Introduction

In todays competitive world corporates and businesses are struggling to maintain profits and
healthy bottom lines .Cost of production, fuel, raw material and human resources is rising
each year .These developments has prompted people to look for Cost reduction Ideas
&methods. Those who have opted for focused cost reduction strategies have survived those
who could not managed have perished.
In recent economic down turn it becomes more important to make cost reduction program a
major initiative in industry .Companies are finding it difficult to retain people and are laying
off people which is unprecedented in recent history of industrial recession .Companies
have to develop its own cost reduction program for savings without cutting jobs .
This chapter will discuss the complex subject of the impact of tension between cost
minimization and quality maximization in organisations. Beside the recent cost reduction and
quality improvement strategies, hidden elements of people issues, short term verses long
term endeavours and the failures of organisations out of complacency due to leaning on past
glories will be discussed.
Your objectives
In this chapter you will learn about the following:

Understand the elements of cost and price

Understand how to reduce cost in organisations
Understand the elements of quality and its cost
Understand how to improve quality in organisations
Understand the conflicting issues of implementation of cost reduction and quality
improvement strategies simultaneously

1 Elements of cost and price

Some form of price or cost analysis should be performed in connection with every
procurement action, regardless of whether the organization is a vendor or a sub recipient.
The form and degree of analysis, however, are dependent on the particular subcontract or
purchase, and the pricing situation. Determination of price reasonableness through price or
cost analysis is required even though the procurement is source directed by the contracting
officer of the sponsoring agency.

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1.1 Cost Elements for Product

Material Cost
These are Principal raw material used in production for final product with help of direct
labour and factory overhead . Further classified into Direct and Indirect
Labour cost
The physical and mental effort to convert raw material into final finished product.
Further classified into Direct and Indirect labour cost .
Factory Over head
It covers all indirect material , indirect labour and all other indirect manufacturing
cost which cannot be specified directly for production of the finished product.
In Relationship with Volume
Fixed Cost
Fixed cost are those cost which are associated with inputs which do not vary with
changes
in volume of output or activity within specified range of activity for a given budget
period .
For example factory rents , insurance cost for factory , salaries for senior executives ,
lease payments
Variable Cost
Cost that tends to vary in total in direct proportion or in a one -to -one relationship to
change in production activity , sales activity or some other measures of volumes are
referred to as variable cost for examples material cost , fuel cost direct labour cost.
Ability to trace
Direct Cost
These are costs that are traceable conveniently and wholly by management to specific
items/area .For examples material cost and
direct labour cost
Indirect Cost
These are common to many items and cannot be traced to any one item/area on the
basis of allocation techniques .For example indirect manufacturing cost are allocated
as part of factory overhead .
As Per Functional Area
Manufacturing Cost
Cost incurred while producing finished product which includes material, labor and
factory
overhead cost
Marketing cost
Cost incurred in promoting /advertisement and other services related to sales
Administrative Cost
It includes cost incurred while directing, controlling and operating factory operations
salaries are included in admin cost
Financing Cost
These cost relates to fund required for running factory operations such as interest on
loans from bank and cost of credit to the customers.
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1.2 The Difference between Price and Cost

One should be aware of the difference between price and cost as depicted in Figure
5.1 and Figure 5.2

Figure 5.1

Figure 5.2
1.3 Total Cost Of Ownership TCO (Figure 5.3)
The purchase price of an asset plus the costs of operation. When choosing among
alternatives in a purchasing decision, buyers should look not just at an item's shortterm price, which is its purchase price, but also at its long-term price, which is its total
cost of ownership. The item with the lower total cost of ownership will be the better
value in the long run. For example, the total cost of ownership of a car is not just the
purchase price, but also the expenses incurred through its use, such as repairs,
insurance and fuel. A used car that appears to be a great bargain might actually have a

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total cost of ownership that is higher than that of a new car, if the used car requires
numerous repairs while the new car has a three-year warranty.

Figure 5.3
1.4

Traditional system cost vs Strategic system cost

The recent trend is now on the Strategic System cost rather than the traditional system
cost as shown in Figure 5.4

Figure 5.4

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1.5 Limitations in management accounting and conventional cost accounting

As there are limitations of both management accounting and conventional practices,
Strategic Cost Management surfaced as the current recent trend (Figure 5.5)
SCMs composition

Figure 5.5
2 Techniques Of Cost Reduction
The following are the widely used techniques of cost reduction:
2.1 Just-In-Time (JIT) System
The main aim of JIT is to produce the required items, at the required quality and
quantity, at the precise time they are required. JIT purchasing requires for the items
where too much carrying costs associated with holding high inventory levels.
purchasing system reduces the investment in inventories because of frequent order of
small quantities.
2.2 Target Costing
Target costing refers to the design of product, and the processes used to produce it, so
that ultimately the product can be manufactured at a cost that will enable the firm to
make profit when the product is sold at an estimated market-driven price. This
estimated price is called target price.
2.3.Activity Based Management(ABM)
Activity based management is the use of activity based costing to improve operations
and to eliminate non-value added cost. The main goal of ABM is to identify and
eliminate non-value added activities and costs.

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2.4 Life Cycle Costing

Life cycle costing estimates and accumulates costs over a product's entire life cycle in
order to determine whether the profits earned during the manufacturing phase will
cover the costs incurred during the pre-and-post manufacturing stage.
2.5 Kaizen Costing
Kaizen costing is the process of cost reduction during the manufacturing phase of an
existing product. The Japanese word 'Kaizen' refers to continual and gradual
improvement through small activities, rather than large or radical improvement through
innovation or large investment technology.
2.6 Business Process-re-engineering
Re-engineering is a complete redesign of process with an emphasis on finding creative
new ways to accomplish an objective. The aim of business process re-engineering is to
improve the key business process in an organization by focusing on simplification, cost
reduction, improved quality and enhanced customer satisfaction.
2.7 Total Quality Management (TQM)
Under the TQM approach, all business functions are involved in a process of
continuous quality improvement.
2.8. Value chain
Value chain analysis is a means of achieving higher customer satisfaction and
managing costs more effectively. The value chain is the linked set of value creating
activities all the way from basic raw materials' sources, component suppliers, to the
ultimate end-use product or service delivered to the customer.
2.9 Bench Marketing
Bench marketing is a continual search for the most effective method of accomplishing a
task by comparing the existing methods and performance levels with those of other
organizations or other sub-units within the same organization.
2.10 Management Audits
Management audits, also known as performance audits, can be used to facilitate cost
reduction in both profit and non-profit organizations. Management audits are intended
to help management to do a better job by identifying waste and inefficiency and
recommending a corrective action.
3 Strategies Of Cost Reduction
Cost reduction strategies can be classified as in Figure 5.6

5-6

Figure 5.6

DEFINITIONS
Cost Savings: A cost reduction that can be specifically identified and will be made to a
budget or program, resulting from implementing a specific alternative in lieu of continuing the
present system.
Cost avoidance: Financial or economic benefits that result from an initiative but do not permit
a monetary reduction to a funded activity or budget.
Cost containment: The process of maintaining organizational costs within a specified budget;
restraining expenditures to meet organizational or project financial targets.
Value enhancement: Value which affects the whole-life costs or whole-life income and its
required functionality.

4 Quality Elements for Product

A business organization produces goods and services to meet its customers needs.
Customers want value and quality has become a major factor in the value of products and
service. Customers know that certain companies produce better-quality products than
others, and they buy accordingly. That means a firm must consider how the consumer
defines quality. Quality should be aimed at the needs of the consumer, present and future.
From this perspective, product and service quality is determined by what the customer wants
and is willing to pay for. Since customers have different product needs, they will have
different quality expectations. This results in a commonly used definition of quality as a
services or products fitness for its intended use, or tness
4. 1 Dimensions of quality for manufactured products
The dimensions of quality for manufactured products a consumer looks for
include the following
i.
Performance: The basic operating characteristics of a product; for example,
how well a car handles or its gas mileage.
ii.
Features: The extra items added to the basic features, such as a stereo CD or
a leather interior in a car.
iii.
Reliability: The probability that a product will operate properly within an
expected time frame; that is, a TV will work without repair for about seven
years.
iv.
Conformance: The degree to which a product meets pre established standards.
v.
Durability: How long the product lasts; its life span before replacement. A pair of
L.L. Bean boots, with care, might be expected to last a lifetime.
vi.
Serviceability: The ease of getting repairs, the speed of repairs, and the
courtesy and competence of the repair person.
vii.
Aesthetics: How a product looks, feels, sounds, smells, or tastes.
viii.
Safety: Assurance that the customer will not suffer injury or harm from a
product; an especially important consideration for automobiles.
ix.
Other perceptions: Subjective perceptions based on brand name, advertising,
and the like.

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4.2 Dimensions of quality for services

i.
Time and timeliness: How long must a customer wait for service, and is it
completed on time? For example, is an overnight package delivered overnight?
ii.
Completeness: Is everything the customer asked for provided? For example, is
a mail order from a catalogue company complete when delivered?
iii.
Courtesy: How are customers treated by employees? For example, are
catalogue phone operators at L.L. Bean nice and are their voices pleasant?
iv.
Consistency: Is the same level of service provided to each customer each time?
Is your newspaper delivered on time every morning?
v.
Accessibility and convenience: How easy is it to obtain the service? For
example, when you call L.L. Bean does the service representative answer
quickly?
vi.
Accuracy: Is the service performed right every time? Is your bank or credit card
statement correct every month?
vii.
Responsiveness: How well does the company react to unusual situations, which
can happen frequently in a service company? For example, how well is a
telephone operator at L.L. Bean able to respond to a customers questions
about a catalogue item not fully described in the catalogue?
5 The Cost Of Quality
According to legendary quality guru Armand Feigenbaum, quality costs are the foundation
for quality systems economics. Quality costs have traditionally served as the basis for
evaluating investments in quality programs. The costs of quality are those incurred to
achieve good quality and to satisfy the customer, as well as costs incurred when quality fails
to satisfy the customer. Thus, quality costs fall into two categories: the cost of achieving
good quality, also known as the cost of quality assurance, and the cost associated with poorquality products, also referred to as the cost of not conforming to specifications.
5.1 The cost of achieving good quality
The costs of a quality management program are prevention costs and appraisal costs.
Prevention costs are the costs of trying to prevent poor-quality products from reaching
the customer. Prevention reflects the quality philosophy of do it right the first time, the
goal of a quality management program. Examples of prevention costs include:
Quality planning costs: The costs of developing and implementing the quality
management program.
Product-design costs: The costs of designing products with quality characteristics.
Process costs: The costs expended to make sure the productive process conforms to
quality specifications.
Training costs: The costs of developing and putting on quality training programs for
employees and management.
Information costs: The costs of acquiring and maintaining (typically on computers) data
related to quality, and the development and analysis of reports on quality performance.
Appraisal costs are the costs of measuring, testing, and analyzing materials, parts,
products, and the productive process to ensure that product-quality specifications are
being met. Examples of appraisal costs include: Inspection and testing: The costs of
testing and inspecting materials, parts, and the product at various stages and at the
end of the process.
Test equipment costs: The costs of maintaining equipment used in testing the quality
characteristics of products.
Operator costs: The costs of the time spent by operators to gather data for testing
product quality, to make equipment adjustments to maintain quality, and to stop work to
assess quality.
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Appraisal costs tend to be higher in a service organization than in a manufacturing

company and, therefore, are a greater proportion of total quality costs. Quality in
services is related primarily to the interaction between an employee and a customer,
which makes the cost of appraising quality more difficult. Quality appraisal in a
manufacturing operation can take place almost exclusively in house; appraisal of
service quality usually requires customer interviews, surveys, questionnaires, and the
like.
5.2 The cost of poor quality
The cost of poor quality (COPQ) is the difference between what it actually costs to
produce a product or deliver a service and what it would cost if there were no defects.
Most companies find that defects, rework and other unnecessary activities related to
quality problems significantly inflate costs; estimates range as high as 20 to 30% of
total revenues. This is generally the largest quality cost category in a company,
frequently accounting for 70 to 90% of total quality costs. This is also where the
greatest cost improvement is possible.
The cost of poor quality can be categorized as internal failure costs or external failure
costs.
Internal failure costs are incurred when poor-quality products are discovered before
they are delivered to the customer. Examples of internal failure costs include:
Scrap costs: The costs of poor-quality products that must be discarded, including labor,
material, and indirect costs.
Rework costs: The costs of fixing defective products to conform to quality
specifications.
Process failure costs: The costs of determining why the production process is
producing poor quality products.
Process downtime costs: The costs of shutting down the productive process to fix the
problem.
Price-downgrading costs: The costs of discounting poor-quality productsthat is,
selling products as seconds.
External failure costs are incurred after the customer has received a poor-quality
product and are primarily related to customer service. Examples of external failure
costs include.
Customer complaint costs: The costs of investigating and satisfactorily responding to a
customer complaint resulting from a poor-quality product.

ACTIVITY 1
(20 MINS)
In the set scenario, the six operational divisions have a total budget as shown below. The
company is becoming very quality conscious and has asked the Operations Managers of
each of the divisions to submit a one-line financial statement to the Director of operations
showing the percentage of POC (Price of Conformance) and the percentage of PONC (Price
of Non-Conformance) for their divisions last year. These POC and PONC percentages are
shown in the table below.
The Director already knows from the company accountant the overall total budget spent by
each division. This is also shown in the table below.
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Total Budget($M)

POC

PONC

Sales and Marketing

30

10

10

Manufacturing and Assembly

250

10

15

Logistics and Distribution

20

10

Research and Development

60

25

15

Customer Services

50

35

50

Corporate Services

10

10

$420M

100%

100%

a) Describe briefly what is meant by TCOP

b) Show the basic equation which defines the relationship between;
POC, PONC, COQ (Cost of Quality), COP (Cost of Product)
and TCOP (Total Cost of Product).
c) Produce a table which shows the total quality financial profiles
for each of the 6 (six) divisions in the format shown below:TCOP ($M)

Sales and Marketing

30

Manufacturing and Assembly

250

Logistics and Distribution

20

Research and Development

60

Customer Services

50

Corporate Services

10
$420M

COP ($M)

POC ($M)

6 Techniques Of Quality Improvement - Continuous Quality Improvement

5-10

PONC ($M)

Continuous Quality Improvement (CQI) is a quality management strategy? If one looks at

this process as a necessary evil as opposed to a valuable tool, they may not be seeing the
big picture in how a properly run study is not difficult to run and not a waste of time.
Moreover, the results can improve the work environment for management, staff and patients.
CQI is more than a simple quality management strategy. It is an entire management
philosophy. A management philosophy that departs sharply from philosophies of the past.
Traditional management philosophies are built upon a bureaucratic command and control
model. CQI is a management philosophy based upon a nonbureaucratic educate and
support model. This change in management philosophy is the most difficult aspect of CQI.
CQI is a mechanism that identifies and resolves problems that cause quality defects. It
provides small incremental improvements in quality over a period of years. Generally, one
does not get results overnight. CQI is not a quick fix for a failing business. The typical
implementation time for CQI is 5-7 years. There are two components to CQI: philosophy and
tools. Use of the tools will result in improved quality even if one does not adopt the CQI
philosophy. CQI activities can occur without changing to a CQI environment. However,
embracing the entire concept and utilizing both the philosophy and the tools obtain the
greatest success. We will begin the discussion with an overview of quality. Particular
emphasis will be placed on service quality.
The following are useful concepts in relation to the CQI philosophy.
6. 1 Benchmarking
This is a quality management strategy of rating business practices against the worlds
best companies. Traditional management strategies compare competitive company to
competitive company. Benchmarking compares the business to the worlds best,
regardless of the industry, product, or service.
6. 2 Just In Time (JIT)
Delivery of services, products, parts, equipment, etc. at just the moment they are
needed. JIT reduces the need for large inventories and storage. It decreases waiting
(and therefore unproductive) time. In the hospital environment, JIT means having staff
available when they are needed instead of constantly available. It may be traditional to
staff X number of people for a department or shift. But JIT requires an evaluation of
when the peak work periods are and adjustment of staff to accommodate the peak
periods.
6.3 Poka-Yoke
Making the service, product, or process mistake-proof is an example of pokayoke. If
there is a right way to do something, make it impossible to do it another way. Pokayoke
means to make the process as idiot proof as possible. Try to conceive of every possible
human error that could occur and safeguard against it. (Medical gas cylinder
connecting systems are an example of poka-yoke.)
6.4 Robust Design
Design the process so it withstands the random fluctuations that decrease quality. No
matter how well everything works there will always be fluctuations in the process.
Design the process to flex enough so fluctuations do not decrease the overall quality.
For example, an RC department should be designed so if an RCP calls in sick, the

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quality of patient care is not affected. The department should be designed to

accommodate this random fluctuation.
6.5 Organizational capital
Organizational capital is the training, education, experience, and intelligence of its
employees. This capital is as valuable as traditional forms of capital. It can and should
be utilized. Organizational capital can very quickly be converted to traditional capital if
management utilizes it properly.
6.6 Creative Destruction
Many of the traditional concepts of management and how to do business are obsolete
for todays marketplace. Organizations must change and change dramatically to
survive. Change should not occur just for the sake of change. It is absurd to change
something that the organization does well just to change it. (If it works well, dont fix it.)
One must identify the good and the bad in the organization and destroy the latter.
Creative destruction is a smart bomb type of destruction process. Only destroy that
which is counterproductive to quality.
6.7 Made-To-Order Components
This is a departure from one of the basic concepts of industrial-age thinking:
interchangeable parts. Made-to-order components are the ultimate in customization. In
this type of operation, a slight deviation in one component is compensated for by the
other components. For example, if one part of a product is off a millimeter, the other
components are made off the same amount. The end product fits together and
functions properly instead of being defective due to one component.
6.8 Flex-Firm
Flex-firms allow individual departments to adopt a structural model that best suits their
primary activities instead of forcing a standard model on every department. Hospitals
are generally bureaucratic structures and departments within hospitals follow this
organizational model. Bureaucracy is just one of many organizational models.
6.9 Innovation Imperative
In todays marketplace, a company must have new products or services to stay viable.
No company can corner the market and stay there without constant innovation.
Stagnation or resting on your laurels will not lead to success. Innovation,
experimentation and creativity are actively encouraged to remain competitive.
Innovation is imperative for todays business.
6.10 CHAOS
Chaos theory deals with randomness and complexity. This theory can assist in the
understanding of complex and dynamic processes such as, running a hospital. Most
sciences look at a given state of matter. They derive information from very strict
control of the variables of what they are studying. The science of chaos accepts the
fact there are an infinite number of variables. It concentrates its attention on the
science of process rather than of state. Chaos studies becoming rather than being.
This type of thought-process is at the core of CQI. An elementary knowledge of chaos
theory can be very useful. Knowledge of emergent behaviour is also extremely useful.
6.11 Shadow Management
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A management structure that takes over during a crisis is shadow management. During
a crisis, decisions must be made rapidly. There is little time for extensive discussion or
to form a committee/task force to study the problem. Certain actions need to be
implemented immediately. There should be an organizational mechanism in place that
can take such action during a crisis. When the crisis is over, this management returns
to the shadows. The organization should be able to operate in two modes, one for
normal operations and one for crisis situations. Shadow management becomes
operative in the latter. CQI does not lend itself well to crisis management. CQI can help
prevent the crisis through careful planning, but it is not a quick response system.
Shadow management may be necessary for a crisis.

6.12 Ad-Hocracy
An organization run by project teams or task forces. Teams and task forces are formed
to achieve the current goals of the company. They are given the authority to achieve
those goals. When the task is completed, they are disbanded or reduced to
maintenance. The team or task force working on a more current project replaces them.
This provides a more democratic distribution of power due to the changing nature of the
task forces.
6.13 Analysis Paralysis
CQI can provide a tremendous amount of data on an organization. This can be
overwhelming and lead to no action. So much time can be spent discussing and
diagramming problems nothing gets done. This is analysis paralysis.
6.14 Intelligent Error
Errors that only hindsight could have prevented. A correct thought process and decision
was made prior to the action producing the error. The organization accepts the fact that
risks must be taken for innovation to occur. This attitude will result in intelligent errors.
In contrast, an organization that penalizes such errors will have few innovations.
7 Other Alternative House of Quality
Every successful company has always used data and information to help in its planning processes. In
planning a new product, engineers have always examined the manufacturing and performance history
of the current product. They look at field test data, comparing their product to that of their
competitors product. They examine any customer satisfaction information that might happen to be
available. Unfortunately, much of this information is often incomplete. It is frequently examined as
individual data, without comparison to other data that may support or contradict it. By contrast,
Quality Function Deployment (QFD) uses a matrix format to capture a number of issues that are vital
to the planning process. The House of Quality Matrix is the most recognized and widely used form of
this method. It translates customer requirements, based on marketing research and benchmarking
data, into an appropriate number of engineering targets to be met by a new product design. Basically,
it is the nerve center and the engine that drives the entire QFD process. According to Hauser and
Clausing, it is a kind of conceptual map that provides the means for inter functional planning and
communication.
There are many different forms of the House of Quality, but its ability to be adapted to the
requirements of a particular problem make it a very strong and reliable system to use. Its general
format is made up of six major components. These include customer requirements, technical
requirements, a planning matrix, an interrelationship matrix, a technical correlation matrix, and a
technical priorities/benchmarks and targets section.
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Figure 5.7 House of Quality

ACTIVITY 2
(10 MINS)
Explain how improving quality can lead to reduced costs.

8 Conflicting issues of implementation of cost reduction and quality improvement

strategies simultaneously
Often lower the operating cost will interrupt the quality improvement scheme. As such the
consideration of the new techniques so called Strategic Cost Management (SCM) would
hopefully resolve this tension.
SCM gives a clear understanding of the firms cost structure in search of sustainable
competitive advantage. SCM is the managerial use of cost information explicitly directed at
one or more of the four stages (strategy formulation, communicating the strategy,
implementing and controlling) of strategic management.
Overall recognition of the cost relationships among the activities in the value chain, and the
process of managing those cost relationships to a firm's advantage. This takes the
organisation in totality.
SCM is the best solution due to:
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Cost analysis in terms of overall value chain of which the firm is a part
Strongly external focus
The design of cost management systems changes dramatically depending on the
basic strategic positioning of the firm
o Cost leadership or
o Product differentiation
Cost is a function of strategic choice about the structure of how to compete and
managerial skill in executing the strategic choices
o Structural cost drivers and
o Executional cost drivers

Strategic cost management (Figure 5.5) is a blend of :

Value chain analysis (how we organize our thinking about cost management?)
Strategic positioning analysis (what role does cost management play in the firm?)
Cost driver analysis
Tools in SCM as in Figure 5.8

Figure 5.8

5-15

ACTIVITY 3
(20 MINS)
Draw a fish-bone chart detailing reasons why an airline customer might be dissatisfied.

ACTIVITY 4
(20 MINS)
In the perspective of the tension of cost reduction and improved quality, what roles do
operations managers play in addressing the major aspects of service quality?
QUICK QUIZZ
1. The Balanced Scorecard is a useful tool for helping managers translate their strategy
into action in the following areas:
A.
Sustainability; Flexibility; Efficiency; Technology
B.
Customers; Financial; Internal Business Processes; Learning and Growth
C.
The Environment; The Community; Suppliers; Other Stakeholders
D.
Strategy; Tactics; Productivity; Profitability

2. Quality function deployment is a methodology to:

A.
compare what the customer wants and what you can do
B.
compare what the customer wants with your products specifications
C.
compare importance weights of your competitors
D.
compare functions with features
3. How can a university control the quality of its output (that is, its graduates)?
4. What are 10 determinants of service quality?
5. Name several products that do not require high quality.
ANSWERS TO QUICK QUZZ
1. B
2. A
3. A university can seek to control the quality of its graduates by:
Setting specific goals for its overall accomplishments
Employing quality faculty
Setting appropriate standards (prerequisites, GPA, required credit hours, etc.)
Employing appropriate evaluation devices (quizzes, examinations, term
papers, etc.)
4. According to Berry, Zeithaml, and Parasuraman, the 10 determinants of service
quality are:
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Reliability
Responsiveness
Competence
Access
Courtesy
Communication
Credibility
Security
Understanding/knowing the customer
Tangibles

5. If one adopts a definition of quality based upon satisfying stated or implied needs, it
is difficult to imagine any product that would not be required to be of high quality.
ANSWERS TO ACTIVITIES
1

a) TCOP is total cost of product. TCOP = COP (Cost of Product) + COQ (Cost of
Quality); COQ includes (POC & PONC)
b) TCOP = COP + COQ; COQ = (POC + PONC)
c) As table below:
TCOP
($M)
Sales and Marketing
Manufacturing and
Assembly
Logistics and Distribution
Research and
Development
Customer Services
Corporate Services

POC ($M)

PONC
($M)

COQ
($M)

COP($M)

30

3.0

6.0

24.0

250
20

25.0
2.0

37.5
1

62.5
3.0

187.5
17.0

60
50
10
$420.0

15.0
17.5
1.0
$63.5

9
25
0.5
$76.0

24.0
42.5
1.5
$139.5

36.0
7.5
8.5
$280.5

Higher quality leads to greater demand, to greater market share, to greater economies of
scale. Additionally, higher quality leads to less scrap, rework, and warranty cost, hence to
less input required for same output.

3
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The design and delivery of service can make a difference on the tangible
components of service, containing the determinants of service quality in the
process design, managing expectations, and having alternate plans for exceptions
and taking a long term approach.

CHAPTER ROUND UP

Total Cost Of Ownership is the purchase price of an asset plus the costs of operation.

Quality, is a term that means different things to different people. We define quality as
"the totality of features and characteristics of a product or service that bears on its
ability to satisfy stated or implied needs." Defining quality expectations is critical to
effective and efficient operations.

CQI is a management philosophy that departs sharply from management

philosophies of the past. Management philosophies of the past are based upon a
bureaucratic command and control model. In this model, specialized workers
perform repetitive tasks at specific levels within the organization.

The House of Quality functions as a living document and a source of ready reference
for related products and future upgrades. While it is a great communication tool at
each step in the process, the matrices are the means and not the end. Its purpose is
to serve as a vehicle for dialogue to strengthen vertical and horizontal
communications.

SCM gives a clear understanding of the firms cost structure in search of sustainable
competitive advantage and be effective use to circumvent the tension of cost and
quality endeavours.

5-18

REFERENCES
1. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Crating Value Along the
Supply Chain 7th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
4. Total cost of ownership :
http://www.investopedia.com/terms/t/totalcostofownership.asp#ixzz3ehM1E8NC
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5. Tools and Techniques of cost reduction:
http://accountlearning.blogspot.in/2011/02/tools-and-techniques-of-costreduction.html
6. Continuous Quality Improvement - Methods And Tools:
http://www.rcecs.com/MyCE/PDFDocs/course/V7029.pdf
7. Quality Elements for Product:
https://www.google.com.sg/search?
q=Quality+Elements+for+Product&rlz=1C1CYCW_enSG632SG632&oq=Quality+Ele
ments+for+Product&aqs=chrome..69i57.4697j0j4&sourceid=chrome&es_sm=0&ie=U
TF-8

5-19