per year, and variable costs would be $500 per boat. Subcontracting would involve a cost per boat of $2,500, and expansion would require an annual fixed cost of $50,000 and a variable cost of $1,000 per boat. a. Find the range of output for each alternative that would yield the lowest total cost. b. Which alternative would yield the lowest total cost for an expected annual volume of 150 boats? c. What other factors might be considered in choosing between expansion and subcontracting?

5. Rework Problem 4b using this additional information: Expansion would result in an increase of $70,000 per year in transportation costs, subcontracting would result in an increase of $25,000 per year, and adding a new location would result in an increase of $4,000 per year.

6. A firm that has recently experienced enormous growth is seeking to lease a small plant in Memphis, TN; Biloxi, MS; or Birmingham, AL. Prepare an economic analysis of the three locations given the following information: Annual costs for building, equipment, and administration would be $40,000 for Memphis, $60,000 for Biloxi, and $100,000 for Birmingham. Labor and materials are expected to be $8 per unit in Memphis, $4 per unit in Biloxi, and $5 per unit in Birmingham. The Memphis loca- tion would increase system transportation costs by $50,000 per year, the Biloxi location by $60,000 per year, and the Birmingham location by $25,000 per year. Expected annual volume is 10,000 units.

7. A retired auto mechanic hopes to open a rustproofing shop. Customers would be local new-car dealers. Two locations are being considered, one in the center of the city and one on the outskirts.

PROBLEMS

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The central city location would involve fixed monthly costs of $7,000 and labor, materials, and transportation costs of $30 per car. The outside location would have fixed monthly costs of $4,700 and labor, materials, and transportation costs of $40 per car. Dealer price at either location will be $90 per car. a. Which location will yield the greatest profit if monthly demand is 200 cars? 300 cars? b. At what volume of output will the two sites yield the same monthly profit?

8. For each of the four types of organizations shown, rate the importance of each factor in terms of making location decisions using L = low importance, M = moderate importance, and H = high importance.

Factor Local Bank Steel Mill Food Warehouse Public School

Convenience for customers

Attractiveness of building

Nearness to raw materials

Large amounts of power

Pollution controls

Labor cost and availability

Transportation costs

Construction costs

9. Using the following factor ratings, determine which location alternative (A, B, or C) should be chosen on the basis of maximum composite score.

    Location Score

Factor (100 points each) Weight A B C

Convenience   .15 80 70 60

Parking facilities   .20 72 76 92

Display area   .18 88 90 90

Shopper traffic   .27 94 86 80

Operating costs    .10 98 90 82

Neighborhood    .10 96 85 75

   1.00      

10. Determine which location has the highest composite score:

Factor Weight East #1 East #2 West

Initial cost  8 100  150  140 

Traffic 10 40 40 30

Maintenance  6 20 25 18

Dock space  6 25 10 12

Neighborhood  4 12  8 15

11. A manager has received an analysis of several cities being considered for a new office complex. The data (10 points maximum) are as follows: a. If the manager weights the factors equally, how would the locations stack up in terms of their

composite factor rating scores? b. If business services and construction costs are given weights that are double the weights of the

other factors, how would the locations stack up?

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  Location Score

Factor A B C

Business services 9 5 5

Community services 7 6 7

Real estate cost 3 8 7

Construction costs 5 6 5

Cost of living 4 7 8

Taxes 5 5 4

Transportation 6 7 8

12. A toy manufacturer produces toys in five locations throughout the country. Raw materials (primar- ily barrels of powdered plastic) will be shipped from a new, centralized warehouse whose location is to be determined. The monthly quantities to be shipped to each location are the same. A coor- dinate system has been established, and the coordinates of each location have been determined as shown. Determine the coordinates of the centralized warehouse.

Location (x,y)

A 3,7

B 8,2

C 4,6

D 4,1

E 6,4

13. A clothing manufacturer produces women’s clothes at four locations in Mexico. Relative locations have been determined, as shown in the table below. The location of a central shipping point for bolts of cloth must now be determined. Weekly quantities to be shipped to each location are also shown in the table. Determine the coordinates of the location that will minimize distribution costs.

Location (x,y) Weekly

Quantity

A 5,7 15

B 6,9 20

C 3,9 25

D 9,4 30

14. A company that handles hazardous waste wants to minimize the shipping cost for shipments to a disposal center from five receiving stations it operates. Given the locations of the receiving sta- tions and the volumes to be shipped daily, determine the location of the disposal center.

Location of Processing

Station, (x,y) Volume,

Tons per Day

10,5   26

4,1   9

4,7 25

2,6 30

8,7 40

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15. An analysis of sites for a distribution center has led to two possible sites (L1 and L2 on the map). The sites are comparable on every key factor. The one remaining factor is the center of gravity. Use the center of gravity method to select the better site. Monthly shipments will be the quantities listed in the table.

Destination  Quantity

D1  900

D2  300

D3  700

D4  600

D5 1,200   D1

D2

D4

D5

L2 L1

D3

Ballou, Ronald H. Business Logistics Management, 5th ed. Upper Saddle River, NJ: Prentice Hall, 2004.

De Meirleir, Marcel. Location, Location, Location: A Plant Location and Site Selection Guide. London: Routledge, 2008.

Grimshaw, David J. Bringing Geographical Information Systems into Business. New York: John Wiley & Sons, 2000.

SELECTED BIBLIOGRAPHY & FURTHER READINGS

Mentzer, John T. “Seven Keys to Facility Location.” Supply Chain Management Review 12, no. 5, May 2008, p. 25.

Pick, James B. Geo-Business: GIS in the Digital Orga- nization. New York: Wiley, 2008.

Walmart is one of the largest corporations in the world, and it has obviously enjoyed tremendous success. But while many welcome its location in their communities, others do not. Some complain that its presence has too many negative effects on a community, ranging from traffic congestion to anti-union sentiment to unfair competition.

Suppose Walmart has announced plans to seek approval from the planning commission of a small town to build a new store. Develop a list of the main arguments, pro and con, that could be

presented at a public hearing on the matter by members of each of these groups:

1. Owners of small businesses located nearby 2. Town residents, and residents of nearby towns

How might a Walmart representative respond to the negative criticisms that might be brought up, and what other benefits could the representative offer the planning board to bolster Walmart’s case for gaining the board’s approval?

CASE HELLO, WALMART?

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9 Management of Quality L E A R N I N G O B J E C T I V E S After completing this chapter, you should be able to:

LO9.1 Discuss the philosophies of quality gurus.

LO9.2 Define the term quality as it relates to products and as it relates to services.

LO9.3 Identify the determinants of quality.

LO9.4 Explain why quality is important and the consequences of poor quality.

LO9.5 Describe and give examples of the costs associated with quality.

LO9.6 Discuss the importance of ethics in managing quality.

LO9.7 Compare the quality awards.

LO9.8 Discuss quality certification and its importance.

LO9.9 Describe TQM.

LO9.10 Give an overview of problem solving.

LO9.11 Give an overview of process improvement.

LO9.12 Describe the Six Sigma methodology.

LO9.13 Describe and use various quality tools.

9.1 Introduction 373

9.2 The Evolution of Quality Management 374

9.3 The Foundations of Modern Quality Management: The Gurus 375

9.4 Insights on Quality Management 378 Defining Quality: The Dimensions of Quality 378

Assessing Service Quality 380 The Determinants of Quality 381 Responsibility for Quality 382 Benefits of Good Quality 383 The Consequences of Poor Quality 383 The Costs of Quality 384 Ethics and Quality Management 386

9.5 Quality Awards 386 The Baldrige Award 387 The European Quality Award 387 The Deming Prize 387

9.6 Quality Certification 387 ISO 9000, 14000, and 24700 387

9.7 Quality and the Supply Chain 389

C H A P T E R O U T L I N E

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© Thomas Samson/AFP/Getty

9.8 Total Quality Management 390 Obstacles to Implementing TQM 392 Criticisms of TQM 393

9.9 Problem Solving, and Process Improvement 394

The Plan-Do-Study-Act Cycle 394 Six Sigma 396

9.10 Quality Tools 398 Illustrations of the Use of Graphical Tools 403

Methods for Generating Ideas 404

9.11 Operations Strategy 406

Cases: Chick-n-Gravy Dinner Line 411 Tip Top Markets 412

This chapter is the first of two chapters on quality. In this chapter you will learn about the evolution of quality manage- ment, definitions of quality, the costs of quality and the consequences of poor quality, some quality awards and quality certification, total quality management, and quality tools.

The importance of quality cannot be overstated; two key elements of every purchasing decision are price and qual- ity. Consequently, having a focus on quality and quality improvement should be a part of every business organization, whether the organization’s business is making cars, selling electronic goods, providing financial services, providing medi- cal services, or baking cookies.

9.1 INTRODUCTION

Broadly defined, quality refers to the ability of a product or service to consistently meet or exceed customer requirements or expectations. However, different customers will have differ- ent requirements, so a working definition of quality is customer-dependent.

For a decade or so, quality was an important focal point in business. But after a while, the emphasis on quality began to fade, and quality took a backseat to other concerns. How- ever, there has been an upsurge recently in the need for attention to quality. Much of this has been driven by recent experience with costs and adverse publicity associated with wide- ranging recalls that have included automobiles, ground meat, toys, produce, dog food, and pharmaceuticals.

Quality The ability of a prod- uct or service to consistently meet or exceed customer expectations.

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Quality is more than just a statistical analysis tool for manufactur- ing lines. When done right, quality should encompass the entire enterprise.

Some 50 years after the advent of the total quality manage- ment (TQM) movement championed by W. Edwards Deming, man- ufacturers of all different sizes and stripes are still being dogged by high-profile manufacturing quality defects. The list is long, and getting longer every week, and crosses every manufacturing verti- cal. At least a token “quality program” is de rigueur for U.S. man- ufacturers, but many are still at lip-service level agreement with the means required to reach the necessary ends. However, talk is cheap—recalls are not.

From tainted beef to spinach, from lead-painted toys to poi- soned pet food and blood thinners to exploding laptop batteries and malfunctioning medical devices, the costs in scrapped prod- uct, consumer lawsuits, and lost brand equity from defects and recalls are huge. Persistent, expensive and well-publicized recalls are striking companies with even the most stellar quality reputa- tions. Toyota, the progenitor of a legendary quality-focused pro- duction system, has suffered a rash of defects that have caused the company to drop in Consumer Reports’ Annual Car Reliability Survey ratings—an important market barometer for its consumers.

On a perhaps less dangerous but equally costly front, Micro- soft’s Xbox 360 video gaming platform suffered a high-profile manufacturing defect that at one point had up to one-third of all units suffering from a “fatal error” (device owners called it “the red ring of death”) that led at least indirectly to markedly weaker competitive positioning in the crucial holiday selling season, as well as a warranty extension that is estimated at more than $6 billion in unplanned accruals.

Many of these manufacturing problems are coming from global supply chains, which is a failure as much of management as it is the defective products themselves. However bleak the situation may seem, all is not lost. Indeed, the responsibility for quality

READING WHATEVER HAPPENED TO QUALITY?

manufacturing finally seems to be taking hold across all levels of the enterprise.

Quality Goes Upstream Talk to the manufacturing community about quality’s place in today’s environment and a clear pattern emerges—companies are finally grasping the “shared responsibility” aspect of Deming’s teachings. If quality is truly everyone’s responsibility, then the idea goes beyond the shop floor and into the front office, the service department and everywhere else that provides value to customers and shareholders.

Ron Atkinson, chairman of the American Society for Quality (ASQ), has been watching this trend unfold. He describes the path that the idea of quality management in manufacturing has taken over the years.

“When I started in manufacturing 35 years ago, there was a policeman installed at the end of the line who looked at the parts and said, ‘That one is OK, that can be shipped and that one can’t.’ Gradually, it got to, ‘Let’s find better ways to do the checking,’ and then to, ‘Let’s find a way to predict what the parts are going to look like when they hit the end of the line,’ so we started doing defect prevention. Now where we’re at is that quality is expanding to cover everything, including outside of the actual manufacturing process, to how do we improve the quality of our HR services and support services? How do we improve the quality of the decisions that are made?”

According to Atkinson, concepts crucial to establishing a top-quality manufacturing line have been driven upstream, and expanded to become part of an overall continuous improvement strategy. “Quality has become a systems approach, rather than focusing on one part at a time and whether it’s dimensionally cor- rect. Quality is continuous improvement.”

Source: Excerpted from Brad Kenney, Industry Week, April 1, 2008.

9.2 THE EVOLUTION OF QUALITY MANAGEMENT

Prior to the Industrial Revolution, skilled craftsmen performed all stages of production. Pride of workmanship and reputation often provided the motivation to see that a job was done right. Lengthy guild apprenticeships caused this attitude to carry over to new workers. Moreover, one person or a small group of people were responsible for an entire product.

A division of labor accompanied the Industrial Revolution; each worker was then respon- sible for only a small portion of each product. Pride of workmanship became less meaningful because workers could no longer identify readily with the final product. The responsibility for quality shifted to the foremen. Inspection was either nonexistent or haphazard, although in some instances 100 percent inspection was used.

Frederick Winslow Taylor, the “Father of Scientific Management,” gave new emphasis to quality by including product inspection and gauging in his list of fundamental areas of manu- facturing management. G. S. Radford improved Taylor’s methods. Two of his most significant

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contributions were the notions of involving quality considerations early in the product design stage and making connections among high quality, increased productivity, and lower costs.

In 1924, Bell Telephone Laboratories introduced statistical control charts that could be used to monitor production. Around 1930, H. F. Dodge and H. G. Romig, also of Bell Labs, introduced tables for sampling. Nevertheless, statistical quality control procedures were not widely used until World War II, when the U.S. government began to require vendors to use them.

World War II caused a dramatic increase in emphasis on quality control. The U.S. Army refined sampling techniques for dealing with large shipments of arms from many suppliers. By the end of the 1940s, the U.S. Army, Bell Labs, and major universities were training engi- neers in other industries in the use of statistical sampling techniques. About the same time, professional quality organizations were emerging throughout the country. One of these orga- nizations was the American Society for Quality Control (ASQC, now known as ASQ). Over the years, the society has promoted quality with its publications, seminars and conferences, and training programs.

During the 1950s, the quality movement evolved into quality assurance. In the mid-1950s, total quality control efforts enlarged the realm of quality efforts from its primary focus on manufacturing to include product design and incoming raw materials. One important feature of this work was greater involvement of upper management in quality.

During the 1960s, the concept of “zero defects” gained favor. This approach focused on employee motivation and awareness, and the expectation of perfection from each employee. It evolved from the success of the Martin Company in producing a “perfect” missile for the U.S. Army.

In the 1970s, quality assurance methods gained increasing emphasis in services including government operations, health care, banking, and the travel industry.

Something else happened in the 1970s that had a global impact on quality. An embargo on oil sales instituted by the Organization of Petroleum Exporting Countries (OPEC) caused an increase in energy costs, and automobile buyers became more interested in fuel-efficient, lower-cost vehicles. Japanese auto producers, who had been improving their products, were poised to take advantage of these changes, and they captured an increased share of the auto- mobile market. The quality of their automobiles enhanced the reputation of Japanese produc- ers, opening the door for a wide array of Japanese-produced goods.

American producers, alarmed by their loss of market share, spent much of the late 1970s and the 1980s trying to improve the quality of their goods while lowering their costs.

The evolution of quality took a dramatic shift from quality assurance to a strategic approach to quality in the late 1970s. Up until that time, the main emphasis had been on finding and correcting defective products before they reached the market. It was still a reactive approach. The strategic approach is proactive, focusing on preventing mistakes from occurring in the first place. The idea is to design quality into products, rather than to find and correct defects after the fact. This approach has now expanded to include processes and services. Quality and profits are more closely linked. This approach also places greater emphasis on customer satisfaction, and it involves all levels of management as well as workers in a continuing effort to increase quality.

9.3 THE FOUNDATIONS OF MODERN QUALITY MANAGEMENT: THE GURUS

A core of quality pioneers shaped current thinking and practice. This section describes some of their key contributions to the field.

Walter Shewhart. Walter Shewhart was a genuine pioneer in the field of quality control, and he became known as the “father of statistical quality control.” He developed control charts for analyzing the output of processes to determine when corrective action was necessary.

LO9.1 Discuss the philoso- phies of quality gurus.

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Shewhart had a strong influence on the thinking of two other gurus, W. Edwards Deming and Joseph Juran.

W. Edwards Deming. Deming, a statistics professor at New York University in the 1940s, went to Japan after World War II to assist the Japanese in improving quality and productivity. The Union of Japanese Scientists, who had invited Dem- ing, were so impressed that in 1951, after a series of lectures presented by Deming, they established the Deming Prize, which is awarded annually to firms that distin- guish themselves with quality management programs.

Although the Japanese revered Deming, he was largely unknown to business leaders in the United States. In fact, he worked with the Japanese for almost 30 years before he gained recognition in his own country. Before his death in 1993, U.S. com- panies turned their attention to Deming, embraced his philosophy, and requested his assistance in setting up quality improvement programs.

Deming compiled a famous list of 14 points he believed were the prescrip- tion needed to achieve quality in an organization (see Table 9.1). His message was that the cause of inefficiency and poor quality is the system, not the employ- ees. Deming felt that it was management’s responsibility to correct the system to achieve the desired results. In addition to the 14 points, Deming stressed the need to reduce variation in output (deviation from a standard), which can be accom- plished by distinguishing between special causes of variation (i.e., correctable) and common causes of variation (i.e., random). Deming’s concept of profound

knowledge incorporates the beliefs and values about learning that guided Japan’s rise to a world economic power.

Joseph M. Juran. Juran, like Deming, taught Japanese manufacturers how to improve the quality of their goods, and he, too, can be regarded as a major force in Japan’s success in quality.

Juran viewed quality as fitness-for-use. He also believed that roughly 80 percent of qual- ity defects are management controllable; thus, management has the responsibility to correct this deficiency. He described quality management in terms of a trilogy consisting of quality planning, quality control, and quality improvement. According to Juran, quality planning is necessary to establish processes that are capable of meeting quality standards; quality control is necessary in order to know when corrective action is needed; and quality improvement will help to find better ways of doing things. A key element of Juran’s philosophy is the commit- ment of management to continual improvement.

Deming Prize Prize estab- lished by the Japanese and awarded annually to firms that distinguish themselves with quality management programs.

© Richard Drew/AP Images

W. Edwards Deming.

1. Create constancy of purpose toward improvement of product and service. 2. Reduce levels of delays, mistakes, defective materials, and defective workmanship. 3. Cease dependence on mass inspection. (Prevent defects rather than detect defects.) 4. Eliminate suppliers that cannot qualify with statistical evidence of quality. 5. Find problems. It is management’s job to work continually on system improvement. 6. Institute modern methods of training on the job. 7. Emphasize quality instead of volume alone. Management must prepare to take immediate action on

reports from foremen concerning barriers such as inherent defects, machines not maintained, poor tools, and fuzzy operational definitions.

8. Drive out fear, so that everyone may work effectively for the company. 9. Break down barriers between departments. People in research, design, sales, and production must

work as a team. 10. Eliminate goals and slogans asking for new levels of productivity without providing methods. 11. Eliminate work standards that prescribe numerical quotas. 12. Remove barriers that stand between the hourly worker and his right to pride of workmanship. 13. Institute a vigorous program of education and retraining. 14. Create a structure in top management that will push every day on the above 13 points.

Source: Adapted from W. Edwards Deming, Out of the Crisis, pp. 23 and 24. Copyright © 2000 MIT Press. Used with permission.

TABLE 9.1 Deming’s 14 points

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Juran is credited as one of the first to measure the cost of quality, and he demonstrated the potential for increased profits that would result if the costs of poor quality could be reduced.

Armand Feigenbaum. Feigenbaum was instrumental in advancing the “cost of noncon- formance” approach as a reason for management to commit to quality. He recognized that quality was not simply a collection of tools and techniques, but a “total field.” According to Feigenbaum, it is the customer who defines quality.

Philip B. Crosby. Crosby developed the concept of zero defects and popularized the phrase “Do it right the first time.” He stressed prevention, and he argued against the idea that “there will always be some level of defectives.” The quality-is-free concept presented in his book, Quality Is Free, is that the costs of poor quality are much greater than traditionally defined. According to Crosby, these costs are so great that rather than viewing quality efforts as costs, organizations should view them as a way to reduce costs, because the improvements generated by quality efforts will more than pay for themselves.

Crosby believes that any level of defects is too high and that achieving quality can be relatively easy, as explained in his book Quality Without Tears: The Art of Hassle-Free Management.

Kaoru Ishikawa. The late Japanese expert on quality was strongly influenced by both Deming and Juran, although he made significant contributions of his own to quality manage- ment. Among his key contributions were the development of the cause-and-effect diagram (also known as a fishbone diagram) for problem solving and the implementation of quality circles, which involve workers in quality improvement. He was the first quality expert to call attention to the internal customer—the next person in the process, the next operation, within the organization.

Genichi Taguchi. Taguchi is best known for the Taguchi loss function, which involves a formula for determining the cost of poor quality. The idea is that the deviation of a part from a standard causes a loss, and the combined effect of deviations of all parts from their standards can be large, even though each individual deviation is small. An important part of his philoso- phy is the cost to society of poor quality.

Taiichi Ohno and Shigeo Shingo. Taiichi Ohno and Shigeo Shingo both developed the philosophy and methods of kaizen, a Japanese term for continuous improvement (defined more fully later in this chapter), at Toyota. Continuous improvement is one of the hallmarks of successful quality management.

Table 9.2 provides a summary of the important contributions of the gurus to modern quality management.

TABLE 9.2 A summary of key contributors to quality management

Contributor Key Contributions

Shewhart Control charts; variance reduction

Deming 14 points; special versus common causes of variation

Juran Quality is fitness-for-use; quality trilogy

Feigenbaum Quality is a total field; the customer defines quality

Crosby Quality is free; zero defects

Ishikawa Cause-and-effect diagrams; quality circles

Taguchi Taguchi loss function

Ohno and Shingo Continuous improvement

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9.4 INSIGHTS ON QUALITY MANAGEMENT

Successful management of quality requires that managers have insights on various aspects of quality. These include defining quality in operational terms, understanding the costs and benefits of quality, recognizing the consequences of poor quality, and recognizing the need for ethical behavior. We begin with defining quality.

Defining Quality: The Dimensions of Quality One way to think about quality is the degree to which performance of a product or service meets or exceeds customer expectations. The difference between these two, that is Perfor- mance—Expectations, is of great interest. If these two measures are equal, the difference is zero, and expectations have been met. If the difference is negative, expectations have not been met, whereas if the difference is positive, performance has exceeded customer expectations.

Customer expectations can be broken down into a number of categories, or dimensions, that customers use to judge the quality of a product or service. Understanding these helps organizations in their efforts to meet or exceed customer expectations. The dimensions used for goods are somewhat different from those used for services.

Product Quality. Product quality is often judged on nine dimensions of quality:1

Performance—main characteristics of the product Aesthetics—appearance, feel, smell, taste Special features—extra characteristics Conformance—how well a product corresponds to design specifications Reliability—dependable performance Durability—ability to perform over time Perceived quality—indirect evaluation of quality (e.g., reputation) Serviceability—handling of complaints or repairs Consistency—quality doesn’t vary

These dimensions are further described by the examples presented in Table 9.3. When referring to a product, a customer sometimes judges the first four dimensions by its fitness for use.

Notice that price is not a dimension of quality.

LO9.2 Define the term quality as it relates to products and as it relates to services.

1Adapted from David Garvin, “Competing on the Eight Dimensions of Quality,” Harvard Business Review 65, no. 6 (1987). Copyright © 1987 by the Harvard Business School Publishing Corporation; all rights reserved.

Dimensions Examples

1. Performance Everything works: fit and finish, ride, handling, acceleration

2. Aesthetics Exterior and interior design

3. Features Convenience: placement of gauges High tech: GPS system Safety: anti-skid, airbags

4. Conformance Car matches manufacturer’s specifications

5. Reliability Infrequent need for repairs

6. Durability Useful life in miles, resistance to rust

7. Perceived quality Top-rated

8. Serviceability Ease of repair

9. Consistency Quality doesn’t vary from car to car

TABLE 9.3 Examples of product quality

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Service Quality. The dimensions of product quality don’t adequately describe service qual- ity. Instead, service quality is often described using the following dimensions:2

Convenience—the availability and accessibility of the service Reliability—the ability to perform a service dependably, consistently, and accurately Responsiveness—the willingness of service providers to help customers in unusual situ- ations and to deal with problems Time—the speed with which service is delivered Assurance—the knowledge exhibited by personnel who come into contact with a cus- tomer and their ability to convey trust and confidence Courtesy—the way customers are treated by employees who come into contact with them Tangibles—the physical appearance of facilities, equipment, personnel, and communica- tion materials Consistency—the ability to provide the same level of good quality repeatedly Expectations—meet (or exceed) customer expectations

Table 9.4 illustrates how the dimensions of service quality might apply to having an automo- bile repaired.

The dimensions of both product and service quality establish a conceptual framework for thinking about quality, but even they are too abstract to be applied operationally for purposes of product or service design, or actually producing a product or delivering a service. They must be stated in terms of specific, measurable characteristics. For example, when buying a car, a customer would naturally be interested in the car’s performance. But what does that mean? In more specific terms, it might refer to a car’s estimated miles per gallon, how quickly it can go from 0 to 60 miles per hour, or its stopping distance when traveling at 60 mph. Each of these can be stated in measurable terms (e.g., estimated miles per gallon: city = 25, high- way = 30). Similar measurable characteristics can often be identified for each of the other product dimensions, as well as for the service dimensions. This is the sort of detailed informa- tion that is needed to both design and produce high-quality goods and services.

Information on customer wants in service can sometimes be difficult to pin down, creating challenges for designing and managing service quality. For example, customers may use words such asfriendly, considerate, and professional to describe what they expect from service provid- ers. These and similar descriptors are often difficult to translate into exact service specifications. Moreover in many instances, customer wants are often industry specific. Thus, the expectations would be quite different for health care versus dry cleaning. Furthermore, customer complaints may be due in part to unrelated factors (e.g., customer’s mood or general health, the weather).

2Adapted from Valerie A. Zeithaml, A. Parasuraman, and Leonard L. Berry, Delivering Quality Service and Bal- ancing Customer Expectations (New York: The Free Press, 1990); and J. R. Evans and W. M. Lindsey, The Manage- ment and Control of Quality, 3rd ed. (St. Paul, MN: West Publishing, 1996).

TABLE 9.4 Examples of service quality dimensions for having a car repaired

Dimension Examples

1. Convenience Was the service center conveniently located?

2. Reliability Was the problem fixed and will the “fix” last?

3. Responsiveness Were customer service personnel willing and able to answer questions?

4. Time How long did the customer have to wait?

5. Assurance Did the customer service personnel seem knowledgeable about the repair?

6. Courtesy Were customer service personnel and the cashier friendly and courteous?

7. Tangibles Were the facilities clean? Were personnel neat?

8. Consistency Was the service quality good, and was it consistent with previous visits?

9. Expectations Were customer expectations met?

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Consumers often associate quiet operation as a sign of product quality, and they are willing to pay extra to get it. Such is the case with clothes washers, dishwashers, air conditioners, shredders, and automobiles. In the case of automobiles, designers know that buyers associate a quiet ride with quality, so doors, hood, wind- shield and exhaust systems have extra soundproofing and seal- ing to keep noise out. They also know that buyers value safety, and that buyers associate safety with how solid a car door sounds when it is closed, so designers have given extra attention to those

READING THE SOUNDS OF QUALITY

sorts of details. A sign of the growing importance of sound in the auto industry is that J.D. Power & Associates measures “pleasant- ness of sound” for doors, signals, and engine acceleration in its Initial Quality Study.

Likewise, cell phone manufacturers are giving careful attention to ring tones and other sounds emitted by their products, as are manufacturers of other electronic gadgets. Source: Based on David Kiley, “Fine-Tuning a Brand’s Signature Sound,” Business- Week, August 13, 2007.

Other challenges with service quality include the reality that customer expectations often change over time and that different customers tend to have different expectations, so what one customer might view as good service quality, another customer might not be satisfied with at all. Couple these with the fact that each contact with a customer is a “moment of truth” in which service quality is instantly judged, and you begin to understand some of the challenges of achieving a consistently high perception of service quality.

If customers participate in a service system (i.e., self-service), there can be increased poten- tial for a negative perception of quality. Consequently, adequate care must be taken to make the necessary customer acts simple and safe, especially since customers cannot be trained. So error prevention must be designed into the system.

It should also be noted that in most instances, some quality dimensions of a product or service will be more important than others, so it is important to identify customer priorities, especially when it is likely that trade-off decisions will be made at various points in design and production. Quality function deployment (described in Chapter 4) is a tool that can be helpful for that purpose.

Assessing Service Quality A widely used tool for assessing service quality is SERVQUAL,3 an instrument designed to obtain feedback on an organization’s ability to provide quality service to customers. It focuses on five of the previously mentioned service dimensions that influence customers’ perceptions of service quality: tangibles, reliability, responsiveness, assurance, and empathy. The results of this service quality audit help management identify service strengths and weaknesses. Of particular interest are any gaps or discrepancies in service quality. There may be discrepancies between:

1. Actual customer expectations and management perceptions of those expectations 2. Management perceptions of customer expectations and service-quality specifications 3. Service quality and service actually delivered 4. Service actually delivered and what is communicated about the service to customers 5. Customers’ expectations of the service provider and their perceptions of provider

delivery.

If gaps are found, they can be related to tangibles or other service quality dimensions to address the discrepancies.

3Valarie A. Zeithaml, A. Parasuraman, and Leonard L. Berry, Delivering Quality Service: Balancing Customer Perceptions and Expectations (New York: The Free Press, 1990), p. 26.

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The Determinants of Quality The degree to which a product or a service successfully satisfies its intended purpose has four primary determinants:

1. Design 2. How well the product or service conforms to the design 3. Ease of use 4. Service after delivery

The design phase is the starting point for the level of quality eventually achieved. Design involves decisions about the specific characteristics of a product or service such as size, shape, and location. Quality of design refers to the intention of designers to include or exclude cer- tain features in a product or service. For example, many different models of automobiles are on the market today. They differ in size, appearance, roominess, fuel economy, comfort, and materials used. These differences reflect choices made by designers that determine the qual- ity of design. Design decisions must take into account customer wants, production or service capabilities, safety and liability (both during production and after delivery), costs, and other similar considerations.

Designers may determine customer wants from information provided by marketing, per- haps through the use of consumer surveys or other market research. Marketing may organize focus groups of consumers to express their views on a product or service (what they like and don’t like, and what they would like to have).

Designers must work closely with representatives of operations to ascertain that designs can be produced; that is, that production or service has the equipment, capacity, and skills necessary to produce or provide a particular design.

A poor design can result in difficulties in production or service. For example, materials might be difficult to obtain, specifications difficult to meet, or procedures difficult to follow. Moreover, if a design is inadequate or inappropriate for the circumstances, the best workman- ship in the world may not be enough to achieve the desired quality. Also, we cannot expect a worker to achieve good results if the given tools or procedures are inadequate. Similarly, a superior design usually cannot offset poor workmanship.

Quality of conformance refers to the degree to which goods and services conform to (i.e., achieve) the intent of the designers. This is affected by factors such as the capability of

Quality of design Intention of designers to include or exclude features in a product or service.

Quality of conformance The degree to which goods or ser- vices conform to the intent of the designers.

Customers shopping for appliances at an Abt Electronics store in Glenview, Illinois. Abt is an independent, family-owned retailer known for quality products and great customer service.

© John Zich/Bloomberg via Getty

LO9.3 Identify the deter- minants of quality.

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equipment used; the skills, training, and motivation of workers; the extent to which the design lends itself to production; the monitoring process to assess conformance; and the taking of cor- rective action (e.g., through problem solving) when necessary. One important key to quality is reducing the variability in process outputs (i.e., reducing the degree to which individual items or individual service acts vary from one another). This will be discussed in detail in Chapter 10.

The determination of quality does not stop once the product or service has been sold or delivered. Ease of use and user instructions are important. They increase the chances, but do not guarantee, that a product will be used for its intended purposes and in such a way that it will continue to function properly and safely. (When faced with liability litigation, companies often argue that injuries and damages occurred because the user misused the product.) Much of the same reasoning can be applied to services. Customers, patients, clients, or other users must be clearly informed on what they should or should not do; otherwise, there is the dan- ger that they will take some action that will adversely affect quality. Some examples include the doctor who fails to specify that a medication should be taken before meals and not with orange juice and the attorney who neglects to inform a client of a deadline for filing a claim.

Much consumer education takes the form of printed instructions and labeling. Thus, man- ufacturers must ensure that directions for unpacking, assembling, using, maintaining, and adjusting the product—and what to do if something goes wrong (e.g., flush eyes with water, call a physician, induce vomiting, do not induce vomiting, disconnect set immediately)—are clearly visible and easily understood.

For a variety of reasons, products do not always perform as expected, and services do not always yield the desired results. Whatever the reason, it is important from a quality standpoint to remedy the situation—through recall and repair of the product, adjustment, replacement or buyback, or reevaluation of a service—and do whatever is necessary to bring the product or service up to standard.

Responsibility for Quality It is true that all members of an organization have some responsibility for quality, but certain parts of the organization are key areas of responsibility:

Top management. Top management has the ultimate responsibility for quality. While establishing strategies for quality, top management must institute programs to improve quality; guide, direct, and motivate managers and workers; and set an example by being involved in quality initiatives. Examples include taking training in quality, issuing peri- odic reports on quality, and attending meetings on quality. Design. Quality products and services begin with design. This includes not only features of the product or service; it also includes attention to the processes that will be required to produce the products and/or the services that will be required to deliver the service to customers. Procurement. The procurement department has responsibility for obtaining goods and services that will not detract from the quality of the organization’s goods and services. Production/operations. Production/operations has responsibility to ensure that pro- cesses yield products and services that conform to design specifications. Monitoring pro- cesses and finding and correcting root causes of problems are important aspects of this responsibility. Quality assurance. Quality assurance is responsible for gathering and analyzing data on problems and working with operations to solve problems. Packaging and shipping. This department must ensure that goods are not damaged in transit, that packages are clearly labeled, that instructions are included, that all parts are included, and that shipping occurs in a timely manner. Marketing and sales. This department has the responsibility to determine customer needs and to communicate them to appropriate areas of the organization. In addition, it has the responsibility to report any problems with products or services.

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Customer service. Customer service is often the first department to learn of problems. It has the responsibility to communicate that information to appropriate departments, deal in a reasonable manner with customers, work to resolve problems, and follow up to confirm that the situation has been effectively remedied.

Poor quality increases certain costs incurred by the organization. The following section provides further detail on costs associated with quality.

Benefits of Good Quality Business organizations with good or excellent quality typically benefit in a variety of ways: an enhanced reputation for quality, the ability to command premium prices, an increased market share, greater customer loyalty, lower liability costs, and fewer production or service problems—which yields higher productivity, fewer complaints from customers, lower production costs, and higher profits. Annual studies by the National Institute of Standards indicate that winners of the Baldrige quality award, described later in the chapter, outperform the S&P 500 Index by a significant amount.4

The Consequences of Poor Quality It is important for management to recognize the different ways in which the quality of a firm’s products or services can affect the organization and to take these into account in developing and maintaining a quality assurance program. Some of the major areas affected by quality are:

1. Loss of business 2. Liability 3. Productivity 4. Costs

Poor designs or defective products or services can result in loss of business. Failure to devote adequate attention to quality can damage a profit-oriented organization’s reputation and lead to a decreased share of the market, or it can lead to increased criticism and/or con- trols for a government agency or nonprofit organization.

In the retail sector, managers might not be fully aware of poor product or service quality because customers do not always report their dissatisfaction. Even so, dissatisfied customers do tend to voice their dissatisfaction to friends and relatives, which can have negative implica- tions for customer perceptions and future business.

Organizations must pay special attention to their potential liability due to damages or inju- ries resulting from either faulty design or poor workmanship. This applies to both products and services. Thus, a poorly designed steering arm on a car might cause the driver to lose control of the car, but so could improper assembly of the steering arm. However, the net result is the same. Similarly, a tree surgeon might be called to cable a tree limb. If the limb later falls and causes damage to a neighbor’s car, the accident might be traced to a poorly designed procedure for cabling or to improper workmanship. Liability for poor quality has been well established in the courts. An organization’s liability costs can often be substantial, especially if large numbers of items are involved, as in the automobile industry, or if potentially wide- spread injury or damage is involved (e.g., an accident at a nuclear power plant). Express written warranties as well as implied warranties generally guarantee the product as safe when used as intended. The courts have tended to extend this to foreseeable uses, even if these uses were not intended by the producer. In the health care field, medical malpractice claims and insurance costs are contributing to skyrocketing costs and have become a major issue nation- wide. It’s been estimated that medical mistakes result in about 98,000 deaths annually in the United States. Surprisingly, this number has remained fairly steady for more than a few years. If medical errors were classified as a disease, they would rank about sixth on the list of major causes of death.

LO9.4 Explain why quality is important and the con- sequences of poor quality.

4“Baldrige Index’ Outperforms S&P 500 by Almost 5 to 1,” press release, available at www.quality.nist.gov.

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MOON IHLWAN, WITH LARRY ARMSTRONG AND MICHAEL EIDAM When Hyundai Motor Co. Chairman Chung Mong Koo said his company could increase the quality of its cars to “Toyota levels,” few took him seriously. After all, Hyundai was the butt of talk-show jokes and a target of industry disdain for tinny cars that were about as reliable as a go-kart. So when J. D. Power & Associates Inc. announced the Korean carmaker had virtually caught up with Toyota in terms of quality, jaws dropped from Detroit to Tokyo. “We still have a long way to go,” says Suh Byung Kee, the senior executive vice-president heading Hyundai’s quality-control team. “But we have completed the first phase of our task.”

The second phase could well be tougher. The eye-opening survey measured initial quality—the number of complaints customers had in the first 90 days of ownership. Hyundai owners reported just 102 problems per 100 cars sold—earning a tie with Honda as the second-best carmaker on the list and falling just below Toyota’s tally of 101. And its Sonata sedan was the top- ranked car in the “entry mid-sized” category. On longer-term measures, though, Hyundai remains a laggard: In a later Power’s Vehicle Dependability Study, Hyundai tallied 342 problems per 100 vehicles after three years of ownership, versus an industry average of 273. Hyundai execs counter that it will take time before the recent improvement shows up in the longer-term statistics.

There’s reason to agree with Hyundai’s optimism. First wooed by the company’s generous warranty—10 years for the drive train and five years for everything else—U.S. consumers are starting to believe that Hyundai is a changed brand. Sales have increased steadily. . . . Jeff Ball, a pharmacist from Laurence Harbor, N.J., has four of them: He and his wife share a Santa Fe SUV and a Sonata sedan (“I call it my Jaguar without the cat,” he says), and

READING HYUNDAI: KISSING CLUNKERS GOODBYE

he has bought smaller models for his sons. Sales like that are helping Hyundai’s bottom line.

A Team with Teeth Hyundai’s focus on quality comes straight from the top. Since 1999, Chairman Chung has boosted the quality team to 865 work- ers from 100, and virtually all employees have had to attend spe- cial seminars on improving Hyundai’s cars. Chung presides over twice-monthly quality meetings in a special conference room and an adjacent workshop, with vehicle lifts and high-intensity spot- lights for comparing Hyundais head-to-head with rivals. And this team has teeth: In the past year, the introduction of three new models was delayed by months as engineers scrambled to boost quality in response to problems found by the team.

The focus is on the details. When customers reported faulty warning lights and difficulty starting engines, Chung set up a $30 million computer center where 71 engineers simulate harsh conditions to test electronics and pinpoint defects. The result: In a Power’s  initial quality survey, Hyundai had only 9.6 problems in these areas per 100 vehicles, versus an industry average of 13.8. Three years ago Hyundai had 23.4 problems, versus the industry’s 17.9. “This is not a shotgun approach,” says Robert Cosmai, presi- dent of the company’s U.S. affiliate, Hyundai Motor America.

The big test came when Hyundai began building redesigned Santa Fes and Sonatas in Alabama. One encouraging sign: Daim- lerChrysler and Mitsubishi Motors Corp. planned to use a Hyundai- designed four-cylinder engine in their own small and midsize cars. “This is a vote of confidence for Hyundai’s engine quality,” says Ahn Soo Woong, an auto analyst at Han-wha Securities Co. Now it’s up to consumers to decide whether Hyundai really makes the grade.

Source: “Hyundai: Kissing Clunkers Goodbye,” BusinessWeek, May 17, 2004. Copyright © 2004 The McGraw-Hill Companies, Inc. Used with permission.

Productivity and quality are often closely related. Poor quality can adversely affect produc- tivity during the manufacturing process if parts are defective and have to be reworked or if an assembler has to try a number of parts before finding one that fits properly. Also, poor quality in tools and equipment can lead to injuries and defective output, which must be reworked or scrapped, thereby reducing the amount of usable output for a given amount of input. Simi- larly, poor service can mean having to redo the service and reduce service productivity.

Cost to remedy a problem is a major consideration in quality management. The earlier a problem is identified in the process, the cheaper the cost to fix it. The cost to fix a problem at the customer end has been estimated at about five times the cost to fix a problem at the design or production stages.

The Costs of Quality Any serious attempt to deal with quality issues must take into account the costs associated with quality. Those costs can be classified into three categories: appraisal, prevention, and failure.

Appraisal costs relate to inspection, testing, and other activities intended to uncover defec- tive products or services, or to assure that there are none. They include the cost of inspectors, testing, test equipment, labs, quality audits, and field testing.

Appraisal costs Costs of activities designed to ensure quality or uncover defects.

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Prevention costs relate to attempts to prevent defects from occurring. They include costs such as planning and administration systems, working with vendors, training, quality control procedures, and extra attention in both the design and production phases to decrease the prob- ability of defective workmanship.

Failure costs are incurred by defective parts or products or by faulty services. Internal failures are those discovered during the production process; external failures are those dis- covered after delivery to the customer. Internal failures occur for a variety of reasons, includ- ing defective material from vendors, incorrect machine settings, faulty equipment, incorrect methods, incorrect processing, carelessness, and faulty or improper material handling proce- dures. The costs of internal failures include lost production time, scrap and rework, investiga- tion costs, possible equipment damage, and possible employee injury. Rework costs involve the salaries of workers and the additional resources needed to perform the rework (e.g., equip- ment, energy, raw materials). Beyond those costs are items such as inspection of reworked parts, disruption of schedules, the added costs of parts and materials in inventory waiting for reworked parts, and the paperwork needed to keep track of the items until they can be reintegrated into the process. External failures are defective products or poor service that go undetected by the producer. Resulting costs include warranty work, handling of complaints, replacements, liability/litigation, payments to customers or discounts used to offset the infe- rior quality, loss of customer goodwill, and opportunity costs related to lost sales.

External failure costs are typically much greater than internal failure costs on a per-unit basis. Table 9.5 summarizes quality costs.

Internal and external failure costs represent costs related to poor quality, whereas appraisal and prevention costs represent investments for achieving good quality.

An important issue in quality management is the value received from expenditures on prevention. There are two schools of thought on this. One is that prevention costs will be outweighed by savings in appraisal and failure costs. This is espoused by such people as Crosby and Juran, discussed in further detail later in this chapter. They believe that as the costs of defect prevention are increased, the costs of appraisal and failure decrease by much more. What this means, if true, is that the net result is lower total costs, and, thus, as Crosby suggests, quality is free. On the other hand, some managers believe that by attempting to go beyond a certain point, such expenditures on quality reduce the funds available for other objectives such as reducing product development times and upgrading technology. The return on quality (ROQ) approach focuses on the economics of quality efforts. In this approach, quality improvement projects are viewed as investments, and, as such, they are evaluated like any other investment, using metrics related to return on investment (ROI).

Prevention costs Costs of preventing defects from occurring.

Failure costs Costs caused by defective parts or products or by faulty services.

Internal failures Failures dis- covered during production.

External failures Failures dis- covered after delivery to the customer.

Return on quality An approach that evaluates the financial return of investments in quality.

TABLE 9.5 Summary of quality costs

Category Description Examples

Appraisal costs Costs related to measuring, evalu- ating, and auditing materials, parts, products, and services to assess conformance with quality standards

Inspection equipment, testing, labs, inspec- tors, and the interruption of production to take samples

Prevention costs Costs related to reducing the poten- tial for quality problems

Quality improvement programs, training, monitoring, data collection and analysis, and design costs

Internal failure costs Costs related to defective products or services before they are delivered to customers

Rework costs, problem solving, material and product losses, scrap, and downtime

External failure costs Costs related to delivering substan- dard products or services to customers

Returned goods, reworking costs, warranty costs, loss of goodwill, liability claims, and penalties

LO9.5 Describe and give examples of the costs associated with quality.

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Larry Coburn, vice president of operations at high-tech audio equipment manufacturer Crown Audio, has seen the need for strong management and employee commitment in his company’s recent quality improvements. The market in his industry was driv- ing the development of more complex products that need to be produced more cheaply, and these twin trends put so much pres- sure on his manufacturing operations that things were breaking down. Their first-pass yields had gotten so bad that their rework inventory had piled up, and even became a major line item on the balance sheet.

“We had areas that were designated for rework that were so large that they were getting on our inventory control list because they were major entities in terms of dollars in inventory,” he recounts. In fact, the problem was large enough to conceal what Coburn and his team call “hidden factories”—millions of dollars of untapped production and sales potential existing within their production line. “We started analyzing these hidden factories and we actually identified $4 million of cost related to poor quality,” Coburn says.

To stem the tide of red ink, Crown Audio embarked on a dras- tic plant-floor triage process that involved stopping production entirely, so as not to generate any more rework. They then analyzed and tested the defective inventory, broke the components up into groups based on the common problems they exhibited, and used those groupings to analyze potential process improvements and defect reduction strategies before plugging them back through the process. Once they finished, they not only had saleable inventory to get out the door, but also had a pretty good handle on the parts of their process that needed changing, says Coburn. “When we started, we had months and sometimes close to a year of backlog

READING REWORK AND MORALE

that needed to be fixed and repaired,” he relates. “Now we are talk- ing in terms of hours of rework in front of us.”

However positive and dramatic this change, Coburn and his management team also realized that it wouldn’t help much if the scrap and rework inventory piles kept growing, he says, which is where he says the less-tangible “employee engagement” part of the equation comes in.

The first aspect is enabling them to do their jobs. “We’re con- tinuing to empower our workers to get real-time data at their fin- gertips so they’re making good decisions without two-week-old data, or without estimating or just evading what they think the problem is,” he says. Rather than having his workers hanging their heads, Crown Audio’s management team is now in the enviable situation of having different lines and shifts brag about their first- pass yields to each other.

Sustaining this motivated, engaged workforce is itself a team effort, says Coburn, who says that he has learned over the course of Crown Audio’s continuing quality initiative that solidly designed manufacturing processes backed up by an engaged and empow- ered workforce is the essential combination to move any company forward. Quality truly is everyone’s responsibility, and everyone appreciates a job well done.

“There is nothing more frustrating than working hard and then knowing that what you did, did not work out or did not come through.” Coburn stresses this point in no uncertain terms. “Morale is everything in quality,” he says. “People want to do a good job, and we have to enable that.”

Source: Excerpted from Brad Kenney, Industry Week, April 1, 2008.

Ethics and Quality Management All members of an organization have an obligation to perform their duties in an ethical man- ner. Ethical behavior comes into play in many situations that involve quality. One major cate- gory is substandard work, including defective products and substandard service, poor designs, shoddy workmanship, and substandard parts and raw materials. Having knowledge of this and failing to correct and report it in a timely manner is unethical and can have a number of nega- tive consequences. These can include increased costs for organizations in terms of decreased productivity, an increase in the accident rate among employees, inconveniences and injuries to customers, and increased liability costs.

A related issue is how an organization chooses to deal with information about quality prob- lems in products that are already in service. For example, automakers and tire makers in recent years have been accused of withholding information about actual or potential qual- ity problems; they failed to issue product recalls, or failed to divulge information, choosing instead to handle any complaints that arose on an individual basis.

9.5 QUALITY AWARDS

Quality awards have been established to generate improvement in quality. The Malcolm Bald- rige Award, the European Quality Award, and the Deming Prize are well-known awards given annually to recognize firms that have integrated quality management into their operations.

LO9.6 Discuss the importance of ethics in managing quality.

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The Baldrige Award Named after the late Malcolm Baldrige, an industrialist and former secretary of commerce, the annual Baldrige Award is administered by the National Institute of Standards and Tech- nology. The purpose of the award competition is to stimulate efforts to improve quality, to recognize quality achievements, and to publicize successful programs.

When the award was first presented in 1988, the award categories were manufacturing and small business. A few years later a service category was added, and then categories for educa- tion and health care were added a few years after that. The earliest winners included Motorola, Globe Metallurgical, Xerox Corporation, and Milliken & Company. Since then, many com- panies have been added to the list. For a complete listing of current and former winners, go to www.patapsco.nist.gov/Award_Recipients.

Applicants are evaluated in seven main areas: leadership, information and analysis, strate- gic planning, human resource management, customer and market focus, process management, and business results.

Examiners check the extent to which top management incorporates quality values in daily management; whether products or services are at least as good as those of competitors; whether employees receive training in quality techniques; if the business works with suppliers to improve quality; and if customers are satisfied. Even organizations that don’t win benefit from applying for the award: All applicants receive a written summary of the strengths and weaknesses of their quality management and suggestions for improvement.

Most states have quality award programs based on the Baldrige criteria. These award programs can serve as an entry point for organizations that want to eventually apply for the national award.

For more information, visit www.nist.gov/baldrige.

The European Quality Award The European Quality Award is Europe’s most prestigious award for organizational excel- lence. The European Quality Award sits at the top of regional and national quality awards, and applicants have often won one or more of those awards prior to applying for the European Quality Award.

The Deming Prize The Deming Prize, named in honor of the late W. Edwards Deming, is Japan’s highly coveted award recognizing successful quality efforts. It is given annually to any company that meets the award’s standards. Although typically given to Japanese firms, in 1989, Florida Power and Light became the first U.S. company to win the award.

The major focus of the judging is on statistical quality control, making it much narrower in scope than the Baldrige Award, which focuses more on customer satisfaction. Companies that win the Deming Prize tend to have quality programs that are detailed and well-communicated throughout the company. Their quality improvement programs also reflect the involvement of senior management and employees, customer satisfaction, and training.

9.6 QUALITY CERTIFICATION

Many firms that do business internationally recognize the importance of quality certification.

ISO 9000, 14000, and 24700 The International Organization for Standardization (ISO) promotes worldwide standards for the improvement of quality, productivity, and operating efficiency through a series of stan- dards and guidelines. Used by industrial and business organizations, regulatory agencies, gov- ernments, and trade organizations, the standards have important economic and social benefits. Not only are they tremendously important for designers, manufacturers, suppliers, service providers, and customers, but the standards make a tremendous contribution to society in

Baldrige Award Annual award given by the U.S. government to recognize quality achievements of U.S. companies.

European Quality Award European award for organizational excellence.

L09.8 Discuss quality certification and its importance.

NIST

LO9.7 Compare the quality awards.

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general: They increase the levels of quality and reliability, productivity, and safety, while making products and services affordable. The standards help facilitate international trade. They provide governments with a basis for health, safety, and environmental legislation. And they aid in transferring technology to developing countries.

Two of the most well-known of these are ISO 9000 and ISO 14000. ISO 9000 pertains to quality management. It concerns what an organization does to ensure that its products or ser- vices conform to its customers’ requirements. ISO 14000 concerns what an organization does to minimize harmful effects to the environment caused by its operations. Both ISO 9000 and ISO 14000 relate to an organization’s processes rather than its products and services, and both stress continual improvement. Moreover, the standards are meant to be generic; no matter what the organization’s business, if it wants to establish a quality management system or an environmental management system, the system must have the essential elements contained in ISO 9000 or in ISO 14000. The ISO 9000 standards are critical for companies doing business internationally, particularly in Europe. They must go through a process that involves docu- menting quality procedures and on-site assessment. The process often takes 12 to 18 months. With certification comes registration in an ISO directory that companies seeking suppliers can refer to for a list of certified companies. They are generally given preference over unreg- istered companies. More than 40,000 companies are registered worldwide; three-fourths of them are located in Europe.

A key requirement for registration is that a company review, refine, and map functions such as process control, inspection, purchasing, training, packaging, and delivery. Similar to the Baldrige Award, the review process involves considerable self-appraisal, resulting in problem identification and improvement. Unlike the Baldrige Award, registered companies face an ongoing series of audits, and they must be re-registered every three years.

In addition to the obvious benefits of certification for companies that want to deal with the European Union, the ISO 9000 certification and registration process is particularly helpful for companies that do not currently have a quality management system; it provides guidelines for establishing the system and making it effective.

Eight quality management principles form the basis of the latest version of ISO 9000:

1. A customer focus 2. Leadership 3. Involvement of people 4. A process approach 5. A system approach to management 6. Continual improvement 7. Use of a factual approach to decision making 8. Mutually beneficial supplier relationships

The standards for ISO 14000 certification bear upon three major areas:

Management systems—systems development and integration of environmental respon- sibilities into business planning Operations—consumption of natural resources and energy Environmental systems—measuring, assessing, and managing emissions, effluents, and other waste streams

ISO 24700 pertains to the quality and performance of office equipment that contains reused components. ISO/IEC 24700 specifies product characteristics for use in an original equipment manufacturer’s or authorized third-party’s declaration of conformity to demon- strate that a marketed product that contains reused components performs equivalent to new, meeting equivalent-to-new component specifications and performance criteria, and continues to meet all the safety and environmental criteria required by responsibly built products. It is relevant to marketed products whose manufacturing and recovery processes result in the reuse of components.

ISO 9000 A set of interna- tional standards on quality management and quality assurance, critical to interna- tional business.

ISO 14000 A set of interna- tional standards for assessing a company’s environmental performance.

ISO 24700 A set of inter- national standards that pertains to the quality and performance of office equip- ment that contains reused components.

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If you’d like to learn more about ISO standards, visit the International Organization for Standardization website at www.ISO.org/ISO/en/ISOonline.frontpage or the American Soci- ety for Quality website at www.asq.org.

9.7 QUALITY AND THE SUPPLY CHAIN

Business leaders are increasingly recognizing the importance of their supply chains in achiev- ing their quality goals. Achievement requires measuring customer perceptions of quality, identifying problem areas, and correcting those problems.

When dealing with supplier quality in global supply chains, companies are finding a wide range in the degree of sophistication concerning quality assurance. Although developed coun- tries often have a fair level of sophistication, little or no awareness of modern quality practices may be found in some less-developed countries. This poses important liability issues for com- panies that outsource to those areas.

An interesting situation is outsourcing in the pharmaceutical industry. Offshore suppliers offer low prices that domestic producers can’t match. However, the cost advantage of off- shore producers is not based solely on lower labor costs; a significant “advantage” is the fact that domestic producers undergo strict and costly government quality regulations and unan- nounced inspections that offshore producers are not subject to. While this lowers the costs to importers, it also increases their liability risks.

Increasingly, the emphasis in supply chain quality management is on reducing outsourcing risk as well as product or service variation and overhead. Risk comes from the use of substan- dard materials or work methods, which can lead to inferior product quality and potential product liability. Tighter control of vendors and worker training can reduce these risks. Variation results from processes that are not in control; it can be reduced through statistical quality control.

The acting chair of the Consumer Product Safety Commission spoke at a press conference on a recall of Mattel Inc. toys manufactured in China. Mattel recalled 18.6 million products around the world because they contained magnets that could fall out and be swallowed by children.

© Jay Mallin/Bloomberg via Getty

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William E. Mitchell, chairman, president and CEO of Arrow Elec- tronics, offered 10 guidelines on how to reduce product quality and related risks in an offshore supply chain. The guidelines were nominally targeted at electronics suppliers, but offer a good start- ing point for many companies looking to reduce risk and potential quality problems.

1. Source from reputable, well-established companies with tight internal controls.

2. Conduct comprehensive background checks, including check- ing trade references and past business history, of supply chain partners before conducting business with them.

3. Implement site inspections of supply chain partners and find out what systems have been put in place to track quality.

4. Conduct ongoing performance reviews of supply chain part- ners and engage in ongoing communications with them to benchmark against preset goals and define improvement plans.

5. Only source from companies that are willing to provide a guar- antee for products in writing.

READING IMPROVING QUALITY AND REDUCING RISK IN OFFSHORING

6. Be cautious of buying from companies that do not have fran- chised relationships with distribution partners to avoid a greater potential risk of counterfeit product.

7. Beware of unusually low pricing. 8. Look for International Organization for Standardization (ISO)

or other equivalent, globally recognized certifications in a supply chain partner’s operations.

9. Establish relationships with third-party organizations. 10. Translate quality into measurable and clearly defined targets

with supply chain partners and ensure these metrics are com- municated regularly with employees.

As the Supply Chain Digest notes, to do this right will involve greater costs, reducing the relative price advantage of offshore strategies to a degree, and requiring companies to build a sub- stantial infrastructure to develop and maintain these monitoring programs.

Source: Excerpted from “Improving Quality and Reducing Risk in Offshoring,” Supply Chain Digest, August 7, 2007. Copyright © 2007 SCDigest. Used with permission.

Overhead can be reduced by assigning quality assurance responsibility to vendors, while cus- tomers operate in a quality audit mode, with some monitoring of vendor quality efforts.

Supply chain quality management can benefit from a collaborative relationship with sup- pliers that includes helping suppliers with quality assurance efforts as well as information sharing on quality-related matters. Ideally, improving supply chain quality can become part of an organization’s continuous improvement efforts.

The following reading offers some guidelines for improving quality and reducing out- sourcing risk.

9.8 TOTAL QUALITY MANAGEMENT

A primary role of management is to lead an organization in its daily operation and to maintain it as a viable entity into the future. Quality has become an important factor in both of these objectives.

The term total quality management (TQM) refers to a quest for quality in an organiza- tion. There are three key philosophies in this approach. One is a never-ending push to improve, which is referred to as continuous improvement; the second is the involvement of everyone in the organization; and the third is a goal of customer satisfaction, which means meeting or exceeding customer expectations. TQM expands the traditional view of quality—looking only at the quality of the final product or services—to looking at the quality of every aspect of the process that produces the product or service. TQM systems are intended to prevent poor qual- ity from occurring.

We can describe the TQM approach as follows:

1. Find out what customers want. This might involve the use of surveys, focus groups, interviews, or some other technique that integrates the customer’s voice in the decision- making process. Be sure to include the internal customer (the next person in the pro- cess) as well as the external customer (the final customer).

2. Design a product or service that will meet (or exceed) what customers want. Make it easy to use and easy to produce.

LO9.9 Describe TQM.

Total quality management (TQM) A philosophy that involves everyone in an orga- nization in a continual effort to improve quality and achieve customer satisfaction.

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3. Design processes that facilitate doing the job right the first time. Determine where mis- takes are likely to occur and try to prevent them. When mistakes do occur, find out why so that they are less likely to occur again. Strive to make the process “mistake-proof.” This is sometimes referred to as a fail-safing: Elements are incorporated in product or service design that make it virtually impossible for an employee (or sometimes a cus- tomer) to do something incorrectly. The Japanese term for this is pokayoke. Examples include parts that fit together one way only and appliance plugs that can be inserted into a wall outlet the correct way only. Another term that is sometimes used is foolproofing, but use of this term may be taken to imply that employees (or customers) are fools—not a wise choice!

4. Keep track of results, and use them to guide improvement in the system. Never stop try- ing to improve.

5. Extend these concepts throughout the supply chain. 6. Top management must be involved and committed. Otherwise, TQM will just be

another fad that fails and fades away.

Many companies have successfully implemented TQM programs. Successful TQM programs are built through the dedication and combined efforts of everyone in the organization.

The preceding description provides a good idea of what TQM is all about, but it doesn’t tell the whole story. A number of other elements of TQM are important:

1. Continuous improvement. The philosophy that seeks to improve all factors related to the process of converting inputs into outputs on an ongoing basis is called continuous improvement. It covers equipment, methods, materials, and people. Under continuous improvement, the old adage “If it ain’t broke, don’t fix it” gets transformed into “Just because it isn’t broke doesn’t mean it can’t be improved.” The concept of continuous improvement was not new, but it did not receive much interest in the United States for a while, even though it originated here. However, many Japanese companies used it for years, and it became a cornerstone of the Japa- nese approach to production. The Japanese use the term kaizen to refer to continuous improvement. The successes of Japanese companies caused other companies to reex- amine many of their approaches. This resulted in a strong interest in the continuous improvement approach.

2. Competitive benchmarking. This involves identifying other organizations that are the best at something and studying how they do it to learn how to improve your operation. The company need not be in the same line of business. For example, Xerox used the mail-order company L.L. Bean to benchmark order filling.

3. Employee empowerment. Giving workers the responsibility for improvements and the authority to make changes to accomplish them provides strong motivation for employ- ees. This puts decision making into the hands of those who are closest to the job and have considerable insight into problems and solutions.

4. Team approach. The use of teams for problem solving and to achieve consensus takes advantage of group synergy, gets people involved, and promotes a spirit of cooperation and shared values among employees.

5. Decisions based on facts rather than opinions. Management gathers and analyzes data as a basis for decision making.

6. Knowledge of tools. Employees and managers are trained in the use of quality tools. 7. Supplier quality. Suppliers must be included in quality assurance and quality improve-

ment efforts so that their processes are capable of delivering quality parts and materials in a timely manner.

8. Champion. A TQM champion’s job is to promote the value and importance of TQM principles throughout the company.

Fail-safing Incorporating design elements that prevent incorrect procedures.

Continuous improvement Philosophy that seeks to make never-ending improvements to the process of converting inputs into outputs.

Kaizen Japanese term for continuous improvement.

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9. Quality at the source. Quality at the source refers to the philosophy of making each worker responsible for the quality of his or her work. The idea is to “Do it right the first time.” Workers are expected to provide goods or services that meet specifications and to find and correct mistakes that occur. In effect, each worker becomes a quality inspector for his or her work. When the work is passed on to the next operation in the process (the internal customer) or, if that step is the last in the process, to the ultimate customer, the worker is “certifying” that it meets quality standards. This accomplishes a number of things: (a) it places direct responsibility for quality on the person(s) who directly affect it; (b) it removes the adversarial relationship that often exists between quality control inspectors and production workers; and (c) it motivates workers by giving them control over their work as well as pride in it.

10. Suppliers are partners in the process, and long-term relation- ships are encouraged. This gives suppliers a vital stake in pro- viding quality goods and services. Suppliers, too, are expected to provide quality at the source, thereby reducing or eliminat- ing the need to inspect deliveries from suppliers.

It would be incorrect to think of TQM as merely a collection of techniques. Rather, TQM reflects a whole new attitude toward qual- ity. It is about the culture of an organization. To truly reap the ben- efits of TQM, the organization must change its culture.

Table 9.6 illustrates the differences between cultures of a TQM organization and a more traditional organization.

Obstacles to Implementing TQM Companies have had varying success in implementing TQM. Some have been quite success- ful, but others have struggled. Part of the difficulty may be with the process by which it is implemented rather than with the principles of TQM. Among the factors cited in the literature are the following:

1. Lack of a companywide definition of quality: Efforts aren’t coordinated; people are working at cross-purposes, addressing different issues, and using different measures of success.

2. Lack of a strategic plan for change: Without such a plan the chance of success is less- ened and the need to address strategic implications of change is ignored.

3. Lack of a customer focus: Without a customer focus, there is a risk of customer dissatisfaction.

4. Poor intraorganizational communication: The left hand doesn’t know what the right hand is doing; frustration, waste, and confusion ensue.

5. Lack of employee empowerment: Not empowering employees gives the impression of not trusting employees to fix problems, adds red tape, and delays solutions.

6. View of quality as a “quick fix”: Quality needs to be a long-term, continuing effort. 7. Emphasis on short-term financial results: “Duct-tape” solutions often treat symptoms;

spend a little now—a lot more later. 8. Inordinate presence of internal politics and “turf” issues: These can sap the energy of an

organization and derail the best of ideas. 9. Lack of strong motivation: Managers need to make sure employees are motivated.

Quality at the source The philosophy of making each worker responsible for the quality of his or her work.

© Paul Sakuma/AP Images

The iPod Shuffle stops playing music when the earphone jack is unplugged. When the earphones are plugged back in, the music resumes right where it left off. This keeps the battery from running down and is an example of mistake proofing.

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TABLE 9.6 Comparing the cultures of TQM and traditional organizations

Aspect Traditional TQM

Overall mission Maximize return on investment Meet or exceed customer expectations

Objectives Emphasis on short term Balance of long term and short term

Management Not always open; sometimes inconsistent objectives

Open; encourages employee input; consistent objectives

Role of manager Issue orders; enforce Coach; remove barriers; build trust

Customer requirements Not highest priority; may be unclear

Highest priority; important to identify and understand

Problems Assign blame; punish Identify and resolve

Problem solving Not systematic; individuals Systematic; teams

Improvement Erratic Continuous

Suppliers Adversarial Partners

Jobs Narrow, specialized; much individual effort

Broad, more general; much team effort

Focus Product oriented Process oriented

10. Lack of time to devote to quality initiatives: Don’t add more work without adding addi- tional resources.

11. Lack of leadership: Managers need to be leaders.5 

This list of potential problems can serve as a guideline for organizations contemplating implementing TQM or as a checklist for those having trouble implementing it.

Criticisms of TQM TQM programs are touted as a way for companies to improve their competitiveness, which is a very worthwhile objective. Nonetheless, TQM programs are not without criticism. The fol- lowing are some of the major criticisms:

1. Overzealous advocates may pursue TQM programs blindly, focusing attention on qual- ity even though other priorities may be more important (e.g., responding quickly to a competitor’s advances).

2. Programs may not be linked to the strategies of the organization in a meaningful way. 3. Quality-related decisions may not be tied to market performance. For instance, customer

satisfaction may be emphasized to the extent that its cost far exceeds any direct or indi- rect benefit of doing so.

4. Failure to carefully plan a program before embarking on it can lead to false starts, employee confusion, and meaningless results.

5. Organizations sometimes pursue continuous improvement (i.e., incremental improve- ment) when dramatic improvement is needed.

6. Quality efforts may not be tied to results.

Note that there is nothing inherently wrong with TQM; the problem is how some indi- viduals or organizations misuse it. Let’s turn our attention to problem solving and process improvement.

5 Excerpt from Gary Salegna and Farzaneh Fazel, “Obstacles to Implementing Quality,” Quality Progress, July 2000, p. 53. Copyright © 2000 American Society for Quality. Reprinted with permission from Quality Progress magazine.

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9.9 PROBLEM SOLVING AND PROCESS IMPROVEMENT

Problem solving is one of the basic procedures of TQM. In order to be successful, problem- solving efforts should follow a standard approach. Table 9.7 describes the basic steps in the TQM problem-solving process.

An important aspect of problem solving in the TQM approach is eliminating the cause so that the problem does not recur. This is why users of the TQM approach often like to think of problems as “opportunities for improvement.”

The Plan-Do-Study-Act Cycle The plan-do-study-act (PDSA) cycle, also referred to as either the Shewhart cycle or the Deming wheel, is the conceptual basis for problem-solving activities. The cycle is illustrated in Figure 9.1. Representing the process with a circle underscores its continuing nature. There are four basic steps in the cycle:

Plan. Begin by studying the current process. Document that process. Then collect data on the process or problem. Next, analyze the data and develop a plan for improvement. Specify measures for evaluating the plan. Do. Implement the plan, on a small scale if possible. Document any changes made during this phase. Collect data systematically for evaluation. Study. Evaluate the data collection during the do phase. Check how closely the results match the original goals of the plan phase. Act. If the results are successful, standardize the new method and communicate the new method to all people associated with the process. Implement training for the new method. If the results are unsuccessful, revise the plan and repeat the process or cease this project.

Employing this sequence of steps provides a systematic approach to continuous improvement.

Process improvement is a systematic approach to improving a process. It involves doc- umentation, measurement, and analysis for the purpose of improving the functioning of a

LO9.10 Give an overview of problem solving.

Plan-do-study-act (PDSA) cycle A framework for prob- lem solving and improvement activities.

Process improvement A sys- tematic approach to improving a process.

Step 1 Define the problem and establish an improvement goal. Give problem definition careful consideration; don’t rush through this step because this will serve as the focal point of problem-solving efforts.

Step 2 Develop performance measures and collect data. The solution must be based on facts. Possible tools include check sheet, scatter diagram, histo- gram, run chart, and control chart.

Step 3 Analyze the problem. Possible tools include Pareto chart, cause-and-effect diagram.

Step 4 Generate potential solutions. Methods include brainstorming, interviewing, and surveying.

Step 5 Choose a solution. Identify the criteria for choosing a solution. (Refer to the goal established in Step 1.) Apply criteria to potential solutions and select the best one.

Step 6 Implement the solution. Keep everyone informed.

Step 7 Monitor the solution to see if it accomplishes the goal. If not, modify the solution, or return to Step 1. Possible tools include control chart and run chart.

TABLE 9.7 Basic steps in problem solving

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Recognize problem

Management Commitment

Form quality improvement

teams

Continuous improvement

Define problem

Ensure permanence

Develop performance

measures

Analyze problem

Implement solution

Evaluate solution

Determine possible causes

PLAN

STUDY

ACT

DO

Plan

Study

Act Do

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process. Typical goals of process improvement include increasing customer satisfaction, achieving higher quality, reducing waste, reducing cost, increasing productivity, and reducing processing time.

Table 9.8 provides an overview of process improvement.

FIGURE 9.1A. The PDSA cycle B. The PDSA cycle applied to problem solving

Source: Figure from Donna Summers, Quality, 2nd ed., p. 67. Copyright © 2000 Prentice Hall, Inc. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

A. Map the process 1. Collect information about the process; identify each step in the process. For each step, determine: The inputs and outputs. The people involved. The decisions that are made. Document such measures as time, cost, space used, waste, employee morale and any employee

turnover, accidents and/or safety hazards, working conditions, revenues and/or profits, quality, and customer satisfaction, as appropriate.

2. Prepare a flowchart that accurately depicts the process. Make sure that key activities and deci- sions are represented.

B. Analyze the process 1. Ask these questions about the process: Is the flow logical? Are any steps or activities missing? Are there any duplications? 2. Ask these questions about each step: Could it be eliminated? Does the step add value? Does any waste occur at this step? Could the time be shortened? Could the cost to perform the step be reduced? Could two (or more) steps be combined? C. Redesign the process Using the results of the analysis, redesign the process. Document the improvements; potential mea-

sures include reductions in time, cost, space, waste, employee turnover, accidents, safety hazards, and increases/ improvements in employee morale, working conditions, revenues/profits, quality, and customer satisfaction.

TABLE 9.8 Overview of process improvement

LO9.11 Give an overview of process improvement.

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Six Sigma The term Six Sigma has several meanings. Statistically, Six Sigma means having no more than 3.4 defects per million opportunities in any process, product, or service. Conceptually, the term is much broader, referring to a program designed to reduce the occurrence of defects to achieve lower costs and improved customer satisfaction. It is based on the application of certain tools and techniques to selected projects to achieve strategic business results. In the business world, Six-Sigma programs have become a key way to improve quality, save time, cut costs, and improve customer satisfaction. Six-Sigma programs can be employed in design, production, service, inventory management, and delivery. It is important for Six-Sigma proj- ects to be aligned with organization strategy.

Motorola pioneered the concept of a Six-Sigma program in the 1980s and actually trade- marked the term. Today, Six Sigma concepts are widely used by businesses, governments, consultants, and even the military as a business performance methodology.

There are management and technical components of Six-Sigma programs. The manage- ment component involves providing strong leadership, defining performance metrics, select- ing projects likely to achieve business results, and selecting and training appropriate people. The technical component involves improving process performance, reducing variation, uti- lizing statistical methods, and designing a structured improvement strategy, which involves definition, measurement, analysis, improvement, and control.

For Six Sigma to succeed in any organization, buy-in at the top is essential. Top manage- ment must formulate and communicate the company’s overall objectives and lead the program for a successful deployment. Other key players in Six-Sigma programs are program champions, “master black belts,” “black belts,” and “green belts.” Champions identify and rank potential projects, help select and evaluate candidates, manage program resources, and serve as advocates for the program. Master black belts have extensive training in statistics and use of quality tools. They are teachers and mentors of black belts. Black belts are project team leaders responsible for implementing process improvement projects. They have typically completed four weeks of Six-Sigma training and have demonstrated mastery of the subject matter through an exam and successful completion of one or more projects. Green belts are members of project teams.

Black belts play a pivotal role in the success of Six-Sigma programs. They influence change, facilitate teamwork, provide leadership in applying tools and techniques, and convey knowledge and skills to green belts. Black belt candidates generally have a proven strength in either a technical discipline such as engineering or a business discipline. Candidates also must have strong “people skills” and be able to facilitate change. And they must be proficient in applying continuous improvement and statistical methods and tools. A black belt must under- stand the technical aspects of process improvement as well as the expected business results (time, money, and quality improvement).

Six Sigma is based on these guiding principles:

1. Reduction of variation is an important goal. 2. The methodology is data driven; it requires valid measurements. 3. Outputs are determined by inputs; focus on modifying and/or controlling inputs to

improve outputs. 4. Only a critical few inputs have a significant impact on outputs (the Pareto effect); con-

centrate on those.

DMAIC (define-measure-analyze-improve-control) is a formalized problem-solving process of Six Sigma. It is composed of five steps that can be applied to any process to improve its effectiveness. The steps are:

1. Define: Set the context and objectives for improvement. 2. Measure: Determine the baseline performance and capability of the process. 3. Analyze: Use data and tools to understand the cause-and-effect relationships of the process. 4. Improve: Develop the modifications that lead to a validated improvement in the process. 5. Control: Establish plans and procedures to ensure that improvements are sustained.

Six Sigma A business process for improving quality, reducing costs, and increasing customer satisfaction.

LO9.12 Describe the six sigma methodology.

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BILL KOWALSKI It may be the most widely acclaimed performance improvement system across the business world, yet Six Sigma is not immune to a paradox common to most large-scale change efforts:

You can’t expect to sustain top executive support without producing consistent bottom-line results . . . yet consistent results aren’t likely without sustained top executive support.

This conundrum is a key finding from a recent survey of more than 240 Six Sigma practitioners across industries and around the globe. Sponsored by Leap Technologies, the survey was con- ducted anonymously over the Web through iSixSigma.com, the leading Six Sigma information portal.

The survey gauged perceptions of Six Sigma practitioners on two primary issues:

1. What causes Six Sigma projects to fail to produce desired results?

2. What would most help to improve Six Sigma project results?

We know these are issues keeping practitioners up at night because these same people are under increasingly heavy pressure to produce and sustain bottom-line results from their projects.

The “Catch 22” for Six Sigma Practitioners The most often cited reason for Six Sigma project failure was “lack of sustained executive sponsorship and commitment.” It is clearly evident that there is no substitute for top leadership support to achieve sustained Six Sigma success. In close second ranking was “lack of buy-in, cooperation and ownership by frontline manag- ers and employees for implementing and sustaining results on Six Sigma project solutions.” These top two barriers to success create a classic “Catch 22” for Six Sigma practitioners. On the one hand, executive commitment is critical to the funding and mandate Six Sigma practitioners need to challenge the status quo.

On the other hand, sustaining executive support is nearly impossible without consistent delivery of results. Yet this payoff can’t be sustained without active support by those most impacted by Six Sigma solutions . . . frontline managers and employees!

Six Sigma is, with its dedicated Belt infrastructure and stan- dardized DMAIC methodology, a more sophisticated and effective approach than past quality improvement methods. But, if there is a chink to be found in Six Sigma’s armor, it is the issue of non- Belt participation and ownership. This problem, however, rarely surfaces in the first 12 to 18 months of a Six Sigma Deployment. In fact, we’ve observed that, initially, many Six Sigma Deployment Leaders experience a false sense of security about results. Why? Because most of the projects taken on by newly trained Black and Green Belts rarely require high levels of frontline support and, for the most part, don’t challenge top management’s ingrained cul- tural biases.

At the same time, it’s also not uncommon for organizations adopting Six Sigma to “hit the wall” once “low touch” projects are completed. Top management’s appetite for results has been

READING WHAT KEEPS SIX SIGMA PRACTITIONERS UP AT NIGHT?

whetted, but the foundational support in terms of skills, experi- ence and commitment may not be there to tackle the projects that present bigger change management challenges.

More Tools Are Needed According to the Six Sigma practitioners completing the survey, the path to better Six Sigma project results requires equipping practitioners with an expanded set of tools to both tackle more complex projects and improve Belt productivity by getting more non-Belt involvement. This finding is not likely to be a revelation to many of the early pioneers who paved the way to the popu- larity of Six Sigma. Companies like Motorola, Allied Signal (now merged with Honeywell), and GE, along with other big players, such as DuPont and 3M (among others), have already taken steps to strengthen their Six Sigma Deployments by enhancing the skills of Belts and expanding the tool kit.

At the same time, the survey results indicate there is more work to do in advancing Six Sigma into a robust and sustainable method for transformational change. The top priority appears to be the expansion of the Six Sigma practitioner’s tool kit to break free of the “Catch 22” syndrome. In fact, the integration of Lean principles by numerous Six Sigma users is a big step in the right direction. However, in addition to Lean tools there also appears to be a growing recognition that more tools are needed to deal with the change management aspects of Six Sigma. Ninety percent of the survey respondents rated the need for a structured tool set for engaging “non-Belts” in projects, particularly those with sig- nificant behavior change requirements.

The preceding finding is linked to the second most important reason practitioners stated as the cause for Six Sigma projects fall- ing short (i.e., lack of buy-in, cooperation, or ownership by front- line employees and managers). The relationship between these two findings correlates with the anecdotal evidence from more experienced Six Sigma organizations about the keys to accel- erating results and reducing project cycle times. As they move down the experience curve and tackle larger and more complex change projects, the most successful Six Sigma organizations have expanded their tool sets and integrated other improvement disciplines such as Lean seamlessly into deployments.

The Keys to a Better Night’s Sleep Six Sigma practitioners can break free of the “Catch 22” syndrome by designing their deployments to deliver consistent results and sustain consistent executive support. The keys are:

1. Expand the tool set early in deployment with methods to get more non-Belt participation and faster results. The key to avoiding confusion or overload is to integrate Lean, Innovation, and other improvement methods into the DMAIC framework.

2. Engage senior leaders to go beyond the rubber-stamping of project selections to actually designing the project plan with the Belts. The benefits are a more realistic appraisal of project requirements and deeper understanding of where and how to apply other tool sets to drive bigger and faster results.

(continued)

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3. Engage non-Belt managers and employees early on projects where there is existing motivation for change.

Taking actions such as these will provide a steadier stream of results, sustained executive support, and a better night’s sleep for Six Sigma practitioners!

About the Author Bill Kowalski is a Senior Partner with Leap Technologies, the leading provider of Change Acceleration Tools for Six Sigma Deployment. For more articles and information on accelerating organization change, visit Leap Technologies on the Web at www. actionworkout.com.

Source: Bill Kowalski, “What Keeps Six Sigma Practitioners Up at Night?” Copy- right © Leap Technologies, Inc., 2003. Used with permission.

(concluded)

9.10 QUALITY TOOLS

There are a number of tools that an organization can use for problem solving and process improvement. This section describes eight of these tools. The tools aid in data collection and interpretation, and provide the basis for decision making.

The first seven tools are often referred to as the seven basic quality tools. Figure 9.2 pro- vides a quick overview of the seven tools.

Flowcharts. A flowchart is a visual representation of a process. As a problem-solving tool, a flowchart can help investigators in identifying possible points in a process where problems occur. Figure 9.3 illustrates a flowchart for catalog telephone orders in which potential failure points are highlighted.

The diamond shapes in the flowchart represent decision points in the process, and the rect- angular shapes represent procedures. The arrows show the direction of “flow” of the steps in the process.

To construct a simple flowchart, begin by listing the steps in a process. Then classify each step as either a procedure or a decision (or check) point. Try to not make the flowchart too detailed or it may be overwhelming, but be careful not to omit any key steps.

Check sheets. A check sheet is a simple tool frequently used for problem identification. Check sheets provide a format that enables users to record and organize data in a way that facilitates collection and analysis. This format might be one of simple checkmarks. Check sheets are designed on the basis of what the users are attempting to learn by collecting data.

Many different formats can be used for a check sheet, and there are many different types of sheets. One frequently used form of check sheet deals with type of defect, another with loca- tion of defects. These are illustrated in Figures 9.4 and 9.5

Figure 9.4 shows tallies that denote the type of defect and the time of day each occurred. Problems with missing labels tend to occur early in the day and smeared print tends to occur late in the day, whereas off-center labels are found throughout the day. Identifying types of defects and when they occur can help in pinpointing causes of the defects.

Figure 9.5 makes it easy to see where defects on the product—in this case, a glove—are occurring. Defects seem to be occurring on the tips of the thumb and first finger, in the finger valleys (especially between the thumb and first finger), and in the center of the gloves. Again, this may help determine why the defects occur and lead to a solution.

Histograms. A histogram can be useful in getting a sense of the distribution of observed values. Among other things, one can see if the distribution is symmetrical, what the range of values is, and if there are any unusual values. Figure 9.6 illustrates a histogram. Note the two peaks. This suggests the possibility of two distributions with different centers. Possible causes might be two workers or two suppliers with different quality.

Pareto Analysis. Pareto analysisis a technique for focusing attention on the most impor- tant problem areas. The Pareto concept, named after the 19th-century Italian economist Vil- fredo Pareto, is that a relatively few factors generally account for a large percentage of the

LO9.13 Describe and use various quality tools.

Flowchart A diagram of the steps in a process.

Check sheet A tool for recording and organizing data to identify a problem.

Histogram A chart of an empirical frequency distribution.

Pareto analysis Technique for classifying problem areas according to degree of impor- tance, and focusing on the most important.

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Defect A B C

1 2

Day

3 4

Check sheet

Flowchart

Scatter diagram

Variable B

Histogram

Frequency

Frequency

Control chart

Upper control limit

Lower control limit

Cause-and-e�ect diagram

Materials Equipment

People Methods

Problem

Pareto chart

Variable A

A B C D E

C B D A E

A tool for organizing and collecting data; a tally of problems or other events by category

A graph that shows the degree and direction of relationship between two variables

A chart that shows an empirical frequency distribution

A diagram that arranges categories from highest to lowest frequency of occurrence

A statistical chart of time-ordered values of a sample statistic (e.g., sample means)

A diagram used to organize a search for the cause(s) of a problem; also known as a fishbone diagram

A diagram of the steps in a process

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FIGURE 9.2 The seven basic quality tools

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Available?

Customer places call

Specify desired item(s)

Begin

End

Confirm order

Specify delivery instructions

Indicate method of payment

Call back?

Lost sale

Alternate selection?

Lost sale

Yes

Yes

Yes

No

No

No

No Yes

Possible lost sale

Possible lost sale

Possible wrong instructions

Busy signal?

Day Time Missing label

O�- center

Smeared print

Loose or folded Other

M 8–9

9–10

10–11

11–12

1–2

2–3

3–4

Type of Defect

Total

Total

(Torn)

6

3

5

3

1

6

8

5 14 10 2 1 32

= Location of a defect

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FIGURE 9.3 Flowchart of catalog call

FIGURE 9.4 An example of a check sheet

FIGURE 9.5 A special-purpose check sheet

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Repair time (minutes)

Frequency

15

Loose OtherMissing label

Smeared print

O�- center

44%

75%

91% 97% 100%

N u

m b

e r

o f

d e

fe ct

s

5

10

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total cases (e.g., complaints, defects, problems). The idea is to classify the cases according to degree of importance and focus on resolving the most important, leaving the less important. Often referred to as the 80–20 rule, the Pareto concept states that approximately 80 percent of the problems come from 20 percent of the items. For instance, 80 percent of machine break- downs come from 20 percent of the machines, and 80 percent of the product defects come from 20 percent of the causes of defects.

Often, it is useful to prepare a chart that shows the number of occurrences by category, arranged in order of frequency. Figure 9.7 illustrates such a chart corresponding to the check sheet shown in Figure 9.4. The dominance of the problem with off-center labels becomes apparent. Presumably, the manager and employees would focus on trying to resolve this prob- lem. Once they accomplished that, they could address the remaining defects in similar fash- ion; “smeared print” would be the next major category to be resolved, and so on. Additional check sheets would be used to collect data to verify that the defects in these categories have been eliminated or greatly reduced. Hence, in later Pareto diagrams, categories such as “off- center” may still appear but would be much less prominent.

Scatter Diagrams. A scatter diagram can be useful in deciding if there is a correlation between the values of two variables. A correlation may point to a cause of a problem. Figure 9.8 shows an example of a scatter diagram. In this particular diagram, there is a positive (upward- sloping) relationship between the humidity and the number of errors per hour. High values of humidity correspond to high numbers of errors, and vice versa. On the other hand, a negative (downward-sloping) relationship would mean that when values of one variable are low, values of the other variable are high, and vice versa.

The higher the correlation between the two variables, the less scatter in the points; the points will tend to line up. Conversely, if there were little or no relationship between two

Scatter diagram A graph that shows the degree and direc- tion of relationship between two variables.

FIGURE 9.6 A histogram

FIGURE 9.7 A Pareto diagram based on data in Figure 9.4

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Time

Upper control limit

Lower control limit

E�ect

cause

cause

cause

cause

cause

cause

cause

cause

cause

cause

cause

cause

cause

cause

People Equipment

Methods Materials

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variables, the points would be completely scattered. In Figure 9.8, the correlation between humidity and errors seems strong because the points appear to scatter along an imaginary line.

Control Charts. A control chart  can be used to monitor a process to see if the process output is random. It can help detect the presence of correctable causes of variation. Figure 9.9 illustrates a control chart. Control charts also can indicate when a problem occurred and give insight into what caused the problem. Control charts are described in detail in Chapter 10.

Cause-and-Effect Diagrams. A cause-and-effect diagram offers a structured approach to the search for the possible cause(s) of a problem. It is also known as a fishbone diagram because of its shape, or an Ishikawa diagram, after the Japanese professor who developed the approach to aid workers overwhelmed by the number of possible sources of problems when problem solving. This tool helps to organize problem-solving efforts by identifying categories of factors that might be causing problems. Often this tool is used after brainstorming sessions to organize the ideas generated. Figure 9.10 illustrates one form of a cause-and-effect diagram.

Some errors are more likely causes than others, depending on the nature of the errors. If the cause is still not obvious at this point, additional investigation into the root cause may be necessary, involving a more in-depth analysis. Often, more detailed information can be

Control chart A statistical chart of time-ordered values of a sample statistic.

Cause-and-effect diagram A diagram used to search for the cause(s) of a problem; also called fishbone diagram.

FIGURE 9.9 A control chart

FIGURE 9.10 One format of a cause-and- effect diagram

FIGURE 9.8 A scatter diagram

Number of errors per hour

Humidity

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Location C

1

2

3

4

Type of Error

B D A E

4 3 1 2

A

B C

D E

Check sheet: Type of error by location

Pareto diagram: A errors by location

Pareto chart: Type of error

Cause-and-e�ect diagram: A errors

A

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obtained by asking who, what, where, when, why, and how questions about factors that appear to be the most likely sources of problems.

Run Charts. A run chart  can be used to track the values of a variable over time. This can aid in identifying trends or other patterns that may be occurring. Figure 9.11provides an example of a run chart showing a decreasing trend in accident frequency over time. Important advantages of run charts are ease of construction and ease of interpretation.

Illustrations of the Use of Graphical Tools This section presents some illustrations of the use of graphical tools in process or product improvement. Figure 9.12 begins with a check sheet that can be used to develop a Pareto chart of the types of errors found. That leads to a more focused analysis of the most frequently occurring type of error using a cause-and-effect diagram. Additional cause-and-effect dia- grams, such as errors by location, might also be used.

Run chart Tool for tracking results over a period of time.

FIGURE 9.12 Employing graphical tools in problem solving

FIGURE 9.11 A run chart shows performance over time

2

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov.

1

Average number of accidents per week

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100% Before

100%

After

Improvement

Additional improvements made to the process

UCL

LCL

UCL = Upper Control Limit LCL = Lower Control Limit

UCL

LCL

UCL

LCL

Process centered and stable

Process not centered and not stable

May 3 May 15

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Figure 9.13 shows how Pareto charts measure the amount of improvement achieved in a before-and-after scenario of errors.

Figure 9.14 illustrates how control charts track two phases of improvement in a process that was initially out of control.

Methods for Generating Ideas Some additional tools that are useful for problem solving and/or for process improvement are brainstorming, quality circles, and benchmarking.

Brainstorming. Brainstorming is a technique in which a group of people share thoughts and ideas on problems in a relaxed atmosphere that encourages unrestrained collective think- ing. The goal is to generate a free flow of ideas on identifying problems, and finding causes, solutions, and ways to implement solutions. In successful brainstorming, criticism is absent, no single member is allowed to dominate sessions, and all ideas are welcomed. Structured brainstorming is an approach to assure that everyone participates.

Quality Circles. One way companies have tapped employees for ideas concerning quality improvement is through quality circles. The circles comprise a number of workers who get together periodically to discuss ways of improving products and processes. Not only are quality circles a valuable source of worker input, they also can motivate workers, if handled properly, by demonstrating management interest in worker ideas. Quality circles are usually less struc- tured and more informal than teams involved in continuous improvement, but in some orga- nizations quality circles have evolved into continuous improvement teams. Perhaps a major distinction between quality circles and teams is the amount of authority given to the teams.

Brainstorming Technique for generating a free flow of ideas in a group of people.

Quality circles Groups of workers who meet to discuss ways of improving products or processes.

FIGURE 9.13 Comparison of before and after using Pareto charts

FIGURE 9.14 Using a control chart to track improvements

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Typically, quality circles have had very little authority to implement any but minor changes; continuous improvement teams are sometimes given a great deal of authority. Consequently, continuous improvement teams have the added motivation generated by empowerment.

Benchmarking. Benchmarking is an approach that can inject new energy into improve- ment efforts. Summarized in Table 9.9, benchmarking is the process of measuring an organi- zation’s performance on a key customer requirement against the best in the industry, or against the best in any industry. Its purpose is to establish a standard against which performance is judged, and to identify a model for learning how to improve. A benchmark demonstrates the degree to which customers of other organizations are satisfied. Once a benchmark has been identified, the goal is to meet or exceed that standard through improvements in appropriate processes. The benchmarking process usually involves these steps:

1. Identify a critical process that needs improvement (e.g., order entry, distribution, service after sale).

2. Identify an organization that excels in the process, preferably the best. 3. Contact the benchmark organization, visit it, and study the benchmark activity. 4. Analyze the data. 5. Improve the critical process at your own organization.

Selecting an industry leader provides insight into what competitors are doing; but competi- tors may be reluctant to share this information. Several organizations are responding to this difficulty by conducting benchmarking studies and providing that information to other orga- nizations without revealing the sources of the data.

Selecting organizations that are world leaders in different industries is another alterna- tive. For example, the Xerox Corporation uses many benchmarks: For employee involvement, Procter & Gamble; for quality process, Florida Power and Light and Toyota; for high-volume production, Canon; for billing collection, American Express; for research and development, AT&T and Hewlett-Packard; for distribution, L.L. Bean and Hershey Foods; and for daily scheduling, Cummins Engine.

Benchmarking Process of measuring performance against the best in the same or another industry.

1. What organizations do it the best? 2. How do they do it? 3. How do we do it now? 4. How can we change to match or exceed the best?

TABLE 9.9 The benchmarking approach

© Ryan Anson/Bloomberg via Getty

Hewlett-Packard (HP), a world leader in research and development, created the TouchSmart PC. Joint research with universities, customers, and partners meets the scientific and business objectives of HP. This model is a benchmark for other companies.

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More and more people are using the Internet. And when these peo- ple want information about a company’s products or services, they often go to the company’s website. In a study of the home pages of Fortune 500 companies, 13 factors were deemed critical to quality. Those factors, and the survey results, are shown as follows.

1. Use of meta tags (e.g., keywords used by search engines): yes, 70%; no, 30%

2. Meaningful home page title: yes, 97%; no, 3% 3. Unique domain name: yes, 91%; no, 9% 4. Search engine site registration: 97% (average) 5. Server reliability: 99% (average) 6. Average speed of loading (seconds): 28k, 19.3; 56k, 10.9; T1,

2.6 sec. 7. Average number of bad links: .40 8. Average number of spelling errors: .16

READING BENCHMARKING CORPORATE WEBSITES OF FORTUNE 500 COMPANIES

9. Visibility of contact information: yes, 74%; no, 26% 10. Indication of last update date: yes, 17%; no, 83% 11. A privacy policy: yes, 53%; no, 47% 12. Presence of a search engine: yes, 59%; no, 41% 13. Translation to multiple languages: yes, 11%; no, 89%

The corporations are doing well on most factors, but they need improvement on the last five.

The list is a handy reference other organizations can use to benchmark their existing home pages to see where improvements are needed or to develop effective home pages.

Question Give one reason for the importance of each factor.

Source: Based on Nabil Tamimi, Murli Rajan, and Rose Sebastianelli, “Benchmark- ing the Home Pages of ‘Fortune 500’ Companies.” Reprinted with permission from Quality Progress © 2000 American Society for Quality. No further distribution allowed without permission.

9.11 OPERATIONS STRATEGY

All customers are concerned with the quality of goods or services they receive. For this rea- son alone, business organizations have a vital, strategic interest in achieving and maintaining high quality standards. Moreover, there is a positive link between quality and productivity, giving an additional incentive for achieving high quality and being able to present that image to current and potential customers.

The best business organizations view quality as a never-ending journey. That is, they strive for continual improvement with the attitude that no matter how good quality is, it can always be improved, and there are benefits for doing so.

In order for total quality management to be successful, it is essential that a majority of those in an organization buy in to the idea. Otherwise, there is a risk that a significant portion of the benefits of the approach will not be realized. Therefore, it is important to give this suf- ficient attention, and to confirm that concordance exists before plunging ahead. A key aspect of this is a top-down approach: Top management needs to be visibly involved and needs to be supportive, both financially and emotionally. Also important is education of managers and workers in the concepts, tools, and procedures of quality. Again, if education is incomplete, there is the risk that TQM will not produce the desired benefits.

And here’s a note of caution: Although customer retention rates can have a dramatic impact on profitability, customer satisfaction does not always guarantee customer loyalty. Conse- quently, organizations may need to develop a retention strategy to deal with this possibility.

It is not enough for an organization to incorporate quality into its operations; the entire sup- ply chain has to be involved. Problems such as defects in purchased parts, long lead times, and late or missed deliveries of goods or services all negatively impact an organization’s ability to satisfy its customers. So it is essential to incorporate quality throughout the supply chain.

This chapter presents philosophies and tools that can be used to achieve high quality and continually improve quality. Quality is the culmination of efforts of the entire organization and its supply chain. It begins with careful assessment of what the customers want, then translating this information into technical specifications to which goods or services must conform. The specifications guide product and service design, process design, production of goods and delivery of services, and service after the sale or delivery.

SUMMARY

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The consequences of poor quality include loss of market share, liability claims, a decrease in produc- tivity, and an increase in costs. Quality costs include costs related to prevention, appraisal, and failure. Determinants of quality are design, conformance to design, ease of use, and service after delivery.

Modern quality management is directed at preventing mistakes rather than finding them after they occur and reducing process output variation. Currently, the business community shows widespread interest in improving quality and competitiveness.

The chapter includes a description of the key contributors to quality management, and it outlines the ISO 9000, ISO 14000, and ISO 24700 international quality standards.

Three awards of distinction—the Baldrige Award, the European Quality Award, and the Deming Prize—are given annually to organizations that have shown great achievement in quality management.

Total quality management is a never-ending pursuit of quality that involves everyone in an organiza- tion. The driving force is customer satisfaction; a key philosophy is continuous improvement. Train- ing of managers and workers in quality concepts, tools, and procedures is an important aspect of the approach. Teams are an integral part of TQM.

Two major aspects of the TQM approach are problem solving and process improvement. Six-Sigma programs are a form of TQM. They emphasize the use of statistical and management science tools on selected projects to achieve business results.

1. Price and quality are the two primary considerations in every buying transaction, so quality is extremely important.

2. Quality gurus have made important contributions to the way business organizations view quality and achieve quality.

3. Quality certification and quality awards are important because they can provide some degree of assurance to customers about quality.

4. Many simple-to-use tools are available for problem solving and process improvement.

KEY POINTS

appraisal costs 384 Baldrige Award 387 benchmarking 405 brainstorming 404 cause-and-effect (fishbone)

diagram 402 check sheet 398 continuous improvement 391 control chart 402 Deming Prize 376 European Quality Award 387 external failures 385 fail-safing 391

failure costs 385 flowchart 398 histogram 398 internal failures 385 ISO 9000 388 ISO 14000 388 ISO 24700 388 kaizen 391 Pareto analysis 398 plan-do-study-act (PDSA)

cycle 394 prevention costs 385 process improvement 394

quality 373 quality at the source 392 quality circles 404 quality of conformance 381 quality of design 381 return on quality 385 run chart 403 scatter diagram 401 Six Sigma 396 total quality management

(TQM) 390

KEY TERMS

The county sheriff’s department handed out the following tickets on a summer weekend. Make a check sheet and a Pareto diagram for the types of infractions.

Ticket Number Infraction

1 Excessive speed

2 Expired inspection

3 Improper turn

4 Excessive speed

5 Parking violation

6 Parking violation

7 Excessive speed

Problem

SOLVED PROBLEM

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Ticket Number Infraction

8 Parking violation

9 Improper turn

10 Parking violation

11 Expired inspection

12 Parking violation

13 Improper turn

14 Parking violation

15 Excessive speed

16 Parking violation

17 Parking violation

18 Parking violation

19 Excessive speed

20 Parking violation

Solution Check sheet (list the types of infractions, tally, summarize frequencies):

Infraction Tally Frequency

Excessive speed //// 5

Expired inspection // 2

Improper turn /// 3

Parking violation //// //// 10

Pareto diagram (arrange infractions from highest frequency to lowest):

2

4

6

8

10

Parking violation

Excessive speed

Improper turn

Expired inspection

1. List and briefly explain: a. The dimensions of service quality b. The determinants of quality

2. Define the terms quality of design and quality of conformance. 3. What are some possible consequences of poor quality? 4. Use the dimensions of quality to describe typical characteristics of these products and services:

a. A television set b. A restaurant meal (product) c. A restaurant meal (service) d. Painting a house e. Surgery and postsurgery care

5. Many product reviews are available on the Internet. Two examples are reviews on electronics prod- ucts such as DVD players and high-definition televisions. There are often both positive and nega- tive reviews. a. Do such reviews (positive and negative) influence your purchasing decisions? Why or why not? b. Why do you suppose consumers take the time and effort to write such reviews? c. There is often a feedback button asking if you found the review helpful. Do you usually

respond? Why or why not? 6. Describe the quality–ethics connection. 7. Select one of the quality gurus and briefly describe his major contributions to quality management.

DISCUSSION AND REVIEW QUESTIONS

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8. a. What is ISO 9000, and why is it important for global businesses to have ISO 9000 certification? b. Compare the Baldrige Award and ISO certification. If an organization were going to seek both,

which one should it seek first? Why? 9. Briefly explain how a company can achieve lower production costs and increase productivity by

improving the quality of its products or services. 10. What are the key elements of the TQM approach? What is the driving force behind TQM? 11. Briefly describe each of the seven quality tools. 12. Briefly define or explain each of these tools: a. Brainstorming b. Benchmarking c. Run charts 13. Explain the plan-do-study-act cycle. 14. List the steps of problem solving. 15. Select four tools and describe how they could be used in problem solving. 16. List the steps of process improvement. 17. Select four tools and describe how they could be used for process improvement.

1. What trade-offs are involved in deciding on whether to offer a product or service guarantee? 2. Who needs to be involved in setting priorities for quality improvement? 3. Name several ways that technology has had an impact on quality.

TAKING STOCK

CRITICAL THINKING EXERCISES

1. A computer repair shop had received a number of complaints on the length of time it took to make repairs. The manager responded by increasing the repair staff by 10 percent. Complaints on repair time quickly decreased, but then complaints on the cost of repairs suddenly increased. Oddly enough, when repair costs were analyzed, the manager found that the average cost of repair had actually decreased relative to what it was before the increase in staff. What are some possible explanations for the complaints, and what actions might the manager contemplate?

2. As a manager, how would you deal with the possibility that customer satisfaction does not always lead to customer retention?

3. What quality-related trade-offs might there be between having a single large, centralized produce- processing facility and having many small, decentralized produce-processing facilities?

4. Give three examples of what would be considered unethical behavior involving management of quality, and state which ethical principle (see Chapter 1) is violated.

PROBLEMS 1. Make a check sheet and then a Pareto diagram for the following car repair shop data.

Ticket No. Work Ticket No. Work Ticket No. Work

1 Tires 11 Brakes 21 Lube & oil

2 Lube & oil 12 Lube & oil 22 Brakes

3 Tires 13 Battery 23 Transmission

4 Battery 14 Lube & oil 24 Brakes

5 Lube & oil 15 Lube & oil 25 Lube & oil

6 Lube & oil 16 Tires 26 Battery

7 Lube & oil 17 Lube & oil 27 Lube & oil

8 Brakes 18 Brakes 28 Battery

9 Lube & oil 19 Tires 29 Brakes

10 Tires 20 Brakes 30 Tires

2. An air-conditioning repair department manager has compiled data on the primary reason for 41 service calls for the previous week, as shown in the table. Using the data, make a check sheet for the problem types for each customer type, and then construct a Pareto diagram for each type of customer.

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Job Number

Problem/ Customer Type

Job Number

Problem/ Customer Type

Job Number

Problem/ Customer Type

301 F/R 315 F/C 329 O/C

302 O/R 316 O/C 330 N/R

303 N/C 317 W/C 331 N/R

304 N/R 318 N/R 332 W/R

305 W/C 319 O/C 333 O/R

306 N/R 320 F/R 334 O/C

307 F/R 321 F/R 335 N/R

308 N/C 322 O/R 336 W/R

309 W/R 323 F/R 337 O/C

310 N/R 324 N/C 338 O/R

311 N/R 325 F/R 339 F/R

312 F/C 326 O/R 340 N/R

313 N/R 327 W/C 341 O/C

314 W/C 328 O/C

Key Problem type: N = Noisy F    = Equipment failure  W  = Runs warm O = Odor Customer type: C = Commercial customer R = Residential customer

3. Prepare a run chart similar to Figure 9.11 for the occurrences of defective computer monitors based on the following data, which an analyst obtained from the process for making the monitors. Workers are given a 15-minute break at 10:15 a.m. and 3:15 p.m., and a lunch break at noon. What can you conclude?

Interval Start Time

Number of Defects

Interval Start Time

Number of Defects

Interval Start Time

Number of Defects

8:00 1 10:45 0 2:15 0

8:15 0 11:00 0 2:30 2

8:30 0 11:15 0 2:45 2

8:45 1 11:30 1 3:00 3

9:00 0 11:45 3 3:30 0

9:15 1 1:00 1 3:45 1

9:30 1 1:15 0 4:00 0

9:45 2 1:30 0 4:15 0

10:00 3 1:45 1 4:30 1

10:30 1 2:00 1 4:45 3

4. Prepare a run diagram for this emergency call data. Use five-minute intervals (i.e., count the calls received in each five-minute interval. Use intervals of 0 to 4, 5 to 9, etc.). Note: Two or more calls may occur in the same minute; there were three operators on duty this night. What can you con- clude from the run chart?

Call Time Call Time Call Time Call Time

1 1:03 12 1:36 23 1:56 34 2:08

2 1:06 13 1:39 24 2:00 35 2:11

3 1:09 14 1:42 25 2:00 36 2:12

4 1:11 15 1:43 26 2:01 37 2:12

5 1:12 16 1:44 27 2:02 38 2:13

6 1:17 17 1:47 28 2:03 39 2:14

7 1:21 18 1:48 29 2:03 40 2:14

8 1:27 19 1:50 30 2:04 41 2:16

9 1:28 20 1:52 31 2:06 42 2:19

10 1:29 21 1:53 32 2:07

11 1:31 22 1:56 33 2:08

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CASE CHICK-N-GRAVY DINNER LINE

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5. Suppose that a table lamp fails to light when turned on. Prepare a simple cause-and-effect diagram to analyze possible causes.

6. Prepare a cause-and-effect diagram to analyze the possible causes of late delivery of parts ordered from a supplier.

7. Prepare a cause-and-effect diagram to analyze why a machine has produced a large run of defective parts. 8. Prepare a scatter diagram for each of these data sets and then express in words the apparent rela-

tionship between the two variables. Put the first variable on the horizontal axis and the second variable on the vertical axis.

a. Age 24 30 22 25 33 27 36 58 37 47 54 28 42 55

Absenteeism rate 6 5 7 6 4 5 4 1 3 2 2 5 3 1

b. Temperature (°F) 65 63 72 66 82 58 75 86 77 65 79 Error rate 1 2 0 0 3 3 1 5 2 1 3

9. Prepare a flowchart that describes going to the library to study for an exam. Your flowchart should include these items: finding a place at the library to study; checking to see if you have your book, paper, highlighter, and so forth; traveling to the library; and the possibility of moving to another location if the place you chose to study starts to get crowded.

10. College students trying to register for a course sometimes find that the course has been closed, or the sec- tion they want has been closed. Prepare a cause-and-effect diagram for this problem.

11. The county sheriff’s department responded to an unusually large number of vehicular accidents along a quarter-mile stretch of highway in recent months. Prepare a cause-and-effect diagram for this problem.

12. Suppose you are going to have a prescription filled at a local pharmacy. Referring to the dimensions of service quality for each dimension, give an example of how you would judge the quality of the service.

The operations manager of a firm that produces frozen dinners had received numerous complaints from supermarkets about the firm’s Chick-n-Gravy dinners. The manager then asked her assistant, Ann, to investigate the matter and to report her recommendations.

Ann’s first task was to determine what problems were generat- ing the complaints. The majority of complaints centered on five

defects: underfilled packages, a missing label, spills/mixed items, unacceptable taste, and improperly sealed packages.

Next, she took samples of dinners from the two production lines and examined each sample, making note of any defects that she found. A summary of those results is shown in the table.

The data resulted from inspecting approximately 800 frozen dinners. What should Ann recommend to the manager?

DEFECT OBSERVED

Date Time Line Underfilled Missing Label

Spill/ Mixed

Unacceptable Taste

Improperly Sealed

5/12 0900 1 ✓✓ ✓ ✓✓✓ 5/12 1330 2 ✓✓ ✓✓ 5/13 1000 2 ✓ ✓✓✓ 5/13 1345 1 ✓✓ ✓✓ 5/13 1530 2 ✓✓ ✓✓✓ ✓ 5/14 0830 1 ✓✓✓ ✓✓✓ 5/14 1100 2 ✓ ✓ ✓✓ 5/14 1400 1 ✓ ✓ 5/15 1030 1 ✓✓✓ ✓✓✓✓✓

(continued)

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CASE TIP TOP MARKETS

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DEFECT OBSERVED

Date Time Line Underfilled Missing Label

Spill/ Mixed

Unacceptable Taste

Improperly Sealed

5/15 1145 2 ✓ ✓✓ 5/15 1500 1 ✓ ✓ 5/16 0845 2 ✓✓ ✓✓ 5/16 1030 1 ✓✓✓ ✓ ✓✓✓ 5/16 1400 1

5/16 1545 2 ✓ ✓✓✓✓ ✓ ✓ ✓✓

(concluded)

Tip Top Markets is a regional chain of supermarkets located in the southeastern United States. Karen Martin, manager of one of the stores, was disturbed by the large number of complaints from customers at her store, particularly on Tuesdays, so she obtained complaint records from the store’s customer service desk for the last nine Tuesdays.

Assume you have been asked to help analyze the data and to make recommendations for improvement. Analyze the data using a check sheet, a Pareto diagram, and run charts. Then construct a

cause-and-effect diagram for the leading category on your Pareto diagram.

On July 15, changes were implemented to reduce out-of-stock complaints, improve store maintenance, and reduce checkout lines/pricing problems. Do the results of the last two weeks reflect improvement?

Based on your analysis, prepare a list of recommendations that will address customer complaints.

June 1

out of orange yogurt produce not fresh bread stale lemon yogurt past sell date checkout lines too long couldn’t find rice overcharged milk past sell date double charged stock clerk rude meat smelled strange cashier not friendly charged for item not purchased out of maple walnut ice cream couldn’t find the sponges something green in meat meat tasted strange didn’t like music store too cold checkout lines too slow

light out in parking lot

June 8

fish smelled funny undercharged out of diet bread out of roses dented can meat spoiled out of hamburger rolls overcharged on two items fish not fresh store too warm cashier not helpful out of ice meat tasted bad telephone out of order ATM ate card overcharged slippery floor rolls stale music too loud bread past sale date

June 15

wanted smaller size overcharged on special too cold in store couldn’t find aspirin out of Wheaties undercharged out of Minute Rice checkout lines too long cashier rude out of diet cola fish tasted fishy meat smelled bad ice cream thawed overcharged on eggs double charged on hard rolls bread not fresh long wait at checkout didn’t like music wrong price on item lost wallet overcharged overcharged on bread fish didn’t smell right

June 22

milk past sales date couldn’t find oatmeal store too warm out of Bounty paper towels foreign object in meat overcharged on orange juice store too cold lines too long at checkout eggs cracked couldn’t find shoelaces couldn’t find lard out of Smucker’s strawberry jam out of 42 oz. Tide out of Frosty Flakes cereal fish really bad out of Thomas’ English Muffins windows dirty

(continued)

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(concluded)

July 20

out of cucumbers out of Tip Top toilet paper

checkout lines too slow out of red peppers

found keys in parking lot out of Tip Top napkins

lost keys out of apricots

wrong price on sale item telephone out of order

overcharged on corn out of cocktail sauce

wrong price on baby food water on floor

out of 18 oz. Tide out of onions

out of Tip Top tissues out of squash

checkout lines too long out of iceberg lettuce

out of romaine lettuce out of Tip Top paper towels

July 13

wrong price on spaghetti undercharged

water on floor out of brown rice

store looked messy out of mushrooms

store too warm overcharged

checkout lines too long checkout wait too long

cashier not friendly shopping cart broken

out of Cheese Doodles couldn’t find aspirin

triple charged out of Tip Top lunch bags

out of Saran Wrap out of Tip Top straws

out of Dove Bars

July 6

out of straws store too warm

out of bird food price not as advertised

overcharged on butter need to open more checkouts

out of masking tape shopping carts hard to steer

stockboy was not helpful debris in aisles

lost child out of Drano

meat looked bad out of Chinese cabbage

overcharged on butter store too warm

out of Swiss chard floors dirty and sticky

too many people in store out of Diamond chopped walnuts

out of bubble bath

out of Dial soap

July 27

out of bananas wanted to know who won the lottery

reported accident in parking lot store too warm

wrong price on cranapple juice oatmeal spilled in bulk section

out of carrots telephone out of order

out of fresh figs out of Tip Top tissues

out of Tip Top napkins water on floor

out of Tip Top straws out of Tip Top paper towels

windows dirty out of Tip Top toilet paper

out of iceberg lettuce spaghetti sauce on floor

dislike store decorations

out of Tip Top lunch bags

out of Peter Pan crunchy peanut butter

out of vanilla soy milk

June 29

checkout line too long restroom not clean

out of Dove soap couldn’t find sponges

out of Bisquick checkout lines slow

eggs cracked out of 18 oz. Tide

store not clean out of Campbell’s turkey soup

store too cold out of pepperoni sticks

cashier too slow checkout lines too long

out of skim milk meat not fresh

charged wrong price overcharged on melon

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Besterfield, Dale H., Carol Besterfield-Micha, Glen Besterfield, and Mary Besterfield-Sacre. Total Quality Management, 3rd ed. Upper Saddle River, NJ: Prentice Hall, 2011.

Brassard, Michael, and Diane Ritter. The Memory Jogger II: A Pocket Guide of Tools for Continuous Improvement and Effective Planning. Methuen, MA: Goal/QPC, 1994.

Butman, John. Juran: A Lifetime of Influence. New York: John Wiley & Sons, 1997.

El-Haik, Basem, and David M. Roy. Service Design for Six Sigma: A Roadmap for Excellence. Hoboken, NJ: John Wiley and Sons, 2005.

Garvin, David A. Managing Quality. New York: Free Press, 1988.

Goetsch, David L., and Stanley B. Davis. Quality Man- agement for Organizational Excellence: Introduc- tion to Total Quality Management, 6th ed. Upper Saddle River, NJ: Prentice Hall, 2010.

SELECTED BIBLIOGRAPHY AND FURTHER READINGS

Gygi, Craig, Neil DeCarlo, and Bruce Williams. Six Sigma for Dummies, 2nd ed. Hoboken, NJ: John Wiley and Sons, 2012.

Scherkenbach, W. W. The Deming Route to Quality and Productivity: Roadmaps and Roadblocks. Rockville, MD: Mercury Press/Fairchild Publications, 1990.

Snee, Ronald D., and Roger W. Hoerl. Six Sigma beyond the Factory Floor: Deployment Strategies for Financial Services, Health Care, and the Rest of the Real Economy. Upper Saddle River, NJ: Pear- son/Prentice Hall, 2005.

Stevenson, William J. “Supercharging Your Pareto Analysis.” Quality Progress. October 2000, pp. 51–55.

Summers, Donna. Quality, 5th ed. Upper Saddle River, NJ: Prentice Hall, 2010.

Trusko, Brett, Carolyn Pexton, Jim Harrington, and Praveen Gupta. Improving Healthcare Quality and Cost with Six Sigma. FT Press, 2007.

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