The Importance of Quality and Identifying Quality Problems
Quality matters because it determines whether a customer buys again and what they tell others, and because failure costs money at every stage.
Before you start
Make sure you're comfortable with these topics first:
Method
- Distinguish internal from external failure in your answer, because the cost per unit is different and the mark scheme usually rewards the distinction.
- Use the data given. Reject rates, return rates, complaint numbers and review scores are all quantifiable, and an answer that calculates from them outscores one that describes them.
- Look for the cause behind the symptom. A rising return rate might be a materials change, a new supplier, an untrained new starter or a machine drifting out of tolerance, and the case usually contains the clue.
- Convert quality into money before evaluating. Number of faulty units multiplied by cost per unit is the basic calculation; add lost repeat custom where the question allows.
- Connect quality to the brand and to price. A business charging a premium is selling a promise of consistency, so a quality failure damages the pricing strategy, not just the current order.
- In evaluation, recognise that quality has an optimum: raising it beyond what customers notice or will pay for adds cost without adding value.
Worked example
Pentland Outdoor sells 4,000 waterproof jackets a month at 90 pounds, with a 40 per cent gross margin. Returns have risen from 2 per cent to 7 per cent of sales since it changed zip supplier. Each return costs 22 pounds in postage, handling and repackaging. Quantify the problem and recommend action.
- Find the increase in returns: the rise is 7 - 2 = 5 percentage points, which on 4,000 jackets is 0.05 x 4,000 = 200 extra returns a month.
- Cost the direct handling: 200 x 22 = 4,400 pounds a month, or 52,800 pounds a year, purely in processing the extra returns.
- Add the lost contribution. Gross profit per jacket is 90 x 0.40 = 36 pounds, so if those 200 sales are lost rather than replaced, the further loss is 200 x 36 = 7,200 pounds a month.
- Identify the likely cause from the case: the rise coincides with the change of zip supplier, so the evidence points at the component rather than at assembly or design.
- Test the cause before acting: check whether returns are concentrated in jackets made after the supplier changed, and inspect the returned items to confirm the zip is the failure point rather than assuming it.
- Compare the options. Reverting to the original zip supplier costs whatever the saving was that prompted the switch; if that saving is less than roughly 4,400 pounds a month it is obviously worth reversing.
- Reach the recommendation: revert or replace the zip supplier immediately, because the handling cost alone is almost certainly larger than the component saving, and add a goods-in check on zips so a supplier change cannot reach the customer untested again. Note also the reputational cost, since a waterproof jacket that fails is reviewed publicly and undermines the premium price.
Practice questions
Try each question, then tap to reveal the answer.
Q1Distinguish between internal and external failure costs.Show answer
Answer: Internal failure costs arise before the product reaches the customer, such as scrap and rework. External failure costs arise after it has been sold, such as refunds, replacements, warranty repairs, lost customers and reputational damage.
Q2Explain why external failure usually costs more per unit than internal failure.Show answer
Answer: The product has already had all its value added, been packaged and delivered, so the business loses the full cost plus the delivery and the handling of the return, and it also risks losing the customer and future sales through a negative review.
Q3A business sells 5,000 units a month and 3 per cent are returned at a cost of 14 pounds each. Calculate the monthly cost of returns.Show answer
Answer: 0.03 x 5,000 = 150 returns. 150 x 14 = 2,100 pounds a month.
Q4Give three ways a business can identify quality problems.Show answer
Answer: Any three of: monitoring reject rates in production; tracking returns and warranty claims; reading customer complaints and online reviews; sampling or inspecting at stages of the process; asking employees who operate the process; mystery shopping or customer surveys.
Q5Why should a business look for the cause rather than fixing each faulty item?Show answer
Answer: Fixing individual items treats the symptom, so the fault keeps recurring and the cost is repeated indefinitely. Finding the cause, such as a supplier change or an untrained operator, removes the cost permanently.
Q6Explain how consistent quality supports a higher price.Show answer
Answer: Customers pay a premium for the confidence that the product will work as expected every time. That confidence is built by consistency, so a brand that never disappoints can charge more than a competitor whose quality varies, even for a similar product.
Q7Give one reason employees are a good source of information about quality problems.Show answer
Answer: They perform the process every day and see where it goes wrong, which steps are rushed, which tools are worn and which materials vary, none of which appears in the finished-goods inspection data.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
Corby Components supplies 20,000 parts a month to a car manufacturer at 12 pounds each, with a 25 per cent gross margin. Its customer has reported a defect rate of 1.5 per cent and has warned that a further rise will end the contract. Each defective part costs Corby 40 pounds in replacement, express delivery and administration. (a) Calculate the monthly cost of the defects. (b) Analyse two actions Corby could take to reduce the defect rate.
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Evaluate the view that a business should aim for the highest possible quality regardless of cost.
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See real GCSE Business past-paper questions, with official mark schemes →
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