The country of Sodor has extensive historical and cultural heritage. And hence, Sodor has many tourist attractions such as castles, temples, historical sites and museums. These attract visitors from both home and abroad. As a result, gift shops where visitors can buy souvenirs are abundant. Examples of these souvenirs are cups, saucers, plates and other porcelain items featuring printed images of tourist attractions.

Thomas & Friends Inc. (T&F) is a major supplier of porcelain souvenir items to the tourism industry of Sodor. T&F manufactures these items in its factories and has specialised imaging machines that print the appropriate images on the porcelain items. The factories are able to produce a diverse range of products and customise products to specific needs of customers. T&F has enjoyed a long-standing good reputation because of the premium quality of its products. In fact, the company is about to close a deal on the right to produce souvenirs for the Paralympic Games which will be held in Sodor in 2 years' time.

Currently, T&F produces about 250,000 porcelain items in its factory every month. Most of these items are shipped in relatively small quantities. Customer orders are picked up from T&F's factories and delivered by a local courier company. T&F has been using this courier company for many years. Recently, however, there has been high profile negative press about this courier company as a result of a delivery incident ruining a batch of very expensive limited edition leather handbags.

As tourism has been booming in Sodor the last two years, there has been an entry of more companies producing souvenirs. In response to an increasingly competitive market, top management at T&F has been placing pressure on its production managers to cut costs and improve productivity.

A growing trend in the number of complaints about the quality of T&F's products was highlighted at a recent top management meeting. Top management is very concerned about the long-term implication of quality issues, stiff competition and meeting the shareholders' expectations of earning a decent return on their investments.

In response, top management has launched initiatives to (i) investigate customer complaints; (ii) implement Total Quality Management; (iii) launch new products; and (iv) implement a Balanced Scorecard for performance measurement and reward.

Preliminary investigations into complaints from gift shop owners appear to be centred on two main issues:

(i) The physical condition of products upon delivery. Evidence suggests that a non-negligible number of products are delivered broken, chipped or cracked. These unusable items are returned to T&F.

(ii) The images of tourist attractions printed on products are incorrectly aligned. As an example, a quality inspection of a recent batch of 100 mugs manufactured for a gift shop in the "Summer Castle" contained 10 mugs with printed mages that slanted significantly from the left to right. This batch of mugs is representative of the overall extent of all defects of all T&F products.

The average cost to produce each porcelain item is $20. Defective items delivered to customers are returned and disposed of by T&F. T&F transfers all defective items to a landfill in Sodor. Unfortunately, porcelain takes years to decompose. Disposal cost averages $1 per defective item. T&F is charged $5 for costs associated with return and re-delivery of each replacement item. It is estimated that approximately 1,000 defective items are delivered to customers every month. Defective items delivered to customers have to be replaced by T&F.

The quality control team at T&F inspects one in every 20 packages for quality issues. The head of production blames the quality control team for the growing number of customer complaints. In turn, the head of quality control blames the packers from the production team for the physical condition of products delivered to customers. As an initiative to boost productivity, the head of production had previously decided to pay T&F's packers a bonus for completing the packaging of more than a target number of packages per hour. In addition, the head of quality has accused the production team of making requests of his quality inspectors to overlook defective items so that tight order deadlines could be met.

Required:

(a) Analyse and compute estimated (i) internal failure; and (ii) external failures per month incurred by T&F.

(b) Advise top management on (i) the likely merits of the arguments made by the head of production and head of quality control with respect to quality issues experienced by T&F; and (ii) additional information that will be useful to top management for making assessment with respect to (i).

(c) Awareness of the importance of sustainable business practices is growing in Sodor. Particularly, with the Paralympic Games drawing international attention to the country, Sodor's government is actively encouraging companies to be sustainable through both rewards and penalties. Design an appropriate Balanced Scorecard for T&F (incorporate sustainability measures where appropriate). For each of the four generic perspectives of a Balanced Scorecard propose two (2) specific performance measures. Justify your choice of performance measures for each perspective.

(d) Explain the implications of a performance measurement and reward system for quality to T&F's top management. Suggest how changes to the current performance measurement and reward system could be made.