Article posted on Medium.com
A quality product or service is one that consistently meets or exceeds customer expectations. To assure that our company’s tangible products meet their desired level of quality, it is important to pay attention to every stage of the product’s process. There are three types of costs when quality considerations: appraisal, prevention, and failure.
Appraisal costs are designed to make sure quality or reveal defects in a product. Inspections, audits, and measuring for some or all the equipment are used. Secret shoppers also fall into this category. These costs are important because “they can be a key expense for companies seeking to maintain high levels of customers and regulatory satisfaction” (Staff).
For example, a pizza restaurant would want their ovens, kitchen appliances and cooking space inspected to meet standards. They would measure each of their ingredients to make sure that our pizza’s taste would exceed customer expectations and hire secret shoppers to test the product during lunch or dinner service. If something does not meet their standards or the standards of their customers, then further testing and improvement are necessary.
Prevention costs are attempts made to keep defects from happening. This is best done by training employees or educating customers about how to use a product. While considering these costs, it’s important to keep quality control procedures and collecting data in mind.
Training a new staff to create and sell pizzas to customers would be a crucial component to prevention costs. By training a staff on how to properly use the prevention equipment, the pizza company is minimizing the risk that someone could injure themselves or others. It’s also important to be smart about what kind of equipment to buy for the pizza restaurant. Collect data on various items and read quality reports and customer reviews on appliances. If equipment is faulty, it will not yield the desired results, could potentially harm an employee, and will have to be replaced. By setting up quality control procedures, one can further reduce the risk that someone could harm themselves or others. For example, if you list the steps for how to properly wash your hands before returning to work, you can reduce the risk of spreading illness.
Failure costs are divided into two separate categories: internal and external. Internal failure costs are those that are discovered during the production, such as a bug or defect. External failure costs are discovered after the product is complete and delivered to customers. Both of these costs should be avoided.
Internal failure costs could include overcooking pizzas, mixing the wrong ingredients (like using sugar instead of salt, etc.), or spilling something and having to throw it away. External failure costs would be delivering the wrong items to a customer, such as serving someone who is gluten-free a pizza with the wrong kind of crust. It could be lying to customers about how long something might take to make, thereby losing their goodwill and having them leave a bad review or not become a returning customer. It could also be harming a customer by serving a product that is undercooked.
There are also trade-offs with appraisal, prevention, and failures costs. A trade-off occurs in situations that involve losing one quality to gain another.
Trade-offs for appraisal costs could include how much it would cost to temporarily stop production so that an inspector can see the equipment being used to make sure that it’s working properly. Another appraisal trade-off would be the cost for a secret shopper to go and experience the product and service used while posing as a customer.
Trade-offs for prevention costs will be incurred by paying employees as they are being trained in learning how to properly use the equipment. Another trade-off would be the cost for a system update or new software to more effectively use the technology at hand.
Lastly, trade-offs for failure costs would be the incurred costs for extra products if something is spilled, over or undercooked, or made incorrectly. Other trade-offs for failure costs include the extra wait time to ensure that a product is created properly and meets or exceeds customers standards.
Staff, I. (2010, August 25). Appraisal Costs. Retrieved February 05, 2018, from https://www.investopedia.com/terms/a/appraisal-costs.asp