Consumer and Producer’s Consumer and Producer’s RiskRisk

Jill SefcikJill Sefcik

OISM 470WOISM 470W

Section #1Section #1

OUTLINEOUTLINE

• DefinitionDefinition• Brainstorming ExerciseBrainstorming Exercise• Nuts and BoltsNuts and Bolts• How it WorksHow it Works• Exercise Exercise • SummarySummary

Consumer’s RiskConsumer’s Risk

• DefinitionDefinition•Accepting a batch of materials that Accepting a batch of materials that

are of poor quality but assuming are of poor quality but assuming the materials are of high quality the materials are of high quality

Producer’s RiskProducer’s Risk

• DefinitionDefinition•Rejecting a batch of materials that Rejecting a batch of materials that

are of good qualityare of good quality

Brainstorming ExerciseBrainstorming Exercise

• How can you minimize consumer How can you minimize consumer and producer’s risk in your and producer’s risk in your organization?organization?

Nuts and BoltsNuts and Bolts

• Types of errorsTypes of errors•Type I error – Producer’s riskType I error – Producer’s risk•Type II error – Consumer’s riskType II error – Consumer’s risk

Nuts and BoltsNuts and Bolts

• Results of Type I and Type II errorsResults of Type I and Type II errors• Lost future salesLost future sales• High costsHigh costs

Nuts and BoltsNuts and Bolts

• Statistical Quality Control Statistical Quality Control proceduresprocedures

• Minimization of Type I errorsMinimization of Type I errors• Large inspection sample sizeLarge inspection sample size• Higher risk of Type II errorsHigher risk of Type II errors

How it WorksHow it Works

• Acceptance samplingAcceptance sampling• used to determine whether to accept or used to determine whether to accept or

reject productreject product• Can inspect 100% of products or few Can inspect 100% of products or few

productsproducts

How it WorksHow it Works

• Acceptance samplingAcceptance sampling•Batch assumed acceptable unless Batch assumed acceptable unless

statistics strongly prove otherwisestatistics strongly prove otherwise- Ex: “The most useful analogy is the Ex: “The most useful analogy is the

U.S. Justice System, where suspects U.S. Justice System, where suspects are assumed to be innocent unless are assumed to be innocent unless they are proven guilty” (Maleyeff 24).they are proven guilty” (Maleyeff 24).

How it WorksHow it Works

• The following slide provides a The following slide provides a visual representation of consumer visual representation of consumer and producer’s riskand producer’s risk

How it WorksHow it WorksTable taken from Table taken from Managing Quality An Integrative Managing Quality An Integrative ApproachApproach

  

  

State of NatureState of Nature

Product Product is Goodis Good

Product is Product is DefectiveDefective

OutcomeOutcome

ConsumeConsumer Accepts r Accepts ProductProduct

OKOK ConsumeConsumer’s riskr’s risk

ConsumeConsumer Rejects r Rejects ProductProduct

ProducerProducer’s risk’s risk

OKOK

Real World ExampleReal World Example

• Consumer’s riskConsumer’s risk•Firestone tires on Ford Explorer’sFirestone tires on Ford Explorer’s

• Consumer’s thought were receiving Consumer’s thought were receiving high quality product but they did high quality product but they did notnot

Real World ExampleReal World Example

• Producer’s riskProducer’s risk• Automotive supplier rejects a batch of Automotive supplier rejects a batch of

harnesses though the harnesses are of a harnesses though the harnesses are of a high qualityhigh quality

ExerciseExercise

• Is this a consumer or producer’s Is this a consumer or producer’s risk?risk?

• A manufacturer of pens rejects a lot of A manufacturer of pens rejects a lot of high quality pens due to standards that high quality pens due to standards that fall outside of their allowable rangefall outside of their allowable range

Exercise - AnswerExercise - Answer

• A manufacturer of pens rejects a lot of A manufacturer of pens rejects a lot of high quality pens due to standards that high quality pens due to standards that fall outside of their allowable rangefall outside of their allowable range

ANSWER-PRODUCER’S RISKANSWER-PRODUCER’S RISK

ExerciseExercise

• Is this a consumer or producer’s Is this a consumer or producer’s risk?risk?

• A house is purchased that is believed to A house is purchased that is believed to be of high quality, but within a month the be of high quality, but within a month the plumbing has failed?plumbing has failed?

Exercise - AnswerExercise - Answer

• A house is purchased that is believed to A house is purchased that is believed to be of high quality, but within a month be of high quality, but within a month the plumbing has failed?the plumbing has failed?

ANSWER – CONSUMER’S RISKANSWER – CONSUMER’S RISK

SummarySummary

• Consumer’s riskConsumer’s risk• Producer’s riskProducer’s risk

BibliographyBibliography

• Foster, S. Thomas, Foster, S. Thomas, Managing Quality An Managing Quality An Integrative ApproachIntegrative Approach, Prentice Hall, 2001, pgs. , Prentice Hall, 2001, pgs. 265, 351-352.265, 351-352.

• Graves, Samuel B,; Ringuest, Jeffrey L.; Graves, Samuel B,; Ringuest, Jeffrey L.; “Producer’s and Consumer’s Risk When “Producer’s and Consumer’s Risk When Proportion Defective is,” Proportion Defective is,” Decision SciencesDecision Sciences, , Sept/Oct 1991, pgs. 753-771.Sept/Oct 1991, pgs. 753-771.

• Maleyeff, John, “The fundamental concepts of Maleyeff, John, “The fundamental concepts of statistical quality control,” statistical quality control,” Industrial Industrial EngineeringEngineering, Norcross, Dec 1994, pgs. 24-25., Norcross, Dec 1994, pgs. 24-25.