Poor quality costs

174 Pages·2001·0.89 MB·English

Accounting and Finance
Master thesis No 2000:26

Poor quality costs

a case study in VBS

Sofie Andersson and Sara Ryfors
Graduate Business School
School of Economics and Commercial Law
Göteborg University
ISSN 1403-851X

Printed by Novum Grafiska
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BSTRACT

This is a case study of poor quality costs in the accounts payable
process in Volvo Business Services AB (VBS). VBS is a new company
that was set up three years ago as a shared services centre for the
Volvo Group. Their main purpose is to co-ordinate parts of the
business administration in all of Volvo’s Swedish companies and
business units, and the accounts payable is one of the services
provided.

The purpose of the study is to find poor quality costs that exist in VBS,
define their causes, and give recommendations to VBS as to how to
improve quality. Primary data collected through brainstorming,
interviews, discussions, and observations is the primary source of
information used for the results and analysis.

The results show that the largest poor quality costs exist in the
activities of handling interest invoices and payment reminders. This is
quite natural since these activities are at the end of the process, and are
the result of problems occurring throughout the invoice process.
Another problem causing large poor quality costs are incomplete
invoices that cannot be processed by VBS because information is
lacking or is incorrect.

There are problems in both VBS as well as in their customer
companies causing the poor quality costs. Some problems are caused
by the customer companies not carrying out their parts of the invoice
process correctly, another is the stressful working situation in VBS, as
well as the relationship between VBS and the customers, where the
responsibilities of each part are not always clear.

Key words: quality, poor quality costs, accounts payable, invoice
processing, shortcomings, shared services

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CKNOWLEDGEMENTS

First of all we would like to direct our warmest and deepest thanks to
all the employees in the non-production material part of the accounts
payable process in VBS. Without their continuous support and help,
and willingness to give us their time, and answer an endless number of
questions, this thesis could never have been done. Thanks to you all!

Thank you to Nils Rune in VBS, for all the practical advice, guidance
and support, and to Tomas Lindh in VBS for encouragement and
interest in our study! Also, we are grateful to Björn Ryfors for helping
us to come in contact with VBS, and make sure we could do a study
there, and to Lars Karlsson, Managing Director, for letting us perform
the study in VBS and letting us have free access to information.
Finally, we want to thank everyone at VBS and the customer
companies who have helped us, and given us information.

For helpful ideas during our work with this thesis, we thank our tutor
Ulla Törnqvist, School of Economics and Commercial Law,
Gothenburg University.

To friends and family we are grateful for encouragement, help,
valuable opinions from proof readers, and general support throughout
this work.

Our warmest thanks also to Ann McKinnon for continuous help,
support, co-ordination etc, etc during our entire time at the Masters
program, without whom we would never have managed!

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ABLE OF CONTENTS
1 INTRODUCTION...................................................................1
1.1 BACKGROUND............................................................................................1
1.2 PROBLEM.....................................................................................................2
1.3 PURPOSE.......................................................................................................5
1.4 SCOPE AND LIMITATIONS....................................................................5
1.5 CHAPTER LAYOUT...................................................................................6
2 METHOD.................................................................................8
2.1 RESEARCH APPROACH..........................................................................8
2.2 RESEARCH PERSPECTIVE.....................................................................9
2.3 RESEARCH METHOD............................................................................11
2.4 CASE STUDY AS RESEARCH STRATEGY......................................13
2.5 DATA COLLECTION..............................................................................14
2.5.1 Primary data.......................................................................................14
2.5.2 Secondary data...................................................................................16
2.6 SELECTING SAMPLES..........................................................................17
2.7 EVALUATION OF THE RESEARCH..................................................19
2.7.1 Internal validity..................................................................................19
2.7.2 External validity.................................................................................20
2.7.3 Reliability ............................................................................................21
2.8 RESEARCH PLAN....................................................................................22
3 SHARED SERVICES ...........................................................28
3.1 BACKGROUND.........................................................................................28
3.2 WHAT ARE SHARED SERVICES CENTRES?.................................30
3.3 WHAT TO INCLUDE IN THE SSC......................................................32
3.4 HOW TO SUCCEED WITH AN SSC....................................................33
3.5 WHY SETTING UP AN SSC AND WHAT ARE THE BENEFITS?34
3.6 PROBLEMS WITH SSCs.........................................................................35
4 PROCESSES..........................................................................38
4.1 BACKGROUND.........................................................................................38
4.2 DEFINITIONS AND CONCEPTS..........................................................39
4.3 PROCESS VIEW........................................................................................41
4.4 PROCESS MANAGEMENT....................................................................42
4.5 ADVANTAGES AND DISADVANTAGES WITH PROCESSES.....44
5 QUALITY CONCEPTS .......................................................46
5.1 WHY QUALITY?.......................................................................................46
5.2 DEVELOPMENT OF QUALITY............................................................48
5.3 WHAT IS QUALITY?...............................................................................52
5.4 WHAT IS SERVICE QUALITY?...........................................................55
5.5 WHAT IS POOR QUALITY?..................................................................58
5.6 QUALITY COSTS AND POOR QUALITY COSTS...........................60
5.6.1 Why measure the costs? ....................................................................60
5.6.2 Definitions............................................................................................62
5.6.3 Categories ............................................................................................64
5.6.4 Levels of poor quality costs...............................................................68
5.6.5 Benefits with using poor quality costs.............................................69
5.6.6 Risks with using poor quality costs..................................................71
5.7 HOW TO MINIMISE THE COSTS .......................................................72
5.8 HOW TO MEASURE PQC......................................................................74
5.8.1 The ISO models...................................................................................75
5.8.2 Sörqvist’s assessment method...........................................................76
5.8.3 What to consider when measuring PQC.........................................80
5.9 HOW TO ANALYSE PQC.......................................................................82
5.9.1 Ishikawa diagram...............................................................................83
5.9.2 Pareto analysis ....................................................................................84
5.9.3 Ratios....................................................................................................85
6 THE CASE STUDY..............................................................87
6.1 VOLVO BUSINESS SERVICES.............................................................87
6.1.1 What is Volvo Business Services?....................................................87
6.1.1.1 Mission Statement, Vision, and Goal..........................................88
6.1.2 Background .........................................................................................89
6.1.3 The organisation and structure of VBS..........................................90
6.1.4 Quality in VBS ....................................................................................92
6.2 THE ACCOUNTS PAYABLE PROCESS.............................................94
6.2.1 The organisation of the process .......................................................95
6.2.2 From purchase to payment...............................................................97
6.2.3 Other activities in the A/P process ..................................................99
6.3 DISCUSSION ABOUT QUALITY AND POOR QUALITY............100
7 RESULTS.............................................................................103
7.1 INVOICE PROCESSING.......................................................................107
7.1.1 Identified shortcomings...................................................................108
7.1.2 The poor quality costs .....................................................................110
7.1.3 The causes..........................................................................................112
7.2 MATCHING.............................................................................................112
7.2.1 Identified shortcomings...................................................................113
7.2.2 The poor quality costs .....................................................................114
7.2.3 The causes..........................................................................................115
7.3 PAYMENT PROPOSALS......................................................................115
7.3.1 Identified shortcomings...................................................................116
7.3.2 The poor quality costs .....................................................................116
7.3.3 The causes..........................................................................................117
7.4 NEGATIVE BALANCES AND INCOMING PAYMENTS.............117
7.4.1 Identified shortcomings...................................................................118
7.4.2 The poor quality costs .....................................................................119
7.4.3 The causes..........................................................................................120
7.5 PAYMENT REMINDERS .....................................................................121
7.5.1 Identified shortcomings...................................................................121
7.5.2 The poor quality costs .....................................................................122
7.5.3 The causes..........................................................................................123
7.6 INTEREST INVOICES..........................................................................125
7.6.1 Identified shortcomings...................................................................126
7.6.2 The poor quality costs .....................................................................126
7.6.3 The causes..........................................................................................127
7.7 GENERAL SHORTCOMINGS ............................................................128
8 ANALYSIS...........................................................................131
9 CONCLUSIONS..................................................................145
9.1 FURTHER RESEARCH.........................................................................150
REFERENCES.......................................................................151
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IST OF FIGURES
Figure 2.1 Research plan for the poor quality cost study..............................................................22
Figure 4.1 Different types of processes........................................................................................41
Figure 5.1 Relations between improved quality and increased profitability.................................47
Figure 5.2 The Deming circle.......................................................................................................50
Figure 5.3 The Kano model of customer satisfaction...................................................................54
Figure 5.4 Poor quality cost classification....................................................................................67
Figure 5.5 Total costs can be reduced by investing in prevention activities.................................72
Figure 5.6 Cost of quality history.................................................................................................73
Figure 5.7 Comparative cost of quality, or poor quality...............................................................74
Figure 5.8 Tree diagram of costs, cost drivers, and root causes....................................................83
Figure 5.9 Ishikawa diagram........................................................................................................84
Figure 5.10 Pareto chart...............................................................................................................85
Figure 6.1 VBS Organisation and Processes................................................................................91
Figure 6.2 Organisation of the non-production part of the A/P process........................................96
Figure 6.3 The invoice way..........................................................................................................97
Figure 8.1 Pareto chart of identified shortcomings, per period...................................................132
Figure 8.2 Ishikawa diagram over causes for poor quality..........................................................143

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IST OF TABLES
Table 7.1 Facts about the A/P process, autumn 2000.................................................................107
Table 7.2 Total amount of hours spent and the PQC, per week, in invoice processing. 111
Table 7.3 Total amount of hours spent and the PQC, per week, in matching..............................114
Table 7.4 Total amount of hours spent and the PQC, per week,.................................................116
in payment proposals.................................................................................................116
Table 7.5 Total amount of hours spent and the PQC, per week,.................................................119
in negative balances and incoming payments............................................................119
Table 7.6 Total amount of hours spent and the PQC, per week, in payment reminders..............123
Table 7.7 Total amount of hours spent and the PQC, per week, in interest invoices...................127
Table 8.1 Pareto table of identified shortcomings, per period.....................................................131
Table 8.2 Sensitivity analysis for all shortcomings.....................................................................144

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PPENDICES
Appendix 1a Interview guide for first round interviews with administrators in VBS
Appendix 1b Interview guide for purchasers
Appendix 2 Categories of poor quality costs according to Campanella
Appendix 3 Process structure of VBS
Appendix 4 Volvo Quality-Related Cost Model
Appendix 5 Recommended invoice format