Managing Costs Across The Value Chain Notes

Lecture 2: Managing Costs Across the Value Chain 11 October 2010 Topics * Emerging performance measurement concerns * Quality costing * Life cycle costing Reading * Required Reading: * Bhimani (2008) chapter 3 (pp. 50-76) on quality * Bhimani (2008) chapter 7 on life cycle costing (pp. 211-219) * Further Reading: * BHDF chapter 20 Emerging Performance Measurement Concerns * Changing information flows * Porter's Value Chain Concept Quality Costing * The biggest mistake of US companies was not improving their quality once Japanese quality was surpassing theirs * Statistical process controls can be used to test quality * Quality costs can be as much as 10-20% of sales revenue What is Quality? * "The Pride of workmanship", Deming * "Conformance to requirements", Crosby * "Fitness for use", Juran * "What the customer says it is", Feigenbaum * Conformance quality = The performance of a product or service according to design and production specifications The Traditional View of Quality: * Improving quality drives up time and costs * Defects and failures of less than 10% are acceptable * Quality should be inspected ex post. * Quality control should be a specialised function The Emerging View of Quality: * Improving quality reduces times and costs * The goal is zero defects and failures * Quality should be designed and built in * Quality control should be integral to production The Relationship Between Voluntary and Non-Voluntary Costs Comparison of Quality Costs in the West and Japan ? Note that Prevention Costs for Western Companies should be 10% not 0% Traditional Cost of Quality Course Notes Page 4 Key Points * Porter's value chain concept * US vs. Japanese quality * Traditional quality view vs. emerging view * Voluntary vs. non-voluntary costs * Total quality management (TQM) * BCG matrix 

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