By: Berlin Packaging Specialist
Date: December 26, 2019
Companies have to work hard to maintain and improve their reputation for quality, which can easily be damaged by product quality defects. The cost of poor quality includes internal and external failure costs.
Internal Failure Costs
Defects that are found before delivery to external customers – are caused by products or services not conforming to requirements or customer/user needs. The more effective a company’s appraisal activities, the greater the chance of catching defects internally and the higher the internal failure costs. (We’ll talk more about appraisal costs later in the paper)
Internal failure costs are caused both by errors in products and by ineffi ciencies in processes.
These costs include:
- Scrap: The labor and material that created the defective product.
- Rework: The cost to correct the defective material.
- Re-testing: The cost to retest products after rework or other revisions.
- Downtime: The loss of effective capacity caused by the quality problems.
- Failure Analysis: The cost of analyzing nonconforming goods or services to determine root causes.
- Changing Processes: The cost of modifying the manufacturing or service processes to correct the defi ciencies.
- Downgrading: The cost difference between the normal selling price and the reduced price due to quality reasons.
- Backorders: The loss of revenue from not fulfi lling current orders and losing future orders due to backorder situations.
External Failure Costs
When a defective product or service is delivered to a customer, external failure costs result. Typically, the cost to eliminate an external failure is five times greater than at the internal phase. This cost is incurred either because the defect was not caught before shipping (which would have resulted in an internal failure costs), because a decision was made to ship knowing about the defect, or because the company did not adequately test its goods prior to shipping.
External failure costs include:
- Complaints: The costs of investigation and adjustment of justifi ed complaints from the defective product.
- Warranties: The costs involved in replacing or making repairs to products that are still within the warranty period.
- Repairing Returns: The costs associated with the receipt, repair, and replacement of defective product.
- Allowances: The costs of concessions made to customers in exchange for an agreement to use a substandard product “as is.”
- Penalties: The costs involved with violations in service level agreements.
- Lost Opportunities: Future profi ts lost due to customers switching for reasons of quality. This includes canceled contracts and loss of prospective customers.
- Company’s Brand and Image: While this cost is hard to measure, it has the potential to be the most damaging to a company. There are many costs involved when something goes wrong. Further, there is another set of costs involved with preventing failures and defects; these are the costs of good quality.