Question

A team of internal auditors developed the following finding, except for their recommendation:

Condition                            Current production rate per machine is 120 units per day, leading to more than two-week delays in job deliveries.

Criteria                                 The standard production rate is an average of 150 units per day per machine.

Cause                                    The variable quality of the current supply of raw materials results in inconsistent product quality, numerous rejects, and machine breakdowns.

Effect                                    In addition to production delays, 10 percent of all orders have been canceled over the last 3 months. New orders have decreased from an average of 100 per week to 90 per week. The combined effect of canceled orders and the loss of new sales decreases revenues by approximately $200,000 monthly. Production costs also have increased by $15,000 per month in materials wastage and $5,000 average monthly repair cost on machinery.

REQUIRED:                         What recommendation would you make in this case?     

Answer 1

Recommendations to be made:

1. The cause has already being identified as the quality of raw materials. With impact of $15,000 wastage and revenue impact from sales returns, the company can go with either of the below two options:
   1. Hire a Quality Inspector to review the raw materials before they are shipped to the factory for production. This way adverse quality raw materials can be returned to the vendor before usage and this helps in reducing the wastage cost and also can potentially increase quality of finished products. The quality inspector can also be employed to review the finished goods before being sent to the customer to reduce the return %.
   2. Look out for a new vendor for better quality of raw materials.
2. In order to increase the sale orders,
   1. Offer discounts to the customers who had reduced their orders.