Producer's risk definition
/What is Producer’s Risk?
Producer's risk relates to incurring a loss despite creating a good batch. In this case, a good batch is rejected by inspection; this is known as a Type 1 error. This risk relates to the following situations:
The manufacturer incurs a loss because it rejects a batch that it could have accepted; or
The manufacturer incurs a loss because it accepts a batch that is then rejected by the customer.
In either case, the manufacturer ends up paying for this mistaken rejection, since it will have to replace the goods that have been rejected.
Example of Producer’s Risk
As an example of producer’s risk, a pharmaceutical company produces a batch of medication that passes all internal quality criteria, but a random quality control sample falsely suggests a defect due to sampling variation, leading to the entire batch being discarded. This results in unnecessary loss and cost to the producer, despite the product being within specifications.