## **Learning Outcomes**

After reading this article, you will be able to explain the principles and application of continuous improvement techniques such as Total Quality Management (TQM), kaizen, and benchmarking. You will be able to classify and interpret different quality costs, describe how these tools relate to organisational performance management, evaluate their advantages and limitations, and confidently apply them to ACCA APM exam scenarios.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand how continuous improvement methods and quality cost management underpin effective performance management. When revising this area, focus on:

- The principles, features, and benefits of Total Quality Management (TQM) and kaizen as continuous improvement approaches
- The main types of quality costs, including prevention, appraisal, internal failure, and external failure
- The impact of quality cost information on performance analysis and decision-making
- The purpose, types, process, and evaluation of benchmarking (internal, competitor, and process/activity)
- The application of continuous improvement and benchmarking techniques to drive improvements at strategic and operational levels

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following best describes kaizen in a performance management system?
   a) A system of annual large-scale process changes
   b) Regular minor improvements involving all staff
   c) Final inspection after production is complete
   d) Setting fixed quality targets with no review

2. In quality cost analysis, which of these is an internal failure cost?
   a) Quality training for staff
   b) Customer refunds
   c) Rework of defective units before shipment
   d) Product inspection and testing

3. What is a primary purpose of benchmarking in performance management?

4. Explain one significant difference between kaizen costing and traditional standard costing.

## **Introduction**

Continuous improvement is an essential element of modern performance management. Organisations must seek ways to improve quality, lower costs, and maintain competitiveness. Techniques such as Total Quality Management (TQM), kaizen, and benchmarking provide systematic methods for sustained improvement, supporting higher performance and reduced waste. Understanding these approaches is critical for APM exam success.

> **Key Term: Total Quality Management (TQM)**
> A company-wide management approach where achieving quality is the responsibility of everyone, with the aim of getting things right first time and driving ongoing improvement.
>
> **Key Term: Kaizen**
> A philosophy of continuous, incremental improvement through small changes involving all employees.

## TQM AND KAIZEN: CONTINUOUS IMPROVEMENT

### Total Quality Management (TQM)

TQM ensures that quality is not relegated to a single function but is embedded throughout all activities and departments. Instead of detecting errors at the end, TQM pushes for prevention—building quality into each step. This typically includes:

- Involving everyone, from top management to shop floor
- Encouraging a prevention mindset
- Ongoing measurement, monitoring, and reward structures aligned to quality

### Kaizen and Kaizen Costing

Kaizen means "change for better" and refers to frequent, small-scale improvements driven by employees at all levels. The emphasis is on making regular, minor adjustments rather than large, infrequent changes. Kaizen costing applies these principles to cost management, meaning cost reduction targets are revised downward regularly as new improvements are made.

> **Key Term: Kaizen Costing**
> The system of frequent, incremental cost reductions achieved by continual process improvement throughout the product's life.

### TQM, Kaizen, and the Performance Management System

Both TQM and kaizen require a supportive culture. All employees are expected to suggest and trial improvements. Cost reductions are built into objectives, and progress is measured and rewarded. A successful system includes training, open communication channels, and visible support from management.

### **Worked Example 1.1**

A food processor notices recurring minor inefficiencies. Staff suggest reorganising the work area, reducing average movement between stations by 10 seconds per unit. Over a year, this saves 90 hours of paid labour.

> **Answer:**
> This small daily saving, when multiplied over time, yields significant efficiency gains. This illustrates kaizen—empowering staff to suggest and enact ongoing, incremental process improvements.

## QUALITY COSTS

Understanding and monitoring quality-related costs is central to identifying areas for process improvement and cost reduction.

### Main Categories of Quality Costs

Quality costs are grouped as follows:

- **Prevention costs**: Costs to stop defects before they happen, such as staff training or quality planning.
- **Appraisal costs**: Costs to detect defects (e.g., inspection, testing).
- **Internal failure costs**: Costs incurred when defects are detected before goods or services reach the customer, such as scrap, rework, and downtime.
- **External failure costs**: Costs arising from defects detected after delivery, including warranty claims, returns, or reputational loss.

> **Key Term: Prevention Cost**
> The cost incurred to avoid errors or defects occurring, such as staff training or improved process design.
>
> **Key Term: Appraisal Cost**
> The cost of evaluating processes or outputs to identify defects; includes inspection and testing.
>
> **Key Term: Internal Failure Cost**
> The cost linked to errors detected before the product or service reaches the customer, such as rework or scrap.
>
> **Key Term: External Failure Cost**
> The cost resulting when faulty goods reach customers, including repairs under warranty or compensation for poor quality.

### Managing Quality Costs

Effective systems invest more in prevention and appraisal to achieve larger reductions in failure costs. Measuring these costs highlights weaknesses and helps set improvement priorities. Over time, prevention efforts should cause a decline in failure-related costs.

### **Worked Example 1.2**

A manufacturer spends \$30,000 on extra operator training (prevention), reducing annual warranty costs (external failure) by \$80,000. The training also lowers scrap (internal failure) by \$15,000.

> **Answer:**
> Investing in prevention has produced an overall quality cost saving of \$65,000. This demonstrates the importance of tracking all categories of quality costs to inform process and resource allocation decisions.

### **Exam Warning**

In exam scenarios, errors often arise from confusing appraisal with prevention, or misclassifying costs (e.g., rework is not an appraisal cost). Always match the cost to its stage—before, during, or after production/shipment.

## BENCHMARKING

Benchmarking is a structured process comparing an organisation’s results, practices, or processes with those of high-performing organisations (inside or outside its sector).

> **Key Term: Benchmarking**
> A systematic comparison of an organisation’s processes and performance with best-in-class, to identify improvement opportunities.
>
> **Key Term: Best Practice**
> The most effective and efficient method of performing an activity or process, identified through internal or external comparison.

### Types of Benchmarking

- **Internal benchmarking**: Comparing units, branches, or teams within the same organisation.
- **Competitor benchmarking**: Direct comparison with similar competitors.
- **Process/activity benchmarking**: Looking at organisations (often outside your own industry) excelling in a specific process.

### The Benchmarking Process

A typical benchmarking exercise follows these steps:

1. Identify processes or metrics to benchmark
2. Choose suitable benchmarking partners
3. Gather and compare data
4. Analyse gaps and set new standards or targets
5. Plan how to bridge the gaps
6. Implement improvements and repeat as necessary

### Evaluating Benchmarking

#### Benefits

- Identifies best-in-class standards
- Reveals performance gaps
- Facilitates realistic, challenging targets
- Encourages learning from others

#### Limitations

- Contextual differences may invalidate direct comparisons
- High cost and time requirements
- May lead to over-focus on what is measured, neglecting important but less quantifiable areas
- Best practice moves over time

### **Worked Example 1.3**

A clothing retailer notices its returns processing lags behind industry leaders. By benchmarking against a fast-moving consumer electronics company, it finds key practices (e.g., rapid in-store refunds) which it adapts to reduce returns resolution time from 10 days to 2 days.

> **Answer:**
> This is process benchmarking—learning from a different sector. It demonstrates how benchmarking can produce substantial performance improvements even from outside the organisation’s core industry.

### **Revision Tip**

When answering exam questions on benchmarking, always state the definition, outline the process, identify the type being used, and apply your answer specifically to the scenario.

## **Summary**

Continuous improvement in performance management relies on embedding TQM and kaizen techniques for ongoing, incremental progress. Classifying and analysing quality costs helps prioritise improvements. Benchmarking provides external or internal reference points, making targets more robust and supporting change. These methods complement each other and are essential for strategic and operational success in performance management.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Describe the core features of TQM and explain continuous improvement through kaizen and kaizen costing
- Distinguish kaizen costing from traditional standard costing systems
- Identify and classify prevention, appraisal, internal failure, and external failure quality costs
- Apply quality cost analysis to performance evaluation and improvement decisions
- Define and explain benchmarking, including internal, competitor, and process/activity types
- Outline and apply the benchmarking process to real scenarios
- Evaluate benefits and common limitations of benchmarking in organisations

## **Key Terms and Concepts**

- Total Quality Management (TQM)
- Kaizen
- Kaizen Costing
- Prevention Cost
- Appraisal Cost
- Internal Failure Cost
- External Failure Cost
- Benchmarking
- Best Practice

Continuous improvement and quality costs - TQM kaizen and benchmarking