In this unit, you will explore how key business activities and trade

AJJeff""-'vi1- considerations influence engineering organisations and are used to

lkis u11-it will be- create a competitive advantage. You will learn why organisations need
~sse-sse-d by ~ se-rie-s of
to control costs and how they make decisions by applying activity-based
costing methods. You will also examine what is meant by quality and
~ssij11-wte-11-ts se-t by your
why it means different things to different people. You will investigate
tu.tor. quality systems, including quality assurance and control. Finally,
you will explore value management as a process to create value in an
organisation.

How you will be assessed

This unit will be assessed by a series of internally assessed tasks set by your tutor.
Throughout this unit you will find assessment practice activities to help you work
towards your assessment. Completing these activities will not mean that you
have achieved a particular grade, but you will have carried out useful research or
preparation that will be relevant when it comes to your final assignment.

In order for you to complete the tasks in your assignment, it is important to check
that you have met all of the assessment criteria. You can do this as you work your way
through the assignment.

If you are hoping to gain a Merit or Distinction, you should also make sure that you
present the information in your assignment in the style that is required by the relevant
assessment criteria. For example, Merit criteria require you to analyse and to produce
a model or complete an exercise accurately, while Distinction criteria require you to
evaluate.

The assignments set by your teacher/tutor will consist of a number of tasks designed
to meet the criteria in the table. They are likely to take the form of written reports but
may also include activities such as the following:
~ Investigation of local businesses, which could include visits.
~ Research and problem-solving projects.
~ Analysing case studies, observations or examples from real-world settings.

70 Applied Commercial and Quality Principles in Engineering

 Getting to know your unit UNIT 4

:t>-
Assessment criteria "'O
~
(I)
CL
This table shows what you must do in order to achieve a Pass, Merit or Distinction grade, and where n
0
you can find activities to help you. 3
3(I)
Pass Merit Distinction .....

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p;·

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Leaming aim Examine business functions and trade considerations that help SlJ
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engineering organisations thrive CL
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141.11 c
SlJ

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Explain how key business activities Analyse how key busi ness activities Evaluate, using language that is -<
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influence an engineering o rga nisation. and trade considerations infl uence an technically correct and of a high ::::! .
engineering organisation, w hich can standard, how key business activities ::I
Assessment practice 4.1 Q.
create a competitive advantage. and trade considerations combine to "'O

Assessment practice 4.1 influence an engineering organisation, .,..

(I)

Explain how trade considerations which can create a competitive ::I

m
influence an engineering organisation. advantage. ::I
Cl.9.

Leaming aim m
Assessment practice 4.1
Explore activity- based cost ing as a method to control costs and
to determine if an engineering product or service is profitable
Assessment practice 4.1 ::I
(I)
(I)
::::! .
::I
cro
l :!iJI
Explain why an engineering organisation Produce accurately an activity-based Produce an accurate and refined
controls costs. cost model for an engineering product activity-based costing model, during
Assessment practice 4.2 or service, explaining the reasons for cost the process, for a product or service
controls. to determine the major cost areas that
Assessment practice 4.2 could impact on profitability, explaining
the reasons for cost controls.
Assessment practice 4.2
Produce an activity-based cost model for
an engineering product or service.

m
.,.
Assessment practice 4.2
Learning aim Explore how engineering organisations use quality systems and
value management to create value

Explain the purpose of different quality Analyse the purpose of different

•••••
Evaluate the outcome of a value
management systems and value quality management systems and value management exercise for a given
management used by engineering management used by engineering engineering activity and make
organisations. organisations. recommendations which include the
Assessment practice 4.3 Assessment practice 4.3 use of quality systems to implement
efficiencies in the engineering activity.
u4w Assessment practice 4.3
Complete a value analysis exercise on a Complete accurately a value analysis
given engineering process. exercise on a given engineering process.
Assessment practice 4.3 Assessment practice 4.3

17
 Getting started
Work in groups to consider the design and manufacture of one of your mobile
phones. Which company manufactured the product? What manufacturing
processes do you think have been involved? What departments could there
be in an organisation that manufactures a mobile phone? What are the costs
of producing a mobile phone? Make notes. When you have completed this
unit, think about how your knowledge and understanding of the topic has
increased. Identify what new information you can add to your notes.

l!I Examine business functions and trade considerations

Iii that help engineering organisations thrive
In this section you will learn to identify how key Here are some functions of which you need to be aware,
business activities and trade considerations influence an and the aspects of work that they cover.
engineering organisation and can be used to create a ~ Human resources (HR) - staff issues within the
competitive advantage. organisation.
~ Finance - financial dealings and costing within the
A1 Business functions organisation.
Engineering organisations range from small, local ~ Sales - marketing and selling the end product to
businesses that manufacture a product for a specific customers, including advertising and promotion.
market to large-scale global businesses such as
~ Operations - activities involved in manufacturing the
BP. Whatever the size of the business, it will have a
product.
management team that manages a range of functions.
~ Research and development (R&D) - market research
Table 4.1 shows examples of key activities that take place
and product investigation to develop the products for
within different business functions.
manufacture; reviewing customer satisfaction.
Key term ) ~ Purchasing - tasks such as sourcing and buying raw
r
materials for manufacture.
Functions - areas of activity into which a business can
be organised.

~ Table 4.1 Key activities within different business functions

l
Functions Examples of activities
Manufacturing • Forming
of products • Fabrication
and delivery of • Removal of material
seivices • Addition of material

I •
•
Assembly processes
Quality checks and inspection/testing processes
Supply chain • Outsourcing decisions - where the organisation considers the use of an external company for a specific job
management • Supplier appraisal - where the organisation evaluates the use of current and alternative suppliers (e.g. of raw
materials)
Marketing and • Brand awareness - how the organisation wants the brand to be perceived by customers
sales • Market research - investigating the market the product is aimed at to aid development
• Sales
• Customer feedback - acquiring data on customer satisfaction and responding to customer comments
Customer • Meeting expectations - organisations that are successful make every attempt to ensure that their customers are
relations satisfied
• Being proactive - for example, taking the initiative to ask customers for feedback or anticipating common
customer concerns

72 Applied Commercial and Quality Principles in Engineering

 Learning aim A UNIT4

~ Table 4.1 - continued )>

-0
-0
I Functions Examples of activities ro
rResource • Sources of funding - identifying funds from internal budgets or from external streams
Cl...
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I management • Resource allocation - allocating resources among different departments and projects 0
3
• Stock control - ensuring that there is sufficient stock available for different departments and projects to use, and 3
ro

I Stoff cmu;tmeot
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purchasing more as required
Internal and external recruitment - appointing staff to new roles from both within and outside the organisation
Apprenticeships - setting up and managing training programmes for apprentices
.....
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Staff management I•• - -·

Appraisals - evaluating and reviewing staff performance
---

Support and training - responding to support and training needs, and ensuring that staff have CPD (continuing
Cl...
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c
~
;::;.-

i·
professional development) opportunities
'<
Financial Financial statements showing profit (the amount of money the company makes when all costs have been paid),
loss (the amount of money the company loses) or break-even (where profits match loss)
"
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organisation will have 'breach of contract' clauses, perhaps
Link ) ::i
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including financial penalties or rejection if it is not happy m
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The activities associated with manufacturing of with the goods or service that the contractor provides. OB.
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products and delivery of services are covered in Unit 2. The contractor will have a force majeure clause to ro
ro
.....
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protect them from liability if something unpredictable or ::i
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unavoidable affects their provision of the goods or service.
, Research )
r 'I A warranty or guarantee can also be included in a contract.
Investigate an organisation through a visit or on the This is a promise made by the contractor to the organisation
internet. What functions or departments does the about the goods or services offered. An express warranty is
organisation have? Make notes on what each function one that is agreed and directly stated or written down; an
or department is responsible for. implied warranty is not actually stated, but is a reasonable
expectation that the goods or service will perform in a
certain way or meet a certain standard. Implied warranties
A2 Trade considerations are supported by laws that govern what they cover.

Tendering and contracting An indemnity clause will also be a part of the contract.
This is an agreement between the contractor and
An organisation may choose to contract out certain
organisation about who is responsible if things go wrong
activities. This is where a different company is used to
or are not as expected. Indemnities may include insurance
provide specific goods or a specific service. For example,
that can provide compensation for any loss or penalty.
an organisation that manufactures products using injection
moulding may design their own moulds but have the metal r Key terms )
casts manufactured by a different company with specialist
equipment. The companies who take up a contract to supply v Contract out - to make a contract with an external
an organisation with goods or services are called contractors. supplier to carry out a specific activity.
Force majeure - a clause that releases a company
If an organisation decides that it wants to contract out an from its obligations under a contract if unpredictable,
activity, it will put that contract 'out to tender'. Companies extraordinary circumstances prevent it from fulfilling
can then put in formal bids, stating how much they would the contract.
charge to carry out the activity. Potential contractors might Liability - being legally or financially responsible for
also provide documents such as drawings or specifications for something.
consideration. The contracting organisation can then decide Warranty or guarantee - a written promise to repair
which contractor to use, often based on price and quality. or replace a product if it does not work or breaks down,
The organisation and chosen contractor will draw up a usually within a specified time frame.
contract for the goods or service provided. The contract will Indemnity - an obligation of one party to pay
contain agreed terms and conditions, with clauses to make compensation for a particular loss suffered by another
sure that each party gets what it needs from the agreement. party.
Insurance - a payment made to guard against
These clauses are designed to protect both the organisation
and the contractor (see Figure 4.1). For example, the

173
 An engineering organisation has contracted out the manufacture of a key part of a
PAUSE POINT
product t hey sell, but the contractor misses the deadline for getting the part to the
organisation, and costs are incurred. What action could the engineering organisation
take? What protection could the contractors have against any finan'Cial penalties?

Consider breach of contract, force majeure and indemnities.

Research the difference between insurance and indemnity. See if you can find an
example of each of these in an engineering contract.

~ Figure 4.1 Contracts can protect both the organisati o n and the contractor

Intellectual property rights

Intellectual property rights are the overall rights that an organisation has to use its
own ideas and designs without another company being able to use them . Examples
are patents and trademarks. If an organisation develops a new product, it can obtain
a patent on the product or invention, so that only it can sell it. Trademarks can include
logos and slogans that a company uses as part of its identity. Establishing these
graphics or words as a trademark stops any other company using them. Registered
designs are used to protect the external appearance of a product, such as its shape,
colour or texture.

r Theory into practice )

r ~

In 1922 William Henry Hoover founded the Hoover Company. He purchased a

patent in 1908 for a vacuum cleaner design that incorporated a rotating brush,
and began to manufacture and market the product. His product and associated
brand became so successful that nowad ays a vacuum cleaner is often generically
referred to as a 'Hoover', even w hen it is of a different brand. 'Hoovering' is now a
recognised English term for vacuuming.
More recently, we use vacuum cleaners called a 'Dyson'. James Dyson invented a
new way of collecting dirt when vacuuming that uses a cyclone system instead of
a filtration bag. Although his vacuum cleaners cost almost twice as much as non-
cyclonic vacuums when they were launched, his innovation was a success. Dyson is
now a billionaire, despite selling his first uprigh t vacu um cleaner as recently as 1993.
Think about and investigate the following questions:
1 What would have happened if William Henry Hoover had not patented his
rotating brush vacuum cleaner design?
2 Why do you think customers were willing to pay twice as much for Dyson
vacuum cleaners when they first came on to the market?
3 Research the designs of Dyson and other similar vacuum cleaners . Did James
Dyson register his design? Why?

174 Applied Commercial and Quality Principles in Engineering

 Learning aim A . .

A3 Competitive advantage r Key term )

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-0
-0
Competitive advantage can be created by all business functions or by any Competitive advantage - (!)
0...
combination of activity and trade considerations. Here are some ways in which an what an organisation does n
0
organisation can achieve competitive advantage. that allows it to outperform 3
3(!)
~ Innovating - An organisation must constantly develop and introduce new and competitors. ~
\. Q.
exciting products to compete with other similar organisations. If it can come up A>
with a product that is unique or which solves a problem that no other product can, A>
:::l
0...
the organisation may have no competition when its product is first introduced.
,()
~ Using new technology - Technology is developing all the time. If an organisation c
~
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embraces new technology, either within its products or in the processes used to -<
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manufacture its products, this could give it the edge it needs to outperform other ::::! .
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companies in the same market. Q.
-0
~ Protecting intellectual property - To stand out from the crowd, an organisation has (!)

to be unique. By protecting its ideas, identity and brand names through patents "'
m
and trademarks, a company can maintain its individuality and the uniqueness of its :::l
Cl.9.
products. :::l
(!)
(!)
~ Managing costs - To make a profit, an organisation needs to manage its costs well. ::::! .
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The costs of manufacturing a product will affect the selling price of the product. OQ

If, by better cost control, an organisation can sell a product of the same quality as
those of its competitors but at a lower price, it will have a competitive advantage.

r Research )

Case study

AgriParts Ltd outsource the manufacture of the part. They must

consider:
whether AgriParts Ltd has the resources to
manufacture the part in-house
whether suppliers are available who could meet the
expectations of AgriParts Ltd
what trading terms would need to be agreed with
suppliers
whether outsourcing would result in lowered costs,
giving AgriParts Ltd a competitive advantage.

Check your knowledge

1 How will Jack find out about potential suppliers?

~ An AgriParts Ltd customer fitting one of their machine parts
2 What expectations would AgriParts Ltd have of
Jack is an employee at AgriParts Ltd, an organisation suppliers?
that provides machine parts for the agricultural industry. 3 What types of trading terms would need to be
His job is to oversee the operations functions within agreed?
the organisation. He has been asked to consider a new
4 How could reduced costs create a competitive
machine part, working with colleagues in finance and
advantage?
purchasing to decide whether AgriParts Ltd should

17~
 Assessment practice 4.1 A.P1 A.P2 A.M1 A.01

Study a local engineering organisation f~

and produce a written report that • What is the task? What am I being asked to do?
explains and evaluates how key business What information will I need to complete the task?
activities and trade considerations • How confident do I feel in my own abilities to complete this task?
influence the organisation and how it Are there any areas I think I may struggle with?
creates a competitive advantage.
Do
Use examples to demonstrate how a • I know what I'm doing and what I am aiming to achieve.
range of factors affect the organisation. • I can identify the parts of the task that I find most challenging and
Ensure that you use correct technical devise ways to overcome these difficulties.
terms and that your report is logically fl.evuw
structured and easy to read . • I can explain what the task involved and how I approached its
completion.
• I can explain how I would approach the hard elements differently
next time.

Explore activity-based costing as a method to control

costs and to determine if an engineering product or
service is profitable
In Learning aim A you saw that costs have a major There needs to be a balance between profitability and
impact on an organisation's profitability and competitive pricing, so it is vital that an organisation gets
competitive advantage. An organisation must review its costing right.
its costs frequently in order to achieve maximum
There are hidden costs that an organisation could easily
potential. Activity-based costing (ABC) is a method
miss without careful cost consideration . Looking back
that an organisation can use to control costs and make
at the example of the piston rod manufacturer, there
judgements on its performance and profitability.
would be the costs of the energy needed to run the
machines in the plant and of the consumables required
B1 Reasons for cost control to maintain the machines; there are also costs that would
Within every function of an organisation, costs have to be be incurred when a machine is out of operation due to
evaluated and controlled to ensure that the organisation maintenance. Accurate and effective costing is essential if
will be profitable. an organisation is to be successful.

Take the example of an engineering organisation that As well as carefully identifying and managing various costs,
manufactures piston rods for the automotive sector. There an organisation has to make decisions on cost that could
are obvious costs that come to mind - for example, the concern:
costs of raw materials, of staff to manage and run the ~ investment - An organisation may have to invest a
manufacturing plant, of machines to manufacture the considerable amount of money in the development
product, and of packaging and shipping the product to the and manufacture of a product before receiving any
customer. profit from its sale; this involves an element of risk. The
All of these costs have to be managed to ensure that the organisation would have to decide how much money
organisation is making money from selling the product. to invest and weigh this against how much profit could
The income from selling the product must cover all the be expected from selling the product, or determine
costs of manufacturing the product, plus an allowance to whether it is worth investing in the product at all.
make some profit. The organisation also has to consider ~ withdrawal - If a product is not making a profit, the
what other companies are charging for a similar product, organisation may decide that it is cost-effective to
and try to make the price of its own product competitive. withdraw the product from sale. This would save on future

76 Applied Commercial and Quality Principles in Engineering

 Learning aim B UNIT4

manufacturing costs, and the organisation could invest the B2 Activity-based costing method )>
"D
savings in a new product that might be more profitable. "D
At one time, costs within engineering organisations were (!)
~ make or buy - In some cases it may cost an organisation 0..
calculated based on the number of hours a machine n
less if it simply buys in a product (or part of a 0
would be running and the number of hours an operative 3
product) that is manufactured elsewhere, rather than 3(!)
would be working. However, with the introduction of
manufacturing the product itself. This is often the .....
new technology and the development of improved Q.
reason why some companies sell products that carry e:..
manufacturing methods, it has become more accurate ~
their brand names but are in fact manufactured by ::i
to cost the manufacturing of a product by reviewing the 0..
other companies overseas. ,()
actual costs needed to complete a job. c
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Types of costs With activity-based costing, each cost is assigned to -<
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Costs can be categorised into a number of types, a category of costs - called an activity cost pool. ~­
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summarised in Table 4.2 . Within each activity cost pool an activity driver is then Q.
"D

~ Table 4.2 Types of costs identified . Activity drivers are the actual factors that (!)
Vl

I Type of cost Description I Examples

cause the cost to increase. For example, if packaging and
despatch constitutes an activity cost pool, the number of
parcels being packaged and shipped would be the activity
Direct Costs that relate • raw materials
driver.
directly to the • work in progress
manufacture of a (WIP)
The steps of the activity-based costing method are as
specific product • direct labour costs
follows:
Indirect ICosts that are
involved in but not
•
•
energy
insurance
1 Identify the activities - the processes required to
produce an output.
directly related to • wages
the manufacture of a • consumables 2 Assign resource costs to activities - including
specific product direct costs, indirect costs and general/administration
Variable Costs that can • raw materials costs.
change over time • consumables 3 Identify the outputs (cost objects) - the products,
Semi-variable Costs that can vary • overtime costs services or customers.
depending on • commission 4 Assign activity costs to outputs - by using activity
demand I· maintenance drivers.
Fixed Costs that stay the
same l·
•
overheads
rent
• machinery costs
The following worked example illustrates how to apply the
activity-based costing method.
• depreciation
• insurance

General/ ICosts relating to • human resources

I administration the administration

associated with
• finance
• information

l manufacturing a
product
technology

Key terms J
Work in progress (WIP} - an incomplete product or Depreciation - the reduction in an object's value over
project that is still being worked on, and which has a total time; this could be related to wear and tear on machines or
cost allocated to it, largely for labour and materials. the decreasing market value of a product.
Overheads - costs that relate to extra services involved Activity cost pool - a category of costs.
in the manufacture of a product, such as equipment costs Activity driver - a factor within an activity cost pool that
and heating or lighting; they are not directly related to the causes costs to increase.
cost of labour or materials.
\_ ,

17
 An engineering organisation manufactures jet engine assemblies (like the one shown in Figure 4.2) for the aerospace
sector. One part of the assembly is manufactured in computer numerical control (CNC) cells. The finance director,
Jessica, has been asked to produce an activity-based costing model for the CNC-machined part.

~ Figure 4.2 Example of ajet engine assembly

Solution

Step l:Jessica's first step is to identify the costs associated with manufacturing the engine part.
We will refer to each engine part manufactured as a unit.
To begin with, Jessica considers how many units are sold per year and how much they are sold for.

Number of units manufactured and sold per annum 265 OOO

Price each unit is sold for £5.50

These values allow her to calculate the sales revenue per year - the total amount of money made by the company
from sale of the product, without considering any costs.
Sales revenue= price per unit x number of units sold
= £5.50 x 265 OOO = £1 457 500

Step 2: Then, Jessica calculates the direct costs associated with manufacturing the product.
She has identified material and labour costs:

Direct material costs per unit £0.50

Direct labour costs per unit £0.35

Step 3:Jessica can now calculate the total direct costs of manufacturing the product:
Direct material costs= material costs per unit x number of units sold
= £0.50 x 265 OOO = £132 500
Direct labour costs = labour costs per unit x number of units sold
= £0.35 x 265 OOO= £92 750
Total direct costs= direct material costs + direct labour costs
= 132 500 + 92 750 = £225 250

Step 4: Next, Jessica analyses the indirect costs associated with manufacturing the product.
She considers the relevant activity cost pools and identifies the activity drivers within those activity cost pools.

7
8 Applied Commercial and Quality Principles in Engineering
 Learning aim B -

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Costs are then assigned per product or unit, as shown in Table 4.3. (")
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~ Table 4.3 Using activity drivers to calculate total cost 3
3
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Activity cost pool Activity driver Cost per unit of Total activity Total indirect costing for !J.
~
activity driver per annum the activity driver
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Purchasing Number of purchase £875 50 875 x 50 = £43 750
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orders received c:
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Setting up of CNC Number of cell set-ups £775 100 775x100 = £77500 -<
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manufacturing cells required ~.
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Machine testing and Number of tests that need £100 1000 100 x 1000 = £100000 !J.
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calibration to be carried out <I>
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Machine maintenance Number of batch runs £680 200 680 x 200 = £136000 m
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that take place o:9.
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Total indirect costs £357 250 <I>
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Step 5: Once Jessica has collected information about direct costs, indirect costs and sales revenue, she can use this to
calculate the organisation's profitability, as shown in Table 4.4.
~ Table 4.4 Calculating annual profit from revenue and costs

Number of units 265000

produced and sold

Total direct costs £225250

Total indirect costs £357 250

Revenue per unit £5.50

Direct costs per unit Total direct costs+ number of units= 225 250 + 265 OOO= £0.85

Indirect costs per unit Total indirect costs+ number of units= 357 250 + 265 OOO= £1 .35

Gross profit per unit Revenue per unit - costs per unit= 5.50 - 0.85 - 1.35 = £3.30

Gross profit margin Gross profit per unit+ revenue per unit= 3.30 + 5.50 = 0.6 = 60%

Step 6: From this analysis Jessica can conclude that manufacturing the part is profitable for the organisation.

Consider the activity-based costing model in the worked example. What difference
G) PAUSE POINT would it make to the profitability of the product if the indirect cost of product
packaging had been taken into account?

Re-calculate the total indirect costs including the cost of product packaging (£0.30
per unit), and then substitute this value into later calculations.
What other indirect costs could be included in the model?

17
 Assessment practice 4.2 B.P3 B.P4 B.M2 s.02

Choose a product manufactured or f~

service provided by an engineering • What is the task? What am I being asked to do?
company and carry out research to • How confident do I feel in my own abilities to complete this task? Are
explore the costs of various activities there any areas I think I may struggle with?
associated with that product or service.
Do
Develop an accurate activity-based • I know what I'm aiming to produce at the end of the task and I am
costing model for the product or clear on the steps that I need to take to achieve my goal.
service. Refine your model throughout I can identify the elements of the task that I find most challenging and
the process. devise ways to overcome these difficulties.
Identify the major cost areas that could fl.evi-ew
affect profitability for the company. • I can explain what the task involved and how I approached its
Explain the reasons why the completion.
engineering company needs to control • I recognise which areas I feel less confident in and can seek ways to
costs. improve my skills in those areas.

m Explore how engineering organisations use quality

systems and value management to create value

In order to be successful, engineering organisations

Key terms )
have to deliver high-quality products and services. To
help ensure that outputs meet a high standard, International Organization for Standardization
the organisation can use quality systems and value (ISO) - an independent organisation that develops
management. In this learning aim you will study some international standards for quality, safety and efficiency.
types of quality system, why organisations use them, ISO 9000 - a quality management system for
and the principles and processes of value analysis on manufacturing and service industries.
~ ~
a product or service.

ISO 9000 series

C1 Quality systems To gain ISO 9000 certification , an engineering organisation
has to demonstrate that it meets 20 requirements. You
Engineering organisations can apply for accreditation
need to be aware of these and keep up to date with the
to show that they meet international quality standards.
latest versions. The standards are updated regularly, with
Accreditation demonstrates to customers that the
the most recent revisions in 2015.
organisation has quality management systems in place -
1 Management responsibility - The management team
this can give the organisation a competitive advantage
must designate the responsibilities of the personnel
and customers the confidence to buy from that
involved in quality management. A policy for quality
organisation.
should be developed that is documented, understood
by all, implemented, refined and monitored. A
The ISO series member of the management team must be designated
The International Organization for Standardization to oversee the implementation, regular review and
(ISO) has a series of standards - the 9000 series - that monitoring of the quality system.
provide a quality assurance system for manufacturing and 2 Quality system - A system which demonstrates that
service industries. These standards can be used to improve customer requirements will be fully satisfied must be
the organisation through applying quality management prepared and implemented.
principles.

30 Applied Commercial and Quality Principles in Engineering

 Learning aim C UNIT4

3 Contract review - Contracts and purchase orders must 17 Internal quality audits - Audits of quality procedures )>
"'O
be reviewed to ensure that they meet the needs of the must be planned and regularly carried out. Results from "'O
ro
customer. Any changes to contracts must be reviewed audits should then be passed to the management team 0..

and agreed. for review and to allow any issues raised to be addressed. 0
n
4 Design control - Projects that the organisation is 18 Training- Staff training needs and the provision of 3
3
involved in must be well planned, with all aspects of the those needs must be addressed and recorded. ....ro
Q.
project being documented and verified. Any changes 19 Servicing - Formalised procedures must be in place ~
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must be controlled by qualified personnel. for the servicing of manufacturing equipment, with ::J
0..
5 Document and data control - All documents and data requirements for quality being met. .0
handled within the organisation must be controlled. 20 Statistical techniques - Statistical methods must be c
~
;:::;:
This includes controlling their production, distribution, identified and applied in order to review the products "<
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amendment and, finally, disposal. and the processes used to manufacture them. ::::!.
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6 Purchasing - Suppliers and contractors must be Q.
The ISO 9001 standard provides a planning tool for quality "'O
evaluated and monitored. This includes monitoring ro
and to support continual improvement. Its purpose is to "'
their quality assurance systems. ::J
ensure that the quality management systems put in place rn
7 Control of supplied product - Products must be easily ::J
by the organisation actually work to improve the business. qg ,
identified and handled and be stored correctly to ::J
It focuses on objectives and on the implementation of ro
ensure protection against damage or loss. ro
more efficient working practices. Areas of the organisation ::::!.
8 Product identification and traceability - Products must ::J
IJQ
covered by ISO 9001 include equipment, facilities, people,
be able to be traced and identified throughout the
training and services.
processes of manufacturing, packaging and delivery to
the customer. Research )
9 Process control - All stages of product manufacture must
be planned, controlled, monitored and documented. What does the ISO 9001 mark look like? Find out by
10 Inspection - Materials supplied to the organisation, researching it on the internet.
\.
the manufacturing processes and the final testing of
the product or service must all be subject to regular ISO 14000 series
inspection, with accurate records kept. You also need to know about the ISO 14000 series.
11 Calibration, measuring and test equipment - The This series of standards provides guidelines on how an
accuracy of measurements taken during product organisation can make improvements relating to the
manufacture must be tested and reviewed. Calibration environment, for example by reducing their carbon
equipment must be regularly maintained. footprint. Some specific standards in the series are:
12 Inspection and test status - Testing must take place
~ ISO 14001 - relates to the reduction of waste.
as products are being manufactured and judgements
~ ISO 14006 - concerns the improvement of product
made as to whether the products pass or fail those
quality in an environmentally positive way. It addresses
inspections. Testing of the tests must also occur.
the implementation, documentation, maintenance
13 Control of non-conforming product - Procedures
and continuous improvement of an organisation's eco-
must be in place to control products that do not pass
design management system.
inspection tests. Such products must not be used but
should be reviewed before disposal. ~ ISO 14040 - relates to life-cycle assessments, which
14 Corrective and preventive action - Any problems means assessing the environmental impact of a product
identified should be reviewed and the cause of each from the supply of raw material, through production,
problem corrected . The effectiveness of the corrective packaging and distribution, all the way to the end of
actions that take place must also be reviewed. the product's life. Guidelines for performing a life-cycle
15 Handling, storage, packaging, preservation and assessment are provided .
delivery - Documents must be kept at all stages
Key term )
through to product delivery, with handling controls in
place to prevent any product damage. Procedures must ISO 14000 - an environmental management system.
be regularly reviewed and maintained.
Carbon footprint - a measure of the environ mental
16 Control of quality records - All records must be
impact of a particular individual or organisation,
collated, indexed and stored to ensure that they are
measured in units of carbon dioxide.
easily retrievable. \. ~

181
 ~ Act - Make recommendations and carry out the change.
Research )

Investigate the ISO 14000 series of standards. What

requirements must organisations meet in order to gain ~~ co
\.
this type of certification? «; ~
~ PLAN ..A
Quality assurance
-z
Having standards is all very well, but more importantly
the organisation has to attain those standards in practice.
Quality assurance is what an organisation does to
make sure that the quality requirements of its products
UJ

>
0
ACT
ED
CHECK
DO

c::-
or services are met. Quality assurance can be seen as a
company-wide philosophy. <Y 0
Key term) O' Jtt I s"
Quality assurance - the set of planned activities for ~ Figure 4.3 The PDCA cycle aims for continuous improvement
ensuring that the quality requirements of a product or
If the change has not been successful, start the cycle again
service are met.
with an alternative change. If the change is successful,
incorporate what has been learned into a wider scope and
Total quality management (TQM) start the cycle again.
By committing to TQM principles, an organisation
demonstrates that high quality is central to the way that all Why implement a quality system?
parts of the organisation work, and that the highest-quality Organisations can choose to implement quality systems to:
product or service is its united goal. ~ benchmark against other organisations - The company
In a TQM organisation: compares its products and working practices with those
of other businesses, particularly the companies that
~ The needs of the customer are fully met and quality
currently lead the field, with the aim of making its own
standards are defined by customer requirements.
business as good or better.
~ Clear systems and procedures for improvement are in
~ ensure consistency of processes - Consistent processes
place.
must be in place to ensure that a product or service of
~ A culture of continual improvement exists, involving all consistent quality is the outcome.
members of the organisation.
~ achieve conformity of the product or service to a
~ Improvement is led by continuous review and feedback. standard - All products or services must meet a set
~ All costs relating to quality are identified and minimum standard so that customers will feel confident
minimised - for example, appraising production about buying them.
processes and consequently preventing failure of ~ reduce unnecessary waste - Excessive purchasing, over-
products as much as possible. processing or over-production costs the organisation
time and money, and should be eliminated.
PDCAcycle
~ improve the effectiveness of the organisation -
PDCA is a management model with four basic steps (plan,
Efficiency improves cost-effectiveness.
do, check, act) for the implementation of change. As
~ gain a competitive advantage - An organisation that
you can see in Figure 4.3, PDCA is a cycle of continuous
has quality systems in place will have a competitive
improvement - like a circle, it never ends.
advantage over companies that don't.
The four steps of PDCA are:
~ achieve customer satisfaction - Customer satisfaction is
~ Plan - Identify the issue, collect data and plan the change.
a measure of the overall success of a business.
~ Do - Develop a solution and test the proposed change. ~ ensure that a product or service is fit for purpose - Any
~ Check - Verify that the proposed change will meet product or service that is not fit for purpose will not sell,
expectations full-scale, and compare with the original. and the organisation will be unsuccessful.

182 Applied Commercial and Quality Principles in Engineering

 Learning aim C UNIT4

Quality control )>

-0
-0
Quality control is an essential part of any quality assurance system . Quality control <D
Cl...
methods are applied within organisations in the same way that they are applied to n
an object in an engineering workshop to monitor a tolerance. Inspection sampling 0
·3
and testing are carried out throughout a product's manufacture to ensure that 3
<D
quality standards are met at every stage. For example, the product's condition could rl
iij '
be monitored through vibration or thermal analysis. Maintenance is planned and
~
undertaken at regular intervals, and a 'right first time' philosophy is adopted - quality ::J
Cl...
control checks should be such that errors can never occur. .0
c
~
;:::;:
r Theory into practice ) -<
'"C1
~.
::J
Toyota Motor Corporation has developed a managerial approach and production Q.
-0
system that they refer to as 'The Toyota Way'. The philosophy is centred on two <D
Vl

considerations: continuous improvement and respect for people. In order to

m
achieve a 'right first time' standard, any employee in the organisation's production ::J
~.
system has the authority to stop the process at any stage if they have a quality ::J
<D
concern . <D
~.
::J
Think about and investigate the following questions: O'Q

What are the 14 principles behind The Toyota Way?

Keyterms )
What drawbacks are there in giving all employees the authority to stop the r ~

manufacturing process? Why does Toyota adopt this form of quality control Quality control - the testing
despite the potential problems you have identified? and monitoring of activities
\.
that are used to check the
quality of a product or service
outcome.
C2 The principles and processes of value
'Right first time' - a quality
management management concept which
asserts that preventing defects
Value management
and errors is better and more
The economic value of a product or service - how much it is 'worth' - is not simply
cost-effective than correcting
equal to its price. It is a measure of how much benefit the product or service
them later.
provides to the customer relative to its cost. Poor value could be due to lack of
Value - how well a product
innovation, high costs incurred during certain parts of the project or inefficiencies
meets the needs of customers
in production processes, among other factors. In an engineering organisation, value
in relation to its price.
management is used to increase the value of outcomes, which can be done by
reducing waste and unnecessary costs while improving the efficiencies of activities Value-added activities -
along the process. activities that directly affect
a product and add value to
Value management begins with conducting a value analysis exercise for a particular
the outcome; these might
product or service. To do this, you first identify the value-added and non-value-
include activities related
added activities associated with the product or service and then analyse all the
to the product's design,
processes involved in producing the outcome. Consider where wastes, redundancies
manufacturing and innovative
or inefficiencies occur in the current process, and generate alternatives that could offer
features.
better value. The results of this functional analysis are used to identify improvements
Non-value-added
that could be made to the process to enhance efficiency and produce a lower-cost
activities - activities that are
outcome.
essential to a product and
its production but do not
directly add value to it; for
example, product inspection,
review and reporting.

18 ~
 Carrying out a value analysis exercise
The process of carrying out a value analysis exercise on a product or service consists of
five stages.
1 Information phase
~ Identify key issues.
~ Identify value-added and non-value-added activities and review their costs.
2 Analysis phase
~ Perform a functional analysis.
~ Identify which existing processing methods are used.
~ Identify key features and parts which are unnecessary.
3 Creative phase
~ Generate alternatives for better-value solutions.
~ Apply problem-solving tools and methods.
~ Develop a least-cost solution.
4 Evaluation phase
~ Assess and prioritise ideas.
5 Development and reporting phase
~ Refine ideas and develop action plans.

The following worked example illustrates these steps of carrying out a value analysis
exercise.

LightUp UK is an engineering company that manufactures torches. The company is reviewing the types of torches it
manufactures that aren't selling well, including their dynamo torch.
Tom Wright works in the company and has been asked to carry out a value analysis exercise on the dynamo torch.
1 Information phase
Tom starts by writing down the cost and price of each unit of the product (Table 4.5).

~ Table 4.5 Cost and price per unit of the dynamo torch

Cost £2.29
(the amount it costs the company to
manufacture each torch)
~~ u~
(the price each torch is sold at)
Tom then gathers some information from customers about whether they think the torch is 'good value'. He finds out
that there may be an issue with the dynamo mechanism inside the torch: many customers say that it breaks easily.
Next, Tom investigates the processes used to manufacture the torch. He identifies some value-added activities and
non-value-added activities, as well as the costs associated with them (Table 4.6).

~ Table 4.6 Costs of value-added activities and non-value-added activities for the dynamo torch

Activities Cost per unit

Machining £0.25
Value-added
Processing £0.60
Inspection and testing £0.30
Non-value-added Transportation between different £0.20
parts of the processing plant

184 Applied Commercial and Quality Principles in Engineering

 Learning aim C UNIT4

)>
"'O
"'O
ro
o._
2 Analysis phase
n
0
Tom undertakes a functional analysis on the dynamo torch. He works with the processing team to examine current 3
manufacturing processes, and with the product development team to discuss the product itself. 3
ro
Tom identifies two key issues: '
!J.
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• There is a cogwheel inside the torch that is made of plastic and takes a lot of wear when the torch is in dynamo ilJ
~
o._
mode. This could be the cause of the customer complaints about breakage of the mechanism. ,()
c
• Among the non-value-added activities, inspection and testing are essential, especially in view of the problems ~
;:::;:
with the torch breaking. However, as regards transportation, two parts of the torch are currently manufactured in -<
--0
different locations of the plant before being brought together for assembly. ~.
~

3 Creative phase !J.

"'O
ro
Based on what he has discovered in the information and analysis phases, Tom now generates some ideas and Vl

solutions.
First, he considers the plastic used to manufacture the cogwheel - could an alternative material be used that is more
resistant to wear?
• Tom considers using a metal - could this prevent the dynamo mechanism from breaking while not adding
significantly to the cost of the final product?
• Tom also considers using a different type of plastic - one that can still be injection-moulded (as this is the
manufacturing process currently used by the company) but which would be more resistant to breakage. Is there
a plastic that could satisfy these requirements?
Tom then considers the transport issue he identified - would it be possible to rearrange the production lines at the
plant to reduce the need for transporting parts around the site?
4 Evaluation phase
After some research and discussion with various teams at the plant, Tom finds that using metal for the cogwheel
would increase the weight of the product, the metal would cost more to purchase, and the part would have to be
manufactured elsewhere as his company can only process plastics through injection moulding. Tom calculates that
this change, despite making the dynamo mechanism less likely to break, would result in a significant increase in the
cost of the torch, so it is not viable.
However, he does discover a different type of plastic that is slightly harder than the plastic used in the original design .
Despite being more brittle, this plastic is less likely to break and is also suitable for injection moulding.
After discussions with the processing team, Tom concludes that it would be possible to move the second assembly-
based production line closer to the injection moulding processing area. This would considerably reduce the need for
transporting parts around the plant and could result in a lowering of the product manufacturing cost.
5 Development and reporting phase
Tom produces costing documentation for his managers and works with the processing team to develop an action
plan to rearrange the plant layout. He will now work with the management team to help them decide whether his
changes should be implemented. The change in material increases the cost of materials by £0.05 per torch, but will
reduce breakage - and so increase customer satisfaction. The change in processing arrangements will reduce the cost
of transportation by £0.10 per torch .
If you were one ofTom's managers, would you implement the changes he has proposed?.

18'.
 Think about the non-value-added activity of inspection and testing in the worked
CD PAUSE POINT
example. Tom did not include a full review of this activity as part of his value
analysis. Should he have?

•=nn•.
.
If inspection and testing were ?dequate, would customers have complained about a
part breaking? How could the inspection and testing processes be improved?
Fu rther inspection and testi ng would result in a higher cost for t his activity.
Recalculate t he tot al manufacturing cost if this activity increased by £0.20 per
unit. What impact might this have on the value management exercise? Would the
recommendations change?

Assessment practice 4.3 c.Ps c.PG C.MJ C.M4 c.oJ

Explain and analyse the purpose of different quality (>~

management systems and value management • What are the components of this task? What am I
principles used by engineering organisations. being asked to do?
Choose an activity or process used in a particular • What information will I need to collect in order to
engineering organisation and perform a value analysis/ complete each stage of the task?
management exercise on that activity or process. Make • How confident do I feel in my own abilities to
sure that you complete all the steps of the analysis complete this task? Are there any areas I think I may
accurately. struggle with?
Evaluate the outcome of the value analysis exercise and Po
make recommendations , including the use of quality • I know what I need to produce at the end of the task
systems to implement efficiencies to the engineering and I am clear on the steps that I need to take to
activity or process. achieve my goal.
Determine whether further value can be created from • I can identify the elements of the task that I find
the engineering product or service that the activity or most challenging and devise ways to overcome these
process relates to. difficulties.
fl.evu.v
• I can explain what the task involved and how I
approached its completion .
• I recognise which areas I feel less confident in and can
seek ways to improve my skills in those areas.

86 Applied Commercial and Quality Principles in Engineering