Solutions (in bold font) to Homework Assignment 3 OPIM 3104: Operations Management

Problem 2-1: Backwoods American, Inc., produces expensive water-repellent, down-lined parkas. The company implemented a total quality-management program in 2005. Following are quality-related accounting data that have been accumulated for the five-year period after the program’s start.

Note: Numbers in the table are in thousands of dollars (e.g. quality cost of 3.2 is $3,200).

a) Compute the company’s total failure costs as a percentage of total quality costs for each of the five years. Does there appear to be a trend to this result? If so, speculate on what might have caused the trend.

The failure costs decrease as a percentage of total quality costs. This may be attributed to an increase in product monitoring and inspection. Fewer defective products are reaching the consumer, as evidenced by the sharp decline in external failure costs.

b) Compute prevention costs and appraisal costs, each as a percentage of total quality costs, during each of the five years. Speculate on what the company’s quality strategy appears to be.

The increase in prevention costs as a percentage of total quality costs indicates that Backwoods American is placing more emphasis on prevention of defects rather than correction of them. Perhaps they are spending more in the areas of quality planning, product design, process, training, and information. This is contributing to a decline in the need for inspection and testing, equipment testing, and operators to test quality; thus appraisal costs decline, both absolutely and as a percentage of total costs. Prevention also contributes to the decline in external and internal failures, because fewer defective products are produced to begin with. Increases in prevention expenditures will result in a decrease in all other quality costs.

c) Compare quality-sales indices and quality-cost indices for each of the five years. Is it possible to assess the effectiveness of the company’s quality management program from these index values?

These index values do not provide much information regarding the effectiveness of the quality assurance program. They are, however, useful in making comparisons from one period to the next and in showing trends in product quality over time
d) List several examples of each quality-related cost – that is, prevention, appraisal, and internal
and external failure – that might result from the production of parkas.

Prevention: Market research, that is, producing what consumers want; purchasing only high-quality down and other materials, designing an efficient and effective manufacturing process; training employees in making quality products.

Appraisal: Inspection of raw materials, work-in-process, and finished product; equipment testing (pattern cutter, sewing machines, etc.), inspection.

Internal failure: Wasted materials and labor, defective products discovered during inspection, use of inefficient processes, equipment downtime, poorly trained employees.

External failure: Defective products, customer complaints, warranty costs, lost sales, loss of good will.

Problem 2-2: The Backwoods American company in Problem 2-1 produces approximately 20,000 parkas annually. The quality management program the company implemented was able to improve the average percentage of good parkas produce by 2% each year, beginning with 83% good –quality parkas in 2006. Only about 20% of poor-quality parkas can be reworked.

a) Compute the product yield for each of the five years.

b) Using a rework cost of $12 per parka, determine the manufacturing cost per good parka for each of the five years. What do these results imply about the company’s quality management program?

Problem 2-9: The total processing cost for producing the X-Pacer running shoe is $18. The Omega Shoe Company starts production of 650 pairs of the shoes weekly, and the average weekly yield is 90%, with 10% defective shoes. One quarter of the defective shoes can be reworked at a cost of $3.75 per shoe.

a) Compute the quality-productivity ratio (QPR)

b) Compute QPR if production rate is increased to 800 pairs of shoes per week

c) Compute QPR if processing cost is reduced to $16.50 and remark cost is reduced to $3.20

d) Compute QPR if the product yield is increased to 93% good quality.