Quality Management (A Level) (Cambridge International A-Level Business): Exam Questions

Read the following extract ( lines 54–56 and Table 3) before answering

Calculate for 2020 the monthly cost of correcting substandard output.

Define the term 'quality'.

Explain one reason why quality is important to a business.

Define the term 'quality control'.

Explain one drawback to a business of relying on quality control.

Define the term 'quality assurance'.

Explain one benefit to a business of using quality assurance.

Define the term 'Total Quality Management'.

Define the term 'benchmarking'.

Explain one benefit to a business of benchmarking.

Extract:

WoodPlayer (WP)

Rona Lupa is a skilled woodworker who set up her own business, WP, to manufacture wooden toys. She started WP in 2015 in country A. The toys are sold to retailers. Quality control and assurance WP has grown rapidly and is now a private limited company employing 35 people in one factory. WP employs skilled workers and offers them training opportunities. Production workers are paid a basic wage plus a piece rate. Workers are expected to check their own work and a brief final inspection is made before products are despatched. Rona is proud of the company’s quality assurance. Leadership and communication Rona is one of two directors. She owns 90% of WP’s total share capital of $1 million. The other director has a limited role in decision-making. Rona thinks of all the ideas for new products. There are managers for each functional area of the business – Operations, Marketing and Finance. Each manager meets individually with Rona and gives her a written report once a week. Rona holds one meeting with all employees at the start of each week to communicate plans and give updates on new developments. Forecast revenue Sales of WP’s products are highly seasonal. Table 1.1 shows data produced by the Marketing Manager. He thinks every functional area of the business will find sales forecasts useful in planning for the future. Table 1.1 WP sales data ($m) Revenue (* forecast data) Trend (* forecast data) Seasonal variation Average seasonal variation 2019 Q3 1.0 Q4 1.1 2020 Q1 1.8 1.288 0.512 0.550 Q2 1.2 1.313 –0.113 –0.084 Q3 1.1 1.350 –0.250 –0.250 Q4 1.2 1.400 –0.200 –0.217 2021 Q1 2.0 1.438 0.562 0.550 Q2 1.4 1.450 –0.050 –0.084 Q3 1.2 1.463 –0.263 –0.250 Q4 1.2 1.488 –0.288 –0.217 2022 Q1 2.1 1.525 0.575 0.550 Q2 1.5 1.588 X –0.084 Q3 1.4 1.638 –0.238 –0.250 Q4 1.5 1.663 –0.163 –0.217 2023 Q1 2.2 1.688* 0.512 –0.550 Q2 1.6* 1.710* –0.110 –0.084 Q3 Y 1.755* –0.250 –0.250

New range of play equipment for outdoor use? Rona is considering a new product range of outdoor play equipment. Some market research has already been carried out which indicates a significant probability of success. Additional machinery will need to be purchased to manufacture the new range. Existing employees will need training on the new machines. WP could finance the new product range with borrowing and existing cash. The return on capital employed (ROCE) for year ending 31 May 2023 is 10%. Based on producing the new product range from January 2024, the Finance Manager provided Rona with forecast financial information for the year ending 31 May 2024: • total issued share capital will remain at $1m • current ratio will fall from 0.8:1 to 0.7:1 • gearing ratio will rise from 30% to 40% • reserves will be $2m • non-current liabilities will rise from $1.5m to $2m. Table 1.2 shows extracts from WP’s financial statements for year ending 31 May 2023 and forecast data for year ending 31 May 2024. Table 1.2 Extract from WP’s financial statements ($m) Forecast for year ending 31 May 2024 Year ending 31 May 2023 Revenue 7.0 6.5 Cost of sales 3.5 3.3 Gross profit 3.5 3.2 Expenses 3.3 2.7 Profit from operations 0.2 0.5 Profit for the year 0.1 0.25 Dividends 0.05 0.15 External influences on WP WP is a relatively small producer in its market sector. It has a unique selling point (USP) which is a combination of good design and excellent quality at an affordable price. This means it is unlikely that any competitor will be able to threaten WP’s market share in the near future. Country A is facing several economic challenges: inflation, skills shortages and high government borrowing. The government intends to implement the following economic policy measures in the next six months: • restrict pay rises for public sector workers • increase income tax rates • increase tax for businesses which do not provide employee training • increase interest rates.

Read the following extract before answering

Analyse two benefits to WP of using quality assurance.

[case-study] Ardley

Ardley manufactures cycle helmets in country M, selling through independent bicycle retailers. Helmets must pass a national safety standard before sale.

In 2024 a batch failed an independent safety test after release, and Ardley recalled 12 000 helmets.

Table 1: Ardley selected data

	2023	2025
Units sold (000)	340	268
Cost of recalls and warranty claims ($000)	60	890
Retailers stocking Ardley helmets	210	154
Average selling price ($)	42	36

The Marketing Director, Priya Sandhu, wants to spend $1.2m on advertising to rebuild sales.

The Operations Director, Tom Vasquez, disagrees. He argues the money should go into quality systems first, since a second recall involving a safety product would finish the business.

Analyse two ways in which poor quality has affected Ardley.

[case-study] Kettleworth Catering

Kettleworth Catering manufactures commercial ovens in country F. Every oven is inspected at the end of the production line by a team of six inspectors. Ovens failing inspection are either reworked or scrapped.

Table 1: Kettleworth Catering monthly production data

	Per month
Ovens produced	900
Ovens failing final inspection	74
Of which scrapped	21
Of which reworked	53
Average cost to produce one oven ($)	1 850
Average cost to rework one oven ($)	640
Inspectors employed	6

The Production Manager, Elif Demir, notes that most faults are traced to a wiring stage roughly halfway through assembly.

The Managing Director, Ross Kinnear, is reluctant to change a system that he says stops any faulty oven reaching a customer.

Analyse two drawbacks to Kettleworth Catering of relying on quality control.

[case-study] Denby Health

Denby Health manufactures veterinary medicines in country R. Quality is currently checked by a separate quality department; production employees have no responsibility for quality and receive almost no quality training.

Table 1: Denby Health selected data

	Current
Employees	240
Batches rejected by the regulator (%)	4.1
Cost of one rejected batch ($)	55 000
Employee suggestions adopted last year	3
Training days per employee per year	1.5

Denby Health is considering introducing Total Quality Management. Doing so would require six training days per employee and is expected to take two years to embed fully.

The Finance Director, Amara Nwosu, questions whether the cost and disruption can be justified.

The Operations Director, Piet Janssen, points to the rejected batches and argues that nobody on the production floor currently regards quality as their concern.

Analyse two ways in which introducing Total Quality Management could benefit Denby Health.

[case-study] Ravenscroft Flooring

Ravenscroft Flooring manufactures laminate flooring in country B. Its managers have compared its performance against the best-performing manufacturer in the industry.

Table 1: Ravenscroft Flooring compared with the industry's best performer

	Ravenscroft	Industry best
Defect rate (%)	6.2	1.4
Time to change production between products (minutes)	95	22
Output per employee per shift (m2)	310	480
Training days per employee per year	2	9

The industry's best performer carries out changeovers using a standardised written procedure, and trains every operator to perform it rather than relying on a small number of specialists.

The Operations Director, Mei Tan, believes the gap can be closed. The Finance Director, Hal Brennan, is sceptical that a competitor's methods will transfer to Ravenscroft Flooring's older machinery.

Analyse two benefits to Ravenscroft Flooring of benchmarking its performance against the industry's best performer.

Extract:

Fashion Frames plc (FF)

FF makes plastic frames for glasses (spectacles) in a factory in country W, in South East Asia. FF sells its plastic frames to wholesale businesses that market well-known brands of plastic frames which they sell globally. The wholesalers reject 7% of the frames supplied by FF because of substandard quality. The FF design team create dynamic styles based on the demands of the wholesalers. Meeting delivery times is very important. FF only delivers 85% of its sales on time. FF needs to improve this percentage. Improving quality Chang, the production manager, aims to reduce the high level of rejects by the wholesalers. He has identified a number of factors which make this difficult including: • employees know that rejected frames can be recycled • production targets are very difficult to meet • problems with suppliers of raw materials • breakdowns with machinery. Chang proposes introducing Total Quality Management (TQM). He thinks this will reduce the number of substandard frames and improve FF’s delivery times. Chang forecasts successful implementation of TQM will also increase output by 10% and average variable cost will fall by 5%. However, Chang is aware that there may be problems with TQM and forecasts can be inaccurate. Table 1 shows information on FF’s output, costs and prices, before TQM is implemented. Table 1: FF’s output, costs and prices Year ending September 2021 Maximum capacity 16 million frames Actual output 14 million frames Average variable cost $20 Average selling price $40 Communication challenges FF has a centralised organisational structure with a low degree of delegation. Directors make decisions, department managers plan how to implement these and supervisors give instructions. Employees have little responsibility or control. FF has provided good pay, good conditions of work and security of employment. However, employees are aware that the directors are considering significant changes to working conditions. All employees find it difficult to discuss this with their line managers. Many employees work alone so information is passed on informally and often inaccurately. This uncertainty has begun to lead to dissatisfaction, complaints, higher absence rates and lower productivity. Privatisation of electricity and water industries In country W, state-owned businesses supply all electricity and water. Prices of services in these industries have risen at above the rate of inflation for the last three years. Sometimes, electricity supply is interrupted and FF finds it difficult to obtain information about reconnection. Water quality is variable. The government has announced it intends to privatise these industries in the next three years, to improve these services.

Buying 3D printers 3D printers that make frames for glasses as part of a CAD/CAM process are becoming available. Chang is considering whether FF should invest in this rapidly developing technology. 3D printers have a guaranteed life span of four years but he believes they are probably usable for six years. There is no way of accurately estimating their value after four years. The directors have told Chang that an acceptable accounting rate of return (ARR) is 5%. Chang thinks new 3D printers will increase FF’s long-term profitability. The 3D printers will result in significant reductions in employee costs and waste and substandard reject costs. Maintenance and training costs will, however, increase. Table 2 and Table 3 show some of Chang’s research. Table 2: Investment appraisal for 3D printers: cash flow forecasts $m Year 0 Year 1 Year 2 Year 3 Year 4 Buy printers (10) Increased maintenance costs (0.1) (0.1) (0.1) (0.1) Increased training costs (0.2) (0.2) (0.2) (0.2) (0.2) Employee cost reductions 2.1 2.1 2.1 2.1 Waste and reject cost reductions 0.8 0.8 0.8 0.8 Net cash flow (10.2) 2.6 2.6 2.6 2.6 Table 3: Discount factors at 5% discount rate Year 0 Year 1 Year 2 Year 3 Year 4 Discount factors 1.000 0.952 0.907 0.864 0.823 There are risks that this technology might be replaced in future by even more advanced process innovations but Chang is keen to invest in 3D printers. He knows competitors are considering buying them. Product development and marketing The marketing manager is concerned that FF relies only on specific orders from wholesalers for plastic frames. He proposes that FF should use product development to design and manufacture metal glasses frames. These would be marketed to wholesalers and directly to businesses who sell glasses with globally recognised brands. FF would have to acquire new skills and equipment in order to design and manufacture metal frames. The marketing manager visited international trade fairs and found that several competitors have research and development (R&D) departments. Strategic choice: enter the Asia Pacific retail market The Chief Executive Officer (CEO) states: ‘My strategic analysis shows that FF must continue with the current business model but should take a new direction as well. My strategic choice is that FF should enter the retail glasses market in the Asia Pacific region. This will mean selling our own glasses in retail shops. We will need to work closely with lens manufacturers. Increased eye strain and higher disposable income are driving the increasing demand for higher value glasses. We could use the Ansoff Matrix to help analyse the link between this business strategy and risk. There are several approaches we could use to enter this new market.’

The CEO illustrates his proposal with Table 4 and Table 5. Table 4: Retail glasses market entry decision tree analysis Regional market Expected monetary value North America + $3m Europe +$4m Asia Pacific + $14m Table 5: Retail glasses sales data Total sales 2021 ($bn) Forecast sales growth 2021–2025 (%) North America 37 8 Europe 39 8 Asia Pacific 35 10 Rest of world 8 14 Managing a change to team working FF currently produces frames on production lines. There are nine stages in the production process, including cutting out plastic sheets, smoothing component parts, attaching them, and final shaping and polishing. Employees only carry out the one task they have been trained for in the production process. The Directors are considering a proposal from Chang to move to team working. A team would be responsible for the whole production of a product and would take all necessary decisions. If successful, FF could possibly reduce the lead-time from order to completion by 60%, inventory levels by 27% and increase productivity by 20%. A change to team working means greater delegation and less centralisation. Control, authority and trust involving directors, managers, supervisors and production employees will have to change. This strategic change must be managed effectively and directors are confident that Chang has the necessary theoretical knowledge. The benefits he identified will only be achieved if he applies the correct techniques to manage the introduction of team working.

Refer the following extract before answering

Evaluate whether total quality management (TQM) is sufficient to solve FF’s production problems.

Extract:

Pizza Adventure Company (PAC)

PAC is a private limited company which owns restaurants. It was started ten years ago in a large city in country X, which is located in Asia. The business was set up by Paulo who had moved to country X from Italy with his parents to start a farm. Paulo soon decided to move to the city where he observed the growing popularity of international food. He decided that he could adapt traditional pizza recipes to appeal to the tastes of Asian customers. This would also attract the increasing numbers of tourists visiting the city. PAC has grown very fast and now owns 10 restaurants throughout country X, in major cities and tourist resorts. The restaurants are managed by local employees. Their performance is assessed by Paulo and his brother Gio, the directors of PAC. Planning and resource management is supported by enterprise resource planning (ERP) software throughout the company. Economic environment The economy of country X has grown in recent years and average incomes are rising by 5% per year. Annual inflation is steady at 4% and unemployment is falling, especially in the cities. Changes in government policy have led to the currency exchange rate of country X appreciating (increasing in value) against other major currencies. The government of country X sees overseas tourists as an economic benefit, so it has lifted travel restrictions and launched a worldwide advertising campaign to encourage visitors. Products and services PAC restaurants sell a wide range of pizzas and other foods, such as salads. Customers have a wide choice of ingredients and toppings for their pizza. Many of these ingredients and toppings are grown or produced at Paulo’s own family farm. This business model has proved very popular and the restaurants are full most lunchtimes and evenings. PAC also offers a takeaway service that enables customers to order by phone or online using an App. Food delivery is outsourced to a specialist company which uses motorbikes to avoid the problem of heavy traffic in the cities. Marketing Paulo’s daughter, Alice, is responsible for marketing. She has talked to Paulo about increasing the range of food available in the restaurants, as she believes that the market for pizza in country X is approaching the maturity stage. In addition, competition is increasing with several multi-national pizza companies starting up in country X. Alice would like PAC to serve a wider range of vegetarian options and many more salads, as well as the pizzas. She has noticed increasing numbers of online articles about the need to eat a healthy diet, with pizzas often mentioned as examples of unhealthy food items. Alice wants to launch a new ‘healthy life’ range of meals at two of the biggest restaurants to test the market. The target market for the new range will be young professionals trying to lead a healthy lifestyle. Alice has used her skills as an ICT graduate to build a website for PAC, which she now maintains on a daily basis, including news on new products, special offers and customer reviews. PAC restaurants have received many excellent reviews on travellers’ websites as well as in local newspaper articles and tourism guides.

Finance PAC’s profits have increased every year. Paulo has always reinvested most of the profit back into the company, after paying dividends to himself and other family shareholders. Paulo has also financed the purchase of some of PAC’s restaurants through loans from banks. Financial data for PAC is shown in Appendix 1. A new project Paulo has identified the rising popularity of ‘street food’ being sold by mobile vendors at events and markets. He would like to import four pizza vans in 2020, equipped with ovens. Pizzas can then be prepared and sold wherever the vans are taken. The total investment will be $50000 per van. Each van will cost $2000 per year to maintain. Paulo plans to purchase the vans using a bank loan. However, Gio is worried about PAC taking on further non-current liabilities. The data for the proposed pizza van project is shown in Appendix 2 and Appendix 3. Human resource and quality issues The restaurant managers have a wide range of delegated powers, including employee recruitment and food ordering, according to the individual restaurant sales. Paulo promotes teamwork in each location. All employees are provided with a uniform and given a free meal at the end of their duty hours. Restaurant opening times are long, requiring careful workforce planning. PAC employees have different employment contracts. Restaurant managers are full-time, permanent employees. Most waiting staff have flexible, part-time contracts. Labour turnover rates are high because restaurant work is demanding and pressurised, with some leavers saying they feel ‘undervalued’. Paulo and his management team try to ensure that food and quality service standards are consistently high in all PAC restaurants. All ingredients are stored carefully and used while still fresh. However, recently there have been an increasing number of customer complaints about the quality of service at two PAC restaurants. A customer has also complained that they became very ill after eating a pizza at a PAC restaurant. She claimed that the food had not been cooked thoroughly. The manager of the restaurant did not take this complaint seriously and she did not inform Gio and Paulo about it. Further expansion Paulo would like to expand PAC further with the aim of increasing return on capital employed. He is planning to meet with his management team to consider two opportunities. Only one strategy will be chosen. A summary of research data is shown in Appendix 4. Option 1: Purchase of ‘Healthy Juice’ bar business Take over ownership of a business which operates two ‘Healthy Juice’ bars in shopping malls in country X. Option 2: Sell franchises of PAC restaurants in countries Y and Z Sell franchises of the PAC restaurant model in neighbouring countries Y and Z. This would require the establishment of a central head office to administer the franchised outlets. Ingredients would be sourced from local suppliers.

Appendix 1: Financial data for PAC ($m) Actual data for 2019 Forecast for 2020 (without new pizza van investment) Revenue 5.2 5.3 Cost of sales 1.3 1.5 Labour costs 1.5 1.7 Marketing and administration costs 0.7 0.8 Other expenses 1.1 1.1 Non-current liabilities 4.9 4.8 Capital employed 10 10 Appendix 2: Financial data for pizza van project Year Net cash flow ($000) Discount factors at 8% 0 (200) 1 1 70 0.93 2 70 0.86 3 80 0.79 4 80 0.74 Appendix 3: Forecast data for each pizza van in 2021, prepared by Gio Forecasted number of customers 6000 Average spend per customer $7.00 Average variable cost per customer $2.50 Labour costs $12000 Van operating costs including maintenance $3500

Appendix 4: Research data for Options 1 and 2 Option 1 Purchase of ‘Healthy Juice’ bar business Option 2 Sell franchises of PAC restaurants in countries Y and Z Initial cost $0.75m $0.5m Timescale needed for implementation 3 months 1–2 years Probability of success 0.85 0.55 Main driving forces • Widen PAC product portfolio • Widen market and extend reach of PAC brand • Use of PAC core competency • Become an international company and brand name Main restraining force • Lack of familiarity with juice products and shopping mall environment • Increasing local and international competitors • Lack of familiarity with franchising and countries Y and Z • Difficult to control franchisees outside country X Position on Ansoff matrix New product, existing market Existing product, new market

Read the following extract before answering

Recommend ways in which Paulo might solve the current quality problems in some PAC restaurants. Justify your recommendation.

[case-study] Redhaven

Redhaven manufactures corrugated boxes in country J for food producers and online retailers. Quality is currently checked by nine inspectors at the end of the production line.

Table 1: Redhaven selected data

	Current
Boxes produced per week (000)	620
Defect rate at final inspection (%)	5.8
Inspectors employed	9
Annual cost of inspection team ($)	315 000
Annual cost of scrapped and reworked output ($)	740 000
Training days per employee per year	1
Employee turnover (%)	31

Switching to quality assurance would mean training all 180 production employees, at a cost of around $260 000 in the first year, and would take about twelve months to embed. Quality would become each operator's responsibility and the inspection team would reduce from nine to two.

The Operations Director, Nadia Farouk, argues that the present system finds faults but never prevents them, and that Redhaven is paying over $1m a year for the privilege.

The HR Director, Colm Byrne, is doubtful. Employee turnover is 31%, so roughly a third of those trained this year will have left within twelve months. Staff receive one training day a year and have never been asked to take responsibility for quality.

Evaluate whether Redhaven should replace its quality control system with quality assurance.