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Narrative 17-2 Because of the Poor Quality of Its Cars,Hyundai Watched Its

question 87

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Narrative 17-2
Because of the poor quality of its cars,Hyundai watched its U.S. sales drop from 264,000 cars to 90,000 cars in just two years. Hyundai cars ranked 26th out of 35 car brands in terms of initial car quality as measured by the influential J.D. Power initial car quality survey. With $6.6 billion in debt,a $1 billion investment for a new manufacturing plant in Alabama,and the company's first-ever loss,Hyundai's new chairman,Chung Mong Koo,declared that improving quality was the only way to fix the company.
The challenge for Chung was to get his managers to put quality,not costs,first. So he sent a visible,meaningful message that poor quality would no longer be tolerated. During one plant visit,Chung demanded to see under the hood of a car on the production line. He was furious when he saw loose wires,tangled hoses,bolts painted four different colours-a tremendous deviation from what the engine compartment was supposed to look like. On the spot,he instructed the plant chief to paint all bolts and screws black and ordered workers not to release any car unless all was orderly under the hood. He then publicly declared that Hyundai would produce higher-quality cars than Toyota by 2008,and that Hyundai would produce the best quality cars in the auto industry.
Today,each workweek starts with a demanding three-hour meeting attended by managers,engineers,designers,and suppliers. In his large boardroom,Chung displays Hyundai cars on rotating turntables or mechanical lifts-whatever is required for those in attendance to see up close what problems need to be fixed. Hyundai managers now measure everything. Hundreds of charts on the walls of every Hyundai factory measure the number of times and the degree to which a process has produced parts that differ meaningfully from the quality standards for those parts. The quality department at Hyundai has grown from 100 to 1,000 people,who now report directly to CEO Chung.
All employees share their ideas about how to improve quality because Chung communicated to workers that their ideas were critical and welcomed. To prove it,he rewarded them with bonuses averaging $150 per employee. At one Hyundai factory,workers have suggested 25,000 ideas for improving quality,30 percent of which have been implemented in the factory. For instance,a worker noticed that the Hyundai Sonata and SG 350 sedans had identically sized spare tires,but different-sized spare tire covers. Though it may sound trivial,using the same spare tire cover for both cars saves Hyundai $100,000 a year.
Hyundai addresses customer complaints as quickly as possible,and these quick responses to customer complaints have had dramatic results,such as reducing Hyundai Santa Fe's score in J.D. Power's initial car quality survey from 149 problems per 100 cars to 93 problems per 100 cars in just one year.
Finally,if the greatly improved quality isn't enough to convince prospective buyers to buy a Hyundai,the company believes that its 5-year/100,000 km warranty may be enough. The longest,most comprehensive warranty in the auto industry shows the confidence the company has in its cars. And those extensive warranties probably won't cost Hyundai much either,as the improved quality of its cars has cut the cost of warranty repairs,which are paid for by headquarters,by 35 percent over the last three years.
-Refer to Narrative 17-2. When Chung Mong Koo,as Hyundai's new chairman and CEO,visited a Hyundai plant,he strode onto the factory floor and demanded to look under the hood of a Sonata sedan. He didn't like it when he saw loose wires,tangled hoses,and bolts painted four different colours. This car was not being built the way it was designed,and its manufacturing flaws resulted in it not working as it was supposed to. Therefore,which of the following did Hyundai have a problem with?

Definitions:

Unfavorable Cost Variance

A situation where actual costs exceed the expected or budgeted costs, indicating that a company is spending more than planned.

Revenue Volume Variance

The difference between the actual sales revenue received and the expected revenue, based on the budgeted sales volume.

Revenue Price Variance

The difference between the actual revenue generated by selling a product at its current price and the expected revenue at a predetermined price.

Direct Materials Price Variance

Direct materials price variance is the difference between the actual cost of materials and the standard cost, multiplied by the quantity of materials purchased.