External Failure and Internal Failure Cost

Given the highly competitive nature of today’s markets we as a company must provide high quality products to survive. Quality itself has become a major competitive factor and in many ways is a contributing factor in success or failure. The intent of this memo is to identify, explain and evaluate the three types of cost associated with quality.

Failure costs is cost associated with products or services that are below par. This can be seen in Internal and External costs. Internal costs are those that are discovered while our products are still in production. External costs are those costs associated with failures identified once the products reach our customers. An example of internal costs would be if one of our manufacturing equipment went faulty and caused our products to be made outside of our quality standards. An external failure example would be the cost applicable to us trying to correct a defective product reaching our customers. We most commonly see this with the need to ship a replacement item for our customers that have received a flawed product.

As I said on the thread discussion,The cost of quality is not the price of creating a quality product or service but the cost of not creating a quality product or service:If an organization can quantify the quality of their products and services, they can use Quality is conformance to requirements as a definition for quality. If an organization cannot quantify, they can use Quality is satisfying the needs and

A breach of contract can ultimately affect more than just the two parties involved; it can affect customers, employees and shareholders as well. A business should decide what types of damages apply to it so to properly estimate its damage calculation. A loss in profits and sales occur during a particular period and could potentially be felt in further periods as well. These losses occur when general operations of a business are affected because of the breach. Another impact a contract violation may have is the additional costs that are added to a business as they try to minimize the problems caused by the breach. The additional costs may result from increased shipping costs, financial penalties or additional not budgeted advertising costs. A business could also suffer from a loss in value if the business is forced to close or a particular segment is lost or negatively impacted due to problems that arise from a contract breach. All of these types of damages may be utilized for a potential plaintiff’s case when filling a lawsuit for a breach of

Cost minimisation however, cannot be pursued without attention to quality - there must be a balance between the two

An important aspect for our consideration includes the costs of quality. Considering our product is not affected by place, income, sex, race, age, or any environmental concern, the profit margins should be considered higher. However, it is crucial to recognize three costs of quality to ensure our product achieves the highest profit margins with little room for the unexpected.

Product production comes with many types of costs. Four of the most common costs are prevention costs, appraisal costs, internal failure costs and external failure costs. These four costs are called quality costs and are costs that all businesses that produce products will pay. The amount of money that will go to each cost is dependent on the amount spent on the other costs. In other words, an increase in one type of cost can result in a decrease in another. Businesses need to understand the nature of each cost in order to understand for which cost to budget.

Internal failures happen for a variety of reasons, defective materials, incorrect machine settings, faulty equipment, carelessness and others. The trade-off cost for fixing these types of failures would be cost of additional production time, scrap materials and rework of inadequate products, investigation costs into the root cause of the issues as well as workers’ salaries to not only do the investigation and rework if needed, but the salaries of the employees that are not able to run the production lines to produce items. The other failure cost is External and these are failures that are discovered by the consumer once they have purchased the product. These can carry a much higher cost when found by the consumers. These costs can include Warranty repairs or replacements, costs of having a customer care center or call center to deal with customer complaints, discounts to customers for current or future products and Legal action if the failure of a product caused some type of personal injury.

Risk of increasing labor costs faster than expected which could directly impact the pricing of the products

In project management, contract almost related with every level of project, such as material buying, price negotiation, customer service and payments. Supplier is another important role in project management. If contractor could give a appropriate contact to supplier, it will helps on build stable relationship, with supplier, even more, it could bargain with price of materials. However, if contract not finish at each single phases of project, it will increase negotiation time, which means definitely time delay and cost overruns. With decent contract management of project, it will simply to avoid such fundamental problems. Another explanation for contract error is worker. Human resource is also important for basic project proceeding, and it has been included in contract management as well. Similarly, all potential possibilities need considered by manager. “careful consideration need to be finished when forming the initial contract, for about what might occur during its operation, this will guarantee that things are included in the contract documents that enable effective contract management”(OGC 2010)

The first type of cost when quality considerations are made are appraisal costs. Appraisal costs are the costs of activities that are designed to ensure quality or expose the defects with a product or service. Appraisal costs include, but are not limited to, inspection

The issues encountered can occur on both the company and customer side, among them are the

Our company should make sure that manufacturers deliver products with the highest design specification, in order to be order-winner quality conformance, by delivering products with no defects (Hill and Hill, 2012). Furthermore, improvements in quality lead to a decrease in cost for the company. According to (Evans, 1997) higher quality products lead to a decrease in costs for the company through higher productivity: ‘improvements in quality leads to lower cost because of less re-work, fewer mistakes, fewer delays and snags’ (Evans 1997, P.55).

Yasin and Alavi (1999) conducted a quantitative study to determine if Total Quality Management (TQM) can produce quality improvement

Implementation of excellent quality comes with a cost. The company must decide if it is really worth compromising the quality for revenue. If the quality costs exceeds the expected revenue of the company then the company must abandon implementing quality control mechanism. If otherwise, the quality would contribute to the product value and hence the revenue.