Economics of quality


We are starting this article with some terminology in relationship to Quality and additional costs incurred if the quality is poor.

Prevention costs: To prevent poor quality in products and services.

Appraisal costs: To measure, evaluate, audit products or services to assure conformance to quality standards or performance requirements.

Failure costs: Resulting from non-conformance to requirements. They may be internal or external.


The existence of any manufacturing unit depends on the quality of product or services, made or supplies by that unit. Even though the status of the employees, of a particular unit, in society is affected by the performance and appearance of the products manufactured or supplied by that particular unit. Employees have great respect in the society to work with certain reputed conglomerates of India including foreign companies. These employees feel lucky to work with such companies. A company is known by the quality of product it manufacturers and its services.
Quality is very important for a manufacturer of products or services. Good quality ensures higher profitability, creates goodwill, and makes the employment of highly skilled manpower with better wages possible. To improve the quality standards, the manufacturers have to spend certain amount of money, the total cost of it exceeds the selling cost or production cost depending upon the type and nature of a product. For this purpose, the manufacturer maintains a inspection and testing departments or a research and development wing with the latest equipment and trained technical personnel. The Unit gives a technical assistance to the suppliers and also sends the suppliers’ factories frequently to check their facilities and whether the facilities are adequate for the production of quality products required by them.

Samples are also evaluated by various concerned departments – inspection, design, engineering and production. Large units maintain service stations or field repairing shops and spend a big amount for the purpose. This is all done to satisfy the customers.

Poor quality or defective products results in the extra cost to a producer/ manufacturer/supplier. This can be explained as under:

1. Poor quality results in reduction in sale and in turn lower production. , increase in cost of production A manufacturer may have to incur heavy losses also for continuation of activity. Cost of loss in sales may prove detrimental to the existence of the manufacturing unit.

2. Manufacturer’s goodwill is also affected. Good will is created as a result of good performance for a long time, and good will once lost is very difficult to establish. It is a time consuming and costly process.

3. A manufacturer or a supplier becomes liable to indemnify the customer for any loss sustained by him due to poor quality, if he or she has guaranteed for the same.

4. A manufacture has to replace the product if the quality of the product is inferior or if it fails to give a rated performance. Sometimes, the product has to be replaced at the customer’s end.

5. A manufacturer has to sell the defective products at a discount or as seconds at a low price.

6. Defective products may cause delays in production processes, which may thereby result in the loss of production and increase in the cost of production per unit.

7. Sometimes, a manufacturer or supplier has to incur the cost for rework on defective products.

8. Sometimes, is also becomes necessary to spend extra money for servicing and repairing the products.

9. Rejection makes it necessary for the firm to spend an extra amount for ore vigorous inspection and testing.

10. Due to rejection no department take responsibility on their shoulders. Such type of activity on the part of various departments affects the morale of the working force badly.

11. Investigation to find out the causes for failures or high rate of defective products etc. becomes necessary. A manufacturer or a supplier has to spend money also for such investigation.

A manufacturer may be forced to with draw certain products from the markets due to certain defects e.g. when on the basis of research it is proved that certain drug is in injurious to health or has side effects. Government withdraws or discontinues the production of such items. The improper use of the product may cause injury to the customer. This is due to absence of proper instructions on the label. Informative labeling with much operating instructions assumed much more importance.

We conclude saying that a rejected product represents a loss to a manufacturer not only equivalent to the cost of materials used in that product but it includes over and above, the cost direct labor and overhead expenses also incurred up to the final stage. e.g. If the rejected material is Rs. 5 per Raw material stage after going through number of operation its cost is Rs. 100 So if that is rejected the cost is not Rs 5 but Rs 100. The manufacturers have to consider the ‘legal costs’ also. There are specific laws which provide for the liability for defective products. Courts award a much higher level of damages in case of litigation. Moreover, a manufacturer or a supplier has to spend a good amount for defending the firm against suits filed by various customers. Formerly legal actions were very rare but today the position has changed with the introduction of Consumer Protection Act (CPA), 1986 and other applicable acts in other countries.

Investing in Quality prevents rejections and the manufacturer can save all the additional expenses cited above.