CHAPTER 5: INVENTORY MANAGEMENT

LEARNING OBJECTIVES:

This topic aims that the students be able to:

1. Understand the concept of inventory management.

2. Discuss inventory and enumerate the types of inventory.

3. Discuss and elaborate the different inventory models.

4. Understand the concept of Just in Time (JIT) inventory system

INVENTORY

The dictionary meaning of inventory is stock of goods or a list of goods. In accounting language, inventory
means stock of finished goods. In a manufacturing point of view, inventory includes, raw material, work in
process, stores, etc.

An Inventory is a stock or store of goods. Firms typically stokes 100s or even 1000 of items in inventory
ranging from small things such as pencils, paper clips, screws, nuts & bolts to large items such as machines
trucks construction equipment and airplanes naturally many of the items a firm carry's in inventory relate
to the kind of business it engages in. Thus manufacturing firms carry supplies of raw materials purchased
parts partially finished items & finished goods, as well as spare parts for machine tools and other supplies.
Department store carry clothing furniture carpeting stationary appliances gifts cards and toys some also
stocks sporting goods paints and tools.

TYPES OF INVENTORY

1. Raw Material Inventory

Raw materials are the basic materials that are used to manufacture finished goods. Examples
include raw metals, fabrics, or chemicals.

 It has been purchased but not processed.

 This inventory can be used to decouple (separate) suppliers from the production process.

 However, the preferred approach is to eliminate supplier variability in quality, quantity, or delivery
time so that separation is not needed.
2.Work-in-Process (WIP) Inventory

Work-in-process (WIP) inventory, also known as in-process inventory or partially completed

goods, refers to items that are in the midst of the production process but have not yet reached the final stage
of being finished goods.

 These are components or raw material that have undergone some change but are not completed.
WIP exists because of the time it takes for a product to be made (called cycle time).

 Reducing cycle time reduces inventory.

3.Finished Goods Inventory

Finished goods inventory includes products that have completed the manufacturing process and are
ready for sale to customers.

 This is completed product awaiting shipment.

 Finished goods may be inventoried because future customer demands are unknown.

4.MRO (Maintenance, Repair, and Operations) Inventory

MRO inventory consists of items used in the production process but are not directly part of the final
product. Examples include tools, spare parts, and supplies for maintenance and repairs.

 This is necessary to keep machinery and processes productive.

 They exist because the need and timing for maintenance and repair of some equipment are
unknown.

 Although the demand for MRO inventory is often a function of maintenance schedules, other
unscheduled MRO demands must be anticipated.
FUNCTION OF INVENTORY

1. To meet anticipated customer demand

2. To smooth production requirements

3. To decouple operations

4. To protect against stock outs

5. To take advantage of order cycles

6. To hedge against price increases

7. To permit operations

8. To take advantage of quantity discounts

INVENTORY MANAGEMENT

Inventory management is the process of overseeing and controlling the flow of goods or products
within a business. The goal is to ensure that an organization has the right amount of inventory at the right
time to meet customer demand while minimizing holding costs and avoiding stock outs. Effective inventory
management involves tracking inventory levels, replenishing stock as needed, and optimizing the overall
supply chain.

Inventory management is primarily about specifying the size and placement of stocked goods.
Inventory management is required at different locations within a facility or within multiple locations of a
supply network to protect the regular and planned course of production against the random disturbance of
running out of materials or goods.

 It means keeping track of the goods or materials a business has on hand, how they are used, and
making sure there's enough to meet demand without overstocking. It involves methods to purchase,
store, and track inventory to optimize costs and ensure items are available when needed.

 It refers to the process of ordering, storing, using, and selling a company's inventory. This includes
the management of raw materials, components, and finished products, as well as warehousing and
processing of such items.
BENEFITS OF INVENTORY MANAGEMENT

 Better Inventory Accuracy: With solid inventory management, you know what’s in stock and
order only the amount of inventory you need to meet demand.
 Reduced Risk of Overselling: Inventory management helps track what’s in stock and what’s on
backorder, so you don’t oversell products.
 Cost Savings: Stock costs money until it sells. Carrying costs include storage handling and
transportation fees, insurance and employee salaries. Inventory is also at risk of theft, loss from
natural disasters or obsolescence.
 Avoiding Stock outs and Excess Stock: Better planning and management helps a business
minimize the number of days, if any, that an item is out of stock and avoid carrying too much
inventory.
 A More Organized Warehouse: An efficient warehouse with items organized based on demand,
which items are often sold together and other factors reduce labor costs and speeds order
fulfillment.

INVENTORY MANAGEMENT RED FLAGS

 Excessive Stock Levels: When you have too much inventory sitting around for extended
periods, it ties up your capital and storage space, leading to potential losses.
 Frequent Stockouts: Running out of essential products too often can result in lost sales and
dissatisfied customers.
 Poor Inventory Turnover: If your inventory turnover rate is low, it means you’re not
selling products fast enough, and you may be left with obsolete items.
 Inaccurate Records: If your records don’t match physical inventory, it can lead to
confusion, errors, and financial discrepancies.
 High Holding Costs: When you spend a significant amount on storage, insurance, and
maintenance for inventory, it can eat into your profits.
 Supplier Reliability Issues: Constant delays or quality problems with your suppliers can
disrupt your supply chain and affect customer satisfaction.
 Unplanned Discounts and Sales: Offering frequent discounts to clear out excess inventory
can impact your profitability.
 Aging Inventory: Goods that have been in stock for a long time can become obsolete,
leading to losses.
 Lack of Demand Forecasting: Not accurately predicting future demand can result in
overstocking or understocking.
  Manual Processes: Relying heavily on manual tracking and ordering can lead to errors and
inefficiencies.

THE BOTTOM LINE

Inventory management is a crucial part of business operations. Proper inventory management

depends on the type of business and what type of product it sells. There may not be one perfect type of
inventory management, because there are pros and cons to each. But taking advantage of the most fitting
type of inventory management style can go a long way.

Inventory management is like keeping your room tidy and your toys sorted. If you want to save
your money, time, and efforts in business, you really need the exact amount of your inventories. Not too
much, not too little – just enough. Whether you’re running a store or just organizing your stuff, these
inventory management tips will help you keep everything in its place and avoid any surprises.

ABC ANALYSIS

ABC analysis, also known as Pareto analysis or the ABC classification system, is a technique used
in inventory management to categorize items based on their importance and value to the business. The goal
is to prioritize management attention and resources on the most critical items. The ABC analysis classifies
items into three categories: A, B, and C.

Here's a breakdown of each category:

 Category A: High-Value, Low-Quantity Items

Items in this category represent a small percentage of the total number of items but contribute to a significant
portion of the total inventory value.

These items are often high-value products or components that may require closer monitoring and more
frequent replenishment.

Example: In a retail setting, the latest high-end smartphones or premium electronic gadgets might be
classified as Category A items.

 Category B: Moderate-Value, Moderate-Quantity Items

Items in this category have a moderate impact on inventory value and are considered to be of moderate
importance.
They are neither as critical as Category A items nor as low in value and importance as Category C items.

Example: In a bookstore, bestselling books that are popular but not as high in value as limited edition or
premium books might be classified as Category B items.

 Category C: Low-Value, High-Quantity Items

Items in this category represent a large percentage of the total number of items but contribute to a relatively
small portion of the total inventory value.

These items are often lower in value and may include everyday items with steady demand.

Example: In a hardware store, common fasteners like nuts, bolts, and screws might be classified as Category
C items.

How ABC Analysis Works:

1. Data Collection:

Gather data on the usage or sales volume and the unit cost of each inventory item.

2. Calculation of Cumulative Percentage:

Sort the items based on their value (usually in descending order of annual consumption value, which is the
product of the unit cost and the annual demand quantity).

Calculate the cumulative percentage of the total value as items are added from the top of the list.

3. Classification:

Classify items into Categories A, B, and C based on predetermined percentage thresholds. For example,
Category A might include the top 20% of items, Category B the next 30%, and Category C the bottom 50%.

Steps for the classification of items:

a. Find out the unit cost and and the usage of each material over a given period;
b. Multiply the unit cost by the estimated annual usage to obtain the net value;
c. List out all the items and arrange them in the descending value (Annual Value);
d. Accumulate value and add up number of items and calculate percentage on total inventory in value
and in number;
e. Draw a curve of percentage items and percentage value;
f. Mark off from the curve the rational limits of A, B and C categories.
 4. Management Focus:

Allocate resources and attention accordingly. Category A items typically require more frequent monitoring,
tighter inventory control, and strategic decision-making.

Example: Let's consider an electronics retailer. The annual consumption value is calculated as the product
of the unit cost and the annual demand quantity for each product. The items might be sorted in descending
order of annual consumption value, and the cumulative percentage is calculated. The classification into
Categories A, B, and C is then determined based on predefined thresholds.

Category A: Top 20% of items contributing to 80% of the total value.

Category B: Next 30% of items contributing to the next 15% of the total value.

Category C: Bottom 50% of items contributing to the remaining 5% of the total value.

In this example, high-end smartphones or premium electronic gadgets might fall into Category A,
bestselling but less expensive items into Category B, and common accessories or lower-priced items into
Category C. This allows the retailer to tailor its inventory management strategies and allocate resources
effectively based on the importance and value of each category.

The boundary between class A and class B might not be as sharply defined; The purpose of this
classification is to ensure that purchasing staff use resources to maximum efficiency by concentrating on
those items that have the greatest potential savings → selective control will be more effective than an
approach that treats all items identically.

INVENTORY MODELS

Economic Order Quantity (EOQ) is a formula used in inventory management to determine the optimal
order quantity that minimizes the total inventory holding costs and ordering costs. EOQ is a balance
between the costs associated with holding inventory (carrying costs) and the costs of ordering or setting up
new orders.

The EOQ formula is expressed as:

Where:

D represents the demand for the product (in units) over a given period.

S represents the ordering cost per order (setup cost).

H represents the holding cost per unit per year.

Demand (D):

This is the quantity of units that a business is expected to sell or use within a specific time period.
It could be daily, monthly, or annually.

Ordering Cost (S):

Ordering Cost, also known as buying cost. This is the cost associated with placing an order or
setting up the production process. It includes costs such as paperwork, communication, transportation, and
any fixed costs incurred each time an order is placed.

 Costs which are associated with the purchasing or ordering of materials.

These costs include:
a) Costs of staff posted for ordering of goods.
b) Expenses incurred on transportation of goods purchased.
c) Inspection costs of incoming materials.
d) Cost of stationary, typing, postage, telephone charges, etc.

Holding Cost (H):

Holding costs, also known as carrying costs, include the expenses associated with holding and
storing inventory. This can include storage space, insurance, obsolescence, and the cost of capital tied up
in the inventory.

 Costs for holding the inventories.

These costs include:
a) the cost of capital invested in inventories.
b) cost of storage which could have been used for other purposes.
c) the loss of materials due to deterioration and obsolescence.
d) insurance costs.
e) cost of spoilage in handling of materials.
 The EOQ model assumes that demand is constant and that all units ordered are received
simultaneously. It also assumes that ordering and holding costs remain constant throughout the ordering
cycle. While these assumptions may not always hold in real-world situations, EOQ provides a useful
starting point for determining an optimal order quantity.

The primary goal of using EOQ is to find the order quantity that minimizes the total cost of
managing inventory. When a company orders too frequently in small quantities, ordering costs increase,
but holding costs decrease. Conversely, when ordering in large quantities infrequently, holding costs
increase, but ordering costs decrease. EOQ helps strike the right balance to minimize the sum of these costs.

Implementing the EOQ model can lead to cost savings and improved inventory management
efficiency. However, it's important to note that EOQ is a static model and may need adjustments in dynamic
environments with changing costs or demand patterns. Additionally, it's just one component of a
comprehensive inventory management strategy.

ECONOMIC ORDER QUANTITY, this model considers various costs of inventory and then determines
what order size minimizes total inventory cost.

 It is an inventory management technique for determining an item’s optimal order size, which is the
size that minimizes the total of its order costs and carrying costs.
 The goal of EOQ is to minimize the total cost, order costs, and carry costs of inventory
 In addition, relevant costs of inventory can be divided into order costs and carrying costs.

Assumptions of the EOQ Model

1. Demand occurs at a constant throughout the year.
2. Lead tine on the receipt of the orders is constant.
3. The entire quantity ordered is received at a one time.
4. The unit costs of the items ordered are constant: thus, there can be no quantity discounts.
5. There are no limitations on the size of the inventory
Let's consider an example of the Economic Order Quantity (EOQ) model for a retail store that sells a popular
product. The EOQ model helps determine the optimal order quantity that minimizes the total cost of
inventory, including holding costs and ordering costs.

Example: XYZ Retail Store

Demand (D):

The annual demand for the product is 20,000 units.

Ordering Cost (S):

The ordering cost per order is $150. This includes costs associated with processing orders, paperwork, and
other administrative expenses.

Holding Cost (H):

The holding cost per unit per year is $4. This includes costs associated with storing and managing inventory,
such as warehousing and insurance.

Now, let's use the EOQ formula to calculate the optimal order quantity (Q):

In this example, the optimal order quantity (Q) is approximately 774 units. This means that the
retail store should place orders of around 774 units each to minimize the total cost of inventory, considering
both ordering costs and holding costs.

To calculate the total cost, additional information is needed, such as the unit cost of the product.
The total cost is the sum of ordering costs and holding costs:
Suppose the unit cost of the product is $20:

In this example, the retail store would need to balance the trade-off between ordering costs and
holding costs. By ordering approximately 774 units at a time, the store aims to achieve the most cost-
effective inventory management strategy

 PRODUCTION ORDER QUANTITY MODEL

The Production Order Quantity (POQ) model is an inventory management model that is an extension of the
Economic Order Quantity (EOQ) model. While EOQ is primarily designed for retailers and manufacturing
companies that produce goods in batches, the POQ model is specifically tailored for companies that produce
goods in a continuous manufacturing process. The POQ model helps determine the optimal production
order quantity that minimizes the total cost of inventory, including holding costs and setup costs.

The formula for Production Order Quantity (POQ) is expressed as:

Where:

D represents the annual demand for the product.

S represents the setup cost per production run.

H represents the holding cost per unit per year.

P represents the production rate (units per time period).

Here's a breakdown of the components:

Demand (D):

This is the quantity of units that a business is expected to produce or sell within a specific time
period, typically a year.
Setup Cost (S):

This represents the cost associated with setting up the production process, including the costs of
preparing machines, materials, and labor for a production run.

Holding Cost (H):

Holding costs, also known as carrying costs, include the expenses associated with holding and
storing inventory. This can include storage space, insurance, obsolescence, and the cost of capital tied up
in the inventory.

Production Rate (P):

This is the rate at which units are produced per time period. It could be expressed as units per day,
units per week, or units per month, depending on the production process.

The POQ model is particularly useful for businesses with continuous production processes, such as
chemical manufacturing or assembly lines. Let's go through an example to illustrate the use of the POQ
model:

Example: XYZ Chemical Company

XYZ Chemical Company produces a chemical compound that has an annual demand of 10,000
units. The setup cost for each production run is $500, and the holding cost is $2 per unit per year. The
production rate is 500 units per month.

D = 10,000 units

S = $500

H = $2

P = 500 units per month

 In this example, the optimal production order quantity (POQ) is approximately 2,236 units. This
means that XYZ Chemical Company should produce and order batches of around 2,236 units to minimize
the total cost of inventory, considering both holding costs and setup costs. The company can then use this
information to plan production runs efficiently and manage inventory levels effectively.

 QUANTITY DISCOUNT MODEL

The Quantity Discount Model is an inventory management approach that takes into account the cost savings
associated with ordering larger quantities of goods. In this model, suppliers often offer price discounts as
an incentive for buyers to place larger orders. The goal is to find the optimal order quantity that minimizes
the total cost, considering both the purchase cost and the ordering cost.

The Quantity Discount Model is an extension of the Economic Order Quantity (EOQ) model,
incorporating volume-based price breaks. The formula for the Quantity Discount Model is more complex
than the EOQ formula, as it accounts for multiple price levels. It can be expressed as:

Where:

Q is the optimal order quantity.

D is the annual demand for the product.

S is the ordering cost per order.

H is the holding cost per unit per year.

r is the discount rate (as a decimal).

p is the proportion of the demand that must be purchased to qualify for the discount.
Here's an example to illustrate the Quantity Discount Model:

Example: XYZ Retail Store

XYZ Retail Store sells a popular product with an annual demand of 10,000 units. The supplier offers a
quantity discount based on the following pricing structure:

 For orders of less than 1,000 units, the price is $10 per unit.
 For orders between 1,000 and 4,999 units, the price is $9 per unit.
 For orders of 5,000 units or more, the price is $8 per unit.

The ordering cost is $200 per order, and the holding cost is $2 per unit per year.

D=10,000 units

S = $200

H = $2

Now, let's calculate the optimal order quantity using the Quantity Discount Model. In this example,
r=0.10 (10% discount for orders between 1,000 and 4,999 units) and p=0.50 (50% of the demand to qualify
for the discount).

In this example, the optimal order quantity (Q) is 1,000 units. This means that XYZ Retail Store
should place orders of 1,000 units each to take advantage of the quantity discount and minimize the total
cost, considering both ordering costs and holding costs. The Quantity Discount Model helps businesses
make informed decisions about order quantities to optimize their inventory management and achieve cost
savings.
INVENTORY MODELS REQUIREMENTS

1. Master production schedule (what is to be made and when)

The Master Production Schedule (MPS) is a crucial production planning tool that provides a detailed plan
for manufacturing products. It specifies the quantity of each product that needs to be produced and the
specific time frame for production. The master production schedule does not provide specific information
about production operations, sequencing, or the assignment of employees to tasks. The relationship between
the sales department and the manufacturing department can be seen as a contractual agreement that aims to
achieve a balance between supply and demand. This is accomplished by establishing predetermined
quantities of products to be produced within specific timeframes.1

2. Bill of Materials (materials and parts required to make the product)

A bill of materials (BOM) serves as a centralized repository of information that is utilized in the
manufacturing process of a product. The document provides a comprehensive inventory of the necessary
components required for product creation, accompanied by detailed instructions for the assembly process.
The assembly process for manufacturers begins with the creation of a Bill of Materials (BOM).

3. Inventory Availability (what is in stock)

The ability to identify the quantity of inventory that is accessible in e-commerce in order to satisfy client
demand is referred to as "stock availability." The present retail landscape is defined by its complexity and
frequent change; hence, real-time stock availability management is essential in this environment. Retailers
are able to optimize their inventory levels, reduce their expenses, and improve their profitability if they
manage the availability of product in real time in an effective manner.

4. Purchase orders outstanding (what is on order, also called expected receipts)

A purchase order is an official contract between the supplier and a business for the purchase of goods and
services. It ensures that the supplier delivers assured quality and quantity of goods and services in the given
time frame.

5. Lead times (how long it takes to get various components)

Lead time refers to the amount of time it takes for a purchase order to be completed in full.
JUST-IN-TIME SYSTEM

The just-in-time (JIT) system is used to minimize inventory investment. The philosophy is that
materials should arrive at exactly the time they are needed for production. Ideally, the firm would have only
work-in-process inventory. Because its objective is to minimize inventory investment, a JIT system uses
no (or very little) safety stock.
JIT inventory ensures there is enough stock to produce only what you need, when you need it. The
goal is to achieve high volume production with minimal inventory on hand and eliminate waste.

History of Just-In-Time Inventory Management

The just-in-time philosophy was initially known as the “Toyota Production System” (TPS) or just-
in-time manufacturing. The approach was developed in post-World War II Japan, when car manufacturing
faced shortages and had to minimize resource consumption to survive and remain competitive.
Eiji Toyoda and Taiichi Ohno, Japanese industrial engineers, created the system when Toyota
Motor Company (TMC) recognized that U.S. carmakers of that era were outpacing their Japanese
counterparts. After some testing, they established the Toyota production system and closed the gap between
1945 and 1970. JIT has continued to grow as a practice worldwide. This system’s basic underlying idea is
to minimize the consumption of resources that add no value to a product.

How Does Just-in-Time Inventory Management Work?

 JIT is what’s known as a lean management process. In JIT, all parts of any production or service
system, particularly people, are interconnected.
 This practice’s origin comes from Kaizen, a Japanese term meaning “change for the better.”
Originating in Japan, the business philosophy looks to continuously improve operations and
involve all employees, from assembly line workers to the CEO. Like JIT, the goal is to reduce
waste and improve quality.
The JIT Process Diagram and Steps
ADVANTAGES AND DISADVANTAGES OF JIT INVENTORY MANAGEMENT

Just-in-time inventory management reduces waste, improves cash flow, increases flexibility, optimizes
human resources and encourages team empowerment. But JIT inventory management relies heavily on
precise forecasting and strong relationships with key suppliers. When something goes wrong with either of
those, that’s a problem because there are no backup options in place.

Kanban as Control Tool: Why Is Kanban a Critical Element for the JIT Inventory System?

Kanban is the “nervous system” of lean JIT production, controlling work-in-progress production
and inventory movement. Kanban is crucial when it comes to eliminating manufacturing waste due to
overproduction.
JIT systems make architectural changes and simplify the planning and control process to a large
extent. Kanban’s pull system creates more flexibility on the production floor because a company only
produces goods based on actual orders.
Kanban is a Japanese word and uses cards (paper or digital) to track the progress of production on
a factory floor. As inventory moves through the manufacturing process, Kanban cards reflect that progress
and can signal when it’s time to order more stock.
ACTIVITIES
I. CROSSWORD PUZZLE

ACROSS
2. Is a stock or store of goods.
3. Is a Japanese word that uses cards (paper or digital) to track the progress of production on a factory
floor.
6. Was initially known as the “Toyota Production System” (TPS)
7. These are components or raw material that have undergone some change but are not completed
9. Are the variable costs per unit of holding an item of inventory for a specific period of time.
10. Is an inventory categorization method that consists of dividing items into three categories

DOWN
1. A type of inventory that is necessary to keep machinery and processes productive
4. Costs which are associated with the purchasing or ordering of materials.
5. Refers to the amount of time it takes for a purchase order to be completed in full.
8. A type of inventory that can be used to decouple (separate) suppliers from the production process.
II. WORD HUNT

J U S T G I V H M E A R E A S O N J

K N S E T U P C O C O N U T L M T U

H A A B C A N A L L N Y E L E B A S

L O B B D E O Q M E D I U M C U B T

K A L C N T S O C G N I Y U B Y C I

A B C A N A L Y S I S I N D A I D N

N C R U A S K L E A D I N G A N E T

B I L L O F I S A P R A N K C G F E

A L E D O M Q O E K J Y J L E O T M

B E T A R N O I T C U D O R P S S E

E A B V A Y A N J U S W N J O V E T

B D L E A D O R E A T A A C D O R P

I T L N Y R E C U T I E P O K A Y T

B I M G A O A K A U N U L A N G Y N

O M T Y E L H S A E T N H A N O J L

B E S H A H A H A E I W I L U V W I

U S I L A B A N S I M C B A S C P I

L B I L L O F M A T E R I A L S K S
1. Also known as Pareto analysis, is a technique used in inventory management to categorize items based
on their importance and value to the business.

2. Also known as the ordering cost. This is the cost associated with placing an order or setting up the
production process. It includes costs such as paperwork, communication, transportation, and any fixed
costs incurred each time an order is placed.

3. Also known as carrying costs, include the expenses associated with holding and storing inventory. This
can include storage space, insurance, obsolescence, and the cost of capital tied up in the inventory.

4. This is the rate at which units are produced per time period. It could be expressed as units per day, units
per week, or units per month, depending on the production process.

5. This represents the cost associated with setting up the production process, including the costs of
preparing machines, materials, and labor for a production run.

6. Is a Japanese word and uses cards (paper or digital) to track the progress of production on a factory
floor.

7. Ensures there is enough stock to produce only what you need, when you need it. The goal is to achieve
high volume production with minimal inventory on hand and eliminate waste.

8. Refers to the amount of time it takes for a purchase order to be completed in full.

9. Serves as a centralized repository of information that is utilized in the manufacturing process of a

product.

10. Is a formula used in inventory management to determine the optimal order quantity that minimizes the
total inventory holding costs and ordering costs.
III. UNSCRAMBLE THE LETTERS!

Directions: Rearrange each set of jumbled letters to reveal the answer with the aid of questions.

1. YTQANUIT DERRO CINOMOCE This model considers various costs of inventory and then
determines what order size minimizes total inventory cost.

2. VIENRTYON GAEMEATNNM It is primarily about specifying the size and placement of

stocked goods.

3. TALERMAI WAR TONEVINYR It has been purchased but not processed.

4. MYSSET AYTTOO COOUDITRPN The just-in-time philosophy was initially known as the
(“_______”) or just-in-time manufacturing. It was created by Eiji Toyoda and Taiichi Ohno.\

5. BAKNAN is a Japanese word and uses cards (paper or digital) to track the progress of production
on a factory floor. It is the "nervous system" of lean JIT production, controlling work-in-progress
production and inventory movement.
INVENTORY MANAGEMENT ASSESSMENT

I. IDENTIFICATION: 10 Points

_________1. Refers to the process of ordering, storing, using, and selling a company's inventory.

_________ 2. This inventory system/management ensures there is enough stock to produce only what you
need, when you need it. Its goal is to achieve high volume production with minimal inventory on hand and
eliminate. waste.

_________ 3. Is an inventory categorization method which consists in dividing items into three categories
(A, B, C).

_________ 4. These are the variable costs per unit of holding an item of inventory for a specific period of
time.

_________ 5. These are components or raw material that have undergone some changeS but are not
completed.

_________ 6. This was initially known as the “Toyota Production System” (TPS).

_________ 7. It is an inventory management technique for determining an item’s optimal order size, which
is the size that minimizes the total of its order costs and carrying costs.

_________ 8. Include the fixed clerical costs of placing and receiving orders: the cost of writing a purchase
order, of processing the resulting paperwork, and of receiving an order and checking it against the invoice.
_________ 9. A type of inventory that has been purchased but not processed.

_________ 10. Is a Japanese word and uses cards (paper or digital) to track the progress of production on
a factory floor and is known as the “nervous system” of lean JIT production, controlling work-in-progress
production and inventory movement.
II. TRUE OR FALSE: 5 Points

______ 1. The dictionary meaning of the inventory is stock of goods or a list of goods. In accounting
language, inventory includes raw material, work in process, stores, etc. In a manufacturing point of view,
inventory means stock of finished goods.
______ 2. An example of an inventory management red flag is "Reduced Risk of Overselling".

______ 3. In the ABC Analysis, category A is the most valuable item whilst those in category C are the
least valuable items.

______ 4. As the size of the order increases, the carrying cost decreases.

______ 5. The Master Production Schedule (MPS) is a crucial production planning tool that provides a
detailed plan for manufacturing products.

III. ENUMERATION: 15 Points

Inventory Model Requirements

1.
2.
3.
4.
5.

Types of Inventory

6.

7.

8.

9.
Give at least 2 Functions of Inventory
10.

11.

Give at least 2 Red Flags of Inventory Management

12.

13.

Give at least 2 Benefits of Inventory Management

14.

15.

IV. PROBLEM SOLVING: 20 Points

(1 point for GIVEN, 2 points for SOLUTION, 2 points for the FINAL ANSWER)

1-5 Economic Order Quantity

Bogart wants to buy a computer for $1,750. It costs 21% each year to store it, and he plans to get 12,000
units annually. Ordering it comes with a $180 cost each time. What's the best quantity to order
economically?

6-10 Production Order Quantity Model

A toy manufacturer uses 48,000 rubber wheels per year for its dump truck. The trucks are assembled over
the entire year. The firm makes its own wheels at a rate of 800 per day and makes them in batches per lot.
Holding cost is $1 per wheel per year. The setup cost is $45 per order. The firm operates 200 days per year.
How many wheels should they make at a time?

11-15 Quantity Discount Model

A bookstore plans to order a series of books from a publisher, with an annual demand of 1000 books. The
ordering cost is $10, and the carrying cost is $3 per book. The new price schedule indicates that orders for
less than 200 books will cost $18 each, for the next 200-300 books will cost $16 each, and for any books
beyond 500, the cost is $14 each. Determine the total cost for the bookstore if they plan to order 600 books.

16-20 ABC Analysis

INVENTORY MANAGEMENT ANSWER KEY
I. CROSSWORD PUZZLE

1. MRO INVENTORY - a type of inventory that is necessary to keep machinery and processes
productive
2. INVENTORY - is a stock or store of goods.
3. KANBAN - is a Japanese word that uses cards (paper or digital) to track the progress of
production on a factory floor.
4. ORDERING COST - costs which are associated with the purchasing or ordering of materials.
5. LEAD TIMES - refers to the amount of time it takes for a purchase order to be completed in full.
6. JIT SYSTEM - was initially known as the “Toyota Production System” (TPS)
7. WIP INVENTORY - these are components or raw material that have undergone some change but
are not completed
8. RAW MATERIAL - a type of inventory that can be used to decouple (separate) suppliers from
the production process.
9. CARRYING COST- are the variable costs per unit of holding an item of inventory for a specific
period of time.
10. ABC ANALYSIS - is an inventory categorization method that consists of dividing items into
three categories
II. WORD HUNT

III. UNSCRAMBLE THE LETTERS!

1. ECONOMIC ORDER QUANTITY

2 INVENTORY MANAGEMENT
3.(RAW MATERIAL INVENTORY
4. TOYOTA PRODUCTION SYSTEM
5. KANBAN
ASSESSMENT
ANSWER KEY

IDENTIFICATION

1. Inventory Management
2. Just-in-time system
3. ABC Analysis
4. Carrying cost/ Holding Cost
5. Work in process inventory
6. Just-in-time system
7. Economic Quantity Order
8. Ordering cost/ Buying cost
9. Raw Material Inventory
10. Kanban

TRUE OF FLASE

1. False
2. False
3. True
4. False
5. True

ENUMERATION

1-5 Inventory Model Requirements

1. Master production schedule
2. Bill of Materials
3. Inventory Availability
4. Purchase orders outstanding
5. Lead times
6-9 Types of Inventory
1. Raw material inventory,
2. Work-in-process inventory.
3. Maintenance/repair/operating supply (MRO) inventory
4. Finished-goods inventory.

10-11 Give at least 2 Functions of Inventory

1. To meet anticipated customer demand.
2. To smooth production requirements.
3. To decouple operations.
4. To protect against stock outs.
5. To take advantage of order cycles.
6. To hedge against price increases.
7. To permit operations.
8. To take advantage of quantity discounts.

12-13 Give at least 2 Red Flags of Inventory Management

1. Excessive Stock Levels
2. Frequent Stockouts
3. Poor Inventory Turnover
4. Inaccurate Records
5. High Holding Costs
6. Supplier Reliability Issues
7. Unplanned Discounts and Sale
8. Aging Inventory
9. Lack of Demand Forecasting
10. Manual Processes

14-15 Give at least 2 Benefits of Inventory Management

1. Better Inventory Accuracy
2. Reduced Risk of Overselling
3. Cost Savings
4. Avoiding Stockouts and Excess Stock
5. A More Organized Warehouse
PROBLEM SOLVING: 20 points
ROUND OFF TO 2 DECIMAL POINTS

Given: 1 point
Solution: 2 points
Answer: 2 points

1-5) EOQ
Bogart wants to buy a computer for $1,750. It costs 21% each year to store it, and he plans to get 12,000
units annually. Ordering it comes with a $180 cost each time. What's the best quantity to order
economically?

Given:
Order cost (cost per order): $180
Annual demand: 12,000 units
Carrying costs: • 21% each year • 1,750

Formula:

Solution:

2 ∗ 12000 ∗ 180
√
0.21 ∗ 1750

Answer:
108.42

6-10) POQM
A toy manufacturer uses 48,000 rubber wheels per year for its dump truck. The trucks are assembled over
the entire year. The firm makes its own wheels at a rate of 800 per day and makes them in batches per lot.
Holding cost is $1 per wheel per year. Setup cost is $45 per order. The firm operates 200 days per year.
How many wheels should they make at a time?

Given: D= 48000

d= 48000/200 = 240 wheels/day

S= 45

H= 1

Formula:

2𝐷𝑆
POQ (Q*) = √
𝐻 (1−𝑑𝑝 )

Solution:

2∗4800∗45
POQ (Q*) = √ 200
1 (1− )
800

(Q*) = 2400

Answer: 2484 or 2485 tires rounded off

11-15) QDM

 A bookstore plans to order a series of books from a publisher, with an annual demand of 1000
books. The ordering cost is $10, and the carrying cost is $3 per book. The new price schedule
indicates that orders for less than 200 books will cost $18 each, for the next 200-300 books will
cost $16 each, and for any books beyond 500, the cost is $14 each. Determine the total cost for the
bookstore if they plan to order 600 books.
Given:
D = 1000 books per year
S = $10 per order
H = $3 per book per year
Formula:

𝑄∗𝐻 𝐷∗𝑆
+ + 𝐴𝐷
2 𝑄
Solution:

600 ∗ 3 1000 ∗ 10
+ + 14 ∗ 1000
2 600

Answer + 14,916.67 or 14,917

ABC ANALYSIS PROBLEM

ITEM ANNUAL UNIT USAGE PERCENTAGE

DEMAND COST

OFFICE 200 1500 300000 42%

CHAIRS

DESKS 150 1300 195000 28%

UNIFORM 100 1000 100000 14%

BOOK 80 800 64000 8%

SHELVES

COMPUTER 90 700 63000 7%

CABINET
 CHAPTER 6: WORK MEASUREMENT

LEARNING OBJECTIVES:

After studying this module, you should be able to:

 Determine labor standard and the use of work measurement and their significance.
 Understand the use of different techniques of work measurement, including Time Study, Synthetic
Data, Predetermined Motion Time System, Analytical Estimating, and Work Sampling.
 Identify the concept of each component of work measurement and their significance.
 Understand the time study and conduct a time study.
 Rate a job and a worker doing a certain job.
 Calculate the basic time, normal time, and standard time.
 Define performance rating and its significance in evaluating work pace.
 Differentiate between various performance rating methods, including Speed Rating, Skill and
Effort Rating, Westinghouse System, Synthetic Rating, Objective Rating, and Physiological
Evaluation.
 Explain the concept of Speed Rating and its focus on the speed of worker movements.

A. LABOR STANDARD AND WORK MEASUREMENT

• LABOR STANDARD
- The amount of labor time that is expected for the completion of a task. It is
sometimes referred to as the standard labor rate.

• WORK MEASUREMENT
- The application of techniques designed to establish the time for a qualified
worker to carry out specific jobs at a defined level of performance.
Determining the amount of worker time required to generate one unit of
output.

OBJECTIVES OF WORK MEASUREMENT

➢ To determine the standard cost and as an aid in preparing budgets.

➢ To balance the crew activities and those jobs requiring several workers.
➢ To determine scheduling and planning work.
➢ To determine the effectiveness of the machine.
➢ To balance production lines for new models or new products.
➢ To make cost estimates of new products.
➢ To determine time standards to be used for providing a basis for wage incentive plans.
➢ To determine time standards to be used for providing a basis for labor cost control.
 TECHNIQUES FOR WORK MEASUREMENT

• Time Study – recording the times and rates of working for the elements of a specified job.
• Synthetic Data – standard data are made available for the most known elemental
operations like preparing, setting, manipulating, removing, clearing, holding, and
tightening.
• Predetermined Motion Time System – normal or basic times are established for human motions
and these time values are used to build up a time for a job at a defined level of performance.
• Analytical Estimating – used to determine the time values for jobs, having
long and non-repetitive operations.
• Work Sampling – does not involve stopwatch measurement, as do many of other techniques.

COMPONENTS OF WORK MEASUREMENT

• Element – a distinct part of a specified job selected for convenience of

observation, method, and analysis.
• Performance rating – process of adjusting the actual pace of working comparing it with the
mental picture of the pace of an operator working at normal speed.
• Allowance – time that allows the worker to recover from fatigue and to attend the personal
needs.
• Standard time – the time, which is taken by a normal worker for a specific task or
job, working under moderate conditions and includes other allowances.

B. TIME STUDIES
Time Study
-estimation of accurate labor cost is very essential as it has got large effect on the price.
-exact estimation of time is very essential for correctly pricing. As labor cost depends upon
time estimation, therefore, time must be estimated correctly as far as possible.
-products should reach to him at a promised date which is only possible when manufacturer
is aware of the time to be taken by the product during manufacture.
TIME STUDY DEFINITION

- “the art of observing and recording the time required to do each detailed element of
an industrial operation”.
The term industrial operation includes manual, mental and machining operations, where:

Industrial Operation

1) Manual time - is divided into three types of operations, i.e. handling of tools,
machines and materials.

2) Mental time - includes time taken by the worker for thinking over some operations.

3) Machining time - includes time taken by the machines in doing its share of work.

Time study can also be defined in the following words “work measurement” is the application
of techniques designed to establish the time for a qualified worker to carry out a specified job
at a definite level of performance.

Tools for Time Study

 Stopwatch - It entails keeping track of the amount of time needed to complete a certain task
before figuring out normal time from the directly observed time.
 Videotape Camcorders - a self-contained portable electronic device with video and recording as
its primary function.
 Time Study Board - It is a lightweight board used for holding the observation sheet and
stopwatch in position. It is of a size slightly larger than that of the observation sheet used.
 Time Study Software - the leading platform for conducting time studies in healthcare settings.
Our software collects time data in real time for accurate and detailed reporting.
 Training Equipment - They are tools used in the training and education of workers to learn the
correct way of working and using time in a job or process. This is essential in improving the
quality and speed of an individual's performance in their role.
Methods of Time Study
 Time Recording Method - This type of machine has a paper tape, which rotates on two
rollers at a uniform speed. This paper tape is graduated in such a way it gives timing in a
fraction of a minute.
 Motion Picture Camera - Uses a camera that is driven at a constant speed of several ranges.
The time taken by each film can be calculated. Most accurate method but is used for high
precision work.
 Stopwatch Method - Recording of time that uses a stopwatch. The stopwatch must be
accurate and graduated in decimals. (can record up to 0.01 minute)

USE OF TIME STUDY

- It is useful in determining the standard time for various operations, which helps in
fixing wages and incentives.
- It is useful to estimate the cost of a product accurately.
- It helps in production control.
- It helps in predicting accurately when the work will be completed and hence customers
can be promised to take delivery on a fixed date.

-Using the time study techniques, it can be found that how much machines an operator can run.

Following Stages in Performing Time Study:

(a) Analysis of Work- The complete job and its operations are split up into various elements.
includes all the tasks performed by the worker and not only the effective work.
(b) Standardization of Methods- Before conducting time-study, all the constituents of the
job such as materials, equipment, tools, working conditions and methods are
standardized.
(c) Making Time Study- The study is done on a printed time study record sheet.
 C. STANDARD, ACTUAL, AND NORMAL TIMES

Making Time Study

Normal Time:

the time required by a normal worker.

Standard Time:
It is the time, which is taken by a normal worker for a specific task or job, working
under moderate conditions and includes other allowances.

Rating Factor:
is expressed as a percentage of the efficiency of representative operator, which
indicates how efficient an operator is in comparison to some of his average fellow workers.
How to Compute for Normal, Average, and Standard Times

FORMULA:
Normal Time (NT) = OT x RF

100
Where: OT =
Observed
Time RF =
Rating
Factor
Standard Time
Case 1: ST= NT x (1+ AF)

Case 2: ST= NT

(1-AF)

Where AF= Allowance Factor

Case 1: Allowance is given as a fraction of the normal time; allowance is added to the the normal time
Case 2: Allowances is given as a fraction of the total workday
 EXAMPLE 1

A restaurant conducted a time study for a job assembling ham and cheese sandwiches. There
were 10 cycles on the job, and the average time was recorded to be 0.385 minute. Determine the
standard time of the assembly if the operator is rated of 80% and the allowance factor is 12%.

SOLUTION:

Given: OT=
0.385 minute
RF = 80%
AF= 12%

Get the normal time

* Always divide the rating factor by 100 if the rating factor is express as percent form.

NT= OT x RF
100
NT=
0.385 x
80
100
NT= 0.308 minute

Next, get the standard time

*We use case 1 formula since there’s no mode use of allowance factor indicated

ST= NT x
(1+ AF)
ST= 0.308
x (1+ .12)
ST= 0.34496 or
0.345 minute
 EXAMPLE 2

A manufacturing company conducted a time study for 10 cycles of a job. The job has
five elements and the total elemental times in minutes for each element and the performance
rating factor are given as follows. Determine the standard time if the allowance factor is 18%.

ELEMENT SUM RATING FACTOR

(RF)
A 3.61 1.05
B 4.84 0.90
C 2.93 1.00
D 4.91 1.10
E 1.78 0.95

SOLUTION:

Given: n= 10 cycles
Sum divided by
AF= 18%
10
ELEMENT SUM RATING FACTOR Average Observed
(RF) Time( OT)
A 3.61 1.05 0.361

B 4.84 0.90 0.484

C 2.93 1.00 0.293

D 4.91 1.10 0.491

E 1.78 0.95 0.178

Multiply RF
ELEMENT SUM RATING Average Average Normalwith Avg. OT
FACTOR (RF) Observed Time (NT)
Time( OT)
A 3.61 1.05 0.361 0.379
B 4.84 0.90 0.484 0.436
C 2.93 1.00 0.293 0.293
D 4.91 1.10 0.491 0.540
E 1.78 0.95 0.178 0.169
= 1.817
EXAMPLE 3
A time study was conducted in an operation with three elements. Each element was
observed four times and the following table shows the recorded data. Determine the normal
time and standard time for the operation for an allowance factor of 10%. Additionally, the
allowance factor is taken as a fraction of the entire workday.

GIVEN DATA:
OBSERVATION
ELEMENT 1 2 3 4 RF
A 0.2 0.3 0.25 0.23 1.20
B 0.18 0.15 0.17 0.16 0.85
C 0.08 0.05 0.07 0.09 0.92

SOLUTION

1. Get the average observed time per element

2. Get the normal time for each element, then get the sum
3. Get the standard time for the operation.

1) AVERAGE OBSERVED 2.) NORMAL TIME

TIME

Element A= 0.2 + 0.3 Element A: 0.245 x 1.20 = 0.294

+0.25+0.23 = 0.245 Element B: 0.165 x 0.85 = 0.140

Element C: 0.073 x 0.92 = 0.067

Element B= 0.18 + 0.15 + 0.17 + 0.16 3.) STANDARD TIME

4 1-AF
= 0.501
= 0.165
1 – 0.10
Element C= 0.08 + 0.05 + 0.07 + 0.09
= 0.557 minute
4
= 0.073
 D. PERFORMANCE RATING METHOD

Performance Rating

▪ Performance rating is the process of adjusting the actual pace of working

comparing it with the mental picture of pace of an operator working at normal
speed.

▪ Rating is the assessment of the worker’s rate of working relative to the

observer’s concept of the rate corresponding to the standard pace.

▪ Standard rating is the average rate of pace at which a qualified worker will naturally
work if he is motivated to apply himself to work but without the stimulus of a wage
incentive plan.

▪ This performance is denoted as 100 on the standard rating and performance scale.

▪ The rating factor is used to convert time into normal time.

Normal time = Observed time x Observed Rating (R) / Standard Rating(100) Methods/Systems of
Performance Rating

• Speed Rating
• Skill and Effort Rating
• Westinghouse System of Rating
• Synthetic Rating
• Objective Rating
• Physiological Evaluation of Performance
Level Speed Rating

▪ Speed of the movement of a worker is the only factor considered in speed rating.
▪ Rating personnel observes the movements of worker against a standard expected
pace or speed and notes the relationship between them as a rating factor.
▪ Speed Rating = worker speed / speed expected from worker
 Skill and Effort Rating

This system was introduced by Charles E. Bedaux in 1961 and is also known as
Bedaux system. In this system, the observer is supposed to evaluate the work rate or speed of
worker's movement and how fast he is performing the motions, but not the movements and
skill he is applying. Unlike the other methods Bedaux introduced a unit "B" that represents a
standard minute, which is composed of:

a) Work component
b) Relaxation component
▪ The procedure is follows :
(a) Divide the operation into smallest measurable elements.
(b) Time the element with the help of a stopwatch having sixty divisions on its dial.
(c) Take sufficient observations and calculate average time.
(d) Estimate the efficiency of the operator in terms of B values assuming the average
worker must obtain 60B per hour and maximum B value can be 80 B per hour. Thus,
convert the observed time in terms of B's with reference to a standard of 60 B per hour
values.
(e) Allow the relaxation factors as shown in
Table. Table: Relaxation Factors

Light Work 1.10 to 1.20

Medium Work 1.20 to 1.35

Heavy Work 1.35 to 1.50

Very Heavy Work 1.50 to 3.00

(f) Now calculate B values for work element by the formula

The number of B's per work element = Observed Time x Speed of work x

( )
Tb×V ×Ra
Relaxation Allowance/ (60 x 60) =

60 ×60
 Where:

• Tb = observed time in seconds

• V = Speed of work in terms B's, and
• Ra = Relaxation Allowance

(f) The sum of all the values of various work elements gives B values per work piece
(g) Variable time (lost time) and setting are to be recorded regularly and special B values
are to be provided accordingly.

(h) Irregular times and disturbance are not to be included.

(i) Purely machining times where workman is not involved are evaluated separately
and added as a method allowance, since only human effort is measured by the
Bedaux system.

Examples:

1. For a work element, the observed time was I0 seconds and the speed is found to be
60 points on Bedaux's scale. If the job is a heavy work for which a relaxation
allowance is given as 1.20, find the B value for the element.

Given: Tb = 10 V = 60 Ra = 1.20

Tb×V ×Ra
( )
Solution: B Value =

60 ×60

( )
10 ×60 ×1.20
=

60 ×60

= 0.2 B

2. Find the B value of the work element whose relaxation allowance is 1.25 and the
worker with 72 B speed is observed to do in 20 seconds.

Given: Tb = 20 V = 72 Ra = 1.25
Westinghouse System of Rating

▪ It is based upon four factors which are further divided into sub-factors and
have numerical values attached with them and these four factors are:

1. Skill,

2. Effort,

3. Conditions and;

4. Consistency

Table: Westinghouse System of Rating

▪ Summarized formula for calculation:

▪ Westinghouse rating = Sum of ratings, i.e. rating of (Skill + Effort +

Conditions + Consistency) as given in Westinghouse tables.

▪ Rating Factor = 1 ± Westinghouse Rating

▪ Normal Time = Observed time * Rating factor

 100
▪ Standard Time = Normal Time ×
(100−Total allowances∈ Percentage

Examples:

1. The observed time for an element is 1.2 minutes and the rating were found to
be as follows :

▪ Skill: Excellent B1

▪ Effort: Good C1

▪ Condition: Average D

▪ Consistency: Good C

➢ Determine the normal time or basic time for the element under observation. (Refer
Westinghouse performance rating table). Also find the standard time @ 20%
allowance.\

Solution:

From the Performance Rating tables of Westinghouse system:

Skill Excelle nt B +0.1

1
1

Effort Good C +0.0

5
1

Condition Average D 0.00

Consistenc y Good C +0.0

1

Overall (Total) Rating +0.1

7
 100
Standard Time = Normal Time ×

(100−Total allowances∈ Percentage)

100
= 1.40 ×

(100−20)

= 1.75 mins.

Synthetic Rating

This system of rating was introduced by Morrow. The time study observer records the actual time
of performance for the element as done in the previous method. Performance times for such elements
have been standardised, which are known as "Predetermined Motion Time Standard Values" or 'PMTS
Values’. The PMT value for the elements from such tables are noted. The ratio of Predetermined Motion
Time Standard value of the element (taken from tables) to Average Actual Time (Observed Time) for the
same element gives the Rating Factor.

Physiological Evaluation of Performance Level

▪ Summarizing all the above methods we can notice the following formula in all the
systems: (Except Bedaux's skill and effort system)

➢ Normal Time = Observed Time × Rating Factor

➢ Standard Time = Normal Time × Allowance Factor

100
➢ Allowance Factor =
100−allowance ∈ percentage
I. TRUE OR FALSE

Directions: Write TRUE on the space provided if the statement is correct. Write FALSE if otherwise.
Then, change the underlined word/s to make the statement true and place your answer on the space
provided

______1. Labor Standard is the amount of labor time that is expected for the completion of a task.

______2. Manual Time is the time which is taken by a normal worker for a specific task or job, working
under moderate conditions and includes other allowances.

______3. Rating factor is expressed in decimals of the efficiency of a representative operator, which
indicates how efficient an operator is in comparison to some of his average fellow workers.

______4. Performance rating is a process of adjusting the actual pace of working comparing it with the
mental picture of the pace of an operator working at normal speed.

______5. Labor standard is sometimes referred to as the Standard Labor Rate.

______6. A Time Study can cause backlogs.

______7. Standard Rating is the average rate of pace at which a qualified worker will naturally work if

he is motivated to apply himself to work but without the stimulus of a wage incentive plan.

______8. One of the objectives of work measurement is to make cost estimates of existing products.

______9. Standard Time is the time which is taken by a normal worker for a specific task or job, working
under moderate conditions and includes other allowances.

______10. Before conducting a time study, all the constituents of the job such as materials, equipment,
tools, working conditions, and methods are standardized is called the Standardized Labor Rate.
II. FILL IN THE BLANKS

Identify the corresponding blank word through the given text.

1. In Labor Standard the amount of __________ expected for the completion of a task.

2. Work Measurement - The application of techniques designed to establish the time for a qualified
worker to carry out specific jobs at a defined level of performance. Determining the amount of worker
time required to generate __________.

3. Performance rating is a process of adjusting the actual pace of working comparing it with the mental
picture of the pace of an operator working at __________.

4. Time Study - estimation of accurate labor cost is essential as it has a large effect on the __________.

5. Time Study: __________, Videotape Camcorders, Time Study Board, Time Study Software, Training
Equipment.

6. Methods of Time Study: Time Recording Method - This type of machine has a paper tape, which
rotates on two rollers at a uniform speed. This paper tape is graduated in such a way it gives timing in a
fraction of __________.

7. Following Stages in Performing Time Studies:

A. Analysis of Work - the complete job and its operations are split up into various __________.

8. Use of Time Studies: It is useful to estimate the cost of a product accurately. It helps in predicting
accurately when the work will be completed and hence customers can be promised to take delivery on a
fixed __________

9. Effects of Bad Time Study: __________; Fatigue; Poor Quality; Rework; Backlog.

10. Performance _________ is the process of adjusting the actual pace of working and comparing it with
the mental picture of the pace of an operator working at normal speed.
III. MUTIPLE CHOICE
1.All are components of Work Measurement EXCEPT?
a. Element c. Allowance
b. Standard Rating d. Performance Rating
2.It includes time taken by the worker to think over some operations.
a. Manual time c. Mental Time
b. Machining time d. None of the above
3.What is NOT part of the group?
a. Stopwatch c. Videotape camcorders
b. Time study software d. Digital Camera
4.An exact estimation of time is essential for correct pricing. Labor Standard is sometime referred to as the Standard
Labor Rate.
a. First statement is true. Second statement is false. c. Both statements are true.
b. First statement is false. Second statement is true. d. Both statements are false.
5. This type of machine has a paper tape, which rotates on two rollers at a uniform speed. This paper tape is
graduated in such a way it gives timing in a fraction of minute
a. Time recording method c. Training Equipment
b. Time study software d. None of the above
6. It includes time taken by the machines in doing its share of work.
a. Manual Time c. Mental Time
b. Machining Time d. Manufacturing Time
7. These are all an example of techniques for work measurement except for:
a. Work Sampling c. Synthetic Data
b. Time Recording Method d. Analytical Estimating
8. It is the process of adjusting the actual pace of working, comparing it with the mental picture of the pace of an
operator working at normal speed.
a. Standard Time c. Performance Rating
b. Allowance d. Element
9. It is the assessment of the worker's rate of working relative to the observer's concept of the rate corresponding to
the standard pace.
a. Rating c. Standard Rating
b. Performance Rating d. Skill Rating
10. It is the average rate of pace at which a qualified worker will naturally work if he is motivated to apply himself
to work but without the stimulus of a wage incentive plan.
a. Rating c. Standard Rating
b. Performance Rating d. Skill Rating
WORK MEASUREMENT ASSESSMENT

I. IDENTIFICATION

__________ 1. A distinct part of specified job selected for convenience of observation, method, and
analysis.

__________ 2. The most accurate method of time study that is used for high-precision work.

__________ 3. It is expressed as a percentage of the efficiency of a representative operator, which

indicates how efficient an operator is in comparison to some of his average fellow workers.

__________ 4. It is a process of adjusting the actual pace of working comparing it with the mental picture
of pace of an operator working at normal speed.

__________ 5. The application of techniques designed to establish the time for a qualified worker to carry
out specific jobs at a defined level of performance. Determining the amount of worker time required to
generate one unit of output.

__________ 6. They observe the movement of workers against a standard expected pace of speed and
note the relationship between hem as a rating factor.

__________ 7. The time required by a normal worker.

__________ 8. The amount of time added to the normal time that allows the worker to recover from
fatigue and to attend to personal needs.

__________ 9. Recording of time that uses a stopwatch.

__________ 10. The anticipated amount of time required for a task to be completed.

II. FILL IN THE BLANK

1.) Speed of the movement of a worker is the only factor considered in _____ rating.

2-4.) “The art of ______ and ______ the time acquired to do each detailed element of an ______
operation.”

5.) An exact estimation of _____ is essential for correct pricing.

III. ENUMERATION:

Stages in Performing Time Studies

1.

2.

3.

Techniques of Work Measurement

1.

2.

3.

4.

5.

Effects of Bad Time Studies

1.

2.

3.

Objectives of Work Measurement

1.

2.

3.

4.
IV: PROBLEM SOLVING

1-5) A worker is assigned to assemble a product; the worker is expected to complete a task in 8 minutes.
However, the worker's actual speed allows them to complete the task in 6 minutes. Calculate the worker's
speed.

6-10) A time study analyst timed an assembly operation for 20 cycles and then computed the average time
per cycle, which was 19.25 minutes. The analyst assigned a rating factor of 92 percent and decided that an
appropriate allowance was 13 percent

11-15) A manufacturing company has a new product that conducts a time study for 11 cycles of a job.
The job has six elements and total elemental times in minutes for each element and determines the
standard time if the allowance factor is 25%.

16-20) A time study was conducted in an operation with three elements. Each element was observed three
times and the following table shows the recorded data. Determine the normal time and standard time for
the operation for an allowance factor of 12%. Additionally, the allowance factor is taken as a fraction of
the entire workday.
Answer Key for Work Measurement

I. TRUE OR FALSE

1. TRUE 6. FALSE – Bad/Bad Time Studies

2. FALSE - Standard Time 7. TRUE

3. FALSE – Percentage 8. FALSE – New/New Products

4. TRUE 9. FALSE - Normal Time

5. TRUE 10. FALSE - Standardization of Methods

II. FILL IN THE BLANKS

1. Time 6. Minute

2. Output 7. Elements

3. Normal 8. Date

4. Price 9. Overtime

5. Stopwatch 10. Rating

III. MULTIPLE CHOICE

1. B
2. C
3. D
4. C
5. A
6. B
7. B
8. C
9. A
10. C
ASSESSMENT
ANSWER KEY

Identification
1. Element
2. Motion Picture Camera
3. Rating Factor
4. Performance Rating
5. Work Measurement
6. Rating Personnel
7. Normal Time
8. Allowance
9. Stopwatch Method
10. Labor Standard

Fill in the Blank

1. Speed
2. Observing
3. Recording
4. Industrial
5. Time

Enumeration
Techniques of Work Measurement 5
• Time Study
• Synthetic Data
• Predetermined Motion Time System
• Analytical Estimating
• Work Sampling

Effects of Bad Time Study 3

• Overtime
• Fatigue
• Poor Quality
• Rework
 CHAPTER 7: TOTAL QUALITY MANAGEMENT

LEARNING OBJECTIVES:
This topic aims that the students be able to:
1. Understand the concept of Total Quality Management.
2. Discuss dimensions of quality.
3. Understand the importance of Quality Gurus.
4. Elaborate the elements of Total Quality Management.
5. Differentiate the two types of Cost Quality
6. Discuss the continuous improvement and Six Sigma.
7. Understand the seven basic quality control tools.
8. Understand the Quality Systems.

Total quality management (TQM) is an integrated organizational effort designed to improve quality at
every level.
 TQM is about meeting quality expectations as defined by the customer; this is called customer-
defined quality
The definition of quality depends on the point of view of the people defining it. Most consumers have a
difficult time defining quality, but they know it when they see it. For example, although you probably have
an opinion as to which manufacturer of athletic shoes provides the highest quality, it would probably be
difficult for you to define your quality standard in precise terms. Also, your friends may have different
opinions regarding which athletic shoes are of highest quality. The difficulty in defining quality exists
regardless of product, and this is true for both manufacturing and service organizations. Think about how
difficult it may be to define quality for products such as airline services, child day-care facilities, college
classes, or even OM textbooks. Further complicating the issue is that the meaning of quality has changed
over time.
Some people view quality as “performance to standards.” Others view it as “meeting the customer’s needs”
or “satisfying the customer.”
Let’s look at some of the more common definitions of quality

 Conformance to specifications
How well a product or service meets the targets and tolerances determined by its designers.
 Fitness for use
A definition of quality that evaluates how well the product performs for its intended use.
 Value for price paid
Quality defined in terms of product or service usefulness for the price paid.
 Support services
Quality defined in terms of the support provided after the product or service is purchased.
  Psychological criteria
A way of defining quality that focuses on judgmental evaluations of what constitutes product or service
excellence.

Differences between Manufacturing and Service Organizations

Defining quality in manufacturing organizations is often different than it is for service organizations.
Manufacturing organizations produce a tangible product that can be seen, touched, and directly measured.
Examples include cars, CD players, clothes, computers, and food items. Therefore, quality definitions in
manufacturing usually focus on tangible product features.

Dimensions of Quality
Eight dimensions of quality were delineated by David A. Garvin. It is a strategic management tool that can
be used as a framework to analyze characteristics of quality.

Performance – Performance refers to a product's primary operating characteristics. For an automobile,

performance would include traits like acceleration, handling, cruising speed, and comfort.

Features – Secondary characteristics, added features. The ones that add extra functionality to their essential
functions.

Conformance - Meeting operating characteristics or industry standards, workmanship.

Reliability – An important dimension of product design is that the product functions as expected. This is
called reliability, the probability that a product, service, or part will perform as intended for a specified
period under normal conditions.

Durability – measure of product life, durability can be defined as the amount of use one gets from a product
before it deteriorates.

Serviceability – reflects on how easy it is for the consumer to obtain repair service, how responsive the
service personnel is, and how reliable the service is.

Aesthetics – Aesthetics is a subjective dimension of quality. How a product looks, feels, sounds, tastes, or
smells is a matter of personal judgement and a reflection of individual preference. In this dimension of
quality, it may be difficult to please everyone.
Perceived Quality - is the impression of excellence that a customer experiences about a product, brand, or
business, derived through sight, sound, touch, and scent. Consumers do not always have complete
information about a product's or service's attributes; indirect measures may be their only basis for
comparing brands.

Quality Gurus

“Quality Guru” refers to an individual who has made significant contributions to the field of quality
management through their expertise, theories, methodologies, or practices.

- Walter A. Shewhart was a statistician at Bell Labs during the 1920s and 1930s. Shewhart studied
randomness and recognized that variability existed in all manufacturing processes. He developed quality
control charts that are used to identify whether the variability in the process is random or due to an
assignable cause, such as poor workers or miscalibrated machinery. He stressed that eliminating variability
improves quality. His work created the foundation for today’s statistical process control, and he is often
referred to as the “grandfather of quality control.”

- W. Edwards Deming is often referred to as the “father of quality control.” He was a statistics professor
at New York University in the 1940s. After World War II, he assisted many Japanese companies in
improving quality. The Japanese regarded him so highly that in 1951 they established the Deming Prize, an
annual award given to firms that demonstrate outstanding quality. It was almost 30 years before American
businesses began adopting Deming’s philosophy.

A number of elements of Deming’s philosophy depart from traditional notions of quality. The first is the
role management should play in a company’s quality improvement effort. Historically, poor quality was
blamed on workers—on their lack of productivity, laziness, or carelessness. However, Deming pointed out
that only 15 percent of quality problems are actually due to worker error. The remaining 85 percent are
caused by processes and systems, including poor management. Deming said that it is up to management to
correct system problems and create an environment that promotes quality and enables workers to achieve
their full potential. He believed that managers should drive out any fear employees have of identifying
quality problems and that numerical quotas should be eliminated. Proper methods should be taught, and
detecting and eliminating poor quality should be everyone’s responsibility.
Deming outlined his philosophy on quality in his famous “14 Points.” These points are principles that help
guide companies in achieving quality improvement. The principles are founded on the idea that upper
management must develop a commitment to quality and provide a system to support this commitment that
involves all employees and suppliers. Deming stressed that quality improvements cannot happen without
the organizational change that comes from upper management.

Joseph M. Juran - After W. Edwards Deming, Dr. He is considered to have had the greatest impact on
quality management. Juran originally worked in the quality program at Western Electric, a former
equipment division of AT&T. He became better known in 1951 after the publication of his book Quality
Control Handbook. In 1954, he went to Japan to work with manufacturers and teach classes on quality.
Though his philosophy is similar to Deming’s, there are some differences. Whereas Deming stressed the
need for an organizational “transformation,” Juran believed that implementing quality initiatives should not
require such a dramatic change and that quality management should be embedded in the organization.

One of Juran’s significant contributions was his focus on the definition of quality and the cost of quality.
Juran is credited with defining quality as fitness for use rather than simply conformance to specifications.
As we have learned in this chapter, defining quality as fitness for use takes into account customer intentions
for use of the product, instead of focusing only on technical specifications. Juran is also credited with
developing the concept of cost of quality, which allows us to measure quality in dollar terms rather than on
the basis of subjective evaluations.
Juran is well known for originating the idea of the quality trilogy: quality planning, quality control, and
quality improvement. The first part of the trilogy, quality planning, is necessary so that companies identify
their customers, product requirements, and overriding business goals. Processes should be set up to ensure
that the quality standards can be met. The second part of the trilogy, quality control, stresses the regular use
of statistical control methods to ensure that quality standards are met and to identify variations from the
standards. The third part of the quality trilogy is quality improvement. According to Juran, quality
improvements should not be just breakthroughs, but continuous as well. Together with Deming, Juran
stressed that to implement continuous improvement, workers need to have training in proper methods on a
regular basis.

Armand V. Feigenbaum - Another quality leader is Armand V. Feigenbaum, who introduced the concept
of total quality control. In his 1961 book Total Quality Control, he outlined his quality principles in 40
steps. Feigenbaum took a total system approach to quality. He promoted the idea of a work environment
where quality developments are integrated throughout the entire organization, where management and
employees have a total commitment to improve quality, and where people learn from each other’s
successes. This philosophy was adapted by the Japanese and termed “company-wide quality control.”

-Philip B. Crosby is known for emphasizing the importance of prevention over inspection in quality
management. He introduced the concept of “zero defects”, which aims to eliminate defects and errors in a
process or product.

Crosby also introduced the idea of “quality is free”, which is the notion that the cost of preventing defects
is always lower than the cost of dealing with defects after they occur.

Crosby’s principle was “Doing it right for the first time”. It was his answer to the quality crisis. The essence
if his philosophy is expressed in what he called the absolutes of quality management and the basic elements
of improvement.

Crosby is also known for his Four Absolutes if Quality:

1. The definition of quality is conformance to requirements.
2. The system of quality is prevention.
3. The performance standard is zero defects.
4. The measurement of quality is the price of non-conformance.

He worked in the area of quality for many years, first at Martin Marietta and then, in the 1970s, as the vice
president for quality at ITT. He developed the phrase “Do it right the first time” and the notion of zero
defects, arguing that no amount of defects should be considered acceptable. He scorned the idea that a small
number of defects is a normal part of the operating process because systems and workers are imperfect.
Instead, he stressed the idea of prevention.

- Kaoru Ishikawa is best known for the development of quality tools called cause-and-effect diagrams,
also called fishbone or Ishikawa diagrams. These diagrams are used for quality problem solving, and we
will look at them in detail later in the chapter. He was the first quality guru to emphasize the importance of
the “internal customer,” the next person in the production process. He was also one of the first to stress the
importance of total company quality control, rather than just focusing on products and services.

He introduced the concept of quality circles. (groups of employees who regularly meets with the aim to
solve problems, improve the quality control if products and facilitate high standards in the workplace)
- Dr. Genichi Taguchi is a Japanese quality expert known for his work in the area of product design. He
estimates that as much as 80 percent of all defective items are caused by poor product design. Taguchi
stresses that companies should focus their quality efforts on the design stage, as it is much cheaper and
easier to make changes during the product design stage than later during the production process.

Taguchi was a Japanese engineer and quality control expert known for his contributions to the statistics and
quality control field. He developed the concept of “loss function”, which measures the deviation of a
product from its target specification. He also introduced the idea of using “robust design” to create products
insensitive to variations in manufacturing processes. Taguchi’s methods are widely used worldwide to
improve the quality of products and reduce manufacturing costs.

Elements of total quality management

TQM distinguishes itself by focusing on identifying the root causes of quality issues and correcting them
at the source, rather than inspecting the product after it has been manufactured. TQM not only encompasses
the entire organization, but it emphasizes that quality is driven by the customer. TQM tries to instill quality
in all aspects of the organization. It is concerned with both the technical aspects of quality and the
participation of people in quality, such as customers, company employees, and suppliers. Here are the
specific concepts that comprise TQM philosophy:

I. Customer Focus: The first and most important feature of TQM is the company's emphasis on its
customers. Meeting or exceeding customer expectations is what quality is all about. The goal is to first
identify and then meet the needs of the customer. TQM recognizes that a perfectly produced product has
little value if it does not meet the needs of the customer. As a result, we can say that quality is driven by
the customer. However, determining what the customer wants can be difficult because tastes and
preferences change. Furthermore, customer expectations frequently differ from one another.

II. Continuous Improvement: We often think of improvement in terms of attainable goals, such as
passing a certification exam or reducing the number of defects to a certain level. Change has traditionally
been associated with large magnitudes for American managers, such as major organisational restructuring.
The Japanese, on the other hand, believe that gradual improvements result in the best and most long-lasting
changes. To use an analogy, they believe that taking frequent small doses of medicine is preferable to taking
one large dose. Continuous improvement, also known as kaizen in Japan, requires the company to
constantly strive to be better through learning and problem solving. We must always evaluate our
performance and take steps to improve it because we can never achieve perfection. Here are two approaches
that can help companies with continuous improvement: the plan–do–study–act (PDSA) cycle and
benchmarking:

 The Plan-Do-Study-Act Cycle (PDSA) describes the activities that a company must perform in order
to incorporate continuous improvement into its operations. This cycle is also known as the
Shewhart cycle or the Deming wheel. This cycle's circular nature demonstrates that continuous
improvement is a never-ending process. Here, we have:

1. Plan: The first step in the PDSA cycle is to plan. Managers must evaluate the current process and
make plans based on any problems they find. They need to document all current procedures, collect data,
and identify problems. This information should then be studied and used to develop a plan for improvement
as well as specific measures to evaluate performance.

2. Do: The next step in the cycle is implementing the plan (do). During the implementation process
managers should document all changes made and collect data for evaluation.

3. Study: The third step is to study the data collected in the previous phase. The data are evaluated to see
whether the plan is achieving the goals established in the plan phase.

4. Act: The last phase of the cycle is to act on the basis of the results of the first three phases. The best
way to accomplish this is to communicate the results to other members of the company and then implement
the new procedure if it has been successful. Note that this is a cycle; the next step is to plan again. After we
have acted, we need to continue evaluating the process, planning, and repeating the cycle again.

 Benchmarking: Another way companies implement continuous improvement is by studying

business practices of companies considered “best in wclass.” This is called benchmarking. The
ability to learn and study how others do things is an important part of continuous improvement.
The benchmark company does not have to be in the same business as long as it excels at something
that the company doing the study wishes to emulate.

III. Employee Empowerment: The TQM philosophy includes empowering all employees to identify
and correct quality issues. Employees were afraid to identify problems under the old quality concept. They
avoided problems for fear of being chastised. Poor quality was frequently passed on to others in order to
make it "someone else's problem." The new quality concept, TQM, provides incentives for employees to
identify quality problems. Employees are rewarded rather than punished for identifying quality issues.
Employees' roles in TQM are vastly different from those in traditional systems. Workers are given the
authority to make quality decisions in the manufacturing process. They are viewed as an essential
component of the effort to achieve high quality. Their contributions are greatly appreciated, and their
suggestions are implemented. Employees receive ongoing and extensive training in quality measurement
tools to perform this function. TQM distinguishes between external and internal customers to emphasize
the role of employees in quality. External customers are those who buy the company's goods and services.
Internal customers are employees who receive goods or services from others in the organization.

1. Team Approach: TQM stresses that quality is an organizational effort. To facilitate the solving of
quality problems, it places great emphasis on teamwork. The use of teams is based on the old adage that
“two heads are better than one.” Using techniques such as brainstorming, discussion, and quality control
tools, teams work regularly to correct problems. The contributions of teams are considered vital to the
success of the company. For this reason, companies set aside time in the workday for team meetings.

2. Quality Circle: One of the most common types of teams is the quality circle, a team of volunteer
production employees and their supervisors whose purpose is to solve quality problems.The quality circle
is a team of volunteer production employees and their supervisors whose purpose is to solve quality
problems. The circle usually has eight to ten members, and decisions are made by group consensus.

The teams usually meet once a week during work hours in a location designated for this purpose. They
adhere to a predefined procedure for analyzing and resolving quality issues. Open debate is encouraged,
but criticism is not permitted. Although the operation of quality circles is friendly and casual, it is serious
business. Quality circles are more than just "chit chat," they do important work for the company and have
been very successful in many firms.

IV. Quality Tools: TQM by clearly places a high level of responsibility on all employees. Employees must
be properly trained in order to identify and correct quality issues. They must understand how to assess
quality using a variety of quality control tools, interpret results, and correct problems. They are simple to
understand while being extremely useful in identifying and analyzing quality issues. Workers may use only
one tool at a time, but a combination of tools is often most beneficial.
V. Product Design: Includes determining the best locations for manufacturing and warehousing facilities,
as well as for retail outlets, and how to design the store itself. In global supply chains, companies also must
decide whether or not to adopt offshore production. This decision now considers the traditional cost factors,
such as production costs, distribution, and inventory, but also takes into account the greater risk of product
damage and delay resulting from offshore production.

1. Quality Function Deployment

A useful tool for translating the voice of the customer into specific technical requirements. Quality function
deployment is also useful in enhancing communication between different functions, such as marketing,
operations, and engineering.
QFD begins by identifying important customer requirements, which typically come from the marketing
department. These requirements are numerically scored based. We will consider the example of
manufacturing a backpack to show how we would use QFD.

 Customer Requirements. The first thing we need to do is survey our customers to find out
specifically what they would be looking for in a product—in this case, a backpack for students. To
find out precisely what features students. would like in a backpack, the marketing department might
send representatives to talk to students on campus, conduct telephone interviews, and maybe
conduct focus groups.

 Competitive Evaluation. The important thing here is to identify which customer requirements we
should pursue and how we fare relative to our competitors. For example, you can see that our
product excels in durability relative to competitors, yet it does not look as nice. This means that we
could gain a competitive advantage by focusing our design efforts on a more appealing product.

 Product Characteristics. Specific product characteristics are on top of the relationship matrix. These
are technical measures. In our example they include the number of zippers and compartments, the
weight of the backpack, the strength of the backpack, the grade of the dye color, and the cost of
materials.

 The Relationship Matrix. The strength of the relationship between customer requirements and
product characteristics is shown in the relationship matrix. For example, you can see that the
number of zippers and compartments is negatively related to the weight of the backpack. A negative
relationship means that as we increase the desirability of one variable, we decrease the desirability
 of the other. At the same time, roominess is positively related to the number of zippers and
compartments, as is appearance. A positive relationship means that an increase in desirability of
one variable is related to an increase in the desirability of another. This type of information is very
important in coordinating the product design.

 The Trade-off Matrix. The next step in our building process is to put the “roof” on the house. This
is done through a trade-off matrix, which shows how each product characteristic is related to the
others and thus allows us to see what trade-offs we need to make. For example, the number of
zippers is negatively related to the weight of the backpack.
 Setting Targets. The last step in constructing the house of quality is to evaluate competitors’
products relative to the specific product characteristics and to set targets for our own product. The
bottom row of the house is the output of quality function deployment. These are specific,
measurable product characteristics that have been formulated from general customer requirements.

 Reliability. Reliability is defined as the probability that a product, system, or service will perform
its intended function adequately for a specified period of time, or will operate in a defined
environment without failure.

VI. Process Management: Or business process management (BPM) – is the technique used by
organizations to analyze, optimize, monitor, and control various business processes. With BPM, companies
are able to: Automate recurring processes, so they always run smoothly.

VII. Managing Supplier Quality: Although implementing supply chain management requires a set of
actions that are unique to every company, the end goal is the same. Companies want a supply chain that
makes it possible to manage and adapt to all of the business dynamics affecting the company.

1. E-distributors- They are the most common form of net marketplace. E-distributors provide electronic
catalogs representing the products of thousands of suppliers. E-distributors are independently owned
intermediaries that provide a single source for customers to make spot purchases. About 40 percent of a
company’s items are purchased on a spot basis.

2. E-purchasing- Companies connect on-line suppliers offering maintenance, repair parts, and operating
supplies (MRO) to businesses that pay fees to join the market. E-procurement companies are typically used
for long-term contractual purchasing and offer value chain management services to both buyers and sellers.
3.On-line Exchanges- Connect hundreds of suppliers to unlimited buyers. Exchanges create a marketplace
focusing on spot requirements of large firms in a single industry, such as the automotive industry or
electronics industry.

4.Industry Consortia- Industry-owned markets that enable buyers to purchase direct inputs from a limited
set of invited participants.

Cost of quality

 According to ASQ (2019) Cost of quality (COQ) is defined as a methodology that allows an
organization to determine the extent to which its resources are used for activities that prevent poor
quality, that appraise the quality of the organization’s products or services, and that result from
internal and external failures.
 The cost of quality is divided into 2 types of the cost of conformance and the cost of non-
conformance. Quality is regarded as important for the business’ products or services offered, for
quality could also be the one to set the business apart from its competitors and improve its income
generation. Ignoring quality could also lead to further expenses due to warranties and customer
dissatisfaction which could reduce the overall quantity of customers in the business.

Cost of Conformance

Cost of conformance from the word “conformance” meaning the degree to which a product, system, or
service adheres and meets the requirements and/or standards. So, Cost of conformance means the cost to
adhere to or meet the standards.

Cost of conformance includes Prevention costs and Appraisal costs.

Prevention costs

 Defined as the cost of implementing and preparing a quality plan.

 From the word “prevention”. Prevention costs are the costs incurred to prevent defects or
substandard traits of a product or service.
 Example: Performing numerous surveys and research in the market to know what the standards
of the competition might be so that the business owner could already have an idea of what standards
should be set on its products.
Appraisal costs

 A specific category of quality control costs where it is the cost incurred for testing, inspecting, and
evaluating their products and services in order to meet customer expectations and regulatory
requirements. Companies often pay these costs to avoid a defective inventory of products. Or in
the case of services educate and train their servicemen/servicewomen until they could finally
comply with customer expectations and standards set by the company.

In the end these conforming costs aim to prevent the further cost and possible damages incurred
when substandard and/or defective products go to the market and eventually to the customers.

Cost of Non-Conformance

Cost of Non-Conformance includes the Internal failure costs and External failure costs.

Internal Failure Costs

 These are the costs that occurred prior to delivery or shipment of the product or the service to the
customer.
 These are the costs to correct deficiencies or defects in a product prior to delivery to the customers.

o Cost of rework, defectives, waste, and scrap

o Cost of re-inspection, re-tests to verify the performance analysis.

External Failure Costs

 These are the costs incurred after the product or service has been delivered to the customer.

Example:

o Warranty charges

o Recalling

o Refund

o Customer Compensation
Continuous improvement

The most important part of a project is the planning phase; this is certainly true for continuous improvement
projects. The better the plan, the better the implementation and the results. When developing a plan, the
team needs to consider all action steps in the process expected to lead to the im- provement desired. Once
all action steps are identified, the next step is to decide the sequence in which these steps should be
implemented. After the sequence is determined, the time allotted to complete each step is calculated, and
responsibility for each step is assigned.

Plan
Planning is the most important phase of every project, and this is especially true for initiatives aimed at
continuous development. greater plans yield greater results and are easier to implement. The team must
take considered each action step in the process that is anticipated to result in the desired improvement while
creating a strategy.

Planning Guidelines
 Obtain upper management commitment through sponsorship
 Form the right combination for the team
 Develop a vision and policy for the team
 Development objectives and guidelines
 Review program and projects

Obtain Upper Management Commitment Through Sponsorship

Whenever a project is being considered, it is wise, indeed imperative, that the most senior member of the
organization be firmly established as sponsor of that project. The project needs his endorsement and the
understanding that his door is always open to discuss progress on the project.

Form the Team

This phase of planning should not be taken lightly. Picking names and then throwing these individuals
together in a room does not create a team. Each function involved in the project should be represented, and
these representatives should have a good working knowledge of the area they represent. They must possess
attributes that foster teamwork. These attributes include honesty, good communication skills, dependability,
leadership, empathy, and a willingness to work with others and share.
Develop a Vision and a Policy Statement
The team needs to know when they have achieved their objective. The vision is where the organisation
wishes to be when all phases of the program are implemented and successful. The vision statement should
be concise and easy to understand. It should be measurable and should fit with the organisation's business
policy. It becomes a policy statement when endorsed and signed by the senior manager at the facility.

Develop Objectives and Guidelines

The team must be provided with the objectives of their project and the guidelines to be followed to achieve
those objectives. For instance, an objective may be to reduce the lead time in turning around a "request for
quote" to a customer. A guideline (or restriction) may be that we are only interested at this point in reducing
in-house lead time. We wish to tackle the outside sales and marketing function at another time.

Review Current Programs and Projects

After the team has been formed and several meetings have been held describing the project and its vision
statement, policy statement, objectives, and guidelines, the team should thoroughly review the project. The
objective of this review is to determine if the team has everything at their disposal to initiate the project and
to successfully achieve the vision. A list of needs should be prepared and submitted to the senior manager
for his consideration and action.

Service and Product Improvement

Service and product improvement comes from initiating new programs or techniques and monitoring.

Advantages of service and product improvement

 Reduced scrap
 Less rework
 Improved capacity
 Fewer returned goods
 Less service calls
 Improved earnings through lower cost of quality
 Improved earnings through more efficient operations
 Satisfied customers
 Satisfied employees
 Gaining a competitive advantage over your competition
Initiate
The next step in the PIE process is initiating actions iden- tified in the planning phase. In my example for
the planning phase, it was important to demonstrate how plans are initi- ated through the use of identifying
and tracking CPIs. We also explored how to expand upon acquired data to further analyze avenues to
improvement.

Evaluate
Total quality management is about measurement and evaluation. The only way to know if improvement is
taking place is by measuring where we are and comparing it to where we were and where we want to be. If
we develop a plan for improvement, initiate action to improve, and do not measure the outcome of our
actions, we are unaware. We do not know if we are improving, remaining constant, or losing ground.

Six sigma

 Six Sigma is a collection of approaches and technologies used to improve business processes by
reducing defects and errors, minimizing variation, and increasing quality and efficiency Six Sigma's
objective is to attain a virtually flawless level of quality, with just 3.4 errors per million chances.
 Motorola Corporation invented the term Six Sigma in the 1980s to characterize the high degree of
quality that the corporation was striving for.
 This picture shows the difference of 3 sigmas that has 2600 defective parts per million to six sigma
with 3.4 defective parts per million
 A six-sigma calculation has a 99.99966% accuracy, whereas a three-sigma calculation has a
99.73% accuracy.
 To attain the six sigma goal, Motorola instituted quality focus in all aspects of the organisation.
Marketing ensures that product characteristics are exactly what clients desire before the product is
developed. Operations ensures that exact product characteristics can be achieved through product
design, the manufacturing process, and the materials used.
 Two aspects to implementing the Six Sigma concept.
- Use of technical tools to identify and eliminate causes of quality problems.
statistical quality control tools and problem-solving tools; cause-and-effect diagrams, flow charts,
and pareto analysis

-Implementation is people's involvement.

all employees have the training to use technical tools and are responsible for rooting out quality
problems.Employees are given martial arts titles
-Individuals with black belts and master black belts- have considerable training in the use
of technical tools and are responsible for carrying out Six Sigma implementation. They are
experienced professionals in charge of measuring, analyzing, process controlling, and
improving. They accomplish this by serving as coaches, team leaders, and facilitators of
the continuous improvement process. Part of Six Sigma is to continuously search for
quality problems and improve upon them. In organizations, this effort is led by the black
belts
-Green belts are persons who have had sufficient technical tool training to work in teams
or on small, individual projects.

 Approach of Six sigma is organised around a five-step plan known as DMAIC, which stands for
Define, Measure, Analyze, Improve, and Control;
-Step 1: Define the quality problem of the process.
-Step 2: Measure the current performance of the process.
-Step 3: Analyze the process to identify the root cause of the quality problem.
-Step 4: Improve the process by eliminating the root causes of the problem.
-Step 5: Control the process to ensure the improvements continue.
The first three steps provide a study of the existing process, whereas the last two
steps are involved in process change. All steps extensively utililze quantitative
tools, such as measuring the current performace and analyzing the process for root
causes of problems. It like PDCA define as Plan-Do-Check-Act
 Successful Six Sigma implementation requires commitment from top company leaders. these
individuals must promote the process, eliminate barriers to implementation, and ensure that proper
resources are available
 A key individual is a champion of Six Sigma. This is a person who comes from the top ranks of the
organization and is responsible for providing direction and overseeing all aspects of the process.
Seven basic quality control tools

1. Cause-and-effect Diagram

 identify potential causes of particular quality problems. They are often called fishbone diagrams
because they look like the bones of a fish. The “head” of the fish is the quality problem, such as
damaged zippers on a garment or broken valves on a tire. The diagram is drawn so that the “spine”
of the fish connects the “head” to the possible cause of the problem. These causes could be related
to the machines, workers, measurement, suppliers, materials, and many other aspects of the
production process. Each of these possible causes can then have smaller “bones” addressing
specific issues that relate to each cause. For example, a problem with machines could be due to a
need for adjustment, old equipment, or tooling problems. Similarly, a problem with workers could
be related to lack of training, poor supervision, or fatigue. Cause-and-effect diagrams are problem-
solving tools commonly used by quality control teams. Specific causes of problems can be explored
through brainstorming. The development of a cause-and-effect diagram requires the team to think
through all the possible causes of poor quality.

2. Flowchart

 is a schematic diagram of the sequence of steps involved in an operation or process. It provides a

visual tool that is easy to use and understand. By seeing the steps involved in an operation or
process, everyone develops a clear picture of how the operation works and where problems could
arise.

3. Checklist

 is a list of common defects and the number of observed occurrences of these defects. It is a simple
yet effective fact-finding tool that allows the worker to collect specific information regarding the
defects observed. A checklist can also be used to focus on other dimensions, such as location or
time. For example, if a defect is being observed frequently, a checklist can be developed that
measures the number of occurrences per shift, per machine, or per operator. In this fashion we can
isolate the location of the particular defect and then focus on correcting the problem.

4. Control Chart

 These charts are used to evaluate whether a process is operating within expectations relative to
some measured value such as weight, width, or volume. For example, we could measure the weight
 of a sack of flour, the width of a tire, or the volume of a bottle of soft drink. When the production
process is operating within expectations, we say that it is “in control.” To evaluate whether or not
a process is in control, we regularly measure the variable of interest and plot it on a control chart.
The chart has a line down the center representing the average value of the variable we are
measuring. Above and below the center line are two lines, called the upper control limit (UCL) and
the lower control limit (LCL). As long as the observed values fall within the upper and lower control
limits, the process is in control and there is no problem with quality. When a measured observation
falls outside of these limits, there is a problem.

5. Scatter Diagram

 are graphs that show how two variables are related to one another. They are particularly useful in
detecting the amount of correlation, or the degree of linear relationship, between two variables. For
example, increased production speed and number of defects could be correlated positively; as
production speed increases, so does the number of defects. Two variables could also be correlated
negatively, so that an increase in one of the variables is associated with a decrease in the other. For
example, increased worker training might be associated with a decrease in the number of defects
observed.

6. Pareto Chart

 is a technique used to identify quality problems based on their degree of importance. The logic
behind is that only a few quality problems are important, whereas many others are not critical. The
technique was named after Vilfredo Pareto, a nineteenth-century Italian economist who determined
that only a small percentage of people controlled most of the wealth. This concept has often been
called the 80–20 rule and has been extended to many areas. In quality management the logic behind
Pareto’s principle is that most quality problems are a result of only a few causes. The trick is to
identify these causes.

7. Histogram

 is a chart that shows the frequency distribution of observed values of a variable. We can see from
the plot what type of distribution a particular variable displays, such as whether it has a normal
distribution and whether the distribution is symmetrical.
Quality Systems
Quality Systems are made up of the quality organization and the written guidelines used to define the quality
organization as they relate to the rest of the organization. Quality systems are the result of the quality policy
established by the executive management team. The two most important elements of quality systems are
the quality manual and the organization's standard operating procedures. When developing the quality
manual, it is recommended that attention be paid to following the guidelines established by the ANSU
ASQC Q9000-1, Q9001-1, Q9002-1, Q9003-1, and Q9004-1 standards. These are the American equivalents
to the ISO 9000 series of quality standards. The ANSI/ASQC standards are available from the American
Society for Quality Control, 611 East Wisconsin Avenue, Milwaukee, WI 53202 and from ASTM. Even if
the organization has no intention of applying for ISO registration, the quality guidelines in the ANSI/ASQC
Q9000-1 series of quality systems are among the best available to control quality.

Quality is achieved when we provide goods and services that meet or exceed customer requirements. The
part or service provided must conform to design or process requirements. The design or process must
conform to its market requirements, and market requirements must conform to customer expectations.
Therefore, three major groups with their necessary support groups are responsible for quality: marketing,
engineering, manufacturing/operations, and their support groups. Manufacturing / operations by the single
term: manufacturing. This one word will mean either a facility that produces a part or a facility that provides
a service. Responsibility for quality in an organization rests with marketing, engineering, and
manufacturing along with the support groups that provide services to them. Each must be held accountable
for their contribution to the overall effort. Marketing must make sure their concept of customer needs and
requirements is fully understood and that they convey this information to the engineering group.
Engineering must assure that they fully translate the marketing requirements to designs and processes that
allow manufacturing to produce the product. Manufacturing must assure that the end product they provide
to the customer conforms to the facility's design engineering requirements.

The quality department's function is to facilitate continuous improvement by providing services to

marketing, engineering, manufacturing, and all their support groups. Their role is similar to that of another
service group in the organization, the accounting department. And, like the accounting department, the
quality department provides assistance in identifying opportunities for improvement through measurement
and communication. The quality department also has experts in the area of quality engineering and
reliability, and technicians and inspection equipment to assist all other facility functions in their
improvement projects.
I. MATCHING TYPE
Direction: Match the description from Column A to the word it describes in Column B. Write the letter of
your answer on the bank provided before the number.
Column A Column B

1. It is an integrated organizational effort a.) David A. Garvin

designed to improve quality at every level. b.) Philip Crosby

2. How well a product or service meets the targets c.) Quality Circle

and tolerances determined by its designer. d.) Team Approach

3. He suggested that there are eight dimensions of quality. e.) QFD

4. It refers to an individual who has made. f.) Total Quality Management

significant contributions to the field of quality management g.) Process Management

through expertise, theories, methodologies, or practices. h.) Cost of quality

5. It refers to a group of employees who regularly meets i.) Six Sigma

with the aim to solve problems. j.) Conformance to

6. It is the Japanese term for continuous improvement. specifications

7. It is a useful tool for translating the voice of the customer k.) Quality Gurus

into specific technical requirements. l.) Kanban

8. It is the technique used by organization to analyze, optimize, m.) Kaizen

monitor, and control various business processes.

9. It is defined as a methodology that allows an organization

to determine the extent to which its resources are used for activities

that prevent poor quality.

10. It is a collection of approaches and technologies used

to improve business processes by reducing defects and errors,

minimizing variation, increasing quality and efficiency.

II. CONCEPT CHART.

Using Ishikawa’s Fish-Bone Diagram, identify the potential causes and sub-causes of Poor Product
Quality.

III. WHO’S WHO?

__________________ 1. He developed the cause-and-effect diagrams.
__________________ 2. He developed the concept of statistical control charts.
__________________ 3. He developed the Taguchi loss function
. __________________ 4. He developed "14 Points" to guide companies in quality improvement.
__________________ 5. He coined the phrase "quality is free."
__________________ 6. He developed the concept of cost of quality.
__________________ 7. He introduced the concept of total quality control.
TOTAL QUALITY MANAGEMENT ASSESSMENT

I. Identification (10 items)

1. These are the costs incurred after the product or service has been delivered to the customer.

2. It is the most important phase of every project, and this is especially true for initiatives aimed at
continuous development.

3. Each function involved in the project should be represented, and these representatives should have a
good working knowledge of the area they represent. They must possess attributes that foster teamwork.

4. The new quality concept, TQM, provides incentives for employees to identify quality problems.
Employees are rewarded rather than punished for identifying quality issues.

5. It is defined as the probability that a product, system, or service will perform its intended function
adequately for a specified period of time, or will operate in a defined environment without failure.

6. A company learns by observing its competitors’ products and their success rate. This includes looking
at product design, pricing strategy, and other aspects of the operation.

7. Is the overall opinion of the customers towards the product. It's the combination of factors like brand
name, price, advertising, etc.

8. It is a collection of approaches and technologies used to improve business processes by reducing

defects and errors, minimizing variation, and increasing quality and efficiency.

9. It is a team of volunteer production employees and their supervisors whose purpose is to solve quality
problems.

10. This is one of the tools that schematic of the sequence of steps involved in an operation or process.
II. MULTIPLE CHOICE (10 items)

1. Total quality management (TQM) is an integrated organizational effort designed to improve quality at
every level; Karu Ishikawa is one of the quality gurus.

a. First statement is true; the second statement is false.

b. First statement is false; the second statement is true.

c. Both statements are true. d. Both statements are false.

2. There are seven (7) dimensions of quality; There are eight (8) elements of total quality management. a.
First statement is true; second statement is false.

b. First statement is false; second statement is true.

c. Both statements are true. d. Both statements are false.

3. Edwards Deming introduced the concept of total quality management; Philip Crosby introduced the
concept of zero defects.

a. First statement is true; the second statement is false.

b. First statement is false; the second statement is true.

c. Both statements are true. d. Both statements are false.

4. What do you call a basic quality control tool that used to evaluate whether a process is operating
within set expectations?

a. Histograms c. Flowchart

b. Control Charts d. Checklist

5. One of the quality gurus that focused on product design quality.

a. Genichi Taguchi c. Walter Shewhart

b. Kaoru Ishikawa d. Armand Feigenbaum

6. Which of the advantages of service and product improvement is not included?

a. Satisfied Employees

b. Improved earnings through more cost of quality

c. Fewer returned goods

d. Improved quality

7. E-distributors connect hundreds of suppliers to unlimited buyers; There are five (5) more common
definitions of quality.

a. First statement is true; the second statement is false.

b. First statement is false; the second statement is true.

c. Both statements are true. d. Both statements are false.

8. Improving the process to identify the root cause of the quality problem is in the third step among the
five-step plan of Six Sigma; Measuring the current performance of the process is in the fourth step among
the five-step plan of Six Sigma.

a. First statement is true; the second statement is false.

b. First statement is false; the second statement is true.

c. Both statements are true.

d. Both statements are false.

9. What do you call a useful tool for translating the voice of the customer into specific technical
requirements?

a. Reliability

b. Product Design

c. Process Management

d. Quality Function Deployment

10. Quality Circle usually has six to eight members, and decisions are made by group consensus; Quality
Circle is one of the most common types of teams.

a. First statement is true; the second statement is false.

b. First statement is false; the second statement is true.

c. Both statements are true.

d. Both statements are false.

III. Enumeration (15 items)

1-3 Give at least 3 Elements of Total Quality Management

-4-5 Give the 2 approaches of Continuous Improvement

6-7 Give the 2 Aspects of Six Sigma

8-12 Give 5 Advantages of Service and Product

13-15 PIE stands for:

16-20 Give at least 5 Basic Quality Control Tools

IV. Fill in the blank (10 items)

1-2. _____________ also known as _____________ in Japan, requires the company to constantly strive
to be better through learning and problem solving.

3-4. The cost of quality is divided into 2 types the _____________ and the_____________

5. Walter Andrew Shewhart is often referred to as the ___________________. Answer:

V. Modified True or False (5 items)

1. Histogram is used to evaluate whether a process is operating within set expectations.

2. Appraisal Costs is defined as the cost of implementing and preparing a quality plan.

3. Philip Crosby introduced the idea of using “robust design” to create products insensitive to variations
in manufacturing processes.

4. Prevention Costs is a specific category of quality control costs where it is the cost incurred for testing,
inspecting, and evaluating their products and services in order to meet customer expectations and
regulatory requirements.

5. Quality Circle is the most common types of teams, a team of volunteer production employees and their
supervisors whose purpose is to solve quality problems.
Answer Key for Total Quality Management

I. MATCHING TYPE

1. f.) Total Quality Management

2. j.) Conformance to Specifications

3. a.) David A. Garvin

4. k.) Quality Gurus

5. c.) Quality Circle

6. m.) Kaizen

7. e.) QFD

8. g.) Process Management

9. h.) Cost of quality

10. i.) Six Sigma

II. CONCEPT CHART.

Answers may vary

III. WHO’S WHO?

1. (KAORU ISHIKAWA)

2. (WALTER A. SHEWHART)

3. (GENICHI TAGUCHI)
4. (W. EDWARDS DEMING)

5. (PHILIP B. CROSBY)

6. (JOSEPH M. JURAN)
7. (ARMAND V. FEIGENBAUM)
ASSESSMENT
ANSWER KEY

I. IDENTIFICATION (15 ITEMS)

1. External Failure Costs

2. Planning
3. Form The Team
4. Employee Empowerment
5. Reliability
6. Benchmarking
7. Perceived Quality
8. Six Sigma
9. Quality Circle
10. Flowchart

II. MULTIPLE CHOICE (10 ITEMS)

1. A
2. D
3. B
4. B
5. A
6. B
7. B
8. A
9. D
10. B
III. ENUMERATION (15 ITEMS)

1-3 Give at least 3 Elements of Total Quality Management

Possible Answers:
 Customer Focus
 Continuous Improvement
 Employee Empowerment
 Use of Quality Tools
 Product Design
 Process Management
 Managing Supplier Quality

4-5 Give the 2 approaches of Continuous Improvement

Possible Answers:
 The Plan-Do-Study-Act Cycle
 Benchmarking

6-7 Give the 2 Aspects of Six Sigma

Possible Answers:
 Use of Technical Tools
 Implementation is People's Involvement

8-12 Give 5 Advantages of Service and Product Management

Possible Answers:
 Reduced Scrap
 Less Rework
 Improved Capacity
 Fewer Returned Goods
 Less Service Calls
 Improved Earnings Through Lower Cost of Quality
 Improved Earnings Through More Efficient Operations
 Satisfied Customers
 Satisfied Employees
 Gaining a Competitive Advantage Over your Competition
13-15 PIE stands for:
ANSWERS:
PLAN
INITIATE
EVALUATE

16-20 Give at least 5 Basic Quality Control Tools

Possible answers:
 Cause-and-Effect Diagram (fishbone diagram)
 Flowchart
 Checklist
 Control chart
 Scatter diagram
 Pareto chart
 Histogram

IV. FILL IN THE BLANK (10 ITEMS)

1-2 Continuous Improvement, Kaizen

3-4 Cost of Conformance, Cost of Non-Conformance

5 Answer: Grandfather of quality control

V. MODIFIED TRUE OR FALSE (5 ITEMS)

Answers:
1. False / Control Charts
2. False / Prevention Costs
3. False / Genichi Taguchi
4. False / Appraisal Costs
5. True