Operations Management For Dummies, 2nd Edition
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You may have heard the saying “Quality is free.” Getting your operations management to implement an effective quality system is anything but free, but the alternative usually proves to be much more expensive.

Producing a quality product or service requires the whole organization to be onboard and involved. Quality begins in product design, requires attention in production, and must be at the forefront of customer service. A sincere focus on quality requires time, energy, and commitment; without it, a business risks lost sales and revenue, potential product liability claims if a product fails, and lowered productivity.

The cost of failure

Failure costs are those costs associated with producing a defective product. Two types of failures exist: those that are discovered internally and those that are detected externally.

Internal failures

Internal failures are defects discovered during the production process. When a company discovers an internal failure, it needs to discard or repair the defective part. The costs associated with internal failures are the wasted resources (labor and material) used to produce the product if it’s discarded, or the additional costs to correct the defect if it’s repaired.

Internal failures also occur in service operations. A good example would be an accountant who discovers an error in a tax return before it’s forwarded to the customer and eventually the IRS.

External failures

External failures are defects discovered after delivery to the customer — either identified by the manufacturer after the product ships or discovered by the customer during normal use.

Numerous types of costs are associated with external failures, and they go well beyond a company losing money because defects are visible to the customer. In other words, the manufacturer must not only repair and replace the product but also deal with the loss of reputation, customer goodwill, and eventually market share.

The actual impact of external failures varies depending on the type of customer that discovers the defect. If the customer is the end consumer, then repairing or replacing the product can quickly provide an opportunity for the company to improve or retain good quality perceptions. When the customer is a business, however, replacing or repairing the product(s) is much less likely to undo the business disruption caused by the failure.

In the worst case, whether it’s a runaway automobile, a spontaneously combusting computer battery, or a child’s toy that becomes a choking hazard, external failures can cause serious injury to customers and incur litigation and liability costs — along with a severe blow to corporate reputation.

This also applies to services; it may be very difficult to regain the trust of a client if a faulty tax return is sent to the IRS and the customer is called in for an audit as a result.

How to detect defects

Expenses associated with detecting poor quality before, during, or after production are known as detection (or appraisal) costs. Inspection and testing are the primary ways a company can find product defects.

Ideally, you want to design quality into the process for creating a product. Sometimes, in addition, inspection and testing are necessary to ensure that the process is operating as designed. To establish an inspection process, you need to decide how many products to inspect and when and where in the process to conduct the inspection.

How many products to inspect is a trade-off between the cost of inspection (which can be high if the test destroys the tested unit) and the cost of external failures if customers purchase the defective products. Most firms test a small percentage of total product output. Some statistical implications are associated with the sample size.

You have three options when choosing when to inspect a product:

  • Incoming inspection of raw materials from suppliers: Monitoring incoming materials prevents a company from wasting resources on material that’s already defective. Proper management of the supply chain should minimize these inspections.

  • Inspection during the production process: Monitoring quality throughout the process is possible withconvenient and easy-to-use statistical techniques.

    Where in the production process you conduct inspections is important to minimize waste. You generally want to inspect before the bottleneck operation to avoid putting any unnecessary burden on the resource that’s already limiting capacity. Other good points of inspection include before an expensive operation (such as gold-plating) and before an irreversible operation (such as heat treating or cutting).

  • Inspection of the finished product: Monitoring quality before products ship out to customers can prevent defects reaching customers. This is usually the most expensive inspection point because the product is complete and has thus already incurred all manufacturing costs; but it may prevent external failures, which can be devastating.

The perks of high quality

Producing and delivering high quality products and services has beneficial external and internal effects.

Internal effects

The most important internal effect of high quality is the increased ability to further improve quality. How is this so? If you have a lot of quality problems, they tend to mask one another. You can’t focus much time on any single suspect. In addition, because all suspects are being scrutinized, they’re probably unwilling to come forward with information that may help eliminate other suspects.

External effects

Externally, high quality results in a perception of reliability and value with customers over time. Customers are known to pay a premium for products — ranging from hotel rooms to vehicles — that they know they can rely on. If several of your products are known to be of high quality, customers will automatically assume that your other products are as well. This helps to increase a company’s market share.

Prevent defects in the first place

Make every effort to prevent defects from occurring in the first place. Doing so requires that quality is designed into the product and the process that makes it. Most firms have some type of quality program in place. These programs go by many different names, including Total Quality Management (TQM) and Six Sigma.

About This Article

This article is from the book:

About the book authors:

Mary Ann Anderson is a consultant in supply chain management and operations strategy. Edward Anderson is an associate professor of operations management at the University of Texas McCombs School of Business. Geoffrey Parker is a professor of management science at the A. B. Freeman School of Business at Tulane University.

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