Business Statistics for Decision-Making Approach

Description
Business statistics is the science of good decision making in the face of uncertainty and is used in many disciplines such as financial analysis, econometrics, auditing, production and operations including services improvement, and marketing research. These sources feature regular repetitive publication of series of data. This makes the topic of time series especially important for business statistics. It is also a branch of applied statistics working mostly on data collected as a by-product of doing business or by government agencies.

Business Statistics: A Decision-Making Approach
Introduction to Quality and Statistical Process Control

Chapter Goals
After completing this chapter, you should be able to: Use the seven basic tools of quality Construct and interpret x-charts and R-charts Construct and interpret p-charts Construct and interpret c-charts

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Chapter Overview
Quality Management and Tools for Improvement Philosophy of Quality Deming's 14 Points Juran's 10 Steps to Quality Improvement
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Tools for Quality Improvement The Basic 7 Tools Control Charts x-bar/R-charts p-charts c-charts

Themes of Quality Management
Primary focus is on process improvement Most variations in process are due to systems Teamwork is integral to quality management Customer satisfaction is a primary goal Organization transformation is necessary It is important to remove fear Higher quality costs less

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Deming's 14 Points
1. Create a constancy of purpose toward improvement
become more competitive, stay in business, and provide jobs

2. Adopt the new philosophy
Better to improve now than to react to problems late

3. Stop depending on inspection to achieve quality -- build in quality from the start
Inspection to find defects at the end of production is too late

4. Stop awarding contracts on the basis of low bids
Better to build long-run purchaser/supplier relationships
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Deming's 14 Points
(continued)

5. Improve the system continuously to improve quality and thus constantly reduce costs 6. Institute training on the job
Workers and managers must know the difference between common cause and special cause variation

7. Institute leadership
Know the difference between leadership and supervision

8. Drive out fear so that everyone may work effectively. 9. Break down barriers between departments so that people can work as a team.
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Deming's 14 Points
(continued)

10. Eliminate slogans and targets for the workforce
They can create adversarial relationships

11. Eliminate quotas and management by objectives 12. Remove barriers to pride of workmanship 13. Institute a vigorous program of education and self-improvement 14. Make the transformation everyone's job

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Juran's 10 Steps to Quality Improvement
1. Build awareness of both the need for improvement and the opportunity for improvement 2. Set goals for improvement 3. Organize to meet the goals that have been set 4. Provide training 5. Implement projects aimed at solving problems
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Juran's 10 Steps to Quality Improvement
(continued)

6. Report progress 7. Give recognition 8. Communicate the results 9. Keep score 10. Maintain momentum by building improvement into the company's regular systems

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The Deming Cycle
Plan

Act

The Deming Cycle

Do
The key is a continuous cycle of improvement

Study
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The Basic 7 Tools
1. Process Flowcharts 2. Brainstorming 3. Fishbone Diagram 4. Histogram 5. Trend Charts 6. Scatter Plots 7. Statistical Process Control Charts
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The Basic 7 Tools
(continued)
1. 2. 3. 4. 5. 6. 7. Process Flowcharts Brainstorming Fishbone Diagram Histogram Trend Charts Scatter Plots Statistical Process Control Charts

Map out the process to better visualize and understand opportunities for improvement

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The Basic 7 Tools
(continued)
1. 2. 3. 4. 5. 6. 7. Process Flowcharts Brainstorming Fishbone Diagram Histogram Trend Charts Scatter Plots Statistical Process Control Charts

Fishbone (cause-and-effect) diagram:
Cause 1 Cause 2
Sub-causes

Problem
Sub-causes

Show patterns of variation

Cause 3

Cause 4

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The Basic 7 Tools
(continued)
1. 2. 3. 4. 5. 6. 7. Process Flowcharts Brainstorming Fishbone Diagram Histogram Trend Charts Scatter Plots Statistical Process Control Charts

Identify trend y

time

Examine relationships y

x
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The Basic 7 Tools
(continued)
1. 2. 3. 4. 5. 6. 7. Process Flowcharts Brainstorming Fishbone Diagram Histogram Trend Charts Scatter Plots Statistical Process Control Charts

Examine the performance of a process over time X

time

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Introduction to Control Charts
Control Charts are used to monitor variation in a measured value from a process
Exhibits trend Can make correction before process is out of control

A process is a repeatable series of steps leading to a specific goal Inherent variation refers to process variation that exists naturally. This variation can be reduced but not eliminated
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Process Variation
Total Process Variation Common Cause = Variation Special Cause + Variation

Variation is natural; inherent in the world around us No two products or service experiences are exactly the same With a fine enough gauge, all things can be seen to differ

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Sources of Variation
Total Process Variation Common Cause = Variation Special Cause + Variation

Variation is often due to differences in: People Machines Materials Methods Measurement Environment
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Common Cause Variation
Total Process Variation Common Cause = Variation Special Cause + Variation

Common cause variation naturally occurring and expected the result of normal variation in materials, tools, machines, operators, and the environment

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Special Cause Variation
Total Process Variation Common Cause = Variation Special Cause + Variation

Special cause variation abnormal or unexpected variation has an assignable cause variation beyond what is considered inherent to the process

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Statistical Process Control Charts
Show when changes in data are due to:
Special or assignable causes Fluctuations not inherent to a process Represents problems to be corrected Data outside control limits or trend Common causes or chance Inherent random variations Consist of numerous small causes of random variability

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Control Chart Basics
Special Cause Variation: Range of unexpected variability

UCL
Common Cause Variation: range of expected variability

+3? - 3?

Process Average LCL time

UCL = Process Average + 3 Standard Deviations LCL = Process Average - 3 Standard Deviations
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Process Variability
Special Cause of Variation: A measurement this far from the process average is very unlikely if only expected variation is present

±3?? 99.7% of process values should be in this range

UCL Process Average LCL time

UCL = Process Average + 3 Standard Deviations LCL = Process Average - 3 Standard Deviations
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Statistical Process Control Charts
Statistical Process Control Charts x-chart and R-chart
Used for measured numeric data

p-chart

c-chart

Used for proportions (attribute data)

Used for number of attributes per sampling unit

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x-chart and R-chart
Used for measured numeric data from a process Start with at least 20 subgroups of observed values Subgroups usually contain 3 to 6 observations each

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Steps to create an x-chart and an R-chart
Calculate subgroup means and ranges Compute the average of the subgroup means and the average range value Prepare graphs of the subgroup means and ranges as a line chart

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Steps to create an x-chart and an R-chart
(continued)

Compute the upper and lower control limits for the x-chart Compute the upper and lower control limits for the R-chart Use lines to show the control limits on the x-chart and R-chart

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Example: x-chart
Process measurements:
Subgroup measures
Subgroup Individual measurements number

Mean, x 14.5 13.0 19.0 ?
Average subgroup mean = x

Range, R 6 73 ?
Average subgroup range = R

1 2

15 12 17 4? ?

17 16 21 ?

15 9 18 ?

11 15 20 ?

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Average of Subgroup Means and Ranges
Average of subgroup means: Average of subgroup ranges:

x i x ?? k
where: where: xi = ith subgroup average k = number of subgroups

R ?

i

R k

Ri = ith subgroup range k = number of subgroups

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Computing Control Limits
The upper and lower control limits for an x-chart are generally defined as
UCL = Process Average + 3 Standard Deviations LCL = Process Average - 3 Standard Deviations

or

UCL? x? 3? LCL? x? 3?

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Computing Control Limits
(continued)

Since control charts were developed before it was easy to calculate ?, the interval was formed using R instead The value A2R is used to estimate 3? , where A2 is from Appendix Q The upper and lower control limits are

UCL? x? A2(R) LCL? x? A2(R)
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where A2 = Shewhart factor for subgroup size n from appendix Q

Example: R-chart
The upper and lower control limits for an R-chart are

UCL? D4(R) LCL? D3(R)
where: D4 and D3 are taken from the Shewhart table (appendix Q) for subgroup size = n
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x-chart and R-chart
UCL

x-chart

x
LCL time UCL

R-chart

R
LCL time

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Using Control Charts
Control Charts are used to check for process control H0: The process is in control
i.e., variation is only due to common causes

HA: The process is out of control
i.e., special cause variation exists

If the process is found to be out of control, steps should be taken to find and eliminate the special causes of variation
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Process In Control
Process in control: points are randomly distributed around the center line and all points are within the control limits
x
UCL

x
LCL

time
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Process Not in Control
Out of control conditions:
One or more points outside control limits Nine or more points in a row on one side of the center line Six or more points moving in the same direction 14 or more points alternating above and below the center line
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Process Not in Control
One or more points outside control limits UCL Nine or more points in a row on one side of the center line UCL

x
LCL Six or more points moving in the same direction UCL

x
LCL 14 or more points alternating above and below the center line UCL

x
LCL
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x
LCL

Out-of-control Processes
When the control chart indicates an out-ofcontrol condition (a point outside the control limits or exhibiting trend, for example)
Contains both common causes of variation and assignable causes of variation The assignable causes of variation must be identified If detrimental to the quality, assignable causes of variation must be removed If increases quality, assignable causes must be incorporated into the process design

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p-Chart
Control chart for proportions
Is an attribute chart

Shows proportion of nonconforming items
Example -- Computer chips: Count the number of defective chips and divide by total chips inspected Chip is either defective or not defective Finding a defective chip can be classified a "success"

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p-Chart
(continued)

Used with equal or unequal sample sizes (subgroups) over time
Unequal sizes should not differ by more than ±25% from average sample sizes Easier to develop with equal sample sizes

Should have np ? 5 and n(1-p) ? 5

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Creating a p-Chart
Calculate subgroup proportions Compute the average of the subgroup proportions Prepare graphs of the subgroup proportions as a line chart Compute the upper and lower control limits Use lines to show the control limits on the p-chart

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p-Chart Example
Subgroup number Sample size Number of successes Proportion of successes, p

1 2 3 ?

150 150 150

15 12 17 ?

.1000 .0800 .1133 ?
Average subgroup proportion = p

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Average of Subgroup Proportions
The average of subgroup proportions = p
If equal sample sizes: If unequal sample sizes:

??

pi k

??

npi i n
i

where: pi = sample proportion for subgroup i k = number of subgroups of size n
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where: ni = number of items in sample i ni = total number of items sampled in k samples

Computing Control Limits
The upper and lower control limits for an p-chart are
UCL = Average Proportion + 3 Standard Deviations LCL = Average Proportion - 3 Standard Deviations

or

UCL? LCL?

? 3? ? ?

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Standard Deviation of Subgroup Proportions
The estimate of the standard deviation for the subgroup proportions is
If equal sample sizes: If unequal sample sizes: Generally, sp is computed separately for each different sample size

sp? ?
where:

(p)(1 n

p = mean subgroup proportion
n = common sample size
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Computing Control Limits
(continued)

The upper and lower control limits for the p-chart are
UCL? p? LCL? p? If sample sizes are equal, this becomes
p) p

)

Proportions are never negative, so if the calculated lower control limit is negative, set LCL = 0

UCL? p? LCL? p?

n n

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p-Chart Examples
For equal sample sizes
UCL p LCL

For unequal sample sizes
UCL p LCL

sp is constant since

n is the same for all subgroups

sp varies for each

subgroup since ni varies

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c-Chart
Control chart for number of nonconformities (occurrences) per sampling unit (an area of opportunity)
Also a type of attribute chart

Shows total number of nonconforming items per unit
examples: number of flaws per pane of glass number of errors per page of code

Assume that the size of each sampling unit remains constant
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Mean and Standard Deviation for a c-Chart
The mean for a c-chart is The standard deviation for a c-chart is

xi c ?? k
where: xi = number of successes per sampling unit k = number of sampling units

s

c

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c-Chart Control Limits
The control limits for a c-chart are

UCL? c? 3 c LCL? c? 3 c

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Process Control
Determine process control for p-chars and c-charts using the same rules as for x-bar and R-charts Out of control conditions:
One or more points outside control limits Nine or more points in a row on one side of the center line Six or more points moving in the same direction 14 or more points alternating above and below the center line

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c-Chart Example
A weaving machine makes cloth in a standard width. Random samples of 10 meters of cloth are examined for flaws. Is the process in control?

Sample number Flaws found

1 2

2 1

3 3

4 0

5 5

6 1

7 0

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Constructing the c-Chart
The mean and standard deviation are:
x i c ?? k ?2? 1 3? 0? 5? 1 0 7 c? 1.7143? 1.3093 1.7143

s?

The control limits are:

UCL? 5.642

c?

3 c?

1.7143?

3(1.3093)?

LCL?

c?

3 c?

1.7143?

3(1.3093)? ? 2.214
Note: LCL < 0 so set LCL = 0
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The completed c-Chart
6 5 4 3 2 1 0 1 2 3 4 5 6 7

UCL = 5.642

c = 1.714 LCL = 0 Sample number

The process is in control. Individual points are distributed around the center line without any pattern. Any improvement in the process must come from reduction in common-cause variation
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Chapter Summary
Reviewed the philosophy of quality management
Demings 14 points Juran's 10 steps

Described the seven basic tools of quality Discussed the theory of control charts
Common cause variation vs. special cause variation

Constructed and interpreted x-charts and Rcharts Constructed and interpreted p-charts Constructed and interpreted c-charts
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