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Texas Instruments: Cost of Quality

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Shivangi Nagarajan

on 9 April 2014

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Transcript of Texas Instruments: Cost of Quality

History of Texas Instruments
Six Sigma

Activity Based Costing
Texas Instruments' M&C division began operating with high standards
Was renowned for its products until the quality was questioned by the Japanese.
This brought about the introduction of the "Total Quality Thrust" system, a COQ system that aimed at improving TI's quality, while still minimizing costs.
The COQ system served its purpose, however, it was not doing a thorough job and several costs were not being included in calculation
This led to top management resisting the usage of the COQ system
In order for TI to raise its standards and minimize its quality costs, the recommended alternatives, such as using Key Performance Indicators, the Six Sigma Method, Activity Based Costing, and time collection of data should be implemented.
With the introduction of the suggestions above, Texas
With several costs and losses not being addressed by the COQ system, should TI continue utilizing it?

Are there any alternative methods of tracking the quality at TI?

How can TI improve its cost of quality?
Texas Instruments: Cost of Quality
Group Presentation by Lida, Shivangi and Zainab
Texas Instruments was formed in 1951
Merged with Metals and Controls Inc. in 1959
Capitalized on M&C's materials and device level strengths and added to its existing capabilities.
Increased competition in recent years has forced M&C to improve quality and service, and lower costs.
Introduction of Total Quality Thrust
As international competition increased,TI focused more on quality improvement.
Financial controls and a quality philosophy were initially emphasized.
1980 - Total Quality Thrust (TQT) method adopted when study revealed that TI's best products were secondary to Japan's worst suppliers.
Principles of Total Quality Thrust
1) Quality and Reliability (Q&R) is responsibility of management

2) All organizations are responsible for Q&R

3) A key criteria for performance evaluations include manager's performance on Q&R

4) Only outcomes of Q&R will be measured; not manager's commitments

5) Q&R has only one acceptable goal: constantly surpass TI's best competitors worldwide
Quality Blue Book
- 1981 -TI established a "Quality Blue Book" which recorded:
product reliability
customer feedback on TI quality
data on COQ
- The Quality Blue Book compared the actual vs. goals, comparisons - with previous period, and 3-month forecasts
- The book was used to emphasize the idea that quality performance was being judged at the same level as financial performance.
- Cost of Quality (COQ) - performance measure included in every - division's Quality Blue Book
Cost of Quality
Designed to highlight cost of poor quality and the cost of doing things wrong.

Four Categories of COQ:
Prevention Costs
: costs incurred to keep quality defects from occurring
Appraisal Costs
: costs to ensure conformity of output to specs.
Internal Failure Costs
: detection of defective products or processes before delivery to customer
External Failure Costs
detection of defective products or processes after delivery to customer

COQ aided in the detection of problems in production, and problems causing bad Profit & Loss Performance.

However, not all issues and concerns were being addressed by the COQ system.
Uses of COQ
Quarterly financial forecasting reports were supplemented by quality reviews
Quality measures were used to focus on long term trends of quality improvement
highlighted potential sources of quality issues
COQ failed to capture indirect costs and losses
Scrap costs were under-reported
Standard part of manufacturing process excluded
Waste reduction neglected
TI lacks a sophisticated system providing non-financial feedback to top management

COQ system measured quality in financial terms

Management focused on improving the cost driver which resulted from costs quality calculation

COQ does not institutionalize quality culture
Activity-Based Costing:
Many COQ elements need to be determined using other methods

Six Sigma:

Key Performance Indicators

Timely Collection of COQ Data

Measure Financial Benefits of High Quality:
- Hard Dollar Financial Impact
- Soft Dollar Financial Impact
Full transcript