Operation Mangament CH15

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© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publiclyaccessible website, in whole or in part.

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OM5 Chapter 15: Quality Management

Discussion Questions

1. Select two of Deming’s 14 Points and discuss the importance of them to operations

managers (as well as all managers) in today’s business environment.

Students can choose any one of them. Some of them that may be more pertinent toOM are:

Point 8: Dr ive Out F ear . Fear is manifested in many ways: fear of reprisal, fear offailure, fear of the unknown, fear of relinquishing control, and fear of change. Nosystem can work without the mutual respect of managers and workers. Workers areoften afraid to report problems because they might not meet their quotas, theirincentive pay might be reduced, or they might be blamed for them. Managers are alsoafraid to cooperate with other departments, because the other managers might receive

higher performance ratings and bonuses, or because they fear takeovers orreorganizations. Fear encourages short-term thinking. Performance metrics, especiallythose used in public and meetings, should focus on jobs, processes, systems, and notindividual performance and people. Fear is a cultural issue for all organizations.Creating a culture without fear is a slow process but can be destroyed in an instantwith a transition of leadership and a change in corporate policies. Therefore, today’smanagers need to continue to be sensitive to the impact that fear can have on theirorganizations.

Point 3: Understand I nspection Routine inspection acknowledges that defects are present, but does not add value to the product. Rather, it is rarely accurate, and

encourages the production of defective products by letting someone else catch and fixthe problem. The rework and disposition of defective material decreases productivityand increases costs. In service industries, rework cannot be performed; externalfailures are the most damaging to business. Deming encouraged workers to takeresponsibility for their work, rather than leave the problems for someone else downthe production line. While mass inspection to assure quality is not used as much todayas it has been in the past, few managers truly understand the concept of variation andhow it affects their processes and inspection practices. By understanding and seekingto reduce variation, managers can eliminate many sources of unnecessary inspection,thus reducing non-value-added costs associated with operations.

Point 4: Stop Making Decisions Purely on the Basis of Cost Purchasing departmentshave long been driven by cost minimization and competition among suppliers withoutregard for quality. Deming recognized that the direct costs associated with poorquality materials that arise during production or during warranty periods, as well asthe loss of customer goodwill, can far exceed the cost “savings” perceived by purchasing. Thus, purchasing must understand its role as a supplier to production and


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its impact on the system. Deming also urged businesses to establish long-termrelationships with fewer suppliers, leading to loyalty and opportunities for mutualimprovement. Management previously justified multiple suppliers for reasons such as providing protection against strikes or natural disasters, while ignoring “hidden” costssuch as increased travel to visit suppliers, loss of volume discounts, increased setup

charges resulting in higher unit costs, and increased inventory and administrativeexpense. Most importantly, constantly changing suppliers solely on the basis of priceincreases the variation in the material supplied to production, because each supplier’s process is different. In contrast, a reduced supply base decreases the variation cominginto the process, thus reducing scrap, rework, and the need for adjustment toaccommodate this variation. A long-term relationship strengthens the supplier-customer bond, allows the supplier to produce in greater quantity, improvescommunication with the customer, and therefore enhances opportunities for processimprovement. Suppliers know that only quality goods are acceptable if they want tomaintain a long-term relationship. Today’s emphasis on supply chain management(SCM) reflects the achievement of Point 4. SCM focuses heavily on a system’s view

of the supply chain with the objective of minimizing total supply chain costs anddeveloping stronger partnerships with suppliers.

Point 12: Remove Bar ri ers to Pr ide in Workmanship People on the factory floor andeven in management were often treated as, in Deming’s words, “a commodity.”Factory workers are given monotonous tasks, provided with inferior machines, tools,or materials, told to run defective items to meet sales pressures, and report tosupervisors who know little about the job. How can these individuals take pride intheir work? Deming believed that one of the biggest barriers to pride in workmanshipis performance appraisal. Performance appraisal destroys teamwork by promotingcompetition for limited resources, fosters mediocrity because objectives typically aredriven by numbers and what the boss wants rather than by quality, focuses on theshort term and discourages risk taking, and confounds the “people resources” withother resources. Although many companies will not eliminate performance appraisalscompletely, some have made substantial changes. Many now separate performanceappraisal from annual salary reviews, using appraisal to recognize accomplishment ofresults and the use of quality processes.

2. How do you think that quality management concepts can support sustainabilityefforts? Find some sources or examples to support your beliefs.

All quality management principles can support sustainability. For example, if we think interms of customers, then society is an important customer of organizations. Other principles,such as those described by the ISO 9000:2000 standards, are useful for sustainability efforts.For instance, we need a process and metrics (factual approach) to make good decisions;


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leadership must drive sustainability efforts; an organization’s workforce (people principle)need to be involved, and so on.

The International Organization for Standardization has developed a voluntary socialresponsibility standard, ISO 26000:2010 – Guidance on social responsibility. [ISO

26000:2010 Abstract, www.iso.org] The standard provides guidance on concepts, terms anddefinitions related to social responsibility; the background, trends and characteristics ofsocial responsibility; principles and practices relating to social responsibility; the coresubjects and issues of social responsibility; integrating, implementing and promoting sociallyresponsible behavior throughout the organization and, through its policies and practices,within its sphere of influence; identifying and engaging with stakeholders; andcommunicating commitments, performance and other information related to socialresponsibility.

CSR has been prominent in the Baldrige Criteria since its inception. [Note: A review ofmanagement theories and their relationships with CSR and the Baldrige Criteria can be found

in Jessica Foote, Nolan Gaffney, and James R. Evans, “Corporate Social Responsibility:Implications for Performance Excellence,” Total Quality Management & BusinessExcellence, 21, 8, August 2010, 799-812.] In the initial 1988 Criteria, public responsibilitywas focused narrowly on mechanisms used for external communication of informationconcerning corporate support of quality assurance or improvement activities outside thecompany. Over the next several years, this item was expanded to include how the companyextended its quality leadership to the external community and integrated its responsibilities tothe public for health, safety, environmental protection, and ethical business practice into itsquality policies and activities. This included how the company promoted quality awarenessand sharing with external groups; how the company encouraged employee leadership andinvolvement in quality activities of external organizations; how the company defined and setquality improvement goals, indicators used to monitor quality, and progress reviews.

3. What types of defects or errors might the following organizations measure andimprove as part of a quality or Six Sigma initiative?

a. a department store such as Wal-Mart or Macy’sCustomer complaints by category (checkout, gift wrapping, tailoring, retail clerks,etc.), long wait times, mispriced labels, number of non-scanable items, etc.

b. Walt Disney World or a regional amusement park such as Six FlagsCustomer complaints by category (ride type, restrooms, food service, tour guides, parking, etc.), long wait times, mispriced store items, customer satisfaction scores by park ride or area, number of stock outs baby carriages, etc.

c. your college or university

http://www.iso.org/http://www.iso.org/


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Customer complaints by category (advising, job placement, student healthservices, college, course, specific faculty, parking, etc.), long wait times, studentsatisfaction scores, courses closed out, course scheduling conflicts, etc.

4. Explain how each of the 7 QC Tools would be used in the five phases of the Six

Sigma DMAIC problem solving approach. For example, in which phase(s) (Define,Measure, Analyze, Improve, or Control) would you expect to use flowcharts, checksheets, and so on?

Define: Flowcharts for defining a process; Pareto analysis for identifying significant problems

Measure: Check sheets for collecting data; histograms for understanding data

Analyze: Flowcharts for more detailed process mapping, cause-and-effect diagramsfor analyzing possible causes of problems; Pareto diagrams for drilling down to key problems

Improve: Scatter diagrams to verify whether improvements will impact the problem

Control: Run and control charts for monitoring how well improvements are performing

5. Which of the Seven QC Tools would be most useful in addressing each of thefollowing situations? Explain your reasoning.

a. A copy machine suffers frequent paper jams and users are often confused as to how

to fix the problem.

Cause and effect diagram to help diagnose the source of the paper jams. (Comment:The focus of this question is to trigger a class discussion of when and where to usethe seven QC tools, and depending on student perception(s) there are several toolsthat could possibly be used in each situation so take a broad perspective on thisquestion.)

b. The publication team for an engineering department wants to improve the

accuracy of its user documentation but is unsure of why documents are not error-free.

Flowcharts to understand the process of creating documents; check sheets and causeand effect diagrams would also be useful to determine the type of errors and theirsources.

c. A bank needs to determine how many teller positions, drive-through stations, and

ATM machines it needs for a new branch bank in a certain busy location. Its

information includes the average numbers and types of customers served by other

similar facilities, as well as demographic information to suggest the level of customertraffic in the new facility.


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Histograms would help to summarize and sort out the data. Scatter diagrams mightalso help to examine relationships between the variables.

d. A contracting agency wants to investigate why they had so many changes in theircontracts. They believe that the number of changes may be related to the dollar value

of the original contract or the days between the request for proposal and the contractaward.

Scatter diagrams to investigate the relationship between number of changes and theother variables.

e. A travel agency is interested in gaining a better understanding of how call volume

varies by time of year in order to adjust staffing schedules.

Run charts would show the call volume over time to show patterns and trends.

Problems and Activities

Note: an asterisk denotes problems for which an Excel spreadsheet template on theCourseMate Web site may be used.

1. Find the websites for the W. Edwards Deming Institute, the Juran Institute, andPhilip Crosby Associates. What services do they offer? How do these organizationsmaintain the philosophies and legacies of these quality leaders?

The websites are: www.deming.org; www.juran.com; and www.philipcrosby.com. Students should explore them to identify consulting and training, seminars offered, publications, FAQs, and so on. For example, if you Google Mr. Deming you willfind over 2 million hits. His teachings are outlined on his web site.

The Deming System of Profound KnowledgeThe following is an excerpt from Chapter 4 of The New Economics, second edition by W. Edwards Deming:

The prevailing style of management must undergo transformation. A system can notunderstand itself. The transformation requires a view from outside. The aim of thischapter is to provide an outside view-a lens-that I call a system of profoundknowledge. It provides a map of theory by which to understand the organizationsthat we work in.The first step is transformation of the individual. This transformation isdiscontinuous. It comes from understanding of the system of profound knowledge.The individual, transformed, will perceive new meaning to his life, to events, tonumbers, to interactions between people.

http://www.deming.org/http://www.juran.com/http://www.philipcrosby.com/http://www.philipcrosby.com/http://www.juran.com/http://www.deming.org/


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Once the individual understands the system of profound knowledge, he will apply its principles in every kind of relationship with other people. He will have a basis for judgment of his own decisions and for transformation of the organizations that he belongs to. The individual, once transformed, will:

Set an example Be a good listener, but will not compromise

Continually teach other people Help people to pull away from their current practice and beliefs and move

into the new philosophy without a feeling of guilt about the past

The layout of profound knowledge appears here in four parts, all related to eachother:

Appreciation for a system Knowledge about variation Theory of knowledge

Psychology

One need not be eminent in any part nor in all four parts in order to understand it andto apply it. The 14 points for management (Out of the Crisis, Ch. 2) in industry,education, and government follow naturally as application of this outside knowledge,for transformation from the present style of Western management to one ofoptimization.

2. Identify an organization that has achieved ISO 9000 certification and write a short paper (1 page maximum) that summarizes the benefits and results that theorganization has achieved using ISO 9000. See if you can find a service

organization rather than a traditional manufacturing company.

A Google search of “ISO 9000 companies” reveals about 700,000 hits. Students willfind firms that achieved good results with ISO certification such as SpecialtiesGraphic Finishers LTD below:

One company (http://www.specialtiesgraphics.com/page.php?id=98), SpecialtiesGraphic Finishers LTD, Toronto, Ontario states the following in its ISO introduction.

WHAT IS ISO 9000?The ISO 9000 philosophy can be summarized in four steps:

1. say what you do,2. do what you say,3. be able to prove it, and4. improve it.

http://www.specialtiesgraphics.com/page.php?id=98http://www.specialtiesgraphics.com/page.php?id=98http://www.specialtiesgraphics.com/page.php?id=98http://www.specialtiesgraphics.com/page.php?id=98


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ISO 9000 is a rigorous, thorough system of quality assurance standards for bothmanufacturing and service organizations. These standards were first widely adopted by businesses in the European Economic Community and are now being acceptedand implemented by many North American companies. Intended to help businessesimprove internal processes through the implementation of effective quality

management systems, these standards also give customers a method of comparingcompeting vendors. For some companies, ISO 9000 has also served as a usefulfoundation for Total Quality Management (TQM) and other quality improvement programs. At the cornerstone of ISO 9000 is a comprehensive audit anddocumentation method that covers objectives, production processes, quality policies, job descriptions, organizational charts, customer requirements, quality control procedures, and problem-solving tools. Ideally, all this documentation results inclearly stated quality control instructions that are implemented company-wide.Documentation can take the form of manuals, flow charts, and diagrams.

ISO 9000 BENEFITS

Companies that adopt ISO 9000 standards offer their customers a reliable, widelyaccepted yardstick against which to measure performance or quality. Internally, theformalization and standardization of processes helps employees become more productive.

As companies clearly document their operating procedures and methodically auditthem, the likelihood of employee ambiguity and misunderstanding dramaticallydiminishes. This helps decrease frustration and allows people to do their jobs moreeffectively and efficiently. Some large printers have hoisted the ISO 9000 banner because their customers require suppliers to be ISO 9000 certified.

As more companies enter international markets, certification, or lack thereof, will become an issue. Even if a printer doesn't have any foreign clients, its customersmay, and this exerts pressure on printers to become ISO 9000 certified. The bestreason why printers should consider adopting ISO 9000 standards is to meetcustomer expectations, improve manufacturing processes, reduce waste, and increase profit margins.

Also, certification provides a competitive advantage when seeking new business andforming strategic partnerships. As an added bonus, companies discover that ISO9000 certification helps their marketing efforts.

A Different Vantage Point ISO 9000, however, has its critics because it focuses on processes and does notguarantee the quality of the finished product. Detractors have suggested that qualitywould be measured better through actual product improvements rather than detaileddocumentation. One author has pointed out that it's possible to comply with ISO9000 standards and still have inferior products. While this may be possible, it doesn't


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mean there's anything wrong with ISO 9000 itself, rather the system was nevermeant to be the answer to all quality issues and business concerns. ISO 9000's true benefit is that it provides a framework for a comprehensive, long-term qualityimprovement program.

WHY DID SPECIALTIES GET ISO 9000 CERTIFIED?As a post press finishing company, Specialties is at the end of the production chain.The company must respond to the quality expectations, not only of its customers, butalso to its customers' customers. To maintain competitive selling proposition,Specialties felt it must meet ongoing market demands for shorter production cycles,seamless client vendor relationships, world-class service, and stringent qualitycontrol. The certification process has forced formalization of systems and operating procedures that has improved the quality of services while achieving better productivity. Specialties chose ISO 9000 over competing programs because ISO9000 focuses on eliminating redundancy and inefficient processes that lead to production mistakes and inconsistencies. In general, the errors of the company's past

lay not with its employees, but with the previous production system. For example,some procedures were never carried out the same way twice, nor were they executedin the most efficient manner. The lack of standardized methods left the companyvulnerable to errors, oversights, and miscommunication. The ISO 9000 processforced consistent procedural standards, which in turn replaced improvisation withclarity and order. Specialties' system today emphasizes a preventive, rather than areactive, approach to solving potential production problems.

CUSTOMER BENEFITSISO 9000 standards have lead to operational consistency and numerous customer benefits. In the graphic arts industry, consistency is a major component of quality.Since Specialties became ISO 9000 certified, many customers have commented onthe company's better quality, improved communication, excellent service, and problem resolution skills. This last result is striking because Specialties employeeshaven't changed – just the system.

THE FINAL WORD No matter how talented a company's workforce is, without standardized proceduresand continuous improvement, even the best people cannot deliver consistentlyoutstanding results. ISO 9000 doesn't claim to point companies in the right direction,rather it makes day-to-day operations go more smoothly and efficiently.

3. Identify an organization that uses the Six Sigma DMAIC improvement approach.Describe (maximum of two pages) some of the ways that this organization hasapplied DMAIC and the results they have achieved.

Many sources provide case studies about Six Sigma. Some include ASQ(www.asq.org), Quality Digest magazine (www.qualitydigest.org), and various

http://www.asq.org/http://www.qualitydigest.org/http://www.qualitydigest.org/http://www.asq.org/


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consulting organizations such as iSixSigma (www.isixsigma.com). Simple websearches will also uncover numerous sources of information.

4. Find two examples similar to the Intel box in this chapter that describe the economicconsequences of poor quality.

A Google search on “economic impact of poor quality” results in over 17 million hits.The Wikipedia web site (http://en.wikipedia.org/wiki/Cost_of_poor_quality ) provides some interesting information.

5.* A bank has set a standard that mortgage applications be processed within a certainnumber of days of filing. If, out of a sample of 2,500 applications, 85 fail to meet thisrequirement, what is the epmo metric and what sigma level does it correspond to?

85 errors per 2,500 opportunities is equivalent to 34,000 epmo. This is a sigma levelof 3.32, using the formula NORMSINV (1 – 85/2,500) + 1.5 = 1.82 +1.5 = 3.32, far

less than a six-sigma level. It is up to the instructor whether to use and/or explain theuse of the Excel function and logic to compute the sigma level. One could also arguethat a 3-sigma level for mortgages is adequate because personal safety is not an issuewhile fixing your vehicles brakes at a 3-sigma level is not adequate.

The Excel template Six Sigma can be used to verify these calculations.

6.* Over the last year, 1,800 injections were administered at a clinic. Quality ismeasured by the proper amount of dosage as well as the correct drug. In sixinstances, the incorrect amount was given, and in three cases, the wrong drug wasgiven. What is the epmo metric and what sigma level does it correspond to?

Because each injection has two different opportunities for error, there are a total of2*1,800 = 3,600 opportunities for error. Thus, epmo = (9/3600)(1,000,000)opportunities for error = 2,500. Many students will not see the 2 opportunities forerror and use the wrong denominator.

http://www.isixsigma.com/http://www.isixsigma.com/


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It is up to the instructor whether to use and/or explain the use of the Excel functionand logic to compute the sigma level. Here a 4- or 5-sigma level of performance isexpected given the potential cost of poor quality (failure).

7. Provide some specific examples of quality costs in a fast-food operation or in theoperation of your college or university. Classify the costs into the four majorcategories described in the chapter.

Quality costs can be organized into four major categories: prevention costs, appraisalcosts, internal-failure costs, and external-failure costs. Prevention costs are thoseexpended to keep nonconforming goods and services from being made and reachingthe customer. Appraisal costs are those expended on ascertaining quality levels

through measurement and analysis of data to detect and correct problems. Internal-

fai lu re costs are costs incurred as a result of unsatisfactory quality that is found

before the delivery of a good or service to the customer. External-f ailu re costs areincurred after poor-quality goods or services reach the customer. Students should provide examples similar to those in the text but for an organization they may bemore familiar with, namely a fast food operation or the university. Some examplesmight be:

Prevention: training fast food workers and college advisors; setting up and updatinginformation systemsAppraisal: double-checking food orders or student course choices to ensure theymeet the requirements for a degreeInternal-failure: discarding a food order that is prepared wrong before handing itover to the customer; wrong set up of computer lab equipment prior to the school yeardiscovered during testingExternal failure: re-doing a food order if the wrong item was given to a customer;recording the wrong grade in a final grade list

8. The following list gives the number of defects found in 30 samples of 100 electronicassemblies taken on a daily basis over one month. Plot these data on a run chart,computing the average value (center line). How do you interpret the chart?


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1 6 5 5 4 3 2 2 4 62 1 3 1 4 5 4 1 6 1512 6 3 4 3 3 2 5 7 4

The average is 4.3. The chart shows an unusual spike at observations 21 and 22,

which may be indicative of a special cause, even without calculating control limits.(You may want to explain to students that the 4.3 defects is an estimate of processcapability. That is, on average this process produces 4.3 defects per day. Continuousimprovement could set reduction targets like 3.5 next year, 3.0 the year after, etc.)

9. Develop cause-and-effect diagrams for any one of the following problems:a. poor exam grade b. no job offersc. too many speeding ticketsd. late for work or school

There is no one correct answer for these diagrams but you will find some studentdiagrams to be quite good. This assignment allows students to apply qualityimprovement tools to personal situations that they know about. Emphasize and checkthat each major cause-and-effect branch should have a major category such as labor,equipment, process/procedures, technology, materials – each with several possible

sub-root causes.

10. Find two examples (different from the ones in this chapter) of how check sheets have been applied in an organization.

A Google search results in about 79,000 hits on the term “check sheets.” A quickreview of some of these hits include the following using check sheets: universities(advising, graduation, curriculum, science experiments, etc.) and manufacturing

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(sales orders, quality control, lean manufacturing, accounting audits, start-up a production process, safety audits, and so on).

11.* Analysis of customer complaints at an e-commerce retailer revealed the following:

Billing errors 537Shipping errors 2,460Electronic charge errors 650Shipping delays 5,372Packing errors 752

Construct a Pareto diagram and discuss the conclusions you may draw from it.Using the Excel template Pareto, we obtain:

We see that shipping delays (55% of errors) and shipping errors (25%) accountfor the majority of customer complaints; these should be the focus ofimprovement activities. If you fix these two root causes you solve 80% ofcustomer complaints.

12.* Classify the following cost elements into the appropriate cost of quality

categories, prepare a Pareto chart for the categories, interpret the results, and provide recommendations.

Cost Element Amount

Customer complaint remakes $ 28,000


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Printing plate revisions 28,000Quality improvement projects 14,000Gauging 100,000Other waste 39,000Correction of typographical errors 210,000

Proofreading450,000Quality planning 57,000Press downtime 285,000Bindery waste 53,000Checking and inspection 42,000

Cost classification:

Customer complaint remakes EXTERNAL FAILURE $ 28,000Printing plate revisions INTERNAL FAILURE 28,000Quality improvement projects PREVENTION 14,000

Gauging APPRAISAL 100,000Other waste INTERNAL FAILURE 39,000Correction of typographical errors INTERNAL FAILURE 210,000Proofreading APPRAISAL 450,000Quality planning PREVENTION 57,000Press downtime INTERNAL FAILURE 285,000Bindery waste INTERNAL FAILURE 53,000Checking and inspection APPRAISAL 42,000

Total Prevention costs: $71,000Total Appraisal costs: $592,000Total Internal failure costs: $615,000Total External failure costs: $28,000


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Although external failure costs are relatively small, the company is incurringextensive costs for appraisal and internal failure. Prevention costs are low,suggesting that more effort be spent on preventing defects and waste.

13.* The following cost of quality data were collected at the installment loandepartment of the Kenney Bank. Classify these data into the appropriate cost ofquality categories and analyze the results. What suggestions would you make tomanagement?

Loan Processing1. Run credit checks: $2,675.012. Review documents: $3,000.633. Make document corrections; gather additional information: $1,032.654. Prepare tickler file; review and follow up on titles,

insurance, second meetings: $155.755. Review all output: $2,243.626. Correct rejects and incorrect output: $425.007. Reconcile incomplete collateral report: $78.348. Handle dealer problem calls; address associate problems;

research and communicate information: $2,500.009. Compensate for system downtime: $519.0110. Conduct training: $1,500.00

Loan Payment

1. Receive, inspect, and process payments: $800.00


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2. Respond to inquiries when no coupon is presented with payments:$829.65

Loan Payoff1. Receive, inspect, and process payoff and release documents: $224.99

2. Research payoff problems: $15.35

Classification:Credit checks Appraisal $2,675.01Review documents Appraisal $3,000.63Make corrections Internal failure $1,032.65Prepare tickler file Appraisal $155.75Review output Appraisal $2,243.62Correct rejects Internal failure $425.00Reconcile incomplete report Internal failure $78.34Handle dealer calls External failure $2,500.00Compensate for system downtime Internal failure $519.01

Conduct training Prevention $1,500.00Receive and inspect payments Appraisal $800.00Respond to inquiries External failure $829.65Receive and inspect release documents Appraisal $224.99Research payoff problems External failure $15.35

Total Prevention costs: $1,500Total Appraisal costs: $9,100Total Internal failure costs: $2,055Total External failure costs: $3,345


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Appraisal activities appear to be keeping failure costs relatively low; however, better prevention should allow the company to reduce appraisal and save a substantial amountof cost.

14. Describe some examples of poka-yoke in consumer products or manufacturing orservice processes different from the ones cited in the chapter.

Poka-yoke (POH-kah YOH-kay) is an approach for mistake-proofing processes

using automatic devices or methods to avoid simple human error. Students can findnumerous examples similar to those described in the text, and should try to derivenew applications in their own lives. Some examples might be creating a checklistfor studying for an exam, setting an alert on a cell phone before class as a reminderto put it on vibrate, coffee pots that shut off after a predetermined amount of time, backing up your hard drive automatically, etc. My favorite poka-yoke is askstudents how many different ways they can insert their flash drive into their PC or

camera card into their digital camera?

15. Refer to the automobile repair flowchart in Exhibit 7.5 in Chapter 7. Identify threeactivities where a potentially serious service error may occur, suggest performancemeasures for each of these three activities in the flowchart, and poka-yokes thatmight prevent such errors from occurring.

One of the most obvious potential errors is the accuracy of the mechanic diagnosingthe problem (s). Missing a serious problem or misdiagnosing it could lead to anaccident, even death. Metrics such as the number of call backs or returns orwarranty claims per mechanic could be used in individual annual reviews and futuretraining requirements. The best poka-yoke is expert training and hiring ofoutstanding mechanics. Other poka-yokes might include checklists, doublemechanic sign off on the diagnosis for safety related problems, and software thatchecks and rechecks systems and does its own independent analysis.

Accurate bills and customer appointments are other good points in the flowchart toaddress poka-yoke issues. Automobile part(s) availability is also critical since we donot want the customer and/or the vehicle to arrive only to find out we are short a part.

Case Teaching Note: Sunshine Enterprises

Overview

An entrepreneur, Abby Martin, must make short- and long-term decisions about how tomanage and grow her restaurant business. The short-term issue is how to handle an extra$25 tip on a customer’s bill the customer says he did not authorize. The long-term


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decision is whether to pursue an aggressive growth strategy by adding twenty restaurants,do nothing, or something in between. Also, enough information is available in the case tocompute the value of a loyal customer. The case assignment questions focus thestudent’s attention of these issues. Students are asked to draw a cause-and-effect diagram(Chapter 15) and compute the value of a loyal customer (Chapter 3). The first case

question can be eliminated if you have not covered Chapter 15, the third question can beeliminated if you have not covered Chapter 3. This case takes about 45 minutes to teachon the board.

Case Questions and Brief Answers

1. Draw a cause-and-effect diagram for the possible causes of the $25 tip service. Selectone possible root cause from your diagram and explain how you would investigateand fix it.

The case presents the following information w/r to possible causes of the $25 tipservice upset.

The customer is responsible to tip properly, add the bill and tip correctly, writelegibly, retain the second receipt, and drink alcohol responsibility.

The employee is responsible to type the bill in the register/computer correctly, go back to the customer if the tip is unreadable and verify the correct amounts, and to be honest.

The restaurant manager is responsible to investigate the store’s receipt history andfind this transaction, audit the source of the error if possible such as a miss-typeddecimal or extra zero, and contact the Credit Card Company and customer toresolve the issue.

The credit card company, a third party provider in this value chain, is responsibleto provide records of the electronic transaction, help resolve the issue, and issue adebt or credit to the customer and/or restaurant if needed.

The cause-and-effect diagram (not shown) should have at least four major branches –customer, employee, manager, and credit card Company with appropriate sub- branches. The fishbone diagram provides a “framework for root cause analysis.”Students may add other sub-branches and possible root causes based on theirexperience. Ideally a team of employees would work on eliminating certain sub-causes by their research and identify a couple of potential major root causes. Forexample, if the restaurant manager finds the signed sales receipt and it shows a $2.50

tip then it is likely the employee typed it in the register wrong. If this is the “rootcause” then one possible action plan is to (a) credit the customer’s credit card for$22.50, (b) call the customer and apologize and explain the tip was typed inincorrectly by the waiter, (c) mail this customer coupons for a free dinner for theinconvenience this service upset caused (i.e., service recovery discussed in Chapter 6)and (d) thank the customer for their business.


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Another poka-yoke is to set up the software so the waiter/waitress has to put the tip

amount in twice much like with PC passwords.

2. What is the average value of a loyal customer (VLC) at Abby’s restaurants (seeChapter 3)? What is the best way to increase revenue given your VLC analysis?

If you do not cover OM2 Chapter 3 then skip this assignment question. There is moreVLC analysis here than you should expect from the students except maybe honorstudents.

Lunch prices - $10 to $20 and dinner prices $20 to $30 so if we assume lunch anddinner are equally likely the average meal price is ($15 + $25)/2 = $20. Thecontribution margin to profit and overhead is 35 percent. The repurchase frequency isonce every two months or 6 and the customer defection rate averages 7.5% so the buyers life cycle is 1/defection rate = 1/.075 = 13.3 years.

In Chapter 3 the equation is VLC = P*CM*RF*BLC (Equation 3.2) so as a base casewe have VLC = ($20)(.35)(6)(13.3) = $558.6 per year. Therefore, Sunshinerestaurants enjoy a high VLC with considerable loyalty and repeat business. It paysto have loyal customers. VLC numbers are averages and include seasonal as well aslocal customers. One way to improve this VLC analysis would be to do a survey ofseasonal versus local customers and see more precisely the relative size of the localversus seasonal revenue sources. The Excel table below summarizes a few “what if”w/r to the VLC.

Example Data Table "What Ifs" w/r to Repurchase Frequencyand Customer Defection Rate

560 0.02 0.04 0.06 0.075 0.08 0.1 0.12

1 $350 $175 $117 $93 $88 $70 $58

2 $700 $350 $233 $187 $175 $140 $117

3 $1,050 $525 $350 $280 $263 $210 $175

4 $1,400 $700 $467 $373 $350 $280 $233

5 $1,750 $875 $583 $467 $438 $350 $292

6 $2,100 $1,050 $700 $560 $525 $420 $350

7 $2,450 $1,225 $817 $653 $613 $490 $408

8$2,800 $1,400 $933 $747 $700 $560 $467

9 $3,150 $1,575 $1,050 $840 $788 $630 $525

10 $3,500 $1,750 $1,167 $933 $875 $700 $583

11 $3,850 $1,925 $1,283 $1,027 $963 $770 $642

12 $4,200 $2,100 $1,400 $1,120 $1,050 $840 $700


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One lesson from this type of analysis is at one visit per year and a 12% customerdefection rate the VLC is only $58 while at 12 visits per year and a defection rate ofonly 2% the VLC jumps to $4,200. It pays to provide excellent food and servicequality as captured by these two VLC variables, and of course, service managementskills are needed to do this. Great food and service pay off!!!

The following Excel Data Table shows that price is a more powerful variable in theVLC computations than decreasing operating costs (i.e., increasing contribution to profit and overhead). For example, if Abby could increase prices by an average of $5to $25 per meal AND decrease operating costs by 5% (i.e., increase the contributionmargin to 40%) all else remaining the same, then the VLC goes from the base case of$560 to $800. These types of numbers can be multiplied by customer counts to get anestimate of total revenue for different action plans.

Example Data Table "What Ifs" w/r to Price and Contribution Margin

$560 0.2 0.25 0.3 0.35 0.4 0.45 0.5$10 $160 $200 $240 $280 $320 $360 $400

$15 $240 $300 $360 $420 $480 $540 $600

$20 $320 $400 $480 $560 $640 $720 $800

$25 $400 $500 $600 $700 $800 $900 $1,000

$30 $480 $600 $720 $840 $960 $1,080 $1,200

$35 $560 $700 $840 $980 $1,120 $1,260 $1,400

$40 $640 $800 $960 $1,120 $1,280 $1,440 $1,600

These data tables are for faculty; undergraduates are not expected to do such tables; MBAsmaybe.

3. Critique the current “informal” quality control system. What changes andimprovements do you recommend if Sunshine expands to 20 restaurants?

The current quality control system is typical of entrepreneurs with a limited numberof sites. They focus on face-to-face interaction with customers and employees, andaudit food and service quality, as well as sales and financial results. The approach toquality control is more informal and inherent in the entrepreneur hands-on approach.Abby analyses customer faces, posture, and body language – a behavioral approach.One advantage of Abby’s direct oversight is problems are not distorted by the chainof command in Abby’s informal QC system.

As the business grows and adds more sites, the nature of the quality control functionchanges considerably. Firms like McDonalds and Bonefish define and monitorquality and customer service more formally with standardized performance measuresystems, required employee training courses on topics like empowerment andstatistical quality control, structured recognition and reward systems, and so on. One


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idea is to read the paragraph in the case on how Abby informally monitors quality inher restaurants now and then compare to a more formal McDonald’s type ofapproach.

One way to provide a framework for deciding whether to expand to twenty sites ornot is to draw the following diagram on the board, explaining it as you go (optional).

Strategy A is to keep the number of goods and services roughly constant and expand

the number of sites. McDonald’s and others fit this general strategy using a great dealof standardization in all their systems (accounting, operations, training, humanresource management, marketing, equipment and facility design, and so on). Oncethe goods and services bundle is basically set including facility design and layout, thisis a “cookie cutter” approach to growth.

Strategy B is to keep the number of sites roughly constant and focus on providingsuperior goods and services. This is the strategy that Abby adopted. For SunshineEnterprise’s six restaurants this includes high food and service quality, cleanfacilities, music, and bands on many nights. Quality is the #1 competitive priorityfor Sunshine.

There are many successful businesses that have followed Strategy A or B. Strategy Cis difficult, if not impossible, to implement successfully. Here, a business isconstantly changing their goods and services bundle, operating systems, and facilitydesign and layout while expanding to more and more sites. It is a recipe for failure.

Number of Site Goods &

Strategy A

Strategy

Strate

Number of


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Webvan is an example of a failed business using Strategy C. (see multisitemanagement discussion in Chapter 9 for more background).

Quality control is quite different for an organization with hundreds or thousands ofsites. The small entrepreneurial business uses a more informal approach whereaslarger organizations must use much more formal systems such as at Burger King,

McDonald’s, and Outback.

Whether to franchise or not is another management growth decision. Strongfranchising agreements allow the business to grow more rapidly than they otherwisecould. A strong corporate quality control monitoring system must be in place forfranchising to work effectively.

4. What are your short- and long-term recommendations? Explain your rationale forthese recommendations.

Students must decide exactly how to handle the service upset, whether to expand ornot and by how much, and what is the best way to increase restaurant revenues.

Short-term Actions

Resolve the $25 tip service upset (how, step by step, who does what andwhen)

Disseminate what was learned w/r to the $25 tip upset to all six restaurantsites

Use Seven Tools and check sheets for restaurant quality control (train, teams,etc.)

Look for ways to increase the value of a loyal customer

Do a short customer survey that sits on each table (design, collect, and analyze by restaurant)

Begin to build a data base on types of customers per restaurant and demand patterns, and type of service upset and how resolved by store

Long-term Actions

Hire secret dinner’s to audit restaurant performance – food and service quality

Develop written procedure manuals and job descriptions and performancestandards especially if they expand

Install an electronic billing system

Maybe purchase some of this cheap land now but do not build restaurants yet.

Work toward a more formal and standardized restaurant control system IFSunshine expands.

Train other managers to do Abby’s job (succession development and planning)


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Postscript (you may or may not want to reveal this)

The short-term service upset was solved by the following action (service recovery) plan. (1) The restaurant manager investigated the $25 tip error and found the waiterhad miss-typed it in the register. (2) The manager credits the customer’s credit cardfor $22.50. (3) The customer was called and the manager apologized, obtained the

customer’s address and mailed him a free lunch/dinner coupon. (4) The waiter was acore member of their staff and the manager believed the service upset was an honestmistake so no action was taken against the employee. (5) All restaurant managerswere informed of the service upset and all employees were told to double check billsand tip amounts when possible (i.e., disseminate this service upset and recoverylesson at one site to all sites, learn from mistakes).

Abby Martin, the entrepreneurial owner of six restaurants and a hotel, decided not toexpand on the west coast of Florida over the long-term. She decided that the currentsize of her businesses allowed her to monitor, control, and manage them effectively.If they expanded to more restaurants she recognized accounting and financial control

systems would need to be standardized, marketing and advertising would need acorporate and local emphasis, and operating and training policies and programs wouldneed to be standardized. It was best to focus on a fixed set of business sites and dothe very best with building customer loyalty and increasing revenue, and buildcapability for the next business cycle upturn.

The management and system skills to manage a few sites (Sunshine Enterprises)versus multiple sites (McDonald’s, Olive Garden, etc.) are very different. Manyentrepreneuriers make the fatal mistake of expanding sites rapidly without adequatecontrols or losing control due to weak franchise agreements. Abby recognized these pitfalls of expansion and focused on premium service at a small number of sites thatwere controllable and profitable.

One lesson is an informal quality control approach/system is not scalable to multiplesites!

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Operation Mangament CH15

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