Mercury, Incorporated, produces cell phones at its plant in Texas. In recent years, the company's market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market. A year ago, the company's cell phones had been ranked low in product quality in a consumer survey, Shocked by this result, Jorge Gomez, Mercury's president, initiated an intense effort to improve product quality. Gomez set up a task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success After the first meeting of the task force, Holly Elsoe, manager of the Marketing Department, asked John Tran, production manager, what he thought of the proposed program. Tran replied, "I have reservations. Quality is too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements, I like to work with goals that I can see and count! I'm nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over." Mercury's quality improvement program has now been in operation for one year. The company's most recent quality cost report is shown below. Mercury, Incorporated Quality Cost Report (in thousands) Last Year This Year Prevention costs: Machine maintenance $ 370 $ 130 Training suppliers 9 10 Quality circles 21 85 Total prevention cost 400 225 Appraisal costs: Incoming inspection 65 20 Final testing 150 88 Total appraisal cost 108 Internal failure costs: Rework 110 70 Scrap 74 45 184 115 Total internal failure cost External failure costs: Warranty repairs 78 28 252 87 Customer returns 330 115 Total external failure cost Total quality cost $ 1,129 $ 563 $ 4,270 $ 4,670 Total production cost 215 luce As they were reviewing the report, Elsoe asked Tran what he now thought of the quality improvement program Tran replied, "I'm relieved that the new quality improvement program hasn't hurt our bonuses, but the program has increased the workload in the Production Department. It is true that customer returns are way down, but the cell phones that were returned by customers to retail outlets were rarely sent back to us for rework." Last Year Percentage of Total Production Cost This Year Percentage of Total Production Cost Percentage of Total Quality Cost Amount Amount Percentage of Total Quality Cost $ 370 $ 130 9 10 85 21 400 8 225 65 150 20 88 108 215 Prevention costs: Machine maintenance Training suppliers Quality circles Total prevention costs Appraisal costs: Incoming inspection Final testing Total appraisal costs Internal failure costs Rework Scrap Total Internal failure costs External failure costs: Warranty repairs Customer returns Total external failure costs Total quality cost Total production cost 110 74 184 70 45 115 78 252 28 87 330 115 $ 5 $ 1,129 4,270 563 4,670 $
