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A story!

Not sure about authenticity of the truth of the story, but just good to drive point on Japanese magnificent obsession for quality. Perhaps, you have heard this story earlier –


Here is the story -

IBM, the American computer giant, had decided to test Japanese manufacturing capabilities by placing a trial order for some computer components. In the specifications IBM had spelt out clearly that they would accept only three defective parts per 10,000.


This caused tremendous amount of stress to the Japanese manufacturer! Do you believe?


On the exact date of delivery, the parts arrived at the doorstep of IBM. The shipment was accompanied with a hand written letter:  “We had a very challenging time with your order and understanding IBM business expectations on 3 defects per 10000 pieces of the product delivered. However, with great difficulty, the three defective parts per 10,000 have been separately manufactured. They have been included in the consignment in a separate packaging, with bold instructions – DEFECTIVE PIECES, AS PER REQUIREMENT. NOT FOR USE. We hope this meets your expectations.”


Japan known for its quality products. Japanese culture is with full of emphasis on quality and team work, besides others.


When a customer is experiencing a high quality product or service, the invisible but backbone of the quality product or service is processes through which product is produced or service is rendered.


Have you ever thought of how any successful organizations – say for example – Apple – is always able to delivery class product or the wonderful shopping experience in Whole Foods – are able to deliver consistently the quality product or service, irrespective of the people they engage in their operations. There could be variety of people working for these companies, from different nation, different belief with different experience level. The key is process.


Among several factors that bind all people in an organization, process is one of the most important factor.


Process is most critical for success of an organization and also success of the people it engages in its operation.


When a new business is set up, when the work is being done by very small team with single digit head count, informal working may be effective. No elaborate processes are needed. The small team join together and deliver value to customers. When the small business has successfully navigated white waters of mortality phase, and scales up its operation, process plays a crucial role in delivering quality deliverable to customers.


Most of the great grand enterprises, which has outlived generation and still performing well, always had quality and measurements embedded into all aspects of their business operations.


As a matter of fact, irrespective of the size and age of the enterprises, every successful company, one can find that quality and measurement is part of their business activities.


Why quality and why measure? In order to achieve high quality the enterprise has to define the quality standards and measure whether their operational processes are achieving the set standards. It is always true, “what you continually measure, starts improve.” As one continuously perform and measure the performance, the quality improvement becomes a habit and way of life. Eventually one can achieve zero defect or defect free production or delivery services processes.


Another important value of measurements is, it tells us what is going right and what is going wrong. It is comparable to pathological and radiological tests one undergo for health improvement. Continuous measurement helps in continuous quality improvement.


In my three decades of professional experience in different enterprises, the successful ones always had quality processes with the aim of continuous process improvement / quality improvement and the contrary is also evidently proved. Meaning, the enterprises without vision on quality drift and stagnate and over a period of time decline in revenue, profits, eventually evaporate in thin air.


As my experience goes, most of the small and medium enterprises leaders who often say “Quality systems? We believe in “Just do it” approach!” Eventually confront difficult times and lack of quality is one of the top 10 reasons for business failure.


Successful enterprises know that spending for setting up quality processes are not expenses, but investment and foundation of the organization.

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in Process Excellence 1656 0

Perhaps, one significant feature of cost accounting is that the core principles forming the very foundation of the subject is fully intact and has weathered many a storm. The methods and technique of costing ( these include Standard costing, ABC, TD-ABC etc) have evolved over the years to synchronize with changes in process of manufacture, market and technology but the core principles of costing , right from its early days, remain the same. Let us briefly, in the ensuing paragraphs, discuss the core principles of cost accounting.


The fundamental economic principle behind cost accounting is that selling price of the product, in long run, shall be atleast at a level which helps in absorbing all types of expenditure incurred in making a product or rendering service . Thus in a manufacturing framework, the cost of the product comprises absorption of all items of expenditure incurred in making the product. The cost of material and labor are known as direct cost since consumption of material and labor have direct relationship with the quantity of production of the final product. Allocation of direct cost into the cost of the product is straightforward and simple because of the relationship with production. For instance, the method for allocation of cost of material input considers multiplication of units of material input for one unit of final product (as per bill-of-material), number of units of production and the purchase price for each unit of material input. Similarly, allocation of direct labor cost reckons the process and set-up time of labor in each resource/operation and multiplication of the same with quantity of production and wage rate per hour. The “Routing” card indicates the standard time for set-up and processing in an operation while the “Pay-Roll” gives the wage rate per hour.


Apart from cost of material and labor, there are many items of expenditure, which have direct relationship with quantity of production. They form “Direct Expenses” and their allocation to the cost of the product will be in similar lines as discussed in respect of material and labor. For example in the case of aluminum industry, electricity is a direct expense and its allocation will be as per technical specification, in terms of number of units of electricity (KWh) per ton of alumina.


In addition to direct costs, there are other items of expenditure, which have no direct relationship with production, but they are essential for making the product. Examples of this kind of expenditure are maintenance expenses, salary of supervisors, expenses in admin, sales and marketing departments. They form broadly “overheads”. Thus an organization will have production overheads, administration overheads, Marketing overheads etc. The allocation of overheads is a complex subject. The cost of a product consists of both direct costs and share of overheads. They vary from industry to industry. Let us discuss about them in our next session under the topic “methods of costing”.

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in Performance Management 1997 1
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