Memo: Understanding the Telecommunications Revolution Essay

We are developing a product that would revolutionize the way we use telecommunications. Picture a cell phone that uses 3d graphics to communicate with someone by simply clicking on the video- camera-function that is found on all smartphones. This cell phone will transform simple phone usage to virtual encounters that will enhance our current and future customer’s lives. The plan is to have this android smartphone be available to the consumer market as of 2015. In order for this to happen we, first, will have to look at the quality cost of this product. Quality cost will play an important factor in making this phone successful. There are a total of three quality costs that we must address for this product. The costs include appraisal, failure, and prevention. Prevention cost assist with checking products for failures. Prevention Costs The first category of costs is prevention costs. These are the costs that a company incurs to ensure that product failures of varius kinds do not occur either during the production process or when in the hands of a customer. These costs can also be incurred to ensure that there are fewer process-related failures. These are discretionary costs, for a company’s management may choose not to expend any funds on prevention activities (though there will be an offsetting increase in failure costs). Examples of prevention costs are as follows: Administration of quality-related activities – Some staff time is required to plan for and administer quality-related prevention activities. The cost of this labor should be supplemented by the cost of related benefits and payroll taxes. Education – Avery significant expense is the preparation of training materials, the cost of trainers and training facilities, and (the largest expense of all) the labor cost of all employees attending the training. This is a key prevention activity, and will be one of the largest costs in the prevention category. New product trial costs – For those organizations releasing new products, having customers test product designs is a central method for ensuring a high quality of design. Accordingly, the costs of products given to customers and survey administration can be clustered into this subcategory. Preventive maintenance – Ensuring that machinery is capable of running when needed is a key prevention activity. This includes the costs of maintenance personnel engaged in preventive maintenance, as well as any related materials and administrative costs. Preventive maintenance scheduling software – The just-noted preventive maintenance activities can be more easily accomplished if there is maintenance software available that tracks the last time such maintenance was conducted and how heavily a machine has been used since that time, and that schedules additional maintenance based on those two factors. Procedure and instruction development – A major prevention activity is the creation of machine operation instructions and other procedures that give employees complete information about how to conduct their jobs. With this information in hand, there is much less chance that any steps in the production process will be mishandled, resulting in quality problems. The cost of this subcategory includes the initial investigation of activities, procedure development, and distribution of the resulting materials. Supplier qualification assessments – Products cannot have a high quality level unless the supplier parts comprising them have high quality standards. The cost of all employee time spent in reviewing and assessing the output of suppliers must fall into this category. Tool design reviews – If a company uses a number of custom tools to create products, then those tools must be carefully reviewed in terms of their ability to produce parts at minimum specification levels, as well as their ability to do so consistently and with minimal failure rates. The costs of these reviews and any resulting tool revision costs must fall into this category. Warranty reviews – One form of prevention is to closely review all customer warranty claims in order to discern clues regarding what product problems can be prevented at the company before they can reach customers. The cost of this review and any subsequent investigation of possible problems should fall into this subcategory. Appraisal Cost The second category of costs is appraisal costs. These are the costs incurred to measure products, the material components used in products, and the processes used to manufacture products. These activities are designed to reduce the number of defective products shipped to customers. These are different from prevention costs, in that they attempt to improve quality strictly through increased inspection activities. These are also discretionary costs, for a company does not have to use any appraisal activities whatsoever—though eliminating them will increase the number of low quality products shipped to customers. Examples of appraisal costs are as follows: Incoming component testing – If there are particularly troublesome problems with materials received from suppliers, then a company may have initiated an extensive effort to review a large proportion of those materials, which will result in costs not only for testing personnel, but also for any materials that are destroyed during the testing process. Material appraisal – It is common for the quality control staff to remove items from various stages of the production process for testing purposes. If the removed materials are destroyed during testing, then the cost of these materials should be recorded as an appraisal cost. Outsourced laboratory testing – Some of the tests conducted on materials are of such a specialized nature that a company finds it to be more cost-effective to send them to an outside laboratory for review. The fees of such laboratories should be charged to this cost subcategory. Process appraisal – The appraisal process is not confined to materials reviews. It is also necessary to periodically analyze how well the production and supporting processes are functioning; the staff time devoted to this activity should be charged to this cost subcategory. Prototype appraisal – The quality staff can spot problems with new products before they are produced by examining a variety of quality-related issues on prototype products. The cost of testing and destruction of prototypes should be grouped into this cost subcategory. Testing equipment calibration – The testing equipment used by the quality staff must be periodically recalibrated to ensure its accuracy. This task is frequently performed by certified outside calibration services, which makes it easier to identify their fees and charge them to this cost subcategory. Testing equipment – Depending on the kinds of quality tests performed, the types of testing equipment needed can be very expensive. If the cost of this equipment falls below a company’s capitalization limit, then the entire cost can be charged straight to this subcategory. If higher, then the associated deprecation expense should be charged here. Internal Failure Cost The third category of costs is internal failure costs. These are costs incurred as a result of discovering product defects prior to shipment. At that time, products can be taken out of the production or warehouse areas, repaired or scrapped, and placed back in the production process if possible. There are a number of related costs that accompany these activities that make this a very expensive cost category. Examples of internal failure costs are as follows: Correction of related paperwork – When a product failure occurs internally, resulting in rework or scrap, there are a number of resulting paperwork activities. One is that the production scheduling staff must schedule new production to replace the items removed from production. Also, the eliminated items must be reported to the purchasing staff, so that they can order replacement materials. Further, the accounting staff must determine the cost of the scrap or rework and record it in the financial records. The staff time required to complete all of these activities should be recorded here. Lost profit on products sold as seconds – When a company finds that it has products of a sufficiently low quality that they cannot be sold through normal sales channels, it may elect to sell them at a discount, rather than expend extra rework effort to bring them up to a higher quality standard. If so, the loss in profits that occurs when these products are sold at the lower price point should be recorded in this subcategory as a cost or a sales discount. Machinery downtime – When internal product failures are discovered, machinery downtime can be caused for two reasons. One is that the machines are now needed to rework defective product, which keeps them from being used to create new product. Also, the cause of the internal failures may be the machinery, which requires some downtime while they are investigated and repaired. In either case, the cost of the machinery downtime should be charged to this cost subcategory. Redesign – If a product continues to have high quality error rates over time, the problem may not be in the manufacturing process at all, but rather in the underlying product design. If so, the engineering staff will require extra time to develop a new design and test it to ensure that all quality problems have been resolved. The engineering time charged to this work should be summarized into this cost subcategory, as well as the costs of any inventory that will become obsolete as a result of design changes. Re-inspection and testing – Once a product has been reworked, it must be inspected and tested to ensure that it now meets quality specifications, which requires extra staff time. Repurchasing – When products are scrapped, the purchasing staff may need to repurchase the components needed to create replacement products. The cost of the time needed to do this can be recorded separately here, or in the ‘‘corrections to related paperwork’’ subcategory that is noted earlier in this list. Rework – Depending on the extent of product rework required, there may be a separate staff devoted to this activity. If not, then production workers must be drawn from the production line (thereby taking time away from the production of other products) to perform this work. In either case, the cost of their time is charged to this account. There may also be a charge for the use of any machinery required to perform rework tasks. Safety stock – If there is a significant volume of internal product failure, the management team may think it necessary to keep on hand large quantities of extra components to make up the shortfall of components that would otherwise occur due to the scrapping of low-quality products. There is an interest cost associated with the investment in this extra inventory, as well as storage, insurance, and obsolescence costs that can be accumulated into this cost subcategory. Scrap – Some products may be of such a low quality level that they cannot be reworked, and so must be thrown away. However, some of these costs may be recouped by the income from sale of the scrap (if this is possible). For high-cost products, this is a very expensive subcategory of internal failure costs. Supplier claims processing – When internal failure costs are traced to supplier quality problems, a company must not only ship back defective supplier parts, but also process claims against the offending suppliers, so that it will not have to pay for the low-quality parts. This claims processing step can be an administrative headache, and an expensive one where there are many supplier-caused quality problems. External Failure Cost The final category of costs is external failure costs – These are the costs incurred when low-quality products are shipped to customers. This tends to be the most difficult quality cost area to measure, because it is difficult to quantify some customer related costs (as noted in the following bullet points). There is general agreement among quality experts that these costs are the most expensive of all the various cost of-quality categories, for the loss of customers due to low quality can have a catastrophic impact on an organization’s profitability. Examples of external failure costs are as follows: Customer surveys – A company may conduct customer surveys for the sole reason that it needs feedback about the quality of products issued to them. If this is the only reason for creating and operating a survey (as opposed to one that is used by the marketing department for product positioning and pricing purposes), then the cost of the survey can be charged to this account. Customer-imposed penalties – Customers who use a company’s output in their products may have considerable concerns about the quality of incoming components and will reinforce these concerns with their suppliers by charging penalties for poor-quality production. If so, these penalties should certainly be segregated into a separate account, so that management can easily determine their extent. Invoice adjustments – The cost of processing alterations to customer invoices can be very time-consuming, especially when there are a large volume of customer returns, for each transaction tends to be a unique one that requires a great deal of time. If this activity requires a significant amount of time, the associated cost can be stored separately in this account; if not, it may be rolled into the ‘‘Processing customer returns’’ account (as noted later in this list). Loss of customers – This is the potentially largest cost in the external failure cost category. It can be quantified by tracking those customers who are no longer buying from the company, contacting them to determine whether low quality was the reason, and then calculating the lost profit based on sales to those customers in the preceding year. Though the resulting figure will not tie to any cost recorded through a traditional accounting system, the opportunity cost of sales lost should still be itemized in this account, due to its potential size. Loss of reputation – A potentially very large expense is the reduction in a company’s reputation when it continually sells ow-quality products. This is a very difficult cost to calculate or even estimate, so most companies do not use this cost account, preferring instead to simply itemize the potential for this cost in the narrative sections of their quality cost reports. Processing customer returns – Whenever a customer returns a product, the receiving staff must complete special paperwork on it, store it in a special location, have it reviewed by a quality control team, and disposition it in accordance with their instructions, while the accounting staff must process a credit to the customer. The costs of all these activities should be charged to this account. Product recall insurance – If a company has a history of conducting product recalls, it may be necessary to reduce its risk of incurring further recall-related costs by procuring a product recall insurance policy. However, this can be a very expensive policy to obtain, especially if there is a recent recall history. The cost is certainly high enough to place in its own separate account. Product recall – If a company finds that quality problems with a product are sufficiently extensive, it can recall them. There are many costs when this happens, including payment for the inbound freight costs for returned products, the cost of reworking defective products, the cost of issuing replacement products, and the administrative overhead associated with these tasks. This can be an inordinately expensive cost subcategory. Supplier warranty claim processing – When customers return products, there is a good chance that the cause of their complaints is issues with product components that were sold to the company by its suppliers. If so, the company must expend considerable effort in filling out warranty claim forms to send to its suppliers in order to obtain reimbursement for shoddy components. These administrative costs should be charged to this account. Warranty claim administration – When there are many product returns from customers, a company will find it necessary to create a full-time warranty claims department. The cost of the staff for this department, as well as all associated overhead costs, should be charged to this account.