A retail website sells a variety of products including clothes, electronics, furniture, sporting goods, books, video games, CDs and DVDs, among other items. An average customer order is $47. Weekly total variable costs are $365,000 and weekly fixed costs are $85,000. The company averages 18,400 orders per week and 12% of all orders are returned for a variety of reasons besides the customer not liking the product, including product misinformation on the website, errors in fulfilling the order, incomplete orders, defective product, breakage, etc. Thirty percent of all returned orders are turned around and refilled correctly per the customer’s desire, but at a cost (for handling, packaging, and mailing) of $8 per order, while the remaining 70% of returned orders are lost. In addition, it is estimated that half of the customers associated with lost orders will not return to the website at a cost of $15 per order. Determine the weekly cost of poor quality for the website. The company can implement a quality improvement program for $800,000 a year that will reduce the percentage of returned orders to 2%; should the company invest in the program? How should the company address its quality problem, i.e., what processes does it likely need to improve?
Why would zero defects not eliminate returned orders?

  • CreatedApril 10, 2014
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