Our firm is the producer of tangible products. We, as a company, must ensure that we are delivering the highest quality products to our customers to maintain a quality reputation and in order to earn repeat and referral business. We have identified the three types of costs associated with the implementation of quality considerations. We believe that if we are mindful of the following costs our quality will improve, our customer satisfaction will improve and our business will prosper. The three types of costs associated with quality considerations are prevention costs, appraisal costs, internal and external failure costs.
Prevention costs are the most effective way to avoid unnecessary problems with production and sales quality. These costs are defined as any steps we as a company can take to pre-emptively avoid any future defects by providing our employees with things such as, proper tools to complete their assigned work, safe and proper working conditions, proper and effective training of all new employees and continual training and education for all existing employees, and by implementing quality control systems to ensure all products produced are up to the company’s and customer’s quality standards.
Appraisal costs are the costs associated with the testing and inspection of purchased materials used in the productions process, inspection of the items the company is producing, checking items produced for conformance, quality control audits and field testing of items produced and the cost of the labor associated with all of these items. These costs are ultimately the quality costs resulting from quality control and while they may be high in numbers but are imperative during the manufacturing and production processes. Internal failure costs are the costs that we would incur should we fail to meet the quality standards of the products we produce. These costs encompass everything from the manufacturing of a defective product to the downtime resulting from a quality assurance problem. Scrap materials, defective and rejected products are some example of internal failure costs incurred from a lack of quality assurance.
External failure costs are the result of internal failure costs that somehow escape recognition and end up with our customers. These costs are warranty repairs and replacements, lawsuits from defective or dangerous products, a loss of referral and repeat business as a result of a battered reputation and any recalls the company may have to endure because of faulty quality assurance; these costs will inevitably cause the most damage as our defective products have reached the product and that is where the problem is realized. The time, money and effort needed to overcome an external failure cost is astronomical and can even become a threat to the company’s very existence. An evaluation of these costs allows us to analyze the trade-offs for each and why it is so important for us, as a company, to maintain high quality control standards.
Preventative costs may be substantial to the company during the initial implementation period because the company may have to update equipment or hire appropriate training managers for our employees but we believe that if we implement these preventative measures the benefits will far outweigh the costs for the company. The tradeoffs if we decide not to take preventative measures we will be opening our processes up for internal failure which will result in lost time, wasted product and unhappy customers from late deliveries. We believe this cost will affect our employee’s morale and increase our costs overall for the reasons stated above which will deteriorate our margin.
Appraisal costs may be numerous in the manufacturing industry and during the production process but the tradeoff for not implementing these appraisal costs is far too great to accept from a cost, benefit perspective. The tradeoffs for not implementing these costs are the use of bad raw materials during production resulting in poorly produced items, products that are not uniformly produced defective products which will ultimately be returned or worse cause harm to the distributor or even customer. We would lose business, lose referrals and possibly even lose suppliers if we do not implement appraisal procedures and we, as a company cannot afford liabilities that would be a direct tradeoff for not implementing appraisal costs. Internal and external costs, we believe, can be the end of the company if we do not take preventative action now.
We leave ourselves open for litigation from faulty products that reached our customers and were injured, the cost of recalling faulty merchandise which requires us to pay for shipping and to replace any defective product that we sold. We also open ourselves up for public ridicule and loss of repeat and referral business from a battered reputation. For all these reasons we believe that the company needs to act now to implement a quality control system, implement preventative measures starting at the training phase of our new employees and monitor our output carefully by auditing our processes and products regularly to help us avoid internal failure and external failure costs as a company.