Total Quality

Management

1. What is TQM
TQM is a process of increasing awareness on quality in all resources and relationships
within the organization.
Two Basic Principles
• Getting things right first time
• Continuous improvement
Before implementation of TQM
• Check current reality - do not go ahead if fund base is unstable, weak administrative
systems, lack of managerial skills, poor employee morale exists in the organisation
Criticisms of TQM
• Focus on documentation and ill measurable outcomes
• Emphasis on quality assurance, rather than improvement
• Internal focus is not matching with customer orientation
• Not for service industries as they do not follow industry best practices The new move
in service industries is TQS-Total Quality Service

2. Cost of Quality
It is the difference between the actual cost of producing, selling and supporting products/
services and the equivalent cost if there were no failures during production/usage by
customers = Cost with no failures – Current Cost.

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3. Four types of Cost of Quality

Types of Cost Examples

Prevention Costs Training, Quality Circles, Replacement of machines.
Appraisal Costs Inspection Cost, Quality Review / Audit Cost.
Internal Failure Costs Rework Cost, Scrap Cost.
External Failure Costs After Sale Service, Warranty Replacement.

Example 1
Classify the following items under the appropriate category of quality costs viz. Prevention
cost, appraisal cost, internal failure cost and external failure cost:
(1) Rework
(2) Disposal of scrap
(3) Warranty repairs
(4) Revenue loss
(5) Repairs to manufacturing equipment
(6) Discount on defective sale
(7) Raw material inspection
(8) Finished product inspection
(9) Establishment of quality circles
(10) Packaging inspection
(11) Quality Consultant Cost
(12) Re-purchase of components to create replacement
(13) Customer survey for feed back on quality
(14) Employee time spend on reviewing and assessing the quality of output.
(15) Testing of material of special nature from outside laboratory.
(16) Re-inspection of product reworked.
(17) Calibration of testing equipment

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(18) Warranty claim processing

(19) Loss of customer due to supply of low quality product.

4. Optimal Cost of Quality

It is generally accepted that an increased expenditure in prevention and appraisal is likely
to result in a substantial reduction in failure costs. Because of the trade off, there may be an
optimum operating level in which the combined costs are at a minimum.
Hence it is further argued that striving for zero defects through a program of continuous
improvements is not good for the economic interest of the company.
Cost
Total Cost
Cost of
Non-conformance
Op v
el

tim Le
a l D e fe c t

Cost of
conformance

% defects
0 1 2 3 4

# There is an inverse relationship between cost of conformance and cost of non-

conformance.
# Ways to reduce non-conformance cost can be : TQM (staff cooperation,
improvement in all processes, prevention and appraisal with a limit on COQ)
and TPM (to keep equipments in top working condition). Use this to advise on
incurring the cost of quality.

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5. Prevention, Appraisal and Failure Model

1. Gather some basic information about
the number of failuresin the system
Failure Data

2. Apply some assumptions to that data

in order to quantify the data
Quantify
The prevention, appraisal, and
failure (PAF) model is the most 3. Chart the data based on the four
widely accepted method for elements listed above and study it
measuring and classifying quality Chart – in 4 categories
costs. Follow this process.
4. Allocate resources to combat the weak-
spots.
Reduce weaknesses

5. Do this study on a regular basis and

evaluate your performance
Continuously improve

6. The Iceberg Model

Many of the costs of quality are hidden and thus making it difficult to identify by formal
measurement systems.

Waste
Customer
Rejects Returns Inspection
Costs
Rework Testing Costs Recalls
Excessive Overtime Excessive Field Incorrectly
Service Expenses Late Completed Sales Order
Pricing or Paper work
Billing Errors Planning Delays Unused Capacity
Excess Inventory
Excessive
Employee Development Complaint
Fluctuation Cost of Failed Handling
Product
Time with
Dissatis ed Customer

Excessive IT
System Costs

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Only a minority of the costs of poor and good quality is obvious - appear above the
surface of the water. The reduction of cost under water has a huge scope. If we identify and
improve these costs, the costs of doing business will significantly reduce.

7. Six C of Quality Control

Six C of
Quality Control

Commitment Culture Continuous Control Cooperation Customer

of all employee Attitude, Improvement Documentation all employees Focus
and seniors Creativity Small, Long Procedures & External,
everyone’s job term Awareness Internal

8. Eight Dimensions of Quality

Eight
Dimensions
of Quality

Performance Aesthetics Reliability Serviceability Conformance Perceived

Primary Looks will not fail Repair and meet the Quality
when Maintenance standards as per
required customer
Features Durability
Additional Life
[Mnemonics = SCRAP PDF]

9. Deming’s 14 point Methodology

Father of Quality Evolution – Mr. Deming

15% Quality problems Worker’s error

85% Quality Problems Processes, Systems & Poor management

(a) Create constancy of purpose for improving products and services. (Long term
quality) (P)
(b) Adopt the new philosophy. (Customer first) (P)

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(c) Cease dependence on inspection to achieve quality. (build quality into the process)
(I)
(d) End the practice of awarding business on price alone; instead, minimize total cost by
working with a single supplier. (Consistency, analyse total cost – not just initial cost)
(S)
(e) Improve constantly and forever every process for planning,
production and service. (PDCA/ Kaizen) (P)
(f ) Institute training on the job. (reduces variation, learn from Quota Wale
one another) (T) (Workmen) ne PPP
(g) Adopt and institute leadership. (don’t just supervise) (L) Ki Sahi mein Faad
(h) Drive out fear. (allow to share ideas, make them feel valued, di. STIL BEE?
seniors approachable) (F)
(i) Break down barriers between staff areas. (internal customers, team work) (B)
(j) Eliminate slogans, exhortations and targets for the workforce. (clear expectation,
praise people) (S)
(k) Eliminate numerical quotas for the workforce and numerical goals for management.
(provide support to achieve quality, measure process rather than people) (Q)
(l) Remove barriers that rob people of pride of workmanship, and eliminate the annual
rating or merit system. (don’t rate everyone, treat them same) (W)
(m) Institute a vigorous program of education and self-improvement for everyone.
(prepare them for future change) (E)
(n) Put everybody in the company to work accomplishing the transformation. (involve
each person, analyse each step) (E)

10. PDCA Cycle

 It consists of four steps - Plan (P), Do (D), Check (C) and Act (A).
 A method for continuous improvement

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ACT PLAN
(Improve) (Problems)

DEMING
Circle

CHECK DO
(Assess) (Solution)

11. Business Excellence Models

Business Excellence (BE) is a philosophy for developing and strengthening the
management systems and processes of an organization to improve performance and
create value for stakeholders.
The essence of this approach is to develop quality management principles that increase
the overall efficiency of the operation, minimize waste in the production of goods and
services, and help to increase employee loyalty as a means of maintaining high standards
throughout the business by achieving excellence in everything that an organization
does (including leadership, strategy, customer focus, information management, people
and processes).
Business Excellence Models existing around the world
• European Foundation of Quality Management Excellence Model (EFQM)
• Baldrige Criteria for Performance Excellence
• Singapore BE Framework
• Japan Quality Award Model
• Australian Business Excellence Framework

A. EFQM Excellence Model

The EFQM model is a practical, non-prescriptive tool that enables organizations to
understand the cause and effect relationships between what their organisation
does and the results it achieves. The EFQM model presents a set of three integrated
components:

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THE FUNDAMENTALS

Talent, OLA, CCFC

THE CRITERIA, CONCEPTUAL FRAMEWORK

5 Enablers 4 Results

People
(Motivated, People Results
Leadership recognised (KPIs - Employee
Personal growth) Processes , Turnover)
(Skills, ethics, Products and
correct Services Business
Strategy Customer
decisions
(Vision, Mission (Value adding, Results Results
at correct
develop & Improve (Market, Share, (Profitability
time, Code
implement) continuously) Satisfaction)
of Conduct) Risks)

Partnership Society Results

& Resources (CSR, Targets)
(Vendors, Machineries,
funds, licenses, patents)

To achieve sustained success, an organisation needs strong leadership and clear

strategic direction. They need to develop and improve their people, partnerships
and processes to deliver value-adding products and services to their customers. If
the right approaches are effectively implemented, they will achieve the results they,
and their stakeholders, expect.

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The RADAR, logic assessment framework

The RADAR logic is a dynamic assessment framework and powerful management
tool that provides astructured approach to questioning the performance of an
organisation.
Plan and develop
APPROACHES

Required DEPLOY
RESULTS Approaches

ASSESS AND REFINE

Approaches and deployment

B. Baldrige Criteria for Performance Excellence

Leadership - Set vision, values, communicate

Strategic Planning - Development of strategy

and implementation

Customer and Market Focus

Listen to customers, market segments, products

Measurement Analysis and Knowledge Management

Performance measure, future projection, data and
information, learning

Workforce
Workforce- Recruitment process, safety, benefits,
performance management
Process management - Key processes, designed to meet
customer requirements, reduce variations, safe

Business Results - Process, customer, workforce,

financials, Leadership and ethical results

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12. Production Schedule

Finished Goods Schedule
Particulars Before QMP After QMP
Gross FG Produced ** **
Less: Downgraded Units at Inspection Stage ** **
FG available for sale ** **
Less: Warranty replacement ** **
Net FG invoiced ** **
Raw Material Schedule
Particulars Before QMP After QMP
Raw Material Purchased ** **
Less: Loss in transit ** **
Raw Material Received at Stores ** **
Less: Loss in storage ** **
Raw Material available for production ** **
Less: Loss in processing ** **
Raw Material consumed for Gross Production ** **
Machine Time Schedule
Particulars Before QMP After QMP
Gross Machine Hours ** **
Less: Downtime or Idle time ** **
Productive Machine Hours for Gross Production ** **

# The main concept is that a company must implement the quality programme even
if there is an extra cost due to it, as it will benefit a company in the long term by
increasing its goodwill & competitiveness

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1 RTP Nov’19 Ex Book

No.
H Automobile Group is among top 20 business houses in India. It has been founded in the year [ ]
1930, at the height of India’s movement for independence from the British, the group has an
Page No.
illustrious history. H’s footprint stretches over a wide range of industries, spanning automobiles
[ ]
(two wheelers manufacturer and three wheelers manufacturer). H’s headquarter is located at
Hyderabad. Bike Production is one of segment of H Group. Management of H wants to analyse
the following actual information for the April:
Cost Data

Customer Complaints Centre Cost ` 35 per hr.

Equipment Testing Cost ` 18 per hr.
Warranty Repair Cost ` 1,560 per bike
Manufacturing Rework Cost ` 228 per bike

Volume and Activity Data

Bikes Requiring Manufacturing Rework 3,200 bikes

Bikes Requiring Warranty Repair 2,600 bikes
Production Line Equipment Testing Time 1,600 hrs.
Customer Complaints Centre Time 2,000 hrs.

Additional Information
Due to the quality issues in the month, the bike production line experienced unproductive
‘down time’ which cost ` 7,70,000. H carried out a quality review of its existing suppliers to
enhance quality levels during the month at a cost of ` 1,25,000.
Required
(i) PREPARE a statement showing ‘Total Quality Costs’.
(ii) ADVISE any TWO measures to reduce the non- conformance cost.

Reference What’sNew
Cost of Quality

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Ex Book
No. 2 MTP May’20
[ ] The CEO of P Limited is concerned with the amounts of resources currently spent on customers
warranty claims. Each box of its product is printed with the logo: “satisfaction guaranteed or
Page No.
your money back”. P is having difficulty competing with X Limited because it does not have
[ ]
the reputation for high quality that X Limited enjoys. Since the warranty claims are so high, the
CEO of P Limited would like to assess what costs are being incurred to ensure the quality of
the product. Following information is collected from various departments within the company
relating to 2018-19:
`
Warranty claims 4,25,000
Employee training costs 1,20,000
Rework 3,00,000
Lost profits from lost customers due to impaired reputation 8,10,000
Cost of rejected units 50,000
Sales return processing 1,75,000
Testing 1,70,000

For the year 2019-20, the CEO is considering spending the following amounts on a new quality
programme:
`
Inspect raw material 1,20,000
Reengineer the production process to improve product quality 7,50,000
Supplier screening and certification 30,000
Preventive maintenance on plant equipment 70,000

P expects the new quality programme to save costs by the following amounts:
`
Reduction in lost profits from lost sales due to impaired reputation 8,00,000
Reduction in rework costs 2,50,000
Reduction in warranty costs 3,25,000
Reduction in sales return processing 1,50,000

Required
(i) PREPARE a Cost of Quality Statement for the year 2018-19 showing the percentage of the
total costs of quality incurred in each cost category. (3 Marks)
(ii) PREPARE a cost benefit analysis of the new quality programme showing how the quality
initiative will affect each cost category. (3 Marks)
(iii) STATE how the manager trade-offs among the four categories of quality costs. (4 Marks)

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Reference What’sNew
Cost of Quality Trade off among categories

3 ICAI Mat; MTP Oct’20 Ex Book

No.
Livewell Limited is a manufacturing company that produces a wide range of consumer products [ ]
for home consumption. Among the popular products are its energy efficient and environment
Page No.
friendly LED lamps. The company has a quality control department that monitors the quality of
[ ]
production.
As per the recent cost of poor quality report, the current rejection rate for LED lamps is 5% of
units input. 5,000 units of input go through the process each day. Each unit that is rejected
results in a ` 200 loss to the company. The quality control department has proposed few changes
to the inspection process that would enable early detection of defects. This would reduce the
overall rejection rate from 5% to 3% of units input. The improved inspection process would cost
the company ` 15,000 each day.
Required
(i) ANALYSE the proposal and suggest if it would be beneficial for the company to implement it.
(ii) After implementation, ANALYSE the maximum rejection rate beyond which the proposal
ceases to be beneficial?

Reference What’sNew
Evaluation of Quality Proposal and
Maximum Rejection Rate

4 Nov'20 Ex Book
No.
TSC Box Ltd. is a manufacturer and supplier of android set up boxes for various DTH operators. [ ]
This is very popular with the operators as it converts normal TV to a smart TV. To ensure supply
Page No.
of good quality products to meet the expectations of the viewers, it has set up quality control
[ ]
department that regularly conducts quality inspection and submits it report to the management
on weekly basis.
As per the latest quality inspection report submitted by the department, it reflects that the
current rejection rate is 7% of units input into the manufacturing system due to poor quality.
3,000 units of input go through the process every day. As per analysis, for each rejection, there
is loss of ` 150 to the company. The management is very much worried due to high rate of
rejection of input units.

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The management has asked for suggestions from the quality; control department in this
regard. The department has suggested implementation of new system for inspection for early
detection of defective units. This change would result in drop of rejection rate to 4% from earlier
7%. The cost of new system will be ` 12,000 per day.
Required :
(i) Analyse the proposed new system for inspection and suggest if it , would be beneficial for
the company. [3]
(ii) Also Calculate the minimum reduction in number of rejections each day upto which the
proposed system will be beneficial. [2]

Reference What’sNew
Evaluation of Quality Proposal and Minimum reduction in number
Maximum Rejection Rate of Rejections

Ex Book
No. 5 May’18
[ ] JK Ltd. produces and sells a single product. Presently the company is having its quality control
system in a small way at an annual external failure and internal failure costs of ` 4,40,000 and
Page No. ` 8,50,000 respectively. As the company is not able to ensure supply of good quality products
[ ] upto the expectations of its customers and wants to manage competition to retain market
share considers an alternative quality control system. It is expected that the implementation of
the system annually will lead to a prevention cost of ` 5,60,000 and an appraisal cost of ` 70,000.
The external and internal failure costs will reduce by ` 1,00,000 and ` 4,10,000 respectively in
the new system. All other activities and costs will remain unchanged.
Required
(i) EXAMINE the new quality control proposal and recommend the acceptance or otherwise
of the proposal both from financial and non financial perspectives. [6]
(ii) What is your ADVICE to the company, if the company wants to achieve zero defect through
a continuous quality improvement programme? [2]
(iii) SUGGEST a suitable quality control level at a minimum cost. [2]

Reference What’sNew
Evaluation of proposal and suggestion
for achieving zero defects and acceptable
level of defects

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6 ICAI Mat, RTP May’19 Ex Book

No.
Cool Air Private Ltd. manufactures electronic components for cars. Car manufacturers are the [ ]
primary customers of these products. Raw material components are bought, assembled and
Page No.
the electronic car components are sold to the customers.
[ ]
The market demand for these components is 5,00,000 units per annum. Cool Air has a market
share of 1,00,000 units per annum (20% market share) for its products. Below are some of the
details relating to the product:

Selling price ` 2,500 per unit

Raw material cost ` 900 per unit
Assembly & machine cost ` 500 per unit
Delivery cost ` 100 per unit
Contribution ` 1,000 per unit

The customers due to defects in the product return 5,000 units each year. They are replaced free
of charge by Cool Air. The replaced components cannot be repaired and do not have any scrap
value. If these defective components had not been supplied, that is, had the sale returns due to
defective units been nil, customers’ perception about the quality of the product would improve.
This could yield 10% increase in market share for Cool Air, that is, demand for its products could
increase to 150,000 units per annum.
Required
(i) ANALYZE, the cost of poor quality per annum due to supply of defective items to the
customers.
(ii) The company management is considering a proposal to implement an inspection process
immediately before delivery of products to the customers. This would ensure nil sales
returns. The cost of having such a facility would be ` 2 crores per annum, this would include
materials and equipment for quality check, overheads and utilities, salaries to quality
control inspectors etc. ANALYZE the net benefit, if any, to the company if it implements
this proposal.
(iii) Quality control investigations reveal that defective production is entirely on account
of inferior quality raw material components procured from a large base of 30 suppliers.
Currently there is no inspection at the procurement stage to check the quality of these
materials. The management has a proposal to have inspectors check the quality control at
the procurement stage itself. Any defective raw material component will be replaced free
of cost by the supplier. This will ensure that no product produced by Cool Air is defective.
The cost of inspection for quality control (materials, equipment, salaries of inspectors etc.)
would be ` 4 crores per annum. ANALYZE the net benefit to the company if it implements
this proposal? Please note that scenarios in questions (ii) and (iii) are independent and not
related to each other.
(iv) Between inspection at the end of the process and inspection at the raw material procure-
ment stage, ADVISE a better proposal to implement (a) in terms of profitability and (b) in
terms of long term business strategy?

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Reference What’sNew
Evaluation of Quality Proposal

Answer
(iv) (a) The proposal to implement inspection immediately before delivering goods to the
customers results in a net benefit of ` 2,70,00,000 per annum. Alternately, the proposal
to implement inspection at the raw material procurement stage results in a net benefit
of ` 1,75,00,000 per annum. Therefore, from a profitability point of view, inspection
immediately before delivery of goods to the customer would the preferred option.
(b) The drawback of inspection at the end of the production process is that (1) it cannot
prevent production of defective goods and (2) information regarding the root
cause of defective production, in this case, supply of defective raw materials will
not get tracked. Therefore, inspection at the end of production does not contribute
to resolving the root cause of defective production. On the other hand, inspection
at the procurement stage can eliminate production of defective goods. This
will ensure a much higher quality of production, better utilization of resources and
production capacity. Therefore, from a long-term strategy point of view, inspection
at the raw material procurement stage will be very beneficial. Currently the cost of
ensuring this highest quality of production (0% defects) is ` 4 crores per annum. The
cost of ensuring 100% quality is quite high, such that the net benefit to the company
is lesser than the other proposal. However, due to its long-term benefit, Cool Air may
consider some minimum essential quality control checks at the procurement stage.
Although selective quality check might not ensure complete elimination of defective
production, it can contribute towards reducing it. At the same time cost of selective
quality check would not be so high as to override its benefits. To determine the extent
of quality control inspection, Cool Air should determine its tolerance limit for
defective production and do an analysis of the quality / cost trade-off.

Ex Book
No. 7 Nov’18
[ ] A Company manufactures a single products, which requires three components. The company
purchases one of the components from three supplier. DJ Ltd., PJ Ltd., and ZJ Ltd. The following
Page No.
informations are available:
[ ]
DJ Ltd. PJ Ltd. ZJ Ltd.
Price quoted by supplier (per hundred units) ` 240 ` 234 ` 260
% of Defective of total receipts 3% 5% 2%
If the defectives are not detected they are utilize in production causing a damage of ₹ 200 per
100 units of the components. Total requirements is 12000 Units of the components.

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The company intends to introduce a system of inspection for the components on receipt. The
inspection cost is estimated at ₹ 26 per 100 units of the components. Such an inspection will
be able to detect only 90% of the defective components received. No payment will be made for
components found to be defective in inspection.
Required:
(i) Advice whether inspection at the point of receipt is justified. (8)
(ii) Which of the three supplier should be asked to supply? (2)

Reference What’sNew
Evaluation of Inspection at the point of
Receipt

8 RTP May’19 Ex Book

No.
As a guest lecturer at a symposium for Business Excellence where you are giving a lecture on [ ]
“Sustaining Business Excellence”. A manufacturer of a fashion clothing line is one of the partici-
Page No.
pants at the symposium. He has the following query:
[ ]
“We are an apparel company that manufacture and sell our fashion clothing and accessories
directly through 30 stores spread across India. Shortly we are planning to establish similar
outlets overseas. Our business is under constant change due to changing customer trends.
At the same time, we are the largest company in our industry segment in India, both in terms
of market share and profits. We have a satisfied base of customers who are loyal to our brand.
Shareholders are also satisfied stakeholders due to good returns provided on their investments.
What would be the relevance of Business Excellence model to our company?
Thank you!”
You are required to frame an appropriate response to this query.
Required
(i) EXPLAIN the importance of business excellence to an organization.
(ii) LIST the tool available to achieve and sustain excellence.
(iii) APPLY the fundamentals of EFQM model on the apparel company.
(iv) EXPLAIN the relationship between various criteria of the model in general terms.

Reference What’sNew
Business Excellence Model

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Answer
(i) Business Excellence is a philosophy for developing and strengthening the management
systems and processes of an organization to improve performance and create value for
stakeholders. Stakeholders in an organization are not limited to shareholders (business)
alone. They include also customers, employees (people) and society. What an organiza-
tion does impact all the stakeholders in different ways, yet they are all interlinked to each
other. Customers’ needs are of paramount importance to companies. Yet given uncertain
conditions, shareholders demand challenging return on their investments. Employees
need more from their company than just their pay-check. They want the company to
enable to grow their knowledge and experience that can improve their career growth.
Society expects companies to operate ethically and for the overall betterment of the
society and environment.
For several years businesses have been operating under challenging circumstances.
For example, landline phones have been entirely replaced by mobile phones. Television
programs can be watched seamlessly on internet enabled mobile phones. Not just this,
today’s smartphones have computing capability much more than the computers that were
used in Apollo Mission to send the first man to moon! The proliferation of mobile phones
has changed not just the telecom industry but also others like communication, banking,
e-commerce etc. The pace of change is both exhilarating and challenging.
To manage this complex scenario, a company cannot focus on only one aspect of their
operations. Optimize processes, delivery quality to customers, manage employee talents,
earn required return on investment while managing to be a socially responsible organiza-
tion. In short, the company should achieve excellence in all aspects of its operations.
This is business excellence. Business excellence principles emerged because of develop-
ment of quality drive into traditional business management. It is imperative not just to
achieve excellence but also to sustain it.
Business excellence models are holistic tools that help companies develop stakeholder
focused strategy. Each operation within a company enables a corresponding result.
Business models present a formal, standardized cause effect relationship between different
operations (enablers) and their resultant consequences. If the company want to achieve
a different result, it has to do things differently. This can be better analysed through
these models. Continuous improvement on various operations will ultimately lead to
excellence. More importantly, these models need to be used to sustain and maintain
excellence to retain their competitive advantage. They are not to be taken as one time
exercise by the company. Assessments using this model have to be made periodically so
that timely action can be taken to achieve the desired result.
(ii) Some of the popular business excellence models are (i) the European Foundation
Quality Management (EFQM) model (ii) Baldrige Criteria for Performance Excellence
(iii) Singapore BE Framework (iv) Japan Quality Award Model and (iv) Australian
Business Excellence Framework.
(iii) The apparel company is a well-established player in the industry. It is a growing company
that is looking to expand its operations overseas. To achieve business excellence in this
environment, the company could adopt the EFQM model, which is a popular model.

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The EFQM model was developed by the European Foundation for Quality Management.
The model provides an all-round view of the organization and it can be used to determine
how different methods fit together and complement each other. It can help the company
understand the cause and effect relationships between what their organization does and
the results it achieves. Creating an EFQM Management Document gives the organization
a holistic overview of its strategic goals, the key approaches it has adopted and the key
results it has achieved.
The fundamental concepts for excellence are the basic principles that describe the essential
foundation for any organization to achieve sustainable excellence. With respect to the
company they can be detailed as below:
(a) Adding value to customers: Companies need to understand their customers, their
needs, anticipate their needs and make use of opportunities to fulfil their expecta-
tions. In the current case, fashion apparel business is ever changing and dynamic due
to the changing trends in customer’s tastes. This could differ across locations within
India and abroad. In the era of e-commerce, competition would be cut-throat. Before
going to “how” it can meet customer’s needs, the company should be clear on “what”
need of the customer it can satisfy. For example, should the company cater to Indian
apparel market, western apparel market, men or women or children apparel market
etc. Once the “what” is clear, the company should have mechanisms in place to find out
and anticipate customer tastes. Accordingly, it should structure its operations to add
value to the customers in terms of quality, availability, support, and experience.
(b) Creating a sustainable future: Society and environment (People and Planet of Triple
Bottomline concept) play a major role in ensuring the sustainability of business. A
company should have as much positive impact on its surroundings and try to minimize
any negative impact on the same. Here, the company should assess the environmen-
tal impact of its operations, measures to minimize adverse impacts, business impact
on the society etc. For example, leather is contended to be harmful to the environ-
ment since it requires the skin of animals specially cattle hide, needs huge amount
of energy and chemicals to process it. This has a negative environmental impact. As
regards societal impact, suppliers of cloth to the apparel company should not indulge
in labor malpractice like child labor and should adhere to safety standards within
its factories. The company should procure cloth only from suppliers who adhere to
such standards.
(c) Developing Organizational Capability: Companies need to manage change within
the organization and beyond. The company should identify “what it is capable of
being great at?” in order to differentiate it from its competitors. For example, the
apparel company may have the capability of tracking its inventory at the stores on
real time basis. As soon as the inventory falls below a certain level, the stores issues
fresh products to stock up. This ensures that there are no stock outs at the retail outlet.
This ability to track inventory real time and ability to stock up quickly may be unique
to the company that gives it a competitive edge. Another can be the ability to quickly
change the apparel production to meet changing trends. Likewise, the company should
identify and develop unique capabilities to have a competitive edge in the market.

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(d) Harnessing creativity and innovation: Continuous improvement and innovation

brings value to the company. The company should promote a working environment
that enables and appreciates creativity and innovation. For example, new apparel
designs can be promoted to test the market. If found feasible, the company can go for
mass production of the same.
(e) Leading with vision, inspiration, and integrity: The tone at the top defines the rest
of the company. The leaders and management of the company should have a clear
vision of what the company wants to achieve, develop strategy to achieve it, work
with integrity and ethics. Leaders shape the future of the organization.
(f ) Managing with agility: Agility would be the capability to identify and effectively
respond to opportunities and threats. For example, although the apparel company
is in an expansionary phase, it should consider the threat, yet opportunity of using
e-commerce as a platform to reach out to customers directly. Brick and mortar stores
are becoming largely redundant due to online platforms, a threat the company should
recognize and act upon.
(g) Succeeding through the talent of people: An organization is only as good as the
people who work in it. There should be an atmosphere of teamwork that enable
achievement of organizational and personal goals. Performance evaluation, reward
and recognition programs, training and talent network are ways to cultivate talent
within the organization.
(h) Sustaining outstanding results: Use of EFQM model is not a onetime exercise.
Constant and periodic evaluation is required to keep up and sustain excellence.
(iv) The criteria of the model are comprised of 5 enablers and 4 results. Enablers covers what
an organization does (its objective) and how it does it (strategy, use of resources to achieve
it).
(a) Leadership: A leader defines the organization’s culture. They enable the organization
to achieve its goals by taking the correct decisions at the correct time. To do this they
should have sufficient skill, work as per the company’s code of conduct and should be
ethical in their dealings.
(b) Strategy: Operations should be planned and directed as per a clearly defined strategy.
The company’s vision and mission statement with respect to its various stakehold-
ers are the goals that the organization wishes to achieve. Strategy (plan) enables the
company to achieve these goals.
(c) People: Excellence is possible only if the people working in the company wish to
achieve it. They must be motivated, recognized, and managed to enable them to work
towards the company’s vision and mission. The work culture should be that this opens
up opportunities for personal development as well. This would cultivate a bond with
the organization, which enables people working within to strive for excellence.
(d) Partnerships and resources: Effective management of partnerships that the
company has with other organizations is critical to success. Partners could be external
vendors, suppliers, and service providers. The services of partners enable business
to operate smoothly. Resources, both tangible and intangible should be managed

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optimally. Tangible resources can be financial (cash, bank accounts) and physical assets
(machinery, building, land etc.). Intangible resources would be intellectual property
rights, information technology, licenses etc. Proper management of resources enables
optimal results.
(e) Processes, Products, and Services: A company exists because of its processes,
products, and services. They should be managed and continuously improved to create
value to the stakeholders.
Results are what the organization achieves following its operations and decisions. As
explained before, the stakeholders of the company are investors (business), people
(employees), customers and society. In order to track performance, the company has to
develop Key Performance Indicators (KPI)s for each of the stakeholder groups. Results
should be tracked periodically. Changes to targets and benchmarks should be continu-
ously made to reflect the current objectives that the company wants to achieve. Some of
the results that the company can look at are:
(a) Customer results: Are the customers of the company satisfied with the products and
service? How does the company fare in terms of brand loyalty? Is the customer base
growing to indicate increasing market share?
(b) People results: Does the company have skilled and motivated employees? What is
the employee turnover with reasons for the same? Does the company have proper
access to hire required talent? Are the employees motivated, trained, recognized,
and rewarded for their performance? What is performance measurement system, is it
robust and accurate to measure performance?
(c) Society results: Is the company a good corporate citizen. Are the objectives of
corporate social responsibility being met? If the organization is a not for profit
organization, is it meeting its objectives and goals?
(d) Business results: Is a for profit organization achieving the required return on
investment, profitability that the shareholders and other investor demand? Has the
company been able to manage financial and other risks properly?
Enablers enable achievement of results. EFQM model documents this flow and symbiosis
in a structured way. It highlights the strength and weakness of the enablers. With this
information, the company can alter its operations and strategy to achieve desired results.
On assessment, there is a flow from results to enablers. If the results have been achieved,
enablers continue to operate status quo. If the results fall short of targets, changes have to
be made to enablers to improve performance.
Therefore, it can be concluded the EFQM model encourages constant self-assessment to
achieve excellence.
When a company wins an excellence award based on a business excellence model, it gains
in stature within the industry. This recognition could work to its advantage financially and
otherwise.

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Ex Book
No. 9 ICAI Mat; MTP Apr’18; MTP Oct’18
[ ] A company produces and sells a single product. The cost data per unit for the year 2017 is
predicted as below:
Page No.
[ ] per unit
Direct Material 35
Direct Labour 25
Variable Overheads 15
Selling Price 90

The company has forecast that demand for the product during the year 2017 will be 28,000
units.
However, to satisfy this level of demand, production quantity will be increased
There are no opening stock and closing stock of the product.
The stock level of material remains unchanged throughout the period.
The following additional information regarding costs and revenue are given:
• 12.5% of the items delivered to customers will be rejected due to specification failure and
will require free replacement. The cost of delivering the replacement item is ` 5 per unit.
• 20% of the items produced will be discovered faulty at the inspection stage before they are
delivered to customers.
• 10% of the direct material will be scrapped due to damage while in storage.
Due to above, total quality costs for the year is expected to be ` 10,75,556.
The company is now considering the following proposal:
1. To introduce training programmes for the workers which, the management of the company
believes, will reduce the level of faulty production to 10%. This training programme will
cost ` 4,50,000 per annum.
2. To avail the services of quality control consultant at an annual charges of ` 50,000 which
would reduce the percentage of faulty items delivered to customers to 9.5%.
Required
(i) PREPARE a statement of expected quality costs the company would incur if it accepts the
proposal. Costs are to be calculated using the four recognised quality costs heads.
(ii) Would you RECOMMEND the proposal? Give financial and non-financial reasons.

Reference What’sNew
Comparative Cost Before and After

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10  ICAI Mat, RTP May’18 Ex Book

No.
CIMZ is a new banking company which is about to open its first branch in INDIA. CIMZ believes [ ]
that in order to win customers from the market, it needs to offer potential customers a new
Page No.
banking experience. Other banking companies are focusing on interest rates and bank charges,
[ ]
whereas CIMZ believes that quality and timely availability of service is an important factor to
attract customers.
Required
EXPLAIN how Total Quality Management would enable CIMZ to gain competitive advantage in
the banking sector.

Reference What’sNew
TQM to gain Competitive Advantage

Answer
Total Quality Management is a management philosophy. It concerns itself with managing the
processes and people to make sure that the customer is satisfied at each and every stage. This
means making the needs of the customer the priority, expanding the relationship beyond
traditional services and incorporating the customer’s needs in the company’s business plan
and corporate strategy. In TQM, the concept of “quality” is perceived exclusively from the frame
of reference of the customer. These customers can be internal, such as, those working in
another department and there can be external customers who are the end recipients
of the product or services. The organisation should attempt for continuous improvement in
the quality that it delivers with the ultimate aim of achieving zero defects in this quality. TQM
should be viewed as an investment rather than as a cost that should be minimised. There are
many ways in which investment can be made in TQM :
• fine-tuning the product mix,
• fine-tuning of the processes of ensuring quality,
• introducing employee development programmes with the nature of an academic course,
• empowering the employees professionally and personally,
• improving the top management commitment to quality,
• monitoring of the performances and proper rewarding based on achievements,
• ensuring the customer satisfaction etc.
Training on Technicals
CIMZ could provide its employees with training in the technical aspects of banking practice
as well as in customer care. Customers would thus get a better service not only technically
but also from a customer care perspective. This should lead to smaller customer complaints

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and greater customer satisfaction. It could also motivate customers to recommend others to
use this bank.
Customer Requirements
TQM also requires CIMZ to respond to its customer’s requirements immediately for example
by providing more staff to reduce the lengths of queues in festive/ seasonal/ busy time. If
Bank could also be opened for longer hours to allow customers to complete their bank related
requirements and have meetings with bank employees at a time that is more convenient for
the customer, this would lead to more satisfaction to customers.
In long run, if bank continue to follow TQM, the bank would have higher profits and competi-
tive advantage in banking sector despite incurring additional expenditure to improve quality.

Ex Book
No. 11  Case Study Digest
[ ]
Dewar Bikes (DB) is large national bike manufacturing company established in the year 2003.
Page No. The company has a strong position in the market and has also traditionally achieved a good
[ ]
market share however facing tough competition. The Board of DB recognises that it needs to
make fundamental changes to its production approach in order to combat increased competi-
tion from foreign manufacturers. DB is now being seen as non-lucrative, pollutive and with less
safety features in comparison to the foreign bikes. The Board plans to address this by improving
the quality of its bikes as well as financial performance.
The components are sourced directly by DB. Suppliers are located worldwide. Suppliers are
evaluated on an ongoing basis, including an assessment of whether to utilise new or alterna-
tive suppliers to improve capacity and performance. The company is having lot of components
piled up in stock and few of them are becoming obsolete. There is lots of reworking as both
internal and external failure are more, so the wastage of resources in reworking needs to be
controlled. The Board is convinced that Lean Manufacturing is the best approach to be adopted.
In DB, production process is grouped by function and production teams comprised a number
of permanent members, who had acquired their positions through seniority and a few newly
selected specialist staff who had yet to discuss their position in any team.
The process of making a bike can be roughly divided into stamping, welding, painting, assem-
bly and inspections, which takes about 11-12 hours in total. The standard time to manufacture
a similar bike in industry is 8-9 hours. The nature of end product demand is unstable due to
economic factors. However, DB forecasts demand based on its internal policies and historical
trends. DB sells its bikes in retail stores located in over 10 metro cities. It focuses on building
close relationships with retailers, working with them to sell its bikes in a compelling manner.
Enclosed Annexure

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Required
You are newly appointed to Management Accounting Department of DB, Chief Management
Accountant asked you to draft a report for CEO, containing-
(i) ANALYSIS of quality costs and ADVISE on two measures to reduce the non-conformance
cost,
(ii) ADVISE on implementation of just-in-time purchasing and production.
Annexure
Statement Showing ‘Total Quality Costs’
Particulars of Costs (`)
Prevention Costs
Supplier Review 2,50,000
Appraisal Costs
Equipment Testing (` 36 x 1,600 hrs.) 57,600
Internal Failure Costs
Down Time 15,40,000
Manufacturing Rework (` 456 x 3,200 bikes) 14,59,200
External Failure Costs
Customer Complaints (` 70 x 2,000 hrs.) 1,40,000
Warranty Repair (` 3,120 x 2,600 bikes) 81,12,000
Total Quality Costs 1,15,58,800

Reference What’sNew
COQ and JIT

Answer
Report
Addressed to:
Office of CEO,
Dewar Bikes
Dated - 06th May 2020
Analysis of Quality Costs

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The reporting of quality costs highlights the cost of quality activities at DB. The total quality
costs statement clearly displays the relationship between conformance costs (prevention and
appraisal costs) and non-conformance costs (internal failure and external failure costs) and the
drivers of a reduction in the overall spending on quality. Statement indicates that only 2.16%
of the total quality cost is the cost of preventing quality problems while 0.50% is the cost of
appraisal activities. Thus, prevention and appraisal costs make up only 2.66% of total quality
costs. In contrast, 97.34% of quality control costs are incurred for internal and external failure
costs.
Two measures to reduce non conformance cost
Total Productive Maintenance (TPM) is a system of maintaining and improving the integ-
rity of production and quality system through keeping all equipment in top working condi-
tion so as to avoid breakdowns and delays in manufacturing processes. It involves identifying
machines in every division (including planning, manufacturing, maintenance) and then plan-
ning & executing a maintenance programme covering their entire useful life.
In this case, TPM will help in reducing internal failure cost (i.e., downtime and manufacturing
rework cost), which constitutes 25.95% of total quality cost, by keeping all equipment in good
working conditions so that there is no downtime or machine breakdown and ensuring that
all equipment run smoothly. If machines work properly, the chances of rework will reduce,
ultimately will also reduce chances of warranty repair and customer complaints (comprising
71.39% of total quality cost which is a major part of total quality cost).
Total Quality Management (TQM) aims at improving the quality of organisational output,
including goods and services, through continual improvement of internal practices. Its objec-
tive is to eradicate waste and increase efficiency without compromising with the quality. It
requires maintaining quality standards in all aspects of business by ensuring that things are
done right the first time so that defects and waste are eliminated from operations.
It appears that DB is not a TQM company at present, due to huge disparity between conform-
ance costs and non-conformance costs. In order to make DB to be successful, all staff at DB
must be engaged in the improvement process and share in the continuous improvement
ethos. In order to establish a reputation as a high- quality bike manufacturer DB must ensure,
staff is having attitude towards the importance of conformance activities, for instance, DB can
conduct third party inspection of components at supplier’s workplace leading to maintenances
of quality standards.
Overall, while applying above two measures, in the DB, consideration must therefore be given
to the optimum balance between the costs of conformance and the costs of non-conformance.
Implementation of Just in Time
Just in time purchasing and production technique will put an end to the harrowing task of
inventory management. In this form of pull system, purchasing of components and produc-
tion of bikes will be based on customer demands and DB will have to accordingly coordinate
with its suppliers to supply the right quantity of components required at the right time. JIT
inventory management calls for having the inventory as and when needed also taking care of
massive holding cost suffered related to large build ups. In this environment, DB will also be

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able to reduce the manufacturing time around 3 hours by streamlining the flow of information
in entire supply chain.
Dewar is assessing alternative suppliers on continuous basis to improve capacity and perfor-
mance. It means it is changing sources of material regularly or using multi-suppliers. In contrast,
JIT is based on reduced number of supplier and move towards single sourcing. It is easier to
develop long term cooperative relationships with a smaller number of suppliers. The quality
of internal services and an organisation’s ability to provide quality products or services to its
customers depends upon this relationship. However, this relationship is obviously missing in
DB.
DB has close relationship with the retailers but relationship with suppliers is equally important.
It appears that firm is also importing its requirements from abroad. In JIT environment, it is
important that suppliers are, to the extent practical, located in close proximity to the manufac-
turing plant. Carefully selected suppliers are capable of delivering high quality materials in a
timely manner, directly at the shopfloor, reducing the material receipt time. Therefore, selection
of right supplier located in close proximity to the manufacturing plant is vital for the proper
implementation of JIT.
It is also important to note that every supplier is different, but the DB has to be able to view
each as one of its part only. The supplier’s network must be able to call up and communicate
directly with the DB’s network, obtaining manufacturing schedules and product specification
in real time. ERP and other sources of electronic data interchange between supplier and DB will
act as backbone in supporting the JIT activity.
On the whole, DB’s management has to treat suppliers as partners with significant influence on
the success of the organization.
The functional division is less appropriate in JIT environment. JIT production requires multi-
skilled teams. In DB, teams need to be formed to work by product i.e., type of bike rather than
by the type of work performed. In addition, staff will need training to work in the new teams,
measures surrounding the amount and effectiveness of training will be required. A JIT system
works best when employees pitch in with suggestions for improvements. The performance can
be measured by computing the number of ideas per worker, the number of ideas suggested in
total, the number of ideas implemented, or the proportion of ideas suggested that are imple-
mented.
DB forecasts demand based on its internal policies and historical trends. Today demand in every
sector of the market changes by leaps and bounds, so using historical data is not at all recom-
mended. Demand forecasts should be pulled by current market trends and prediction of future
market sentiments. However, in case of DB, demand is unstable. In this case, in order to prevent
stock-outs, inventory managers can only increase the Kanban numbers of each product; the
greater are the variations, the greater is the need of Kanban cards and, thus, the higher is stock
level and need more working capital per rupee of sales.

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Conclusion
The Board desires to improve the quality as well as financial position which can be achieved
through successfully implementation of quality control and lean system. However, the factors
discussed above should be taken care of. It is worthwhile to note that any return on investment
in proposed system must be viewed long term rather than short term since optimum results
may not be realized until the system has been in place for some time.
Further details can be tabled on requisition basis.
Closure of Report
Chief Management Accountant
(For Management Accounting Department)
Dewar Bikes .

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Space For Self Notes

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Space For Self Notes

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