Appraisal Costs

Any defective parts and products should be caught as early as possible in the production process. Appraisal costs , which are sometimes called inspection costs, are incurred to identify defective products before the products are shipped to customers. Unfortunately, performing appraisal activities doesn’t keep defects from happening again, and most managers now realize that maintaining an army of inspectors is a costly (and ineffective) approach to quality control. Therefore, employees are increasingly being asked to be responsible for their own quality control. This approach, along with designing products to be easy to manufacture properly, allows quality to be built into products rather than relying on inspection to get the defects out.

Internal Failure Costs

Failure costs are incurred when a product fails to conform to its design specifications. Failure costs can be either internal or external.  Internal failure costs  result from identifying defects before they are shipped to customers. These costs include scrap, rejected products, reworking of defective units, and downtime caused by quality problems. In some companies, as little as 10% of the company’s products make it through the production process without rework of some kind. Of course, the more effective a company’s appraisal activities, the greater the chance of catching defects internally and the greater the level of internal failure costs. This is the price that is paid to avoid incurring external failure costs, which can be devastating.

External Failure Costs

External failure costs  result when a defective product is delivered to a customer. As shown in Exhibit 2B–1 , external failure costs include warranty repairs and replacements, product recalls, liability arising from legal action against a company, and lost sales arising from a reputation for poor quality. Such costs can decimate profits.

In the past, some managers have taken the attitude, “Let’s go ahead and ship everything to customers, and we’ll take care of any problems under the warranty.” This attitude generally results in high external failure costs, customer ill will, and declining market share and profits.

Distribution of Quality Costs

Quality costs for some companies range between 10% and 20% of total sales, whereas experts say that these costs should be more in the 2% to 4% range. How does a company reduce its total quality cost? The answer lies in how the quality costs are distributed. Refer to the graph in  Exhibit 2B–2 , which shows total quality costs as a function of the quality of conformance.