TOM CASE STUDY A small company produce medical control devices. The manufacturing plant in Lille produces a device called T, which are sold to medical analysis laboratories. The price is 360 euros per unit. Part 1: The T products are manufactured using raw materials and components from the beginning of the process. If there is waste, raw materials and components cannot be saved. Before supplying the product to the sales department, the plant makes some statistical control for quality checking. In average, 5 % of the gross production is wasted through it. On this same gross production, 3 % pass through this control and are delivered to the customer and then replaced by the after-sales service. The company provides you with the following accounting information for the year 2019: - Standard manufacturing cost for a production of 2000 units by month': Raw materials and components: 100 euros Direct Labour: 80 euros Manufacturing Overheads: 100 euros Distribution Costs : 38 euros Standard costs: 318 euros The cost of the statistical control is 4000 euros by month. After-sales costs are the following: The cost of a replacement on claim, not considering the replacement of the product itself, is estimated to 140 euros, but the marketing also suggests adding 80 euros for deterioration of the image of the product quality. During April, a production process dysfunction provoked delay in the deliveries and then the cancellation of an order of 120 units. Further, an exceptional discount of 8 euros is given to 30% of the deliveries (on net production) that where delayed. 1. Please, provide an estimate of the cost linked to quality problems in 2019. This is the maximum production capacity 2 The distribution costs are sunk. Part 2: . . . You are a consulting firm, and you want to convince the top management of this company to implement quality management in the plant. This project would take place over five years, and the following figures are provided. Investments to be done: Equipment for permanent quality control: Year 1: 130 000 curos Year 2: 80 000 euros Depreciation takes place over five years. Installation of an Information System dedicated to quality management: 60 000 euros over three years. Operating costs: Training of the staff to quality management: Year 1: 40 000 curos Year 2: 20 000 euros Year 3: 20 000 euros Operating costs of the quality management Information System: Year 1: 15 000 curos Year 2: 24 000 euros Year 3 and following: 30 000 euros Cost of the self-control on the line: Year 1: 3,5 % of Labor cost Year 2: 2,5 % Year 3 etc.: The statistical control at the end of the production will disappear. The improvement of quality would have the following effects: The wastes would be identified at earlier stages, and their cost would then include in average the raw materials and components and half of the other manufacturing costs. The waste percentage would decrease with the following pattern: Year 1: 4 % Year 2: 3 % Year 3: 2 % Year 4&5: 1,5 % The deliveries of non-conform I would decrease adopting the following pattern: Year 1: 2 % Year 2: 1,5 % Year 3: Year 4 & 5: 0,5 % The additional units available due to the better quality conformance are quickly sold as the market is not saturated, at the usual conditions. 2. How to convince the top management that quality management is necessary, and will improve the company situation? 2% . . 1 TOM CASE STUDY A small company produce medical control devices. The manufacturing plant in Lille produces a device called T, which are sold to medical analysis laboratories. The price is 360 euros per unit. Part 1: The T products are manufactured using raw materials and components from the beginning of the process. If there is waste, raw materials and components cannot be saved. Before supplying the product to the sales department, the plant makes some statistical control for quality checking. In average, 5 % of the gross production is wasted through it. On this same gross production, 3 % pass through this control and are delivered to the customer and then replaced by the after-sales service. The company provides you with the following accounting information for the year 2019: - Standard manufacturing cost for a production of 2000 units by month': Raw materials and components: 100 euros Direct Labour: 80 euros Manufacturing Overheads: 100 euros Distribution Costs : 38 euros Standard costs: 318 euros The cost of the statistical control is 4000 euros by month. After-sales costs are the following: The cost of a replacement on claim, not considering the replacement of the product itself, is estimated to 140 euros, but the marketing also suggests adding 80 euros for deterioration of the image of the product quality. During April, a production process dysfunction provoked delay in the deliveries and then the cancellation of an order of 120 units. Further, an exceptional discount of 8 euros is given to 30% of the deliveries (on net production) that where delayed. 1. Please, provide an estimate of the cost linked to quality problems in 2019. This is the maximum production capacity 2 The distribution costs are sunk. Part 2: . . . You are a consulting firm, and you want to convince the top management of this company to implement quality management in the plant. This project would take place over five years, and the following figures are provided. Investments to be done: Equipment for permanent quality control: Year 1: 130 000 curos Year 2: 80 000 euros Depreciation takes place over five years. Installation of an Information System dedicated to quality management: 60 000 euros over three years. Operating costs: Training of the staff to quality management: Year 1: 40 000 curos Year 2: 20 000 euros Year 3: 20 000 euros Operating costs of the quality management Information System: Year 1: 15 000 curos Year 2: 24 000 euros Year 3 and following: 30 000 euros Cost of the self-control on the line: Year 1: 3,5 % of Labor cost Year 2: 2,5 % Year 3 etc.: The statistical control at the end of the production will disappear. The improvement of quality would have the following effects: The wastes would be identified at earlier stages, and their cost would then include in average the raw materials and components and half of the other manufacturing costs. The waste percentage would decrease with the following pattern: Year 1: 4 % Year 2: 3 % Year 3: 2 % Year 4&5: 1,5 % The deliveries of non-conform I would decrease adopting the following pattern: Year 1: 2 % Year 2: 1,5 % Year 3: Year 4 & 5: 0,5 % The additional units available due to the better quality conformance are quickly sold as the market is not saturated, at the usual conditions. 2. How to convince the top management that quality management is necessary, and will improve the company situation? 2% . . 1