Chapter 13 Inventory Management © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 1 Learning Objectives (1 of 2) You should be able to: 13.1 Define the term inventory 13.2 List the different types of inventory 13.3 Describe the main functions of inventory 13.4 Discuss the main requirements for effective management 13.5 Explain periodic and perpetual review systems 13.6 Describe the costs that are relevant for inventory management 13.7 Describe the A-B-C approach and explain how it is useful 13-‹#› © McGraw-Hill Education. Learning Objectives (2 of 2) 13.8 Describe the basic EOQ model and its assumptions and solve typical problems 13.9 Describe the economic production quantity model and solve typical problems 13.10 Describe the quantity discount model and solve typical problems 13.11 Describe reorder point models and solve typical problems 13.12 Describe situations in which the fixed-order interval model is appropriate and solve typical problems 13.12 Describe situations in which the single-period model is appropriate, and solve typical problems 13-‹#› © McGraw-Hill Education. Learning Objective 13.1 Inventory Inventory A stock or store of goods Independent demand items Items that are ready to be sold or used Inventories are a vital part of business: (1) necessary for operations and (2) contribute to customer satisfaction A “typical” firm has roughly 30% of its current assets and as much as 90% of its working capital invested in inventory 13-‹#› © McGraw-Hill Education. Learning Objective 13.2 Types of Inventory Raw materials and purchased parts Work-in-process (WIP) Finished goods inventories or merchandise Tools and supplies Maintenance and repairs (MRO) inventory Goods-in-transit to warehouses or customers (pipeline inventory) 13-‹#› © McGraw-Hill Education. Learning Objective 13.3 Inventory Functions Inventories serve a number of functions such as: To meet anticipated customer demand To smooth production requirements To decouple operations To protect against stockouts To take advantage of order cycles To hedge against price increases To permit operations To take advantage of quantity discounts 13-‹#› © McGraw-Hill Education. Learning Objective 13.3 Objectives of Inventory Control Inventory management has two main concerns: Level of customer service Having the right goods available in the right quantity in the right place at the right time Costs of ordering and carrying inventories The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds Measures of performance Customer satisfaction Number and quantity of backorders Customer complaints Customer satisfaction Inventory turnover 13-‹#› © McGraw-Hill Education. Learning Objective 13.4 Effective Inventory Mana.

1. Chapter 13
Inventory Management
© McGraw-Hill Education. All rights reserved. Authorized only
for instructor use in the classroom. No reproduction or further
distribution permitted without the prior written consent of
McGraw-Hill Education.
1
Learning Objectives (1 of 2)
You should be able to:
13.1 Define the term inventory
13.2 List the different types of inventory
13.3 Describe the main functions of inventory
13.4 Discuss the main requirements for effective management
13.5 Explain periodic and perpetual review systems
13.6 Describe the costs that are relevant for inventory
management
13.7 Describe the A-B-C approach and explain how it is useful
13-‹#›
© McGraw-Hill Education.
Learning Objectives (2 of 2)
13.8 Describe the basic EOQ model and its assumptions and
solve typical problems

2. 13.9 Describe the economic production quantity model and
solve typical problems
13.10 Describe the quantity discount model and solve typical
problems
13.11 Describe reorder point models and solve typical problems
13.12 Describe situations in which the fixed-order interval
model is appropriate and solve typical problems
13.12 Describe situations in which the single-period model
is appropriate, and solve typical problems
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.1
Inventory
Inventory
A stock or store of goods
Independent demand items
Items that are ready to be sold or used
Inventories are a vital part of business: (1) necessary for
operations and (2) contribute to customer satisfaction
A “typical” firm has roughly 30% of its current assets and as
much as 90% of its working capital invested in inventory
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.2
Types of Inventory
Raw materials and purchased parts
Work-in-process (WIP)
Finished goods inventories or merchandise

3. Tools and supplies
Maintenance and repairs (MRO) inventory
Goods-in-transit to warehouses or customers (pipeline
inventory)
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.3
Inventory Functions
Inventories serve a number of functions such as:
To meet anticipated customer demand
To smooth production requirements
To decouple operations
To protect against stockouts
To take advantage of order cycles
To hedge against price increases
To permit operations
To take advantage of quantity discounts
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.3
Objectives of Inventory Control
Inventory management has two main concerns:
Level of customer service
Having the right goods available in the right quantity in the
right place at the right time
Costs of ordering and carrying inventories
The overall objective of inventory management is to achieve
satisfactory levels of customer service while keeping inventory

4. costs within reasonable bounds
Measures of performance
Customer satisfaction
Number and quantity of backorders
Customer complaints
Customer satisfaction
Inventory turnover
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.4
Effective Inventory Management
Requires:
A system keep track of inventory
A reliable forecast of demand
Knowledge of lead time and lead time variability
Reasonable estimates of
Holding costs
Ordering costs
Shortage costs
A classification system for inventory items
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.5
Inventory Counting Systems
Periodic system
Physical count of items in inventory made at periodic intervals
Perpetual inventory system
System that keeps track of removals from inventory

5. continuously, thus monitoring current levels of each item
An order is placed when inventory drops to a predetermined
minimum level
Two-bin system
Two containers of inventory; reorder when the first is empty
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.5
Inventory Counting Technologies
Universal product code (UPC)
Bar code printed on a label that has information about the item
to which it is attached
Radio frequency identification (RFID) tags
A technology that uses radio waves to identify objects, such as
goods, in supply chains
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.6
Inventory Costs
Purchase cost
The amount paid to buy the inventory
Holding (carrying) costs
Cost to carry an item in inventory for a length of time, usually a
year
Ordering costs
Costs of ordering and receiving inventory
Setup costs
The costs involved in preparing equipment for a job

6. Analogous to ordering costs
Shortage costs
Costs resulting when demand exceeds the supply of inventory;
often unrealized profit per unit
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.6
ABC Classification System (1 of 2)
A-B-C approach
Classifying inventory according to some measure of importance,
and allocating control efforts accordingly
A items (very important)
10 to 20 percent of the number of items in inventory and about
60 to 70 percent of the annual dollar value
B items (moderately important)
C items (least important)
50 to 60 percent of the number of items in inventory but only
about 10 to 15 percent of the annual dollar value
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.7
ABC Classification System (2 of 2)
13-‹#›
© McGraw-Hill Education.

7. Learning Objective 13.7
Cycle Counting
Cycle counting
A physical count of items in inventory
Cycle counting management
How much accuracy is needed?
A items: ± 0.2 percent
B items: ± 1 percent
C items: ± 5 percent
When should cycle counting be performed?
Who should do it?
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.8
How Much to Order: EOQ Models
Economic order quantity models identify the optimal order
quantity by minimizing the sum of annual costs that vary with
order size and frequency
The basic economic order quantity model
The economic production quantity model
The quantity discount model
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.8
Basic EOQ Model
The basic EOQ model is used to find a fixed order quantity that
will minimize total annual inventory costs

8. Assumptions:
Only one product is involved
Annual demand requirements are known
Demand is even throughout the year
Lead time does not vary
Each order is received in a single delivery
There are no quantity discounts
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.8
The Inventory Cycle
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.8
Total Annual Cost
where
Q = Order quantity in units
H = Holding (carrying) cost per unit, usually per year
D = Demand, usually in units per year
S = Ordering cost per order
13-‹#›
© McGraw-Hill Education.

9. Learning Objective 13.8
Goal: Total Cost Minimization
The Total-Cost Curve Is U-Shaped
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.8
Deriving EOQ
Using calculus, we take the derivative of the total cost function
and set the derivative (slope) equal to zero and solve for Q.
The total cost curve reaches its minimum where the carrying
and ordering costs are equal.
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.9
Economic Production Quantity (EPQ)
The batch mode is widely used in production. In certain
instances, the capacity to produce a part exceeds its usage
(demand rate).
Assumptions
Only one item is involved
Annual demand requirements are known
Usage rate is constant
Usage occurs continually, but production occurs periodically
The production rate is constant

10. Lead time does not vary
There are no quantity discounts
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.9
EPQ: Inventory Profile
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.9
EPQ – Total Cost
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.9
EPQ
13-‹#›
© McGraw-Hill Education.

11. Learning Objective 13.10
Quantity Discount Model
Quantity discount
Price reduction for larger orders offered to customers to induce
them to buy in large quantities
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.10
Quantity Discounts (1 of 2)
Adding PD does not change EOQ
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.10
Quantity Discounts (2 of 2)
The total-cost curve with quantity discounts is composed of a
portion of the total-cost curve for each price
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11

12. When to Reorder
Reorder point
When the quantity on hand of an item drops to this amount, the
item is reordered.
Determinants of the reorder point
The rate of demand
The lead time
The extent of demand and/or lead time variability
The degree of stockout risk acceptable to management
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
Reorder Point: Under Certainty
ROP = d × LT
where
d = Demand rate (units per period, per day, per week)
LT = Lead time (in same time units as d)
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
Reorder Point: Under Uncertainty
Demand or lead time uncertainty creates the possibility that
demand will be greater than available supply
To reduce the likelihood of a stockout, it becomes necessary to
carry safety stock
Safety stock
Stock that is held in excess of expected demand due to variable
demand and/or lead time

13. ROP = Expected demand during lead time + Safety Stock
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
Safety Stock
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
Safety Stock?
As the amount of safety stock carried increases, the risk of
stockout decreases.
This improves customer service level
Service level
The probability that demand will not exceed supply during lead
time
Service level = 100% - stockout risk
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
How Much Safety Stock?
The amount of safety stock that is appropriate for a given
situation depends upon:
The average demand rate and average lead time

14. Demand and lead time variability
The desired service level
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
Reorder Point
The ROP based on a normal distribution of lead time demand
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
Reorder Point: Demand Uncertainty
Note: If only demand is variable, then
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.11
Reorder Point: Lead Time Uncertainty

15. Note: If only lead time is variable, then
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.12
How Much to Order: FOI
Fixed-order-interval (FOI) model
Orders are placed at fixed time intervals
Reasons for using the FOI model
Supplier’s policy may encourage its use
Grouping orders from the same supplier can produce savings in
shipping costs
Some circumstances do not lend themselves to continuously
monitoring inventory position
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.12
Fixed-Quantity versus Fixed Interval Ordering (1 of 2)
Fixed Quantity
13-‹#›
© McGraw-Hill Education.

16. Learning Objective 13.12
Fixed-Quantity versus Fixed-Interval Ordering (2 of 2)
Fixed Interval
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.12
FOI Model
where
OI = Order interval (length of time between orders)
A = Amount on hand record time
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.13
Single-Period Model (1 of 2)
Single-period model
Model for ordering of perishables and other items with limited
useful lives
Shortage cost
Generally, the unrealized profit per unit
Excess cost
Different between purchase cost and salvage value of items left
over at the end of the period

17. 13-‹#›
© McGraw-Hill Education.
Learning Objective 13.13
Single-Period Model (2 of 2)
The goal of the single-period model is to identify the order
quantity that will minimize the long-run excess and shortage
costs
Two categories of problem:
Demand can be characterized by a continuous distribution
Demand can be characterized by a discrete distribution
13-‹#›
© McGraw-Hill Education.
Learning Objective 13.13
Stocking Levels
13-‹#›
© McGraw-Hill Education.
End of Presentation

18. © McGraw-Hill Education. All rights reserved. Authorized only
for instructor use in the classroom. No reproduction or further
distribution permitted without the prior written consent of
McGraw-Hill Education.
13-‹#›
S
Q
D
H
2
Q
+
=
+
=
Cost
Ordering
Annual
Cost
Holding
Annual
Cost
Total
(
)
(
)
cost

19. holding
unit
per
annual
cost
order
demand
annual
2
=
=
H
2Ds
Q
0
(
)
rate
Usage
rate
delivery
or
Production
inventory
Maximum
where

20. Cost
Setup
Cost
Carrying
TC
min
=
=
-
=
=
+
÷
ø
ö
ç
è
æ
=
+
=
u
p
u
p
p
Q
I
S
Q
D

21. H
2
I
p
max
max
u
p
p
H
2DS
Q
p
-
=
price
Unit
where
Cost
Purchasing
Cost
Ordering
Cost
Carrying
Cost
Total
=
+
+

22. =
+
+
=
P
PD
S
Q
D
H
2
Q
demand
time
lead
of
deviation
standard
The
ó
deviations
standard
of
Number
where
time
lead

23. during
demand
Expected
ROP
LT
LT
=
=
+
=
d
d
z
z
ó
)
as
units
time
(same
time
Lead
LT
)

24. as
units
time
(same
period
per
demand
of
stdev.
The
week)
per
day,
(per
period
per
demand
Average
deviations
standard
of

25. Number
where
LT
ROP
d
d
ó
d
z
z
ó
LT
d
d
d
=
=
=
=
+
´
=
LT
LT
d
d
ó
ó
=
(
)
(
)
(

26. )
d
d
d
z
d
as
units
time
same
time
lead
Average
LT
as
units
time
same
time
lead
stddev.of

27. The
ó
week
per
day,
per
period
per
Demand
deviations
standard
of
Number
where
LT
ROP
LT
LT
=
=
=
=
+
´
=
zd
ó
LT
LT
ó
d

28. ó
d
=
A
z
ó
d
d
-
+
+
+
=
-
+
=
LT
OI
LT)
OI
(
time
reorder
at
hand
on
Amount
stock
Safety
interval
protection

29. during
demand
Expected
Order
to
Amount
unit
per
Cost
-
unit
per
Revenue
=
=
s
shortage
C
C
unit
per
value
Salvage
-
unit
per

30. Cost
=
=
e
excess
C
C
unit
per
cost
excess
unit
per
cost
shortage
where
level
Service
=
=
+
=
e
s
e
s
s
C
C
C
C

31. C
ISM 645 Mission, Vision, and Time Horizon Statement (MVTH)
Worksheet
The following information is provided to assist you in writing
the Mission, Vision, and Time Horizon
Statements.
Writing the Mission Statement – Comparisons
The mission statement describes the purpose of the organization
and the reason the business or business
unit exists. You will be creating an IT mission statement for the
Acme Company. Review the article,
“Mission Statements.” Then, based on what you have learned,
evaluate the mission statements of the
following service companies:
• Microsoft®
“At Microsoft, our mission and values are to help people and
businesses throughout the
world realize their full potential.”

32. • Apple®
“Apple designs Macs, the best personal computers in the world,
along with OS X, iLife, iWork
and professional software. Apple leads the digital music
revolution with its iPods and iTunes
online store. Apple has reinvented the mobile phone with its
revolutionary iPhone and App
store, and is defining the future of mobile media and computing
devices with iPad.”
In your evaluation, consider the positive aspects as well as the
shortfalls of the statements. Do your own
additional research on these companies and consider whether
the company’s strategic approach aligns
with its mission statement.
Writing the Vision Statement – Comparisons
The vision statement describes the business or business unit’s
direction and its long-term goals. You will
be creating an IT vision statement for the Acme Company.
Review the article, “Vision Statements.” Then,
based on what you have learned, evaluate the vision statements
of the following media companies:

33. http://onstrategyhq.com/resources/mission-
statements/#Defining%20Your%20Mission
http://onstrategyhq.com/resources/vision-statements/
• EMC®
“We believe that information is a business’s most important
asset. Ideas—and the people who
come up with them—are the only real differentiator. Our
promise is to help you take that
differentiator as far as possible. We will deliver on this promise
by helping organizations of
all sizes manage more information more effectively than ever
before. We will provide
solutions that meet and exceed your most demanding business
and IT challenges. We will
bring your information to life.”
• Dell®
“Listen. Learn. Deliver.”
In your evaluation, consider the positive aspects as well as the
shortfalls of the statements. Consider
whether the company’s strategic approach aligns with its vision
statement.

34. Writing the Strategic Time Horizon Statement
The Strategic Time Horizon is the time frame in which a
strategic plan exists. Strategy is about placing
things in motion and making plans for the future. But for
planning purposes there cannot be an infinite
future. Time is an important variable in planning. Setting a time
horizon allows your plan to have a scale
as well as an end point. This is called a Time Horizon. It is
simple: From the Mission and Vision
Statement, determine the major initiatives that will be required
for your organization. These should be
extremely high level and strategic. Place these in a time
sequence that makes sense for your company and
is in keeping with your company’s overall strategic direction.
The Time Horizon is usually set in years and shows forward
progression. For granularity, quarters are
sometimes shown. However, nothing more detailed than that is
used, as the purpose of the Time Horizon
is to provide a general overview or Horizonal Aspect to the
plan. Overlapping various major endeavors is
fine if it makes sense and the general resources to accomplish
this will likely be there at the time needed.

35. Here is an example of a real IT Time Horizon for a major
International Company. Note the five year plan
spread and the quarterly segmentation. The major initiatives are
indicated using a time bar against the
years and quarters. Here you have a visual representation of
what the IT Strategic Direction will be, the
major Strategic Initiatives, and what business initiatives (and
areas) they will be addressing:
Chapter 9
Management of Quality
© McGraw-Hill Education. All rights reserved. Authorized only
for instructor use in the classroom. No reproduction or further
distribution permitted without the prior written consent of
McGraw-Hill Education.
1

36. Learning Objectives (1 of 2)
You should be able to:
9.1 Discuss the philosophies of quality gurus
9.2 Define the term quality as it relates to products and as it
relates to services
9.3 Identify the determinants of quality
9.4 Explain why quality is important and the consequences of
poor quality
9.5 Distinguish the costs associated with quality
9.6 Discuss the importance of ethics in managing quality
9-‹#›
© McGraw-Hill Education.
Learning Objectives (2 of 2)
9.7 Compare the quality awards
9.8 Discuss quality certification and its importance
9.9 Describe TQM
9.10 Give an overview of problem solving
9.11 Give an overview of process improvement
9.12 Describe the six sigma methodology
9.13 Describe and use various quality tools
9-‹#›
© McGraw-Hill Education.
Quality Management
Quality
The ability of a product or service to consistently meet or
exceed customer expectations
For a decade or so, quality was an important focal point in
business. After a while, this emphasis began to fade as other

37. concerns took precedence
There has been a recent resurgence in attention to quality given
recent experiences with the costs and adverse attention
associated with highly visible quality failures:
Auto recalls
Toys
Produce
Dog food
Pharmaceuticals
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.1
Quality Contributors (1 of 2)
Walter Shewart
“father of statistical quality control”
Control charts
Variance reduction
W. Edwards Deming
Special versus common cause variation
The 14 points
Joseph Juran
Quality Control Handbook, 1951
Viewed quality as fitness-for-use
Quality trilogy – quality planning, quality control, quality
improvement
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.1

38. Quality Contributors (2 of 2)
Armand Feigenbaum
Quality is a “total field”
The customer defines quality
Philip B. Crosby
Zero defects
Quality is Free, 1979
Kaoru Ishikawa
Cause-and-effect diagram
Quality circles
Recognized the internal customer
Genichi Taguchi
Taguchi loss function
Taiichi Ohno and Shigeo Shingo
Developed philosophy and methods of kaizen
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.2
Dimensions of Product Quality
Performance – main characteristics of the product
Aesthetics – appearance, feel, smell, taste
Special features – extra characteristics
Conformance – how well the product conforms to design
specifications
Reliability – consistency of performance
Durability – the useful life of the product
Perceived quality – indirect evaluation of quality
Serviceability – handling of complaints or repairs
Consistency – quality doesn’t vary

39. 9-‹#›
© McGraw-Hill Education.
Learning Objective 9.2
Dimensions of Service Quality (1 of 2)
Convenience – the availability and accessibility of the service
Reliability – ability to perform a service dependably,
consistently, and accurately
Responsiveness – willingness to help customers in unusual
situations and to deal with problems
Time – the speed with which the service is delivered
Assurance – knowledge exhibited by personnel and their ability
to convey trust and confidence
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.2
Dimensions of Service Quality (2 of 2)
Courtesy – the way customers are treated by employees
Tangibles – the physical appearance of facilities, equipment,
personnel, and communication materials
Consistency – the ability to provide the same level of good
quality repeatedly
Expectancy – meet (or exceed) customer expectations
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.2
Assessing Service Quality
Audit service to identify strengths and weaknesses

40. In particular, look for discrepancies between:
Customer expectations and management perceptions of those
expectations
Management perceptions customer expectations and service-
quality specifications
Service quality and service actually delivered
Service actually delivered and what is communicated about the
service to customers
Customers’ expectations of the service provider and their
perceptions of provider delivery
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.3
Determinants of Quality
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 services conform to the intent of
the designers
Ease-of-use and user instructions
Increase the likelihood that a product will be used for its
intended purpose and in such a way that it will continue to
function properly and safely
After-the-sale service
Taking care of issues and problems that arise after the sale
9-‹#›
© McGraw-Hill Education.

41. Responsibility for Quality
Top management
Design
Procurement
Production/operations
Quality assurance
Packaging and shipping
Marketing and sales
Customer service
Everyone in the organization has some responsibility for
quality, but certain areas of the organization are involved in
activities that make them key areas of responsibility
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.4
Benefits of Good Quality
Enhanced reputation for quality
Ability to command premium prices
Increased market share
Greater customer loyalty
Lower liability costs
Fewer production or service problems
Lower production costs
Higher profits
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.4
The Consequences of Poor Quality

42. Loss of business
Liability
Productivity
Costs
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.5
Costs of Quality (1 of 2)
Appraisal costs
Costs of activities designed to ensure quality or uncover defects
Prevention costs
All TQ training, TQ planning, customer assessment, process
control, and quality improvement costs to prevent defects from
occurring
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.5
Costs of Quality (2 of 2)
Failure costs - costs incurred by defective parts/products or
faulty services
Internal failure costs
Costs incurred to fix problems that are detected before the
product/service is delivered to the customer
External failure costs
All costs incurred to fix problems that are detected after the
product/service is delivered to the customer

43. 9-‹#›
© McGraw-Hill Education.
Learning Objective 9.6
Ethics and Quality
Substandard work
Defective products
Substandard service
Poor designs
Shoddy workmanship
Substandard parts and materials
Having knowledge of this and failing to correct and report it in
a timely manner is unethical.
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.7
The Baldrige Competition
Award categories
Education
Healthcare
Manufacturing
Nonprofit/government
Service
Small Business
Purpose of the award
Stimulate efforts to improve quality
Recognize quality achievements
Publicize successful programs

44. 9-‹#›
© McGraw-Hill Education.
Learning Objective 9.7
Baldrige Criteria
Leadership
Strategic planning
Customer focus
Measurement, analysis, and knowledge management
Workforce focus
Operations focus
Results
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.8
Quality Certification (1 of 2)
International Organization for Standardization
ISO 9000
Set of international standards on quality management and
quality assurance, critical to international business
ISO 14000
A set of international standards for assessing a company’s
environmental performance
ISO 24700
Pertains to the quality and performance of office equipment that
contains reused components
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© McGraw-Hill Education.

45. Learning Objective 9.8
Quality Certification (2 of 2)
ISO 9000
Quality principles
Principle 1 Customer focus
Principle 2 Leadership
Principle 3 Involvement of people
Principle 4 Process approach
Principle 5 System approach to management
Principle 6 Continual improvement
Principle 7Factual approach to decision making
Principle 8 Mutually beneficial supplier relationships
9-‹#›
© McGraw-Hill Education.
Quality and the Supply Chain
Business leaders are increasingly recognizing the importance of
their supply chains in achieving their quality goals
Requires:
Measuring customer perceptions of quality
Identifying problem areas
Correcting these problems
Supply chain quality management can benefit from a
collaborative relationship with suppliers
Helping suppliers with quality assurance efforts
Information sharing on quality-related matters
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.9

46. Total Quality Management
A Philosophy that involves everyone in an organization in a
continual effort to improve quality and achieve customer
satisfaction.
TQM
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.9
TQM Approach
Find out what the customer wants
Design a product or service that meets or exceeds customer
wants
Design processes that facilitate doing the job right the first time
Keep track of results
Extend these concepts throughout the supply chain
Top management must be involved and committed
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.9
TQM Elements
Continuous improvement
Competitive benchmarking
Employee empowerment
Team approach
Decision based on fact, not opinion
Knowledge of tools
Supplier quality
Champion

47. Quality at the source
Suppliers are partners in the process
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.9
Continuous Improvement
Continuous improvement
Philosophy that seeks to make never-ending improvements to
the process of converting inputs into outputs
Kaizen
Japanese word for continuous improvement
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.9
Quality at the Source
The philosophy of making each worker responsible for the
quality of his or her work
“Do it right” and “If it isn’t right, fix it”
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.9
Obstacles to Implementing TQM
Obstacles include:
Lack of company-wide definition of quality

48. Lack of strategic plan for change
Lack of customer focus
Poor inter-organizational communication
Lack of employee empowerment
View of quality as a “quick fix”
Emphasis on short-term financial results
Inordinate presence of internal politics and “turf” issues
Lack of strong motivation
Lack of time to devote to quality initiatives
Lack of leadership
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.10
PDSA Cycle (1 of 3)
Plan-Do-Study-Act (PDSA) cycle
Plan
Begin by studying and documenting the current process.
Collect data on the process or problem
Analyze the data and develop a plan for improvement
Specify measures for evaluating the plan
Do
Implement the plan, document any changes made, collect data
for analysis
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.10
PDSA Cycle (2 of 3)
Study

49. Evaluate the data collection during the do phase
Check results against goals formulated during the plan phase
Act
If the results are successful, standardize the new method and
communicate it to the relevant personnel
Implement training for the new method
If unsuccessful, revise the plan and repeat the process
If unsuccessful, revise the plan and repeat the process
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.10
PDSA Cycle (3 of 3)
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.10
Problem Solving
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.11
Process Improvement
Process improvement
A systematic approach to improving a process

50. Map the process
Collect information about the process and identify each step in
the process
Prepare a flowchart that accurately depicts the process
Analyze the process
Ask critical questions about the process
Ask specific questions about each step in the process
Redesign the process
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.12
Six Sigma (1 of 2)
Six Sigma
A business process for improving quality, reducing costs, and
increasing customer satisfaction
Statistically
Having no more than 3.4 defects per million
Conceptually
Program designed to reduce defects
Requires the use of certain tools and techniques
Principles
Reduction in variation is an important goal
The methodology is data driven; it requires data validation
Outputs are determined by inputs
Only a critical few inputs have a significant impact on outputs
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.12

51. Six Sigma (2 of 2)
DMAIC
Define: Set the context and objectives for improvement
Measure: Determine the baseline performance and capability of
the process
Analyze: Use data and tools to understand the cause-and-effect
relationships of the process
Improve: Develop the modifications that lead to a validated
improvement of the process
Control: Establish plans and procedures to ensure that
improvements are sustained
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.13
Basic Quality Tools (1 of 7)
Flowchart
A diagram of the steps in a process
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.13
Basic Quality Tools (2 of 7)
Check sheet
A tool for organizing and collecting data; a tally of problems or
other events by category.

52. 9-‹#›
© McGraw-Hill Education.
Learning Objective 9.13
Basic Quality Tools (3 of 7)
Histogram
A chart that shows empirical frequency distribution
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.13
Basic Quality Tools (4 of 7)
Pareto chart
A diagram that arranges categories from highest to lowest
frequency of occurrence
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.13
Basic Quality Tools (5 of 7)
Scatter diagram
A graph that shows the degree and direction of relationship
between two variables

53. 9-‹#›
© McGraw-Hill Education.
Learning Objective 9.13
Basic Quality Tools (6 of 7)
Control chart
A statistical chart of time-ordered values of a sample statistic
(e.g., sample means)
9-‹#›
© McGraw-Hill Education.
Learning Objective 9.13
Basic Quality Tools (7 of 7)
Cause-and-effect diagram
A diagram used to organize a search for the cause(s) of a
problems; also known as a fishbone diagram.
9-‹#›
© McGraw-Hill Education.
Methods for Generating Ideas
Brainstorming
Quality circles
Benchmarking
9-‹#›
© McGraw-Hill Education.

54. Quality Circles
Quality circle
Groups of workers who meet to discuss ways of improving
products or processes
Less structured and more informal than teams involved in
continuous improvement
Quality circle teams have historically had relatively little
authority to make any but the most minor changes
9-‹#›
© McGraw-Hill Education.
Benchmarking Process
Identify a critical process that needs improvement
Identify an organization that excels in this process
Contact that organization
Analyze the data
Improve the critical process
9-‹#›
© McGraw-Hill Education.
Operations Strategy
Quality is a strategic imperative for organizations
Customers are very concerned with the quality of goods and
services they receive
Quality is a never-ending journey
It is important that most organizational members understand and
buy into this idea
Customer satisfaction ≠ customer loyalty
Quality needs to be incorporated throughout the entire supply

55. chain, not just the organization itself
9-‹#›
© McGraw-Hill Education.
End of Presentation
© McGraw-Hill Education. All rights reserved. Authorized only
for instructor use in the classroom. No reproduction or further
distribution permitted without the prior written consent of
McGraw-Hill Education.
9-‹#›
TO: Kelly Anderson, Operations Manager
FROM: Alexis Finley, Production Manager
DATE: April 20, 2020
SUBJECT: Root Cause Analysis
Background
Kibby and Strand is going through a tough month since
customers complaints have been at an all-time high due to
quality issues with recently shipped orders. Last quarter, the
organization was facing concerns when promising customers
delivery dates that were too tight, and it appears quality may
have suffered in an effort to meet short deadlines.
Purpose

56. Clothing brands face daily scrutiny for their suppliers’ working
conditions, their environmental impact and their delivery times
(Burkhart, 2019). Customer complaints are a part of doing
business and usually one of the best sources of valuable
information. A complaint is a chance for Kibby and Strand to
learn from their mistakes and do better for their customers.
1. Make it right the first time – the organization needs to
refocus their resources by spending their assets on important
aspects of the business instead of wasting it on recalls.
2. If not made right the first time, catch it before it gets to the
customer – the shipping department needs to inspect each item
before delivery to make sure it exceeds customers’ expectations
3. Do not let the suppliers dictate the quality – the receiving
department needs to audit the raw materials that are coming in
before production to make sure they meet the quality percentage
4. Educate the customers about our products – Kibby and Strand
can sell the products, however taking the extra step for
customers to understand the differences in quality when
selecting their raw materials for production
5. Do not send a replacement without checking it first –
inspection is key before delivery so customers stay loyal to our
organization
6. Think about quality from a customer’s perspective – the
organization needs to anticipate customer’s needs
Consistently making quality products is not easy, however,
cultivating a quality mindset throughout the organization will
go a long way towards the success that will not only benefit the
customers but the company as well.
Recommendation
Root Cause Analysis (RCA) is defined as a collective term that
describes a wide range of approaches, tools, and techniques

57. used to uncover causes of problems (2020). The RCA steps
Kibby and Strand need to focus on are:
1. Communicate with Receiving and Shipping Manager to figure
out the production period in which these complaints were made
that focused on stitching problems.
2. Once production period has been detected, the employees
need to go through all the remaining stock to check for
defective raw materials/products that the organization will not
be able to sell to the customers.
3. Have a meeting with the employees to discuss the problems
that Kibby and Strand are facing and create a solution that we
will best fit the needs of the organization and the customers.
Establishing where the root cause is such as:
a. Receiving department – incoming raw materials from
suppliers are defective and not the correct quality percentage
b. Production department – materials going through the
machines are causing defective problems
c. Shipping department – inspections are not being done
correctly and/or products are being shipped to the wrong
customers. Required training may be needed for new and
existing candidates.
4. Once employees are on board, continuous monitoring of the
operational process from receiving to shipping is needed to
identity any mistakes early so that it can be corrected in a
timely manner.
As Kibby and Strand dedicate their focus on monitoring the
assembly line from start to finish, production activity and
customer satisfaction will lead the company to establish
excellent reviews as defective products are spotted early on.

58. References:
10 Ways to Help Your Quality Team Reduce Customer
Complaints. (2020, January 9). Retrieved April 20, 2020, from
https://www.qualitymag.com/articles/95446-ways-to-help-your-
quality-team-reduce-customer-complaints
American Society for Quality. (2020). What is Root Cause
Analysis (RCA)? Retrieved April 20, 2020, from
https://asq.org/quality-resources/root-cause-analysis
Burkhart, M. (2019, April 16). 3 Ways to Manage Garment
Quality Control. Retrieved April 20, 2020, from
https://www.intouch-quality.com/blog/3-key-areas-of-quality-
control-for-garments
Nichol, M. (2019, October 2). The 12 most important metrics to
measure in manufacturing. Retrieved April 13, 2020, from
https://blog.matthews.com.au/the-12-most-important-metrics-to-
measure-in-manufacturing/