Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations. It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates economic and industrial development of a country.
"Stock exchanges are privately organized markets which are used to facilitate trading in securities."
The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as,
"An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities."
Features of Stock Exchange
Characteristics or features of stock exchange are:-
Market for securities : Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.
Deals in second hand securities : It deals with shares, debentures bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market.
Regulates trade in securities : Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade
Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.
Transactions effected only through members : All the transactions in securities at the stock exchange are effected only through its authorised brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorised brokers only.
Association of persons : A stock exchange is an association of persons or body of individuals which may be registered or unregistered.
Recognition from Central Government : Stock exchange is an organised market. It requires recognition from the Central Government.
Working as per rules : Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.
Specific location : Stock exchange is a particular market place where authorised brokers come together daily (i.e. on working days) on the floor of market called trading circles and conduct trading activities. The prices of different securities traded are shown on electronic boards. After the working hours market is closed. All the working of stock exchanges is conducted and controlled through computers and electronic system.
Financial Barometers : Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange.
Stock exchange provides a ready and continuous market for purchase and sale of securities. It provides ready outlet for buying and selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed securities.
2. Facilitates evaluation of securities
Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i.e price list).
3. Encourages capital formation
Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing and risk taking among the investing class and converts their savings into profitable investment. It acts as an instrument of capital formation. In addition, it also acts as a channel for right (safe and profitable) investment.
4. Provides safety and security in dealings
Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted as per well defined rules and regulations. The managing body of the exchange keeps control on the members. Fraudulent practices are also checked effectively. Due to various rules and regulations, stock exchange functions as the custodian of funds of genuine investors.
5. Regulates company management
Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e supervision) of stock exchange authorities.
6. Facilitates public borrowing
Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly.
7. Provides clearing house facility
Stock exchange provides a clearing house facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility.
8. Facilitates healthy speculation
Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector.
9. Serves as Economic Barometer
Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions.
10. Facilitates Bank Lending
Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities.
Securities and Exchange Board of India (SEBI) is an apex body for overall development and regulation of the securities market. It was set up on April 12, 1988. To start with, SEBI was set up as a non-statutory body. Later on it became a statutory body under the Securities Exchange Board of India Act, 1992. The Act entrusted SEBI with comprehensive powers over practically all the aspects of capital market operations.
The role or functions of SEBI are discussed below.
To protect the interests of investors through proper education and guidance as regards their investment in securities. For this, SEBI has made rules and regulation to be followed by the financial intermediaries such as brokers, etc. SEBI looks after the complaints received from investors for fair settlement. It also issues booklets for the guidance and protection of small investors.
To regulate and control the business on stock exchanges and other security markets. For this, SEBI keeps supervision on brokers. Registration of brokers and sub-brokers is made compulsory and they are expected to follow certain rules and regulations. Effective control is also maintained by SEBI on the working of stock exchanges.
To make registration and to regulate the functioning of intermediaries such as stock brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries operating on the securities market. In addition, to provide suitable training to intermediaries. This function is useful for healthy atmosphere on the stock exchange and for the protection of small investors.
To register and regulate the working of mutual funds including UTI (Unit Trust of India). SEBI has made rules and regulations to be followed by mutual funds. The purpose is to maintain effective supervision on their operations & avoid their unfair and anti-investor activities.
To promote self-regulatory organization of intermediaries. SEBI is given wide statutory powers. However, self-regulation is better than external regulation. Here, the function of SEBI is to encourage intermediaries to form their professional associations and control undesirable activities of their members. SEBI can also use its powers when required for protection of small investors.
To regulate mergers, takeovers and acquisitions of companies in order to protect the interest of investors. For this, SEBI has issued suitable guidelines so that such mergers and takeovers will not be at the cost of small investors.
To prohibit fraudulent and unfair practices of intermediaries operating on securities markets. SEBI is not for interfering in the normal working of these intermediaries. Its function is to regulate and control their objectional practices which may harm the investors and healthy growth of capital market.
To issue guidelines to companies regarding capital issues. Separate guidelines are prepared for first public issue of new companies, for public issue by existing listed companies and for first public issue by existing private companies. SEBI is expected to conduct research and publish information useful to all market players (i.e. all buyers and sellers).
To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-regulating organizations and to take suitable remedial measures wherever necessary. This function is undertaken for orderly working of stock exchanges & intermediaries.
To restrict insider trading activity through suitable measures. This function is useful for avoiding undesirable activities of brokers and securities scams.
Provides liquidity to investement : Stock exchange provides liquidity (i.e easy convertibility to cash) to investment in securities. An investor can sell his securities at any time because of the ready market provided by the stock exchange. Stock exchange provides easy marketability to corporate securities.
Provides collateral value to securities : Stock exchange provides better value to securities as collateral for a loan. This facilitates borrowing from a bank against securities on easy terms.
Offers opportunity to participate in the industrial growth : Stock exchange provides capital for industrial growth. It enables an investor to participate in the industrial development of the country.
Estimates the worth of securities : Stock exchange provides the facility of knowing the worth (i.e true market value) of investment due to quotations (i.e price list) and reports published regularly by the exchange. This type of information guides investors as regards their future investments. They can purchase or sell securities as per the price trends (i.e latest price value) in the market.
Offers safety in corporate investment : An investor can invest his surplus money (i.e extra money) in the listed securities with reasonable safety. The risk in such investment is reduced considerably due to the supervision of stock exchange authorities on listed companies. Moreover, securities are listed only when the exchange authorities are satisfied as regards legality and solvency of company concerned. Such scrutiny (detailed checking) avoids listing, of securities of unsound companies (i.e companies with bad financial status).
Services given by Stock Exchange to Companies ↓
Widens market for securities : Stock exchange widens the market for the listed securities and enables the companies to collect capital for promotion, expansion and modernization purpose. It indirectly provides financial support to companies / corporations.
Creates goodwill and reputation : Stock exchange enhances the goodwill and the reputation of the companies whose securities are listed. Listing acts as a charater certificate given to a company. It gives prestigious position to company.
Facilitates fair pricing of listed securities : The market price of listed securities tends to be slightly higher in relation to earnings and property values.
Provides better response from investors : Listed securities get better response from the investor due to safety and security. Listing of securities is a unique service which stock exchanges offer to companies. It is a moral support given to stable companies.
Facilitates quick selling of securities : Stock exchange enables companies to sell their securities easily and quickly. This is natural as investors always prefer to invest money in listed securities.
Service given by Stock Exchange to Economy ↓
Brings economic development : Stock exchanges brings rapid economic development through mobilization of funds for productive purposes. This facilitates the process of economic growth.
The important powers of SEBI (Securities and Exchange Board of India) are:-
Figure 1. Image or picture of SEBI's official logo.
1. Powers relating to stock exchanges & intermediaries
SEBI has wide powers regarding the stock exchanges and intermediaries dealing in securities. It can ask information from the stock exchanges and intermediaries regarding their business transactions for inspection or scrutiny and other purpose.
2. Power to impose monetary penalties
SEBI has been empowered to impose monetary penalties on capital market intermediaries and other participants for a range of violations. It can even impose suspension of their registration for a short period.
3. Power to initiate actions in functions assigned
SEBI has a power to initiate actions in regard to functions assigned. For example, it can issue guidelines to different intermediaries or can introduce specific rules for the protection of interests of investors.
4. Power to regulate insider trading
SEBI has power to regulate insider trading or can regulate the functions of merchant bankers.
5. Powers under Securities Contracts Act
For effective regulation of stock exchange, the Ministry of Finance issued a Notification on 13 September, 1994 delegating several of its powers under the Securities Contracts (Regulations) Act to SEBI. SEBI is also empowered by the Finance Ministry to nominate three members on the Governing Body of every stock exchange.
6. Power to regulate business of stock exchanges
SEBI is also empowered to regulate the business of stock exchanges, intermediaries associated with the securities market as well as mutual funds, fraudulent and unfair trade practices relating to securities and regulation of acquisition of shares and takeovers of companies.
Role of Stock Exchanges In Capital Market of India
Stock Exchanges play a crucial role in the consolidation of a national economy in general and in the development of industrial sector in particular. It is the most dynamic and organised component of capital market. Especially, in developing countries like India, the stock exchanges play a cardinal role in promoting the level of capital formation through effective mobilisation of savings and ensuring investment safety.
Lets study the role of stock exchanges in capital market of India :-
1. Effective Mobilisation of savings
Stock exchanges provide organised market for an individual as well as institutional investors. They regulate the trading transactions with proper rules and regulations in order to ensure investor's protection. This helps to consolidate the confidence of investors and small savers. Thus, stock exchanges attract small savings especially of large number of investors in the capital market.
2. Promoting Capital formation
The funds mobilised through capital market are provided to the industries engaged in the production of various goods and services useful for the society. This leads to capital formation and development of national assets. The savings mobilised are channelised into appropriate avenues of investment.
3. Wider Avenues of investment
Stock exchanges provide a wider avenue for the investment to the people and organisations with investible surplus. Companies from diverse industries like Information Technology, Steel, Chemicals, Fuels and Petroleum, Cement, Fertilizers, etc. offer various kinds of equity and debt securities to the investors. Online trading facility has brought the stock exchange at the doorsteps of investors through computer network. Diverse type of securities is made available in the stock exchanges to suit the varying objectives and notions of different classes of investor. Necessary information from stock exchanges available from different sources guides the investors in the effective management of their investment portfolios.
4. Liquidity of investment
Stock exchanges provide liquidity of investment to the investors. Investors can sell out any of their investments in securities at any time during trading days and trading hours on stock exchanges. Thus, stock exchanges provide liquidity of investment. The on-line trading and online settlement of demat securities facilitates the investors to sellout their investments and realise the proceeds within a day or two. Even investors can switch over their investment from one security to another according to the changing scenario of capital market.
5. Investment priorities
Stock exchanges facilitate the investors to decide his investment priorities by providing him the basket of different kinds of securities of different industries and companies. He can sell stock of one company and buy a stock of another company through stock exchange whenever he wants. He can manage his investment portfolio to maximise his wealth.
6. Investment safety
Stock exchanges through their by-laws, Securities and Exchange Board of India (SEBI) guidelines, transparent procedures try to provide safety to the investment in industrial securities. Government has established the National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI) for investors' safety. Exchange authorities try to curb speculative practices and minimise the risk for common investor to preserve his confidence.
7. Wide Marketability to Securities
Online price quoting system and online buying and selling facility have changed the nature and working of stock exchanges. Formerly, the dealings on stock exchanges were restricted to its head quarters. The investors across the country were absolutely in dark about the price fluctuations on stock exchanges due to the lack of information. But today due to Internet, on line quoting facility is available at the computers of investors. As a result, they can keep track of price fluctuations taking place on stock exchange every second during the working hours. Certain T.V. Channels like CNBC are fully devoted to stock market information and corporate news. Even other channels display the on line quoting of stocks. Thus, modern stock exchanges backed up by internet and information technology provide wide marketability to securities of the industries. Demat facility has revolutionised the procedure of transfer of securities and facilitated marketing.
8. Financial resources for public and private sectors
Stock Exchanges make available the financial resources available to the industries in public and private sector through various kinds of securities. Due to the assurance of liquidity, marketing support, investment safety assured through stock exchanges, the public issues of securities by these industries receive strong public response (resulting in oversubscription of issue).
9. Funds for Development Purpose
Stock exchanges enable the government to mobilise the funds for public utilities and public undertakings which take up the developmental activities like power projects, shipping, railways, telecommunication, dams & roads constructions, etc. Stock exchanges provide liquidity, marketability, price continuity and constant evaluation of government securities.
10. Indicator of Industrial Development
Stock exchanges are the symbolic indicators of industrial development of a nation. Productivity, efficiency, economic-status, prospects of each industry and every unit in an industry is reflected through the price fluctuation of industrial securities on stock exchanges. Stock exchange sensex and price fluctuations of securities of various companies tell the entire story of changes in industrial sector.
11. Barometer of National Economy
Stock exchange is taken as a Barometer of the economy of a country. Each economy is economically symbolized (indicators) by its most significant stock exchange. New York Stock Exchange, London Stock Exchange, Tokyo Stock Exchange and Bombay Stock Exchange are considered as barometers of U.S.A, United Kingdom, Japan and India respectively. At both national and international level these stock exchanges represent the progress and conditions of their economies.
Thus, stock exchange serves the nation in several ways through its diversified economic services which include imparting liquidity to investments, providing marketability, enabling evaluation and ensuring price continuity of securities.
Every manufacturing organisation is concerned with the quality of its product. While it is important that quantity requirements be satisfied and production schedules met, it is equally important that the finished product meet established specifications. Because, customer's satisfaction is derived from quality products and services. Stiff competition at national and international level and consumer's awareness require production of quality goods and services for survival and growth of the company. Quality and productivity are more likely to bring prosperity into the country and improve quality of work life. However, the management looks to achieve customer satisfaction by running its business at the desired economic level. Both these can be attained by properly integrating quality development, quality maintenance and quality improvement of die product. The integration of these three aspects of a product can be achieved through a sound quality control system. 2. The Meaning of Quality Quality is a relative term and it is generally used with reference to die end use of the product. For example, a gear used in sugarcane juice extracting machine may not possess good surface finish, tolerance and accuracy as compared with the gear used in the head STOCK of a lathe, still it may be considered of good quality if it works satisfactorily in die juice extracting machine. The quality is thus defined as die fitness for use/purpose at die most economical level. The quality depends on die perception of a person in a given situation. The situation can be user-oriented, cost-oriented or supplier-oriented. Since, die item is manufactured for me use of die customer, die requirements of die customer dictates die quality of die product. Quality is to be planned, achieved, controlled and improved continuously. The word "Quality" has variety of meanings :-
Fitness for purpose : The component is said to possess good quality, if it works well in the equipment for which it is meant. Quality is tiius defined as fitness for purpose.
Conformance to requirements : Quality is die ability of the material/component to perform satisfactorily in an application for which it is intended by die user. Quality of a product, thus, means conformance to requirements. Customer needs have to be assessed and translated into specifications depending upon die characteristics required for specific application. Just as every human has his own characteristics every application has its own characteristics.
Grade : Quality is a distinguishing feature or grade of the product in appearance, performance, life, reliability, taste, odor, maintainability etc. This is generally called as quality characteristics.
Degree of preference : Quality is the degree to which a specified product is preferred over competing products of equivalent grade, based on comparative test by customers, normally called as customer's preference.
Degree of excellence : Quality is a measure of degree of general excellence of the product.
Measure of fulfillment of promises : The quality of a product is a measure of fulfillment of the promises made to the customers.
Suitability : For specific application.
Reliability : It should give efficient and consistent performance.
Durability : It should have desired life.
Safety : Safe and foolproof workability.
Affordability : It should be economical.
Maintainability : It should be easy to maintain.
Aesthetic look : It should look attractive.
Satisfaction to customers : It should satisfy the customers' requirements.
Economical : It should have reasonable price.
Versatility : It should serve number of purposes.
A product can be said to possess good quality if all the above requirements are properly balanced while designing and manufacturing it.
Quality Control
Control can be defined as "a process by means of which we observe the actual performance and compare it with some standard". If there is a deviation between the observed performance and the standard performance then it is necessary to take corrective action. The term "Quality Control" has variety of meanings :
Quality control is the process through which we measure the actual quality performance, compare it with the standards and take corrective action if there is a deviation.
It is a systematic control of various factors that affect the quality of the product. It depends on : Material, Tools, Machines, type of labour, working conditions, measuring instruments, etc.
Quality control can be defined as the entire collection of activities which ensures that the operation will produce the optimum quality products at minimum cost.
It can also be defined as the tools, devices or skills through which quality activities are carried out.
It is the name of the department which devotes itself full time to quality functions.
The procedure for meeting the quality goals is termed as quality control.
It is a system, plan or method of approach to the solution of quality problems.
As per A.Y. Feigorbaum
Total Quality control is "An effective system for integrating the quality development, quality maintenance and quality improvement efforts of the various groups in anorganization, so as to enable production and services at the most economical levels which allow full customer satisfaction."
4. Steps In Quality Control Programme
Formulate quality policy.
Work out details of product requirements, set the standards (specifications) on the basis of customers preference, cost and profit.
Select inspection plan and set up procedure for checking.
Detect deviations from set standards or specifications.
Take corrective action through proper authority and make necessary changes to achieve standards.
Decide on salvage method i.e. to decide how the defective parts are disposed of, entire scrap or rework.
Co-ordination of quality problems.
Developing quality consciousness in the organization. Quality control is not a function of any single department or a person. It is the primary responsibility of any supervisor to turn out work of acceptable quality.
Quality control is one aspect of production planning and control. It is basically concerned with the quality production through regular inspection technique. Quality is a combination of characteristics pertaining to the manufacture of the product and control is the correction in the quality of the product, when the deviations in the product are more than expected. A good quality item is one which conforms to some standard specifications. These specifications are determined by the expectations of consumers and also by the availability and costs of processes and materials. To most people, quality is variable. It is subjectively judged because it deals with the relative goodness of a product. When a buyer boasts that his house or car is the best, it implies high quality. Quality is thus subjective and vaguely measurable.
In the words of Broom,
"subjective quality refers to degree of goodness of a product and objectively it consists of a set of measurable characteristics for which standard dimensions together with small, allowable departures, up and down, may be prescribed." All manufacturing processes face a basic difficulty. It is physically impossible to make all items or units exactly alike. There is always variability in the product. With precision manufacturing, the variability may be difficult to see but nevertheless it is there. When variability becomes obvious it results in scraps, re-work and losses, thus adding to the costs.
5. Objectives of Quality Control
Establishment of quality standard : The main objective of quality control is the economical production of a high quality product at the quality level the customer wants. It is basically for eliminating variations in production and in order to have uniformity in production.
Locating quality deviations : It is necessary to analyze the trend and extent of quality deviations in a manufacturing process. Such deviations should be explained by statistical techniques when they cannot be attributed to the element of chance.
Evaluating methods and processes of production : By evaluating methods and processes of production, quality control helps to take corrective measures to maintain the quality of the product during the process of manufacture.
Quick sale of quality goods : Quality control accelerates the sale of the goods by supplying only the quality goods in the market. Consumers also support quality goods.
Production of standard quality goods : Quality control aims at manufacturing standard quality products and avoids the production of inferior quality goods. Such standard quality goods give satisfaction to consumers and also create goodwill in the market.
Improvement in quality : One objective of quality control is to find out high quality standards and to make constant efforts to reach those standards. Quality control aims at creating quality consciousness at all levels in the Organisation.
6. Steps In Quality Control Process
Devising control over raw materials : The quality of the finished product is determined mostly by the quality of raw materials. It calls for close connection between the raw material purchase department of the company and the vendors. As and when necessary, a resident inspector may be deputed by the Quality Control Department in the vendor's place to see that only goods in accordance with specifications are supplied. It is advisable to reinspect the raw materials before putting them to actual use.
Fixing standards and specifications : In order to make any scheme of quality control successful, it is essential to predetermine standards and specifications. The practice should be to provide quality instructions in the form of drawings, showing shapes, dimensions and specifications describing color, strength, thickness, chemical composition, etc.
Exercising control over production operations : In order to execute efficient practices, the technical expert of the Quality Control Department must investigate, from time to time, the operating methods. Such investigation helps to eliminate all possible variables.
Locating inspection points : When the points at which defects occur are wrongly located or located with delay, it hinders quality control. Therefore there should first inspection of the raw materials at the vendor's places, then at the company's plant, then at the various points during the process of production and finally at the time of packing. The defects are likely to occur at these points. The finished goods can be cleared after obtaining 'O.K.' or 'All Correct' from the Quality Control Department.
Maintaining quality of equipments : The final quality of the products is conditioned by the quality of the equipments and other devices used. The Quality Control Department is responsible for testing the equipment used in inspection such as gauges, which measure dimensions, electronic devices, magnetic devices and industrial radio graphical instruments.
Maintaining records : The Quality Control Department is responsible for maintaining all records relating to quality inspection and control and the number rejected.
7. Advantages of Quality Control
Quality control is important as it offers certain advantages to the manufacturer. Such advantages are: stability to sale, goodwill in the market, ability to face market competition effectively, reduction in production costs, and elimination of wastage due to rejections and uniformity in production. These benefits are important for sales promotion and profit maximization. Manufacturers now give special attention to quality control techniques for long term benefits. Attention is given to research and development activities for this purpose. Even foreign collaborations are made for raising the quality standards of products manufactured. In brief, quality control is a matter of great importance in production management. The benefits of quality control to consumes are: Availability of standard quality and reliable goods, proper reward for the price paid, safety to life and health, better standard of living and protection against substitution or adulteration and quick shopping of goods. Consumers always purchase standard quality goods even by paying a little higher price as they get full satisfaction over a long period from quality goods. Consumers, particularly educated consumers, support quality products as they know the benefits available from such standard quality products. This suggests the importance of quality control from the point of view of consumers. The importance of quality control is, now, accepted even at the global level. Consumers now insist for superior quality goods. Expenditure on quality control is an investment for more sale and satisfaction to consumers. Quality control is a must for export promotion. Companies can capture foreign markets only by manufacturing superior quality goods at reasonable cost of production. Japan is a leading world exporter. This is mainly due to superior quality of goods manufactured in Japan. Governments in many countries support quality control measures. They provide all possible help for maintaining superior quality of goods. Restrictions are also imposed on the manufacturing of cheap goods. Even associations of manufacturers and traders support quality control measures. This suggests the importance of quality control in business. In addition, the following advantages of quality control also suggest its importance:
Improvement in the quality of production and reduction in the production cost.
Uniformity in the production and supply of standard quality goods to consumers.
Offering full return of the price paid by consumers and giving convenience and satisfaction to consumers. This also develops cordial relations with consumers.
Reduction in spoiled production and rejection from consumers and dealers.
Promotion of exports due to superior and standard quality production.
Sales promotion in the internal market and facing market completion with confidence.
Reduction in the inspection cost.
Improvement in the productivity and motivation of employees.
Making the products popular in the market and thereby to develop market goodwill.
8. Cost of Quality
The costs of carrying out company quality program are known as "Cost of Quality". It includes :-
Market research cost of discovering quality needs of customer.
Product research and development cost of creating a product concept, which will meet quality needs.
The design cost of transmitting product concept into information which represents planning for manufacturer.
Cost of inspection and test.
Cost of defect prevention.
Cost of quality assurance.
Cost of scrap and quality failure.
The quality cost can be defined in four categories :-
Cost of prevention.
Cost of appraisal.
Cost of internal failures.
Cost of external failures.
8.1 (a) Cost of Prevention
It consists of costs associated with person engaged in designing, implementing, maintaining the quality system. Cost of prevention includes:-
Cost of Quality planning : It includes the cost associated with creating a overall quality plan, the cost of market research and product development, inspection plan, reliability plan etc.
Cost of Documenting : It includes cost of preparation of manuals and procedures to communicate these costs.
Process control cost : Used with quality plans procedure to achieve fitness for use.
Cost of training : Cost associated in preparing any programs for attaining, improving, maintaining quality programs.
Cost associated with preventing recurring defects : Engineering, technical, supervisory, cost of preventing recurring defects.
Cost of investigation, analysis of correction of causes of defects by quality central department.
Cost of investigation, analysis of correction of causes of defects by engineering control department.
Cost of consciousness programs.
8.2 (b) Cost of Appraisal
Costs associated with measuring, evaluating or auditing the products, component and purchase materials to assure conformance with quality standard and performance requirement are called as "Cost of appraisal". In other words, the cost of evaluating, quality and of identifying and segregating non-conforming part and assemblies. This consist costs of :-
Receiving or incoming tests and inspection.
Laboratory and acceptance test.
Inspection and test.
Checking labor.
Set up for inspection and test.
Inspection of test material.
Quality Audits.
Review of test and inspection data.
Evaluation of field stocks, spare parts.
8.3 (c) Cost of internal failures
The costs associated with defective products, components, materials that fail to meet quality requirements and results in manufacturing losses are called as "Cost of internal failures". Costs associated with scrap i.e. Cost of material, labor. Cost of rework, repair i.e. Cost of making defective parts and assembly rules. Cost of re-inspection and re-test after defective parts are repaired. Costs associated with material review activity. Cost of processes yield lower that might be attainable by improved controls. Trouble shooting.
8.4 (d) Cost of External Failures
Cost because of defective products being shifted to the customer.
Cost of processing complaints from the customer.
Cost of service to customer to receive defective items.
Cost of inspecting, preparing defective items.
Cost of replacing defective products.
9. The Concept of Total Quality Management (TQM)
Total quality management is a comprehensive concept and not related only to the quality of goods and services. It suggests that high quality standards (e.g., ISO 9000) should be maintained in other aspects of management such as production cost, marketing, sales promotion, etc. For such quality/efficiency in all aspects of business management, consciousness/awareness needs to be developed at all levels and among employees working in all departments of the enterprise. Employees must be motivated for maintaining high quality standards. In addition, their cooperation/involvement is necessary for maintaining efficiency in all aspects of business management. In brief, quality management is not the responsibility of management alone. Participation/involvement of both parties (management and employees) is essential for achievement of quality and other benefits.
The concept of TQM is closely related to the concept of quality circles which is very popular and also successful in Japan. Quality circles are work groups that meet frequently to study the ways and means to improve quality, reduce cost, eliminate wastages and solve other production problems. Here, employees are associated with quality, cost, efficiency, productivity, consumer service and satisfaction. This creates background for the concept of TQM. TQM aims at improving the total performance at the work place. It covers all functions, activities and people who are responsible for competitiveness of an Organisation. The employees are expected to participate not only in maintaining quality but also in improving their total performance so that the wastages will be avoided, production cost will go down and the enterprise can earn more profit. TQM means strategic commitment to improving quality by combining statistical quality control methods with a cultural commitment to seeking incremental improvements that increase productivity and lower costs. Total quality management reflects the culture of an Organisation. It indicates consumer oriented, quality-oriented management philosophy. It is a commitment to quality by all managers and workers. TQM is a philosophy for achieving customer satisfaction which involves all - managers, employees and users. It is management by commitment and not management by control. This technique is to be introduced through quality circles. The route to TQM is through application of simple tools followed by Organisation change and culture change. Total quality management is based on the following four powerful elements:
Focus on customer expectations,
Employees' involvement,
Mastery of processes,
Team work.
9.1 Definition of TQM
According to John Gilbert,
Total Quality Management is "A process designed to focus on customer expectations, preventing problems, building commitment to quality in the workforce and promoting open decision-making."
9.2 Origin of TQM
Stress on quality management : In TQM, collective efforts are being made for improving quality of goods and services so as to give more satisfaction to consumers. Quality improvement is also useful for facing market competition and for creating market reputation. In brief, TQM involves steps for improving quality and productivity. There is total commitment to quality on the part of entire Organisation. TQM covers all functions, activities and people who are instrumental for raising the competitiveness.
Continuous process : TQM is a continuous process/activity as there is ample scope for using new methods and techniques for improvement in the quality standards and performance. "Steal ideas constantly and shamelessly" is the rule in TQM. Implementation of innovative ideas or taking benefit of new opportunities is an integral aspect of TQM. In fact, TQM is a never ending quest for achieving new levels of performance.
Stress on quality assurance system : The aim of TQM is to give maximum satisfaction to consumers by providing goods which are best in quality (zero defects). The present ISO9000 series is a set of well recognised standards for quality assurance system. The Japanese have been using quality assurance concepts and principles as a part of their TQM implementation programme even when specific name or number was not used. Thus, quality assurance system is an integral part of TQM.
Linkage of quality and productivity : The TQM technique is useful for improving quality as well as productivity. In a TQM programme, the focus is on quality improvement. However, such programme also raises productivity. The methods used in TQM programmes. E.g. stress on quality improvement, zero defects production, making all employees responsible for quality maintenance and improvement) are likely to bring quality improvement as well as yield improvement. Similarly, the TQM programme creates a feeling of participation among the employees. There is also positive improvement in the morale of employees.
TQM is a gradual process : Introduction of TQM is a gradual process. It is self improvement and group improvement programme through team building for raising quality and productivity. TQM is about the gradual change of people's behavior towards the tasks they perform and their attitude towards other people. A mental revolution among the employees is required for the execution of TQM. However, such change in the mental make-up of managers and employees requires long period. This suggests that TQM is a gradual process. There are, in fact, four broad phases in the introduction of TQM.
These are:
Awareness Phase,
Planning Phase,
Implementation Phase, and
Institutional Phase.
Focus on customers : Customers are the source of all the revenue that flows through the corporation. Their satisfaction keeps the money flowing especially in an open market where competitors are wooing them too. The focus of TQM is on customer satisfaction on quality, cost and delivery through improved orgarnisational quality of processes. According to British Quality Association (BQA), TQM is a corporate business management philosophy which recognised that customers' needs and business goals are inseparable.
Employee involvement : Employees involvement is the most important recognised feature of TQM. In fact, quality's a team work of all employees. Their participation and co-operation are required to be taken at all levels. TQM is possible only through participative management. Under TQM, employees will be motivated to participate actively in the process of quality improvement through incentives and recognition of contribution for achieving quality standards.
Formation of quality improvement teams : A cornerstone of TQM is the team building that leads to commitment to improvement. Such teams include quality steering teams, corrective actions teams and so on. Such teams motivate employees and facilitate quality improvement.
Management's involvement : TQM is a systems approach in managing business and improving overall performance. It needs total commitment from the top management to provide viable leadership to the whole approach. Top level management has to take number of initiatives in order to start the process of TQM. In fact, TQM cannot have a good take off without total commitment of CEO and other senior executives.
9.3 Advantages of TQM
Customer satisfaction : TQM is basically for the satisfaction and welfare of customers. Needs and expectations of customers are given special attention in TQM. The attention is on customers and zero defect goods will be supplied to them. As a result, there will be reduction in the complaints of consumers/customers. TQM is not for profit-making at the cost of customers but it is for giving satisfaction and welfare to them.
Quality improvement : One major advantage of a TQM is quality improvement at all levels and in all activities. There is a systematic attempt to eliminate deficiencies such as production scrap or rework, customer complaints and material shortages. The cornerstone of any successful TQM system is the organised elimination of waste. The rejection rate in the production process will be low and this minimizes waste of materials and human efforts. Due to quality improvement, the sales and profits will also increase. The company will also develop goodwill and market recognition as supplier of quality goods.
Absence of additional investment : One advantage of TQM is that TQM does not require any additional investment. It improves operational quality as well as reduces cost. This technique is quite convenient to developing countries which are facing financial difficulties due to various reasons. TQM gives many benefits but without additional financial burden.
Raises competitiveness : TQM technique is useful for raising quality and reducing costs. This naturally raises competitiveness in the domestic as well as global markets. TQM technique is useful for exports by raising global competitiveness.
Facilitates expansion and diversification : TQM leads to large turnover and high profits along with market reputation and consumer support. The company can use this profit for the execution of its expansion and diversification programmes. In brief, TQM facilitates expansion and diversification of business.
Provides trained and motivated employees : TQM philosophy has its positive impact on employees. They are given proper training, monetary and non-monetary incentives, attractive working conditions and proper treatment. Workers take pride in manufacturing defect-free products.
Miscellaneous Advantages : TQM technique offers other advantages as noted below:-
Long-term consumer support,
Prestigious position in international marketing,
High standard of living to employees, and
Cost control.
10. Quality Circle (QC)
Dewar, President of the International Association of QCs, defines QCs as "a way of capturing the creative and innovative power that lies within the work force". A quality circle is a small group of volunteers (usually 3 to 12 employees) doing similar work. They meet regularly under the leadership of their immediate supervisor, or some one chosen among the circle to identify problems, set priorities, discover causes and propose solutions. These may concern quality, productivity, safety, job structure, process flow, control mechanism, aesthetics of the work area etc. According to Maurice Alston,
"Quality Circles are small groups of people doing similar work who, together with their supervisors volunteer to meet for an hour a week to study and solve work related problems which affect them. Circle leaders and members are trained in simple problem solving techniques which identify causes and develop solutions. At an appropriate time, presentations are made by the quality circles to the management who decide whether to accept, modify or decline the proposals". Quality Circle is a participative management system in which workers make suggestions and improvements for the betterment of organisation.
10.1 Concept of Quality Circle
The Quality Circle concept has three major attributes; these are :
QC is a form of participative management.
QC is a human resource development technique.
QC is a problem solving technique.
10.2 Objectives of Quality Circles
Objectives which contribute to the improvement and development of the enterprise and indirectly the interest of the employees are :
To improve the quality and productivity and thus contribute to the improvements and development of the enterprise.
To reduce the cost of products or services by waste reduction, safety, effective utilisation of resources, avoiding unnecessary errors and defects.
To identify and solve work related problems that interfere with production.
To tap the creative intelligence of the persons working in the organisation and to make full use of its human resources.
To permit employees to develop and use greater amount of knowledge and skill and motivate them to apply to a wide range of challenging tasks.
To improve communication within the organisation.
To increase employees' loyalty and commitment to the organisation and its goals.
To respect humanity and build a happy bright work place environment which is meaningful to work in.
To enrich human capability, confidence, moral, attitude and relationship.
To satisfy the human needs of recognition, achievement and self-development.
10.3 Advantages of Quality Circles
The organization can accomplish one or more of the following advantages by establishing quality circles:
Promote high level of productivity and quality-mindedness.
Self and mutual development of employees.
Creating team spirit and unity of action.
Increased motivation, job satisfaction and pride in their work.
Reduced absenteeism and labour turnover.
Developing sense of belongingness towards a particular organization.
Waste Reduction.
Cost reduction.
Improved communication.
Safety improvement.
Increased utilization of human resource potential.
Enhancement in consciousness and moral of employees through recognition of their activities.
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