Universal Computer Company is one of the country's leading computer producers. The company's plants tend to specialize in producing a single product line or, at most, a limited range of products. The company has considerable vertical integration. Parts manufactured in one plant are assembled into components in another, which in turn are assembled into final products in yet another plant. Each plant operates on the basis of a profit center.

The Crawly plant produces computer chips, modules, wire harnesses and terminal boards, which are shipped to other plants of the company. In addition to numerous computer chips, the Crawly plant manufactures more than 40 different modules for the Phillips plant. The two floors are about five miles apart.

The problem of quality:

Production at the Phillips plant has been plagued by poor quality. Upon examination, it has been discovered that a considerable part of this problem can be attributed to the quality of the modules received from the Crawley plant.

The Crawley plant maintains a final inspection operation. There has been considerable dispute between the two plants over whether the Crawley plant must maintain a 95 percent overall acceptance level for all modules shipped to the Phillips plant, or whether it must maintain that standard for each of the 42 modules shipped. The Phillips plant manager has insisted that the standard must be maintained for each of the 42 individual modules produced. Crawley's plant manager argues that the requirements mean that the overall 95 percent level must be maintained for the sum of modules produced. Experience at the Phillips plant shows that while some module types were consistently well above the 95 percent acceptance level, 12 module types had erratic quality and often fell well below the 95 percent level. As a result, while individual module types may be below standard, the quality level of all modules was equal to or greater than 95 percent. This posed serious problems at the Phillips plant, as the quality of its products is controlled by the quality of the poorest module.

The dispute between plants:

The management of the Phillips plant felt that the quality problem of the modules received from the Crawley plant was causing them great difficulties. It caused problems with customers, who complained about the malfunction of products containing Crawley modules. As a result, the Phillips plant operation had added an incoming inspection of 12 poor quality modules received from the Crawley plant. There were times when the number of rejected modules was large enough to slow down or even temporarily stop production. At that time, to maintain production schedules, the Phillips plant had to work overtime. In addition, the Phillips plant had the expense of correcting all defective units received from the Crawley plant.

Ideally, Phillips plant management would like to receive all modules without defects. While this was recognized as impossible, they felt that the Crawley plant should at least accept the expense of repairs, additional inspections and overtime required by the poor quality of parts.

Since installing entry procedures on all 12 modules, the Phillips plant had been rejecting about $15,000 worth of modules a week. For the most part, these had been stored pending the resolution of the dispute over which plant should be responsible for repairing them. Occasionally, when the supply of good modules ran out, repairs were made to some of the rejected units to maintain production. the Phillips plant continued to make repairs on the remaining 30 types or modules as the need for repairs was discovered at assembly or final inspection.

From his perspective, Crawley's plant management felt it was fulfilling its obligation by maintaining a quality level of 95 percent or higher in all its modules shipped to the Phillips plant. In addition, they noted that the use of sampling methods in the inspection meant that some substandard units had to pass and that the cost of dealing with them was a normal business expense that the Phillips plant would have to accept as any other plant would. They noted that when purchasing parts from external suppliers it was common practice in the company to absorb the costs of handling the normal level of defective parts.

Phillips plant management argued that Crawley plant management was ignoring its responsibility to the company by imposing the cost of repairs at its plant, where only repairs could be made, rather than having the costs borne by the Crawley plant, where corrections of faulty processes could be made.

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