How do normal and abnormal losses of units differ and how is each treated in an EUP schedule?
normal loss abnormal loss machine malfunctions once every 100 production runs and improperly blends ingredients. The machine processes 50,000 runs each year and the ingredients in each run cost $10. Correcting the problem has been estimated to cost $20,000 per year. Spoilage cost is $5,000 per year (500 spoiled batches X $10 worth of ingredients) plus a minimal amount of overhead costs. If company employees are aware of the malfunction and catch every improperly blended run, accepting the spoilage is less expensive than correcting the problem.
If, alternatively, the spoiled runs are allowed to leave the plant, they may create substantial quality failure costs in the form of dissatisfied customers and/or salespeople who might receive the spoiled product. Managers in world-class companies should be aware that the estimate of the cost to develop a new customer is $50,000, five times as much as the estimated cost of keeping an existing one.2 In making their cost-benefit analysis, managers must be certain to quantify all the costs (both direct and indirect) involved in spoilage problems.
An abnormal loss is a loss in excess of the normal, predicted tolerance limits. Thus, when an abnormal loss occurs, so does a normal loss (unless zero defects have been set as the AQL). Abnormal losses generally arise because of human or machine error during the production process. For example, if the tolerances on one of a company's production machines were set incorrectly, a significant quantity of defective products might be produced before the error was noticed. Because abnormal losses result from nonrandom, special adverse conditions and actions, they are more likely to be preventable than some types of normal losses.
Realistically, units are lost in a production process at a specific point. However, accounting for lost units requires that the loss be specified as being either continuous or discrete. For example, the weight loss in roasting coffee beans and the relatively continual breakage of fragile glass ornaments can be considered continuous loss continuous losses because they occur fairly uniformly throughout the production process.
discrete loss In contrast, a discrete loss is assumed to occur at a specific point. Examples of discrete losses include adding the wrong amount of vinegar to a recipe for salad dressing or attaching a part to a motor upside down. The units are only deemed lost and unacceptable when a quality check is performed. Therefore, regardless of where in the process the units were truly "lost," the loss point is always deemed to be an inspection point. Thus, units that have passed an inspection point should be good units (relative to the specific characteristics inspected), whereas units that have not yet passed an inspection point may be good or may be defective/spoiled.
Control points can be either built into the system or performed by inspectors. The former requires an investment in prevention costs; the latter results in appraisal costs. Both are effective, but prevention is often more efficient because acceptable quality cannot be inspected into a product; it must be a part of the production process. Investments to prevent lost units may relate either to people or machines. (Prevention costs and appraisal costs are formally defined in Chapter 8.)
In determining how many quality control inspection points (machine or human) to install, management must weigh the costs of having more inspections against the savings resulting from (1) not applying additional material, labor, and overhead to products that are already spoiled or defective (direct savings) and (2) the reduction or elimination of internal and external failure costs (indirect savings). Quality control points should always be placed before any bottlenecks in the production system so that the bottleneck resource is not used to process already defective/spoiled units. Additionally, a process that generates a continuous defect/spoilage loss requires a quality control point at the end of production; otherwise, some defective/spoiled units would not be found and would be sent to customers, creating external failure costs. (Failure costs are formally defined in Chapter 8.)
2 Peter L. Grieco, Jr., "World-Class Customers," Executive Excellence (February 1996), p. 10.
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