How to Identify External Costs in Your Quality Management System

While internal failure costs are these costs of deficiencies discovered before delivery which are associated with the failure or nonconformists to meet requirements or implicit needs of external and internal customersو the external failure costs are these costs associated with deficiencies that are found after product is received by the customers which also included are lost opportunities for sales revenue.The external failure costs come into play when the product or service does not conform the customer requirements or expectations after he received the product or services. In the past, some managers attitude was “let’s ship everything to customers and we will take care of any problem under the warranty. which generally results in high external failure costs. And this can be four times greater than internal failure costs.

when you implement quality cost program in your organization then it is important to determine the external failure costs the same as the importance of internal failure costs and here is some examples about external failure costs

1- Failure to meet customer requirements and needs:

  • Warranty: is the costs involved in replacing or making repairs to products that are still within the warranty period
  • Complaint adjustment: is the costs of investigation and adjustment of justified complaints attributable to defective product or installation
  • Returned material: is The costs associated with receipt and replacement of defective product received from the field
  • Allowances: Is the Costs of concessions made to customer due to substandard products accepted by the customer as is or to conforming product that does not meet customer needs
  • penalties due to poor quality: This applies to goods or services delivered or to internal processes such as late payment of an invoice resulting in a lost discount for paying on time
  • Rework on support operations: Correcting errors on billing and other external processes
  • Revenuer losses in support operations: An example is the failure to collect on receivables from some customers
  • Liability Costs: liability claims, including the cost of product or service liability insurance

2- Lost Opportunities for Sales Revenue

  • Customer defections: Profit margin on current revenue lost due to customers who switch for reasons of quality “Contracts that are canceled due to quality”
  • New customers lost because of quality: Profit on potential customers lost because of poor quality
  • New customers lost because of lack of capability to meet customer needs

For more information on establishing ISO Quality Management Systems, contact:

J. M. Juran and A. B. Godfrey, Juran’s Quality Handbook, 5th ed.ASQ Quality Costs Committee. Principles of Quality Costs: Principles, Implementation and Use, Third Edition. J. Campanella, editor Milwaukee: ASQ Quality Press, 1999


Leave a Reply