Introduction
Every company desires to produce high-quality products that are free from defects. However, the production of flawless products comes with a price. Other than the normal production costs, the company must undergo some quality costs that are associated with the detection of defective products before they reach the customer (Snieska, Daunoriene, & Zekeviciene, 2013). Moreover, the company has to find ways of dealing with the possible defects to ensure their products meet the desired quality. This paper will give a stringent analysis of the quality costs of an MNO manufacturing company that produces luggage. Specifically, the paper will emphasize the prevention costs, appraisal costs, internal failure costs, and external failure costs.
Prevention costs
Prevention costs are incurred in the process of avoiding defects from occurring. Prevention costs are very essential as they prevent all the subsequent quality costs from happening. Many companies use quality circles to prevent costs. Essentially, the quality circles consist of professionalized employees who are well versed with the company’s activities. The group of employees consults with other workers to come up with ways of improving the quality of the company’s products. The MNO manufacturing company spent $24,000 on design work and product improvement. Employee training is yet another preventive cost that companies meet to prevent the subsequent quality costs. It is evident that trained employees professionally handle the production processes, and they are less likely to produce defective items as compared to employees who lack the necessary training. MNO manufacturing company spent $12,000 on employee training. This is a clear indication that the company employed a preventive strategy to reduce or prevent products defects during the production process.
Appraisal costs
Appraisal costs are all the costs incurred while giving technical support to identify defective products. The first appraisal cost occurs during inspection of the incoming raw materials. The MNO manufacturing company spent $10,000 on the inspection of incoming raw materials. The process of inspection goes on during the processing procedures, and the final appraisal cost is incurred while inspecting the final products. Essentially, the appraisal costs help in identifying defects before the products can reach the customers. The MNO manufacturing company spent $20,000 on the inspection of final products before dispatch. Appraisal costs are not very effective in preventing defects as the process of inspecting every product is tedious, time-consuming, costly, and it is prone to errors.
Internal failure costs
Whenever a product fails to attain the required standards and specifications, it is not usable. Internal failure costs are associated with the identification and disposal of unusable products before they reach the customer. Rejected products, scrap, and defective products are some of the internal failure costs that a company incurs. It is noteworthy that a company that has efficient appraisal activities is likely to identify defective products before they can reach the customer. The MNO manufacturing company incurred an internal failure cost of $18,000 for scraps from the production process.
External failure costs
This is the worst cost that a company can incur because external failure costs are realized after the products are delivered to the customer. External failure costs comprise the repair and maintenance costs of already sold products, recalled products, and guaranteed products. The external failure costs expose the company to monetary losses, and they destroy the reputation of the company (Cosmin & Ana-Maria, 2013). Some customers even go ahead and take legal actions against the company, where, the destroyed reputation of the company leads to declined profits. The MNO manufacturing company incurred a huge external failure cost of $40,000 about costs related to customer complaints.
Approach to reduce the failure costs
A cost-benefit analysis is very necessary when determining whether increasing one of the prevention costs would reduce the total failure costs (Wood, 2011). The company has determined that if they increase employee-training costs by $15,000, they expect to reduce all failure costs by 20%. Firstly, it is necessary, to sum up, all the failure costs and identify if 20% of the failure costs surpass the associated cost of $15,000.
The failure costs amount to $124,000, and 20% of the amount is $24,800. Therefore, increasing the employee training cost by $15,000 will save the company from incurring a cost of $24,800.
Conclusion
In carrying out a cost-benefit analysis, it is clear that the benefits associated with the approach of increasing prevention costs outweigh the associated costs. Therefore, the company should go ahead and increase employee training by $15,000. The difference between the benefits and the costs, ($24,800-$15,000= $9,800), is the net benefit that the company will gain by increasing employee training. Further, the company should find other ways of reducing the external failure costs that may have adverse consequences to the company.
References
Cosmin, D., & Ana-Maria, S. (2013). Cost of quality and taguchi loss function. Annals of the University Of Oradea, Economic Science Series, 22(1), 1479-1485.
Snieska, V., Daunoriene, A., & Zekeviciene, A. (2013). Hidden costs in the evaluation of quality failure costs. Engineering Economics, 24(3), 176-186.
Wood, D.C. (Ed.). (2011). Principles of quality costs: Financial measures for strategic implementation of quality management (4th ed.). Milwaukee, WI: ASQ Quality Press.