As an employee within this company, this memo will address the various types of costs when quality considerations are made within the company, explanations for these types of costs, and three types of costs and how they are portrayed when used with trade-offs within manufacturing the product or service.
The first type of cost when quality considerations are made are appraisal costs. Appraisal costs are the costs of activities that are designed to ensure quality or expose the defects with a product or service. Appraisal costs include, but are not limited to, inspection costs, testing, equipment testing, testing equipment labs, quality audits, and field testing.
The second type of cost when quality considerations are made are prevention costs. Prevention costs are used to prevent defects from occurring. Prevention costs include, but are not limited to, planning and administration systems, working with vendors, training of employees, quality control procedures, and also extra attention in both the design and production phases of the company to help decrease the probability of defective workmanship.
The third type of cost when quality considerations are made are failure costs. Failure costs are usually incurred by defective parts or by having faulty services. Failure costs include internal and external failures. Internal failures are those that are usually found during the production process and external failures are those that are usually found after delivery of the service or product to the customer.
There are many different kinds of external costs within a company, including providing warranty work for products and services, handling the complaints of customers about services or products received from the company, as well as replacing products or services for faulty failures of the product or services provided from the company. Additionally, liability and litigation are also a concern when dealing with external failure costs for a company, which can be costly if proper actions are not taken by the company. Finally, another example of external failures are payments to customers or customers who are offered discounts to help offset the defective product or service that was received by the customer.
Internal failures often happen for many different reasons including receiving defective products from vendors, having the wrong settings set on the machines used to produce the product, using equipment that is not up to the correct safety standards, as well as using the improper methods when operating the machines, carelessness of employees, and not using the proper material handling procedures set forth by the company. The costs of internal failures include loss of production time, having to scrap and rework products, having to investigate circumstances within the workplace that are costing the company money, and damage done to the equipment. Regarding rework, often times the salaries and wages of employees can be affected. With his, there are many steps and procedures that a company must undergo and figure out to be able to get to the bottom of the issues that lie within this aspect of internal failure costs.
There are many trade-offs for each of the decisions that a company makes within all three types of these cost types when quality consideration is used. If the company decides to put more time into training employees properly on operating machines and look for signs of faulty machinery, which is considered to be a prevention cost, then the company will likely see a decline in the number of accidents related to employee carelessness during the production process. The tradeoff for reducing internal failure costs is an increase in training costs. The company will need to take into account that the cost of training employees will become greater. Testing the equipment, which is considered to be an appraisal cost, can more than likely make the quality of a product increase by being able to produce more product that is acceptable and non-faulty. This will more than likely cause the external and internal failure costs to decline over a period of time so the company must decide if this is a huge expense they are willing to realize.
In closing, the company must decide which of the three costs they are willing to trade-off with the other costs to make the company become more profitable over a longer period of time and reduce the number of internal and external failure costs within the company.