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How Internal Quality Failures Cause Losses & Disruption in Factories

June 24, 2016

 by Renaud Anjoran

In a previous article we touched on quality failures that are external to the organization (already delivered to customers). We concluded that catching problems before shipping was a much cheaper proposition. Internal quality failures are not as expensive as external ones. But the costs can still run very high.

Let’s break those costs down into several categories in this post...

1. Manual sorting & rework

A quality failure was found. Something has to be done to fix it. Chances are, it will consume manpower and some material will have to be discarded.

Example: a shipment of plastic toys does not pass the importer’s final quality control. The factory needs to sort out the whole shipment, discard 10% of the pieces, re-work 20% of the pieces, and send all the good pieces by plane (at their expense) instead of seaship. This is a heavy loss for the manufacturer.

In the old days, Chinese factories were treating labor as a very cheap commodity and they would throw 20 warm bodies at a job without thinking twice. This old reflex is still in place in many companies today, despite wages being much higher now.

In theory, the proper process to deal with internal quality failures like this would follow these steps:

  • Collect more information and communicate it to the customer to get confirmation of what they can accept.
  • Do some quick tests to see what can be reworked vs. what has to be discarded (and ask the customer if re-production is needed).
  • Train the workers on what is “OK” and “not OK” (which might be sorted as “can be reworked” and “cannot be reworked”.
  • Do a full sorting job; communicate the results to the customer little by little.
  • In parallel, launch the re-work, get it inspected, and get a feedback loop in place (which includes the sorting workers).
  • The most important is to also investigate the root cause(s) and act on them.

I have never seen a factory outside the auto industry who applied this type of process fully. Unfortunately, taking shortcuts is tempting… but the organization doesn’t learn and second (or third) sorting jobs are often necessary.


2. Scrap (wasted material)

This is quite similar to point 1, but it might happen during processing – not only after a process is over, as is often the case with re-work.

Example: a printer uses highly automated equipment. They print a batch of 10,000 brochures in one go, and then notice the settings of the equipment were wrong. Their customer refuses the brochures. They have to re-order the paper and produce a new batch at their expense. The cost is a 100% loss of materials and processing time, as well as a disruption of the production planning and a 5% penalty for late shipment.


3. Customer chargebacks and penalties

As shown in the above examples, a customer might give penalties for late shipment or even request a shipment by air. Similarly, they might charge the re-inspection cost back to the manufacturer. In some cases, their full loss is charged back to the supplier.

Example: a supplier of car parts is experiencing a yield of only 70% (i.e. 30% of their production has to be reworked or discarded), which slows down their production. They are unable to provide the number of parts the car factory needs. One day, the car assembly line is down for 10 minutes because of a shortage. The supplier is billed 400,000 USD to compensate for that shortage.


4. Disruption of production planning

Manufacturers seldom consider this cost. When a last-minute change in the production plan is necessary (for example for immediate rework or urgent re-production), production efficiencies usually drop. In turn it means the factory makes (and sells) fewer products while keeping its fix costs untouched.

Example: a molding press was set up to process a large batch and work for a week continuously. In order to re-produce a small batch that could not be shipped due to a serious quality issue, the molds need to be changed… and then changed again to resume production of the large batch. In addition, the polymer is in different colors, which necessitates flushing the press of the old polymer every time.


So the bad news is… Internal quality failures cost a lot of money too, even if they are still much cheaper than external failures.

Next join CMC as we look at the costs of catching quality problems, before looking at smart solutions to decrease the total costs of quality.


How do you deal with internal quality issues? Is your factory or supplier already suffering from the above problems? If so, which?

Please add to our community by leaving a comment below with your thoughts or questions, and we'll gladly respond!


'How To Cut Costs Through Quality Improvement Activities' eBook 


Topics: Quality

Renaud Anjoran

Renaud Anjoran

15 years experience in China.
Partner, China Manufacturing Consultants.
Worked with hundreds of factories in China.
Certifications: ASQ CQE & CRE; ISO 9001 & 14001 lead auditor.
Author of well-read blog, Quality Inspection Tips.

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