Question

What quality costs will Mars incur from its recall of Snickers candy bars?

The US chocolate maker Mars, one of the world’s largest privately-held companies, issued a voluntary recall in 55 countries for Snickers bars, Milky Way minis, and some other candy bar varieties that were manufactured in a Dutch factory between December 2015 and January 2016. A red piece of plastic was found in one Snickers bar by a customer in Germany; that piece of plastic was traced back to a protective cover used in the manufacturing process at a Mars production facility in the Netherlands. This recall potentially covers millions of candy bars; the recall does not affect Mars’ products made in the US. In an interview with the Financial Times, a financial analyst estimated that the recall would cost the company tens of millions of dollars.

Questions to discuss:

Prior to the recall, what specific costs of quality could Mars incur in the design, production, and distribution of its candy bars? Use your imagination - think about the manufacturing costs we have studied thus far.

What specific costs were the analysts referring to when estimating that this recall could cost Mars “tens of millions of dollars?” List as many costs as you can imagine might be incurred related to the recall. Again, use your imagination.

Answer 1

Solution:

1) Prior to the recall, the following types of specific costs could be incurred by Mars in the design, production and distribution of its candy bars:

A) Quality Planning - This is one of the most important quality cost incurred by any company.It refers to the level of quality desired for the product and how to go about that to achieve that quality.Once it is planned the level of quality reauired, it becomes easy for planning as to how to achieve it.It relates to the minimum standards necessarily required for the product to be able to sell in a market and is the most essential cost to be incurred.

B) Quality Training - Once the quality planning had been done to know what level of quality is required for the product, next step is the quality training where the training programmes are conceptualised and provided to the staff members to achieve that particular level of quality required.These trainings are very essential so that the cocerned workers or staff members know beforehand what is expected of them and what is the best way to achieve the desired result.

C) Auditing costs to know the effectiveness of Quality system - One of the major quality cost is the cost incurred on the Audit to know the effectiveess of quality syste. This is because even though the company has done the quality planning and training to achieve the desired quality level , there is no definite proof of the same unless it is confirmed by conducting audit of the effectiveness of the quality system installed and developed.Auditing gives us the confidence to know that our quality system is foolproof and the staff has understood the requirements clearly.

D) Final Product testing and inspection - After the Final Product is made following all the quality system procedures and training ,it becomes necessary to test the end product to know whether it conforms to all the standards required of the product and is fit for use or not. Unless the end product is tested for its quality and usefulness, one cannot be sure whether it will serve the required purpose or not.

E) Net cost of Scrap and spoilage - In every production, there is some scrap and spoilage inherent which cannot be avoided at any cost.Such costs are also a part of quality costs becuase when we do quality planning, we are required to perform all our activities in a systematic manner which will always lead to some wastage or spoilage in the production process which cannot be avoided.

F) Disposal of defective goods - After completion of our manufacturing process, there will be some defectibve goods which will be there as a result of the quality process.Now these defective products needs to be disposed off which will also incur a cost which cannot be avoided.

G) Packaging Inspection - After the final product is made after doing numerous quality testings and taking precautions, these are packaged so that they can be shipped to the destination.But this packaging done has also to be inspected to be sure that it is properly done and will be able to reach the desired destination without any problems like leaking,pilferage etc. So these packages are put to various tests to determine their sustainance and adequacy.

H) Retesting and design changes - After a product reaches its final stage, it is retested to know whwther it conforms to the predetermined standards,quality or not. And there are some instances where it is found out that the final product manufactired is not feasible or conforms to required quality.So there arises a need to change its design which results in an additional cost for the same.

2) The specific costs which the analysts were referring to when estimating that this recall could cost Mars “tens of millions of dollars are:

A) Costs of Recalls - The cost of recalling back a product could be huge because it involves diiferent kinds of costs like courier costs,administration costs and shipping costs which can vary depending on the location and the size of the product to be recalled.

B) Lost sales because of poor product performance - Another cost is the sales which is being lost due to the poor product performance because the Manufacturer loses the margin on returned items, the sale of which must be reversed or otherwise reflected in financial statements, as well as any projected sales of the recalled product. The more product-units returned, the lower will be the revenue recognized which is a huge loss to the manufacturer.

C) Customer dissatisfaction - Another major cost involved though not in immediate real terms is the customer dissatisfaction with the product recalled because when a customer sends back a product due to some defect, it sets in his mind that there is a problem with this Company's product and he may not be able to purchase that product even in future even after the product ahs been rectified.

D) Liability arising from defective products - Liability can arise due to the defective prodcuts if the customer decided to sue te company in respect of the defective product.These costs are relatively easy for companies to quantify, but are difficult for others to analyze because settlements are often sealed. To the extent that the recalls are for products belonging to public companies, and these companies report these costs in their Annual Reports, we can have an idea about the claimed damage amounts. Yet, the actual cost of the suit, including legal fees associated with defence of a particular product issue, are difficult to know.

E) Lost Market share - When a company recalls its products from the market due to some defects, it loses a substantial market share because the competitors find it a perfect opportunity to increase their sales by flooding their products in the market resulting in an increase in their market share.So the company loses its market shares due to these recalls.

• The various costs can be classified as follows :

PRE RECALL

Cost	Type of Cost
Quality Planning	PREVENTION
Quality Training	PREVENTION
Auditing costs to know the effectiveness of Quality system	PREVENTION
Final Product testing and inspection	PREVENTION
Net cost of Scrap and spoilage	INTERNAL FAILURE
Disposal of defective goods	INTERNAL FAILURE
Packaging Inspection	APPRAISAL
Retesting and design changes	INTERNAL FAILURE

POST RECALL

Costs of Recalls	EXTERNAL FAILURE
Lost sales because of poor product performance	EXTERNAL FAILURE
Customer dissatisfaction	EXTERNAL FAILURE
Liability arising from defective products	EXTERNAL FAILURE
Lost Market share	EXTERNAL FAILURE