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Errors in the production process (either by humans or machines) cause a loss of units through rejection at inspection for failure to meet appropriate quality standards or designated product specifications. Whether these lost units are considered defective or spoiled depends on their ability to be economically reworked.
Economically reworked means that (1) the unit can be reprocessed to a sufficient quality level to be salable through normal distribution channels and (2) incremental rework cost is less than incremental revenue from the sale of reworked units. A defective unit can be economically reworked, but a spoiled unit cannot. An inspector in the company making the product determines which are defective and which are spoiled.
To illustrate the difference between defective and spoiled units, assume you order blackened redfish at a restaurant. You are now the control inspector. If the redfish brought to you is barely blackened, it is a defective unit because the chef can cook it longer to bring it up to “product specifications.” The incremental revenue is the selling price of the redfish; the incremental cost is a few moments of the chef’s time. However, if the fish brought to you is blackened to a cinder, it is a spoiled unit because it cannot be reworked. Therefore, a newly cooked blackened redfish would have to be provided.
