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Chapter 19: Problem 9

Give two examples of nonfinancial measures of internal-business-process quality.

Short Answer

Expert verified
Two nonfinancial measures of internal business-process quality include the On-time Delivery Rate and First Pass Yield (FPY). The On-time Delivery Rate is calculated by dividing the number of on-time deliveries by the total number of deliveries made during a specific period, times 100. The FPY is calculated by dividing the number of units that pass quality inspection on the first attempt by the total number of units produced during a given period, times 100. Both of these measures assess the efficiency and effectiveness of a company's internal processes.

Step by step solution

01

Identify internal business processes

Internal business processes are activities and tasks carried out within an organization that contribute towards meeting its goals and objectives. These processes can range from customer service to production and operations management, and from marketing to human resources.
02

Example 1: On-time Delivery Rate

One nonfinancial measure of internal business process quality is the on-time delivery rate. This metric assesses the percentage of products or services delivered to customers within the agreed-upon timeframe. A higher on-time delivery rate indicates better efficiency and effectiveness in the company's processes, leading to higher levels of customer satisfaction. To calculate this metric, divide the number of on-time deliveries by the total number of deliveries made during a specific period (e.g., a month), and multiply by 100 to get the percentage.
03

Example 2: First Pass Yield (FPY)

Another nonfinancial measure of internal business process quality is the first pass yield (FPY). This metric measures the proportion of products or services that meet the required quality standards without the need for rework, repair, or correction. Higher FPY rates imply that the company's processes are more effective in producing quality outputs and reduce the resources required for fixing errors. To calculate this metric, divide the number of units that pass quality inspection on the first attempt by the total number of units produced during a given period and multiply by 100 to get the percentage. In summary, the two examples of nonfinancial measures of internal business process quality are the on-time delivery rate and the first pass yield. These metrics help assess the efficiency and effectiveness of an organization's processes, contributing towards achieving its goals and objectives.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Nonfinancial Measures
In the business world, not every measure of success can be boiled down to financial figures. Nonfinancial measures provide a clearer picture of the quality and efficiency of a company's operations. These measures offer insights into aspects of the business process that are not directly tied to revenue or cost, but still heavily affect the company's performance and customer satisfaction.

Some examples include quality standards, process timing, and employee morale. By assessing these factors, companies can ensure they are not just profitable, but also effective and competitive. Tracking nonfinancial measures allows businesses to identify areas for improvement that may not immediately impact the bottom line but are critical for long-term success.
On-time Delivery Rate
The on-time delivery rate is a crucial nonfinancial measure in evaluating business process quality. It reflects how often products or services are delivered to customers by the promised date. Businesses use this metric to measure the efficiency of their supply chain and order fulfillment processes.

A high on-time delivery rate indicates that the processes are streamlined and functioning smoothly, leading to enhanced customer satisfaction and loyalty. To calculate this measure, divide the number of orders delivered on time by the total number of orders, then multiply the result by 100 to express it as a percentage.
  • Improving communication with suppliers and logistics partners can boost this rate.
  • Investing in better forecasting and inventory management tools can help prevent delays.
Keeping overviews of these factors allows businesses to refine their processes and set realistic timelines that enhance customer experiences.
First Pass Yield
First pass yield (FPY) is an essential nonfinancial metric that evaluates the quality of internal processes. It measures the percentage of products manufactured correctly the first time without any defects or rework required. This is a measure of quality and efficiency in production operations.

By aiming to improve FPY, companies can minimize waste, reduce costs, and increase customer satisfaction. Calculating FPY involves dividing the number of products that pass inspection the first time by the total number produced, then multiplying by 100.
  • A high FPY signifies a stable process with minimal errors and interruptions.
  • Continuous quality training can boost FPY by empowering employees to produce correctly the first time.
Reducing variability in production also supports developing robust processes that will lead to consistently high FPY numbers.
Efficiency
Efficiency in business processes is about doing things right, with minimal waste and optimal use of resources. Measuring efficiency allows a company to gauge how well its processes convert inputs into outputs. This can encompass both financial and nonfinancial aspects.

Efficient processes help increase the bottom line by reducing costs and improving quality and speed of service.
  • Automation of repetitive tasks can greatly increase efficiency.
  • Regular assessments and process optimizations can find and remove bottlenecks.
By focusing on efficiency, companies can perform consistently at high levels while conserving resources, which is beneficial both for the organization and its clients.
Organizational Processes
Organizational processes are the set of activities and tasks that form the backbone of a company. They range from small daily operations to strategic planning activities. These processes are critical for achieving the organization's objectives and maintaining a competitive edge.

Understanding and refining organizational processes help ensure that they are contributing significantly to business goals. Processes cover a broad spectrum including, but not limited to, customer service, production, supply chain management, and administrative duties.
  • Streamlining organizational processes helps improve clarity and communication within the company.
  • Regularly evaluating process effectiveness ensures alignment with the company's strategic objectives.
By refining these processes, businesses can better align operations with their mission and improve overall performance.

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Most popular questions from this chapter

The Tristan Corporation sells 250,000 V262 valves to the automobile and truck industry. Tristan has a capacity of 150,000 machine-hours and can produce two valves per machine-hour. V262's contribution margin per unit is 7. Tristan sells only 250,000 valves because 50,000 valves (20% of the good valves need to be reworked. It takes 1machine-hour to rework two valves, so 25,000 hours of capacity are used in the rework process. Tristan's rework costs are 550,000 dollar Rework costs consist of the following: Direct materials and direct rework labor (variable costs): 5 dollar per unit Fixed costs of equipment, rent, and overhead allocation: 6 dollar per unit Tristan's process designers have developed a modification that would maintain the speed of the process and ensure 100% quality and no rework. The new process would cost 538,000 dollar per year. The following additional information is available: The demand for Tristan's V262 valves is 400,000 per year. The Colton Corporation has asked Tristan to supply 27,000 T971 valves (another product) if Tristan implements the new design. The contribution margin per \(\mathrm{T} 971\) valve is \(\$ 12 .\) Tristan can make one \(\mathrm{T} 971\) valve per machine-hour with \(100 \%\) quality and no rework. 1\. Suppose Tristan's designers implement the new design. Should Tristan accept Colton's order for 27,000 T971 valves? Show your calculations. 2\. Should Tristan implement the new design? Show your calculations. 3\. What nonfinancial and qualitative factors should Tristan consider in deciding whether to implement the new design?

Distinguish between internal failure costs and external failure costs.

Rector Corporation is examining its quality control program. Which of the following statements is/ are correct? 1\. Rework costs should be regarded as a cost of quality when the rework is caused by internal failure. II. Prevention costs are costs that are incurred to prevent the sale and production of defective units. III. Internal failure costs are costs of failure of machinery on the production line. 1\. \(I, \|,\) and \(\| I\) are correct. 2\. Il only is correct. 3\. I and III only are correct. 4\. I only is correct.

Refer to the information presented in Exercise 19-25. The head of the registration advisors at SMU has decided that the advisors must finish their advising in 2 weeks (10 working days) and therefore must advise 420 students a day. However, the average waiting time given a 12 -minute advising period will result in student complaints, as will reducing the aver- age advising time to 10 minutes. SMU is considering two alternatives: a. Hire two more advisors for the 2-week (10-working day) advising period. This will increase the available number of advisors to 12 and therefore lower the average wating time. b. Increase the number of days that the advisors will work during the 2-week registration period to 6 days a week. . If SMU increases the number of days worked to 6 per week, then the 10 advisors need only see 350 students a day to advise all of the students in 2 weeks. 1\. What would the average wait time be under alternative A and under alternative B? 2\. If advisors earn100 per day, which alternative would be cheaper for SMU (assume that if advisors work 6 days in a given workweek, they will be paid time and a half for the sixth day? 3\. From a student satisfaction point of view, which of the two alternatives would be preferred? Why?

SpeedPrint manufactures and sells 18,000 high-technology printing presses each year. The variable and fixed costs of rework and repair are as follows: SpeedPrint's current presses have a quality problem that causes variations in the shade of some colors. Its engineers suggest changing a key component in each press. The new component will cost 70 more than the old one. In the nextyear, however, SpeedPrint expects that with the new componentitwill (1) save 14,000 hours of rework, (2) save 850 hours of customer support, (3) move 225 fewer loads, (4) save 8,000 hours of warranty repairs, and (5) sell an additional 140 printing presses, for a total contribution margin of \$1,680,000 SpeedPrint believes that even as it improves quality, it will not be able to save any of the fixed costs of re work or repair. SpeedPrint uses a 1 -year time horizon for this decision because it plans to introduce a new press a t the end of the year. 1\. Should SpeedPrint change to the new component? Show your calculations. 2\. Suppose the estimate of 140 additional printing presses sold is uncertain. What is the minimum number of additional printing presses that SpeedPrint needs to sell to justify adopting the new component? 3\. What other factors should managers at SpeedPrint consider when making their decision about chang ing to a new component?
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