External Failure Costs vs. Internal Failure Costs

Attribute	External Failure Costs	Internal Failure Costs
Definition	Costs incurred when defects are found after the product has been delivered to the customer	Costs incurred when defects are found before the product is delivered to the customer
Impact	Can damage reputation, lead to customer dissatisfaction, and result in lost sales	Can result in rework, scrap, and delays in production
Costs	Include warranty claims, product recalls, and customer support	Include rework, scrap, and downtime

Definition

External failure costs and internal failure costs are two types of costs associated with quality management in a business. External failure costs refer to the costs incurred when defects are discovered after the product has been delivered to the customer. These costs include warranty claims, product recalls, and customer complaints. On the other hand, internal failure costs are costs incurred when defects are discovered before the product is delivered to the customer. These costs include rework, scrap, and downtime.

Impact on Business

External failure costs can have a significant impact on a business's reputation and bottom line. When customers experience defects in a product, they are likely to lose trust in the company and may choose to take their business elsewhere. This can result in lost sales and damage to the brand's image. Internal failure costs, on the other hand, can impact a business's productivity and efficiency. When defects are discovered during the production process, it can lead to delays, increased production costs, and decreased employee morale.

Prevention

Preventing external failure costs requires a focus on quality control and customer feedback. By implementing quality control measures throughout the production process and actively seeking feedback from customers, businesses can identify and address potential defects before they reach the customer. Internal failure costs, on the other hand, can be prevented through effective training, process improvement, and regular quality checks. By investing in employee training, optimizing production processes, and conducting regular quality audits, businesses can reduce the likelihood of defects occurring during production.

Measurement

Measuring external failure costs involves tracking warranty claims, customer complaints, and product recalls. By analyzing these metrics, businesses can identify trends and patterns that may indicate underlying quality issues. Internal failure costs, on the other hand, can be measured by tracking rework, scrap, and downtime. By monitoring these metrics, businesses can identify areas of improvement and implement corrective actions to reduce internal failure costs.

Costs

External failure costs are typically higher than internal failure costs, as they involve expenses related to customer dissatisfaction and potential legal liabilities. These costs can include refunds, replacements, and legal fees. Internal failure costs, on the other hand, are more focused on the direct costs of rework, scrap, and downtime. While internal failure costs may be lower in terms of monetary value, they can still have a significant impact on a business's profitability and competitiveness.

Conclusion

In conclusion, external failure costs and internal failure costs are both important aspects of quality management in a business. While external failure costs can have a more immediate impact on a business's reputation and bottom line, internal failure costs can also have significant consequences in terms of productivity and efficiency. By understanding the differences between these two types of costs and implementing strategies to prevent and reduce them, businesses can improve their overall quality management practices and ultimately enhance their competitiveness in the market.