MGT530-M9C3-Critical Thinking

Name

CT_Rubric_100

Description

100 Points

Rubric Detail
Levels of Achievement
Criteria

Exceeds Expectation

Meets Expectation

Some Expectations

Unsatisfactory

Content

33 to 35 points

29 to 32 points

26 to 28 points

0 to 25 points

Demonstrates
substantial and
extensive knowledge of
the materials, with no
errors or major
omissions.

Demonstrates adequate
knowledge of the
materials; may include
some minor errors or
omissions.

Demonstrates fair
knowledge of the materials
and/or includes some
major errors or omissions.

Fails to demonstrate
knowledge of the
materials and/or
includes many major
errors or omissions.

33 to 35 points

29 to 32 points

26 to 28 points

0 to 25 points

Provides strong thought,
insight, and analysis of
concepts and
applications.

Provides adequate
thought, insight, and
analysis of concepts and
applications.

Provides poor though,
insight, and analysis of
concepts and applications.

Provides little or no
thought, insight, and
analysis of concepts and
applications.

15 to 15 points

13 to 14 points

11 to 12 points

0 to 10 points

Sources go above and
beyond required criteria
and are well chosen to
provide effective
substance and
perspectives on the
issue under
examination.

Sources meet required
criteria and are
adequately chosen to
provide substance and
perspectives on the issue
under examination.

Sources meet required
criteria but are poorly
chosen to provide
substance and perspectives
on the issue under
examination.

Source selection and
integration of knowledge
from the course is clearly
deficient.

15 to 15 points

13 to 14 points

11 to 12 points

0 to 10 points

Project is clearly
organized, well written,
and in proper format as
outlined in the
assignment. Strong
sentence and paragraph
structure, contains no
errors in grammar,
spelling, APA style, or
APA citations and
references.

Project is fairly well
organized and written
and is in proper format as
outlined in the
assignment. Reasonably
good sentence and
paragraph structure, may
include a few minor
errors in grammar,
spelling, APA style, or APA
citations and references.

Project is poorly organized
and written and may not
follow proper format as
outlined in the assignment.
Inconsistent to inadequate
sentence and paragraph
development, and/or
includes numerous or
major errors in grammar,
spelling, APA style or APA
citations and references.

Project is not organized
or well written and is not
in proper format as
outlined in the
assignment. Poor quality
work; unacceptable in
terms of grammar,
spelling, APA style, and
APA citations and
references.

Analysis

Sources

Demonstrates
college-level
proficiency in
organization,
grammar and
style.

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Quality Control

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written consent of McGraw-Hill Education.

10-1

You should be able to:
LO 10.1
LO 10.2
LO 10.3
LO 10.4

Explain the need for quality control
Discuss the basic issues of inspection
List and briefly explain the elements of the control process
Explain how control charts are used to monitor a process, and
the concepts that underlie their use
LO 10.5 Use and interpret control charts
LO 10.6 Perform run tests to check for nonrandomness in process output
LO 10.7 Assess process capability

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10-2

 Quality control
 A process that evaluates output relative to a standard

and takes corrective action when output doesn’t meet
standards
 If results are acceptable no further action is required

 Unacceptable results call for correction action

 Inspection alone is not sufficient to achieve a reasonable

level of quality
 Most organizations rely upon some inspection and a great

deal of process control to achieve an acceptable level of
quality

LO 10.1

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10-3

LO 10.1

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10-4

 Inspection
 An appraisal activity that compares goods or services to

a standard
 Inspection issues:






LO 10.2

How much to inspect and how often
At what points in the process to inspect
Whether to inspect in a centralized or on-site location
Whether to inspect attributes or variables

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10-5

LO 10.2

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10-6

 Typical inspection points:
 Raw materials and purchased parts
 Finished products
 Before a costly operation
 Before an irreversible process
 Before a covering process

LO 10.2

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10-7

Inspection Point
Characteristics
Accounting/billing
Accuracy, timeliness
Building and grounds
Appearance and safety
Main desk
Appearance, waiting times, accuracy of bills
Maid service
Completeness, productivity
Personnel
Appearance, manners, productivity
Reservations/occupancy Over/underbooking, percent occupancy
Restaurants
Kitchen, menus, meals, bills
Room service
Waiting time, quality of food
Supplies
Ordering, receiving, inventories

LO 10.2

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10-8

 Effects on cost and level of disruption are a major

issue in selecting centralized vs. on-site inspection
 Off-Site
 Specialized tests that may best be completed in a lab
 More specialized testing equipment
 More favorable testing environment

 On-Site
 Quicker decisions are rendered
 Avoid introduction of extraneous factors
 Quality at the source

LO 10.2

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10-9

 Quality control seeks quality of conformance
 A product or service conforms to specifications

 A tool used to help in this process:
 SPC
 Statistical evaluation of the output of a process
 Helps us to decide if a process is “in control” or if corrective

action is needed

LO 10.2

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10-10

 Two basic questions concerning variability:

Issue of process control
 Are the variations random? If nonrandom variation
is present, the process is said to be unstable.
2. Issue of process capability
 Given a stable process, is the inherent variability of
the process within a range that conforms to
performance criteria?
1.

LO 10.2

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10-11

 Variation
 Random (common cause) variation:
 Natural variation in the output of a process, created by

countless minor factors
 Assignable (special cause) variation:
 A variation whose cause can be identified
 A nonrandom variation

LO 10.2

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10-12

 SPC involves periodically taking samples of process

output and computing sample statistics:
 Sample means
 The number of occurrences of some outcome

 Sample statistics are used to judge the randomness of

process variation

LO 10.2

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10-13

FIGURE 10.4A The sampling distribution of means is normal, and it
has less variability than the process distribution, which might not be normal
LO 10.3

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10-14

 Sampling and corrective action are only a part of the

control process
 Steps required for effective control:
 Define: What is to be controlled?
 Measure: How will measurement be accomplished?

 Compare: There must be a standard of comparison
 Evaluate: Establish a definition of out of control
 Correct: Uncover the cause of nonrandom variability and fix it
 Monitor: Verify that the problem has been eliminated

LO 10.3

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10-15

 Control chart
 A time-ordered plot of representative sample statistics

obtained from an ongoing process (e.g. sample means),
used to distinguish between random and nonrandom
variability
 Control limits
 The dividing lines between random and nonrandom

deviations from the mean of the distribution
 Upper and lower control limits define the range of acceptable

variation

LO 10.4

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10-16

Each point on the control chart represents a sample of n
observations
LO 10.4

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10-17

 Type I error
 Concluding a process is not in control when it actually is.
 The probability of rejecting the null hypothesis when the null

hypothesis is true
 Manufacturer’s risk

 Type II error
 Concluding a process is in control when it is not.
 The probability of failing to reject the null hypothesis when the null

hypothesis is false
 Consumer’s risk

LO 10.4

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10-18

LO 10.4

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McGraw-Hill Education.

10-19

LO 10.4

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10-20

 Variables generate data that are measured
 Mean control charts
 Used to monitor the central tendency of a process
 “x-bar” charts

 Range control charts
 Used to monitor the process dispersion
 R charts

LO 10.5

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10-21

k

k

x=

 xi
i =1

k

where
x = Average of sample means
x i = mean of sample i

R

R = i =1
k
where

i

R = Average of sample ranges
Ri = Range of sample i

k = number of samples

LO 10.5

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10-22

 Used to monitor the central tendency of a process

x − chart Control Limits
UCLx = x + A2 R
LCLx = x − A2 R
where
A2 = a control chart factor based on sample size, n
LO 10.5

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10-23

 Used to monitor process dispersion

R Chart Control Limits
UCLR = D4 R
LCLR = D3 R
where
D3 = a control chart factor based on sample size, n
D4 = a control chart factor based on sample size, n
LO 10.5

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10-24

LO 10.5

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McGraw-Hill Education.

10-25

LO 10.5

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10-26

 To determine initial control limits:
 Obtain 20 to 25 samples
 Compute appropriate sample statistics
 Establish preliminary control limits
 Determine if any points fall outside of the control limits
 If you find no out-of-control signals, assume the process is in control
 If you find an out-of-control signal, search for and correct the

assignable cause of variation
 Resume the process and collect another set of observations on

which to base control limits
 Plot the data on the control chart and check for out-of-control
signals

LO 10.5

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10-27

 Attributes generate data that are counted.
 p-chart
 Control chart used to monitor the proportion of defectives in

a process
 c-chart
 Control chart used to monitor the number of defects per unit

LO 10.5

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10-28

 When observations can be placed into two

categories
 Good or bad
 Pass or fail

 Operate or don’t operate

 When the data consists of multiple samples of

several observations each

LO 10.5

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10-29

Total number of defectives
p=
Total number of observatio ns
p (1 − p )
ˆ p =
n
UCL p = p + z (ˆ p )
LCL p = p − z (ˆ p )
LO 10.5

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10-30

 Use only when the number of occurrences per unit of

measure can be counted; non-occurrences cannot be
counted.
Scratches, chips, dents, or errors per item
 Cracks or faults per unit of distance
 Breaks or tears per unit of area
 Bacteria or pollutants per unit of volume
 Calls, complaints, failures per unit of time


UCL c = c + z c
LCL c = c − z c
LO 10.5

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10-31

 At what points in the process to use control charts
 What size samples to take
 Sample frequency

 What type of control chart to use
 Variables
 Attributes

LO 10.5

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10-32

 Even if a process appears to be in control, the data may

still not reflect a random process
 Analysts often supplement control charts with a run
test
 Run test

 A test for patterns in a sequence
 Run
 Sequence of observations with a certain characteristic

LO 10.6

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10-33

LO 10.6

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10-34

 Once a process has been determined to be stable, it is

necessary to determine if the process is capable of
producing output that is within an acceptable range
 Tolerances or specifications
 Range of acceptable values established by engineering design or

customer requirements
 Process variability
 Natural or inherent variability in a process
 Process capability

 The inherent variability of process output (process width)

relative to the variation allowed by the design specification
(specification width)
LO 10.7

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10-35

Lower
Upper
Specification Specification

Process variability (width)
exceeds specifications

Lower
Specification

Lower
Specification

Upper
Specification

Process variability (width)
matches specifications width

Upper
Specification

Process variability (width) is less
than the specification width

LO 10.7

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10-36

UTL – LTL
Cp =
6
where
UTL = upper tole rance (specifica tion) limit
LTL = lower tole rance(spec ification) limit

LO 10.7

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10-37

 Used when a process is not centered at its target, or

nominal, value

C pk = min C pu , C pl 
 UTL − x x − LTL 
= min 
,

3 
 3

LO 10.7

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10-38

 Simplify
 Standardize
 Mistake-proof
 Upgrade equipment

 Automate

LO 10.7

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10-39

LO 10.7

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10-40

 There are several risks of using capability

measures:
 The process may not be stable
 The process output may not be normally distributed
 The process is not centered but Cp is used

LO 10.7

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10-41

 Quality is a primary consideration for nearly all

customers
 Achieving and maintaining quality standards is of

strategic importance to all business organizations
 Product and service design

 Increase capability in order to move from extensive use of

control charts and inspection to achieve desired quality
outcomes

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10-42

Management of
Quality

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distribution without the prior written consent of McGraw-Hill Education.

You should be able to:
LO 9.1 Discuss the philosophies of quality gurus
LO 9.2 Define the term quality as it relates to products and as it relates to
services
LO 9.3 Identify the determinants of quality
LO 9.4 Explain why quality is important and the consequences of poor
quality
LO 9.5 Describe and give examples of the costs associated with quality
LO 9.6 Discuss the importance of ethics in managing quality
LO 9.7 Compare the quality awards
LO 9.8 Discuss quality certification and its importance
LO 9.9 Describe TQM
LO 9.10 Give an overview of problem solving
LO 9.11 Give an overview of process improvement
LO 9.12 Describe the Six Sigma methodology
LO 9.13 Describe and use various quality tools

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 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
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

LO 9.1

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 Walter Shewart
 “Father of statistical quality control”
 Control charts
 Variance reduction
 W. Edwards Deming
 Special vs. 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
LO 9.1

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 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

LO 9.1

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 Genichi Taguchi
 Taguchi loss function
 Taiichi Ohno and Shigeo Shingo
 Developed philosophy and methods of kaizen

LO 9.1

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 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

LO 9.2

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 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
 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

LO 9.2

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 Audit service to identify strengths and weaknesses
 In particular, look for discrepancies between:
1.
Customer expectations and management perceptions of those
expectations
2. Management perceptions, customer expectations, and servicequality specifications
3. Service quality and service actually delivered
4. Service actually delivered and what is communicated about the
service to customers
5. Customers’ expectations of the service provider and their
perceptions of provider delivery

LO 9.2

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 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

LO 9.3

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 Top management
 Design
 Procurement
 Production/operations

 Quality assurance
 Packaging and shipping
 Marketing and sales

 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

 Customer service

LO 9.3

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 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

LO 9.4

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 Loss of business
 Liability
 Productivity
 Costs

LO 9.4

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 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

LO 9.5

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 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

LO 9.5

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 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.

LO 9.6

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 Award categories
1.
2.
3.
4.
5.
6.

Education
Healthcare
Manufacturing
Nonprofit/government
Service
Small Business

 Purpose of the award
1.
2.
3.

LO 9.7

Stimulate efforts to improve quality
Recognize quality achievements
Publicize successful programs
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Leadership
II. Strategic planning
III. Customer focus
IV. Measurement, analysis, and knowledge management
V. Workforce focus
VI. Operations focus
VII. Results
I.

LO 9.7

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 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

LO 9.8

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 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 7
Factual approach to decision making
 Principle 8
Mutually beneficial supplier relationships

LO 9.8

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 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

LO 9.8

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McGraw-Hill Education.

 A philosophy that involves everyone in an organization

in a continual effort to improve quality and achieve
customer satisfaction

T

LO 9.9

Q

M

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1.
2.
3.
4.
5.
6.

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

LO 9.9

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McGraw-Hill Education.

Continuous improvement
2. Competitive benchmarking
3. Employee empowerment
4. Team approach
5. Decision based on fact, not opinion
6. Knowledge of tools
7. Supplier quality
8. Champion
9. Quality at the source
10. Suppliers are partners in the process
1.

LO 9.9

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McGraw-Hill Education.

 Continuous improvement
 Philosophy that seeks to make never-ending

improvements to the process of converting inputs into
outputs
 Kaizen
 Japanese word for continuous improvement

LO 9.9

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McGraw-Hill Education.

 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”

LO 9.9

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McGraw-Hill Education.

 Obstacles include:
 Lack of company-wide definition of quality
 Lack of strategic plan for change
 Lack of customer focus
 Poor intra-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

LO 9.9

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McGraw-Hill Education.

 Overzealous advocates may pursue TQM programs blindly,

focusing attention on quality
 Programs may not be linked to the strategies of the
organization in a meaningful way
 Quality-related decisions may not be tied to market
performance
 Failure to carefully plan a program before embarking on it can
lead to false starts, employee confusion, and meaningless
results
 Organizations sometimes pursue continuous improvement
 Quality efforts may not be tied to results

LO 9.9

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McGraw-Hill Education.

Act

Plan

Study

Do

 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

LO 9.10

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McGraw-Hill Education.

Act

Plan

Study

Do

 Plan-Do-Study-Act (PDSA) cycle
 Study
 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

LO 9.10

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McGraw-Hill Education.

LO 9.10

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McGraw-Hill Education.

 Process improvement
 A systematic approach to improving a process
 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

LO 9.11

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McGraw-Hill Education.

 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

LO 9.12

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McGraw-Hill Education.

 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
 DMAIC
 Define:
 Measure:

Set the context and objectives for improvement
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

LO 9.12

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McGraw-Hill Education.

 Flowchart
 Check sheet
 Histogram
 Pareto chart
 Scatter diagram
 Control chart
 Cause-and-effect diagram

LO 9.13

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McGraw-Hill Education.

LO 9.13

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McGraw-Hill Education.

 Brainstorming
 Quality circles
 Benchmarking

LO 9.13

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McGraw-Hill Education.

 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

LO 9.13

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McGraw-Hill Education.

1.
2.
3.
4.

5.

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

LO 9.13

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McGraw-Hill Education.

 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 chain, not just the organization itself

LO 9.13

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McGraw-Hill Education.

Location Planning
and Analysis

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distribution without the prior written consent of McGraw-Hill Education.
8-1

You should be able to:
LO 8.1
Identify some of the main reasons organizations need to make
location decisions
LO 8.2
Explain why location decisions are important
LO 8.3
Discuss the options that are available for location decisions
LO 8.4
Discuss key considerations related to global location decisions.
LO 8.5
Outline the decision process for making location decisions
LO 8.6
Describe some of the key factors that guide service and retail
location decisions.
LO 8.7
Use the techniques presented to evaluate location alternatives.

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8-2

 Location decisions arise for a variety of reasons:
 Addition of new facilities
 As part of a marketing strategy to expand markets
 Growth in demand that cannot be satisfied by expanding
existing facilities

 Depletion of basic inputs requires relocation
 Shift in markets
 Cost of doing business at a particular location makes

relocation attractive

LO 8.1

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McGraw-Hill Education.

8-3

 Location decisions:
 Are closely tied to an organization’s strategies
 Low-cost
 Convenience to attract market share
 Affect capacity and flexibility
 Represent a long-term commitment of resources

 Affect investment requirements, operating costs, revenues, and operations
 Impact competitive advantage
 Importance to supply chains

LO 8.2

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McGraw-Hill Education.

8-4

 Location decisions are based on:
 Profit potential or cost and customer service
 Finding a number of acceptable locations from which to choose
 Position in the supply chain
 End: accessibility, consumer demographics, traffic patterns, and local customs
are important
 Middle: locate near suppliers or markets
 Beginning: locate near the source of raw materials
 Web-based retail organizations are effectively location independent

LO 8.2

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McGraw-Hill Education.

8-5

 Location criteria can depend on where a business is in the

supply chain
 Supply chain management must address supply chain
configuration:
 Number and location of suppliers, production facilities,
warehouses and distribution centers
 Centralized vs. decentralized distribution
 The importance of such decisions is underscored by their
reflection of the basic strategy for accessing customer
markets

LO 8.2

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McGraw-Hill Education.

8-6

 Existing companies generally have four options

available in location planning:
1.
2.
3.
4.

LO 8.2

Expand an existing facility
Add new locations while retaining existing facilities
Shut down one location and move to another
Do nothing

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McGraw-Hill Education.

8-7

 Two key factors have contributed to the attractiveness

of globalization:
 Trade agreements such as
 North American Free Trade Agreement (NAFTA)
 General Agreement on Tariffs and Trade (GATT)
 U.S.-China Trade Relations Act
 EU and WTO efforts to facilitate trade
 Technology
 Advances in communication and information technology

LO 8.3

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McGraw-Hill Education.

8-8

 A wide range of benefits have accrued to organizations

that have globalized operations:
 Markets
 Cost savings
 Legal and regulatory
 Financial
 Other

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McGraw-Hill Education.

8-9

 There are a number of disadvantages that may

arise when locating globally:
 Transportation costs
 Security costs
 Unskilled labor
 Import restrictions
 Criticism for locating out-of-country
 Productivity

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McGraw-Hill Education.

8-10

 Organizations locating globally should be aware

of potential risk factors related to:
 Intellectual property rights
 Political instability and unrest
 Terrorism
 Economic instability
 Legal regulation
 Ethical considerations

 Cultural differences
 Quality

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McGraw-Hill Education.

8-11

 Managerial implications for global operations:
 Language and cultural differences
 Risk of miscommunication
 Development of trust
 Different management styles
 Corruption and bribery
 Increased travel (and related) costs
 Challenges associated with managing far-flung operations
 Level of technology and resistance to technological change
 Domestic personnel may resist locating, even temporarily

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McGraw-Hill Education.

8-12

 Steps:
1.
Decide on the criteria to use for evaluating location alternatives
2. Identify important factors, such as location of markets or raw
materials
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community alternatives
4. Evaluate the alternatives and make a decision

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McGraw-Hill Education.

8-13

Factors Relating to Foreign Locations
Government

a.

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

Cultural differences

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

Customer preferences

Possible “buy locally” sentiment

Labor

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

Resources

Availability and quality of raw materials, energy, transportation
infrastructure

Financial

Financial incentives, tax rates, inflation rates, interest rates

Technological

Rate of technological change, rate of innovations

Market

Market potential, competition

Safety

Crime, terrorism threat

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McGraw-Hill Education.

8-14

 Primary regional factors:
 Location of raw materials
 Necessity
 Perishability
 Transportation costs
 Location of markets
 As part of a profit-oriented company’s competitive strategy
 So not-for-profits can meet the needs of their service users
 Distribution costs and perishability

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McGraw-Hill Education.

8-15

 Labor factors
 Cost of labor
 Availability of suitably skilled workers
 Wage rates in the area
 Labor productivity
 Attitudes toward work
 Whether unions pose a serious potential problem
 Other factors
 Climate and taxes may play an important role in location
decisions

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McGraw-Hill Education.

8-16

 Many communities actively attempt to attract new

businesses they perceive to be a good fit for the community
 Businesses also actively seek attractive communities based
on such factors such as:
 Quality of life

 Services
 Attitudes
 Taxes
 Environmental regulations
 Utilities
 Development support

LO 8.5

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McGraw-Hill Education.

8-17

 Primary site location considerations are
 Land
 Transportation
 Zoning
 Other restrictions

LO 8.5

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McGraw-Hill Education.

8-18

 Organizing operations
 Product plant strategy
 Entire products or product lines are produced in separate
plants, and each plant usually supplies the entire domestic
market

 Market area plant strategy
 Plants are designated to serve a particular geographic
segment of the market
 Plants produce most, if not all, of a company’s products

LO 8.5

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McGraw-Hill Education.

8-19

 Organizing operations
 Process plant strategy
 Different plants focus on different aspects of a process
 Automobile manufacturers – engine plant, body stamping plant,

etc.
 Coordination across the system becomes a significant issue

 General-purpose plant strategy
 Plants are flexible and capable of handling a range of
products

LO 8.5

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McGraw-Hill Education.

8-20

 Examples
 Logistics companies use GIS data to plan fleet
 Publishers of magazines and newspapers use a GIS to
analyze circulation and attract advertisers
 Banks use a GIS to help decide where to locate branch banks
 Utility companies use a GIS to balance supply and demand,
and identify problem areas
 Insurance companies use a GIS to determine premiums
based on population distribution, crime figures, and
likelihood of natural disasters such as flooding in various
locations, and to manage risk

LO 8.5

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McGraw-Hill Education.

8-21

 GIS
 A computer-based tool for collecting, storing, retrieving,

and displaying demographic data on maps
 Aids decision makers in
 Targeting market segments

 Identifying locations relative to their market potential
 Planning distribution networks

 Portraying relevant information on a map makes it

easier for decision makers to understand

LO 8.5

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McGraw-Hill Education.

8-22

 Considerations:
 Nearness to raw materials is not usually a consideration
 Customer access is
 A prime consideration for some: restaurants, hotels, etc.
 Not an important consideration for others: service call
centers, etc.
 Tend to be profit or revenue driven, and so are
 Concerned with demographics, competition, traffic volume
patterns, and convenience

 Clustering
 Similar types of businesses locate near one another

LO 8.6

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McGraw-Hill Education.

8-23

 Common techniques:
 Locational cost-volume-profit analysis
 Transportation model
 Factor rating
 Center of gravity method

LO 8.7

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McGraw-Hill Education.

8-24

 Locational cost-profit-volume analysis
 Technique for evaluating location choices in economic terms
 Steps:
1.
Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or
highest profit) for the expected level of output

LO 8.7

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McGraw-Hill Education.

8-25

 Assumptions

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

LO 8.7

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McGraw-Hill Education.

8-26

 For a cost analysis, compute the total cost for each

alternative location:

Total Cost = FC + v  Q
where
FC = Fixed cost
v = Variable cost per unit
Q = Quantity or volume of output

LO 8.7

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McGraw-Hill Education.

8-27

 Fixed and variable costs for four potential plant

locations are shown below:

LO 8.7

Location

Fixed Cost
per Year

Variable Cost
per Unit

A

$250,000

$11

B

$100,000

$30

C

$150,000

$20

D

$200,000

$35

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McGraw-Hill Education.

8-28

Plot of Location Total Costs

LO 8.7

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McGraw-Hill Education.

8-29

 Range approximations
 B Superior (up to 4,999 units)

Total Cost of C = Total Cost of B
150,000 + 20Q = 100,000 + 30Q
50,000 = 10Q
Q = 5,000

 C Superior (>5,000 to 11,111 units)

Total Cost of A = Total Cost of C
250,000 + 11Q = 150,000 + 20Q
100,000 = 9Q

 A superior (11,112 units and up)

LO 8.7

Q = 11,111.11

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McGraw-Hill Education.

8-30

 Factor rating
 General approach to evaluating locations that includes quantitative
and qualitative inputs
 Procedure:
Determine which factors are relevant
Assign a weight to each factor that indicates its relative importance
compared with all other factors

1.
2.


3.
4.
5.
6.

LO 8.7

Weights typically sum to 1.00

Decide on a common scale for all factors, and set a minimum acceptable
score if necessary
Score each location alternative
Multiply the factor weight by the score for each factor, and sum the results
for each location alternative
Choose the alternative that has the highest composite score, unless it fails
to meet the minimum acceptable score

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McGraw-Hill Education.

8-31

 A photo-processing company intends to open a new branch store. The

following table contains information on two potential locations. Which is
better?

Scores
(Out of 100)
Factor

Weight

Alt 1

Alt 2

Proximity to
existing source

.10

100

60

Traffic volume

.05

80

80

Rental costs

.40

70

90

Size

.10

86

92

Layout

.20

40

70

Operating Cost

.15

80

90

1.00

LO 8.7

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McGraw-Hill Education.

8-32

 A photo-processing company intends to open a new branch store. The

following table contains information on two potential locations. Which is
better?
Scores
(Out of 100)
Factor

Weight

Alt 1

Alt 2

Alt 1

Proximity to
existing source

.10

100

60

.10(100) = 10.0

.10(60) = 6.0

Traffic volume

.05

80

80

.05(80) = 4.0

.05(80) = 4.0

Rental costs

.40

70

90

.40(70) = 28.0

.40(90) = 36.0

Size

.10

86

92

.10(86) = 8.6

.10(92) = 9.2

Layout

.20

40

70

.20(40) = 8.0

.20(70) = 14.0

Operating Cost

.15

80

90

.15(80) = 12.0

.15(90) = 13.5

70.6

82.7

1.00

LO 8.7

Weighted Scores
Alt 2

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8-33

 Center of gravity method
 Method for locating a distribution center that minimizes
distribution costs
 Treats distribution costs as a linear function of the distance and
the quantity shipped
 The quantity to be shipped to each destination is assumed to be
fixed
 The method includes the use of a map that shows the locations
of destinations
 The map must be accurate and drawn to scale

 A coordinate system is overlaid on the map to determine relative

locations

LO 8.7

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McGraw-Hill Education.

8-34

Figure 8.1

LO 8.7

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McGraw-Hill Education.

8-35

 If quantities to be shipped to every location are equal, you can obtain

the coordinates of the center of gravity by finding the average of the xcoordinates and the average of the y-coordinates.

x

x=

i

n

y

y=

i

n

where
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i
n = Number of destinatio ns

LO 8.7

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McGraw-Hill Education.

8-36

Suppose you are attempting to find the center of
gravity for the problem depicted in Figure 8.1c.
Destination

x

y

D1

2

2

D2

3

5

D3

5

4

D4

8

5

18

16

x 18

x=
= = 4.5
i

n

4

y 16

y=
=
=4
i

n

4

Here, the center of gravity is (4.5,4). This is
slightly west of D3 from Figure 8.1.

LO 8.7

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McGraw-Hill Education.

8-37

 When the quantities to be shipped to every location are unequal, you

can obtain the coordinates of the center of gravity by finding the
weighted average of the x-coordinates and the average of the ycoordinates.
xi Qi

x=
 Qi

yQ

y=
Q
i

i

i

where
Qi = Quantity t o be shipped to destinatio n i
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i

LO 8.7

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McGraw-Hill Education.

8-38

 Suppose the shipments for the problem depicted in Figure 8.1a are not

all equal. Determine the center of gravity based on the following
information.

LO 8.7

Destination

x

y

Weekly
Quantity

D1

2

2

800

D2

3

5

900

D3

5

4

200

D4

8

5

100

18

16

2,000

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8-39

x Q 2(800) + 3(900) + 5(200) + 8(100) 6,100

x=
=
=
= 3.05
2,000
2,000
Q
i

i

i

yQ
2(800) + 5(900) + 4(200) + 5(100) 7,400

y=
i=
=
= 3.7
2,000
2,000
Q
i

i

i

 The coordinates for the center of gravity are (3.05, 3.7). You may round

the x-coordinate down to 3.0, so the coordinates for the center of
gravity are (3.0, 3.7). This is south of destination D2 (3, 5).

LO 8.7

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McGraw-Hill Education.

8-40

LO 8.7

Copyright ©2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.

8-41

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