Prevention cost

From CEOpedia | Management online

Prevention cost is all expenses incurred by the company in order to minimize the appearance of a product or service defect. These are both expenses in the sphere of production, design or storage. All this to prevent shortages. An example of such a cost may be investing in a pieces of training for workers from the production sector, so that they know how to properly produce a given product or service. "Prevention costs are all the costs expended to prevent errors from being made or, to say it another way, all the costs involved in helping the employee do the job right every time. If you look at this from financial viewpoint, it is really not a cost. It is an investment in the future, often called a cost - avoidance investment" (Harrington J. H, 1987, p.14)

Types of prevention cost:

  • Product or service standards: establishing records for incoming materials and processes
  • Creation of quality, production and control plans
  • Creating and maintaining a quality system
  • Training and development programs

It is much better, more convenient and cheaper to bear prevention costs than selling damaged goods or servicing. Because it often ends up exchanging the whole product / service and losing customers.

Prevention cost in COQ

"Cost of quality (COQ) is a method used by organizations to show the financial impact of quality activities. Attaching a dollar amount of quality related activities clarifies where there may be significant opportunities of quality improvement. Once recognized, process improvement efforts can be focused on those with the higher potential pay-off" (Westcott R.T., 2013, chapter 5). It is a way that allows the company to determine to what extent its resources are used for activities that prevent bad products and services, which are the cause of internal and external failures. Thanks to this information, the company knows what its potential savings may be.

Cost of quality is divided into two basic types of costs:

  • Cost of control

There are prevention cost (described above) and appraisal costs (Similar to prevention cost. These are all expenses that are incurred to avoid quality problems. These are quality inspections).

The first type of cost of failure of control is internal failure costs (It is when the product produced is defective. The cost of processing such goods is part of the cost). The second type is external failure costs. The costs arose as a result of producing a defective product. These are the costs linked with product recall, guarantees, and service costs. It can also be (unmeasurable) cost of lost customers.

To sum up: "Total quality costs = Prevention costs + Appraisal costs + Internal failure costs + External failure costs" (Chopra A., Garg D., 2011, p.511)

Examples of Prevention cost

  • Quality Control Tests: Conducting quality control tests during the production process is an important part of prevention cost. Quality control tests help detect any potential defects in the product or service before it is released to the market.
  • Research & Development: Investing in research and development is a common form of prevention cost. Companies often invest in research and development to identify potential problems with their products or services before they are released.
  • Employee Training: Providing training to employees is another form of prevention cost. Companies typically invest in training their employees in order to ensure that they are familiar with the product or service they are working with and that they are familiar with any potential issues that may arise.
  • Design Modifications: Companies may also invest in design modifications in order to prevent defects from occurring. Design modifications can help improve the quality of the product or service and can also help to prevent defects from occurring in the first place.
  • Materials Testing: Companies may also invest in materials testing in order to identify any potential issues with the materials used in the production of their products or services. This can help to reduce the risk of defects occurring during production.

Advantages of Prevention cost

Prevention costs can bring many advantages to the company. These include:

  • Reducing the appearance of product or service defects, resulting in higher customer satisfaction and increased brand loyalty. This is especially beneficial in an industry where reputation is key.
  • It can help to reduce costs associated with returns, refunds and warranty claims, as well as the cost of manufacturing and designing a new product.
  • Prevention costs can help to reduce the chances of costly accidents or incidents, as well as improving safety standards for workers.
  • Prevention costs can also help to improve the efficiency of production processes, as well as help to reduce waste and inefficiency.
  • Increased prevention costs can also mean increased innovation, as companies are forced to look for new and better ways to produce a product or service without compromising quality.

Limitations of Prevention cost

Prevention cost is an important business strategy to reduce the occurrence of product or service defects, but there are some limitations to its effectiveness. These include:

  • Cost: Prevention costs are often expensive and may require a large initial investment. This cost can be a deterrent to companies, as they may not be able to afford to make the necessary expenditures.
  • Time: Prevention costs often require a significant amount of time to implement. This can delay the production or roll-out of a product or service and can lead to missed deadlines.
  • Knowledge: It is difficult to predict which areas need to be addressed in order to prevent product or service defects. As a result, companies may spend money on preventative measures that do not have the desired effect.
  • Compliance: In some cases, companies may be required to comply with certain regulations or standards that require additional prevention costs. This can add to the costs of production or service delivery.
  • Incentives: If the company does not have sufficient incentives to invest in prevention costs, then they may not choose to do so. This can lead to an increase in product or service defects.

Other approaches related to Prevention cost

One way to reduce the cost of prevention is to identify potential risks and take appropriate measures to mitigate them. Other approaches related to prevention cost include:

  • Implementing quality control procedures - Quality control involves the monitoring of products and services to ensure they meet the standards of the company. Quality control procedures help to identify potential risks early on and provide the necessary information to minimize the cost of prevention.
  • Investing in research and development - Research and development are essential for the development of new products and services, as well as for the improvement of existing ones. Research and development can help identify potential risks and provide the necessary data to reduce the cost of prevention.
  • Utilizing predictive analytics - Predictive analytics can be used to identify potential risks and take preventative measures. Through predictive analytics, companies can analyze data to identify patterns and develop strategies to reduce the cost of prevention.
  • Strengthening internal systems - Companies can strengthen their internal systems by implementing new technologies and protocols that help to identify and address potential risks. This can help to reduce the cost of prevention by ensuring that potential risks are identified and addressed quickly and efficiently.

In summary, there are several approaches that companies can take to reduce the cost of prevention. These include implementing quality control procedures, investing in research and development, utilizing predictive analytics, and strengthening internal systems.


Prevention cost — recommended articles
Cost of poor quality — Quality assurance — External failure costs — Operating effectiveness — Benefits of risk management — Zero defects — Line balancing — Business process reengineering — Maintenance strategy

References

Author: Edyta Krzyczman

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