When a product doesn’t meet specification but is subsequently repaired and sold, it is called rework

Companies try to minimize rework, as well as spoilage and scrap, during production. Why? Because higher-than-normal levels of spoilage and scrap can have a significant negative effect on a company’s profits. Rework can also cause companies to incur substantial costs, as the following article about Tesla shows.

Rework Hampers Tesla Model 3 Production^*

When Tesla unveiled its Model 3 electric car, more than 400,000 people paid $1,000 for a spot on the waiting list to purchase one of the sedans. To meet this unprecedented demand, Tesla quickly ramped up Model 3 production. The goal: produce 5,000 new cars per week by June 30, 2018.

As that deadline neared, Tesla encountered significant production woes with high levels of raw materials waste and rework required on parts made at its Gigafactory in Nevada. Out of the 5,000 Model 3s produced per week, nearly 4,300 required some rework. Tesla did the rework at its offsite remanufacturing facility rather than onsite, as is standard industry practice.

Along with increased materials costs, the rework added more than 2,600 additional labor-hours per week to the manufacturing process. In early 2019, Tesla was forced to cut its full-time workforce by 7% to cut costs and bolster Model 3 profitability amid its rocky launch.

For Tesla and other companies, the costs of producing defective output can be enormous. Firms in industries as varied as construction (Skanska), aeronautics (Lockheed Martin), product development software (Dassault Systemes), and specialty food (Tate & Lyle) have set zero-defects goals. Reducing defects and waste is also a key element of sustainability programs at many enlightened organizations and government bodies.

In this chapter, we focus on three types of costs that arise as a result of defects—spoilage, rework, and scrap—and ways to account for them. We also describe how to determine (1) the cost of products, (2) cost of goods sold, and (3) inventory values when spoilage, rework, and scrap occur.

The Washington Post/Mason Trinca