OUTLINE Definition Brainstorming Exercise Nuts and Bolts How it Works Summary

Consumer’s Risk Definition Accepting a batch of materials that are of poor quality but assuming the materials are of high quality In consumer’s risk you are accepting a batch of materials though it is defective and does not fall within the acceptable allowable range.

Producer’s Risk Definition Rejecting a batch of materials that are of good quality In producer’s risk you are rejecting a batch of materials though the batch falls within an acceptable allowable range.

Brainstorming Exercise How can you minimize consumer and producer’s risk in your organization? Using statistical quality control measures and inspecting a larger sample size in order to reduce variability can help to minimize the potential for consumer and producer’s risk. Also it would be beneficial to implement other quality control methods.

Nuts and Bolts Types of errors Type I error – Producer’s risk Type II error – Consumer’s risk A Type I error occurs when a batch is rejected when the quality of the batch is really acceptable. A Type II error occurs when a batch is accepted though is has unacceptable quality.

Nuts and Bolts Results of Type I and Type II errors Lost future sales High costs A Type I error can result in high costs because batches are being thrown out as waste when they have acceptable quality. This waste results in large costs for the company. A Type II error can affect future sales because consumers are given defective products believed to be of high quality. As a result, consumers will be unsatisfied with the product and never want to buy the product again causing future lost sales.

Nuts and Bolts Statistical Quality Control procedures Minimization of Type I errors Large inspection sample size Higher risk of Type II errors Statistical Quality Control helps to minimize Type I errors by taking a large sample size inspection. Though the use of this procedure can result in a higher risk of Type II errors.

How it Works Acceptance sampling used to determine whether to accept or reject product Can inspect 100% of products or few products Acceptance sampling is used to inspect products to determine whether to accept or reject the product.

How it Works Acceptance sampling Batch assumed acceptable unless statistics strongly prove otherwise Ex: “The most useful analogy is the U.S. Justice System, where suspects are assumed to be innocent unless they are proven guilty” (Maleyeff 24). When doing acceptance sampling, a batch is assumed to be acceptable unless it can be proven unacceptable.

How it Works The following slide provides a visual representation of consumer and producer’s risk The next slide shows the outcomes of consumer and producer’s risk.

How it Works Table taken from Managing Quality An Integrative Approach   State of Nature Product is Good Product is Defective Outcome Consumer Accepts Product OK Consumer’s risk Consumer Rejects Product Producer’s risk This slide shows the outcome of a consumer accepting a product and the product is good or defective. Additionally it shows the outcome when a consumer rejects a product and the product is good or defective.

Real World Example Consumer’s risk Firestone tires on Ford Explorer’s Consumer’s thought were receiving high quality product but they did not This consumer risk example shows how consumers bought a product with unacceptable quality. As a result it may result in future lost sales for these companies.

Real World Example Producer’s risk Automotive supplier rejects a batch of harnesses though the harnesses are of a high quality This producer’s risk example is a common occurrence for many companies as acceptable products are being thrown away as waste.

Exercise Is this a consumer or producer’s risk? A manufacturer of pens rejects a lot of high quality pens due to standards that fall outside of their allowable range The answer is producer’s risk

ANSWER-PRODUCER’S RISK Exercise - Answer A manufacturer of pens rejects a lot of high quality pens due to standards that fall outside of their allowable range ANSWER-PRODUCER’S RISK

Exercise Is this a consumer or producer’s risk? A house is purchased that is believed to be of high quality, but within a month the plumbing has failed? The answer is consumer’s risk

ANSWER – CONSUMER’S RISK Exercise - Answer A house is purchased that is believed to be of high quality, but within a month the plumbing has failed? ANSWER – CONSUMER’S RISK

Summary Consumer’s risk Producer’s risk In consumer’s risk you are accepting a batch of materials though it is defective and does not fall within the acceptable allowable range. In producer’s risk you are rejecting a batch of materials though the batch falls within an acceptable allowable range.

Bibliography Foster, S. Thomas, Managing Quality An Integrative Approach, Prentice Hall, 2001, pgs. 265, 351-352. Graves, Samuel B,; Ringuest, Jeffrey L.; “Producer’s and Consumer’s Risk When Proportion Defective is,” Decision Sciences, Sept/Oct 1991, pgs. 753-771. Maleyeff, John, “The fundamental concepts of statistical quality control,” Industrial Engineering, Norcross, Dec 1994, pgs. 24-25.