Task: Critical Success Factors
(Analyzing Quality Cost Report)
Bergen, Inc., produces telephone equipment at its Georgia plant. In recent years, the company's market share has been eroded by stiff competition from Asian and European competitors. Price and product quality are the two key areas in which companies compete in this market.
Two years ago, Jerry Holman, Bergen's president, decided to devote more resources to the improvement of product quality after learning that his company's products had been ranked fourth in product quality in a recent survey of telephone equipment users. He believed that Bergen could no longer afford to ignore the importance of product qual¬ity. Holman set up a task force that he headed to implement a formal quality improvement program. Included on this task were representatives from engineering, sales, customer service, production, and accounting. This broad representation was needed because Holman believed that this was a company wide program, and that all employees should share the responsibility for its success.
After the first meeting of the task force, Sheila Haynes, manager of sales, asked Tony Reese, production manager, what he thought of the proposed program. Reese replied, "I have reservations. Quality is too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements. I like to work with goals that I can see and count! I'm nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over."
Bergen's quality improvement program has now been in operation for two years. The company's most recent cost report is shown below.
BERGEN, INC Quality Cost Report (in thousands)
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12/31/x7
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12131/x8
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Prevention costs:
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Machine maintenance ..........
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$215
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$160
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|
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Training suppliers ................
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5
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15
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|
|
Design reviews ....................
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20
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$ 240
|
95
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$ 270
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Appraisal costs:
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|
|
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Incoming inspection .............
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$ 45
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$ 22
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|
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Final testing .........................
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160
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205
|
94
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116
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Internal failure costs:
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Rework ................................
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$120
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$ 62
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|
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Scrap ...................................
|
68
|
188
|
40
|
102
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External failure costs:
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|
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Warranty repairs ..................
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$ 69
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$ 23
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|
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Customer returns .................
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262
|
331
|
80
|
103
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Total quality cost ..................
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$ 964
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$ 591
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Total production cost ...........
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$4,120
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$4,510
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As they were reviewing the report, Haynes asked Reese what he now thought of the quality improvement program. "The work is really moving through the production depart¬ment," Reese replied. "We used to spend time helping the customer service department solve their problems, but they are leaving us alone these days. I have no complaints so far, and I'm relieved to see the new quality improvement hasn't adversely affected our bonuses. I'm anxious to see if it increases our bonuses in the future."