External Failure Costs
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External Failure costs represent a category in the total cost of quality where the quality costs are related to defects found after delivery of the product to the customer. External failure costs are generally the highest of the 4 cost of quality categories since the full value of work and processes had to be performed to get the product to the customer. These costs are incurred because the product shipped failed to conform to quality requirements and may include warranties, shipping charges, repairs, recalls, legal actions and lost sales.
External failure costs are notorious for being difficult to measure due to the hidden costs associated with defective products being received by the end user. So how does one measure the cost of lost sales or loss of potential customers? One method is by using customer survey that ask such questions regarding the behavior of returning product.
Example, Using a customer survey one might determine that 9 out of 10 customers who purchase a defective product are likely to discard it and only 1 of 10 return it to the manufacturer for refund or replacement a multiplier can be applied to estimate customer returns. In this case multiplying actual customer returns by can provide a reasonable estimate of this element of external failure cost. This number can help determine the typical customer’s intention to on buying the product again after receiving a defective one and the number of dissatisfied customers that may provide a measure of lost sales.
Internal Failure Costs
Internal failure costs are costs that are incurred as a result of identifying defective products before they are shipped to customers. The labor, material, and (usually) overhead that created the defective product. The areas / nonmenclature are numerous and include; scrap, spoilage, defectives, etc.
The cost to correct the defective material or errors in service products which are found prior to sending to the customer. Some examples of internal costs of quality are:
- Lost or missing information: The cost to retrieve this expected information.
The cost analyzing nonconforming goods or services to determine the root causes. - Supplier scrap and rework: Scrap and rework costs due to nonconforming product received from suppliers. This includes the costs to the buyer of resolving the supplier quality problems.
- 100% Sorting inspection: The cost of completing 100% inspection to sort defective units from good units.
- Retest: The cost to retest products after rework or other revision.
Changing processes: The cost of modifying the manufacturing or service processes to correct the deficiencies. - Redesign of hardware: The cost to change designs of hardware to correct the issues.
- Redesign of software: The internal cost to changing software designs.
- Scrapping of obsolete product: The cost of disposing scrap.
- Scrap in support operations: Costs from defective items in indirect operations.
Rework in internal support operations: Costs from correcting defective items in indirect operations. - Downgrading: The cost difference between the normal selling price and the reduced price due to quality reasons.
- Variability of product characteristics: Rework losses that occur with conforming product (e.g.,overfill of packages due to variability of filling and measuring equipment).
- Unplanned downtime of equipment: Loss of capacity of equipment due to failures.
- Inventory shrinkage: Loss costs due to the difference between actual and recorded inventory quantity.
- Non-value-added activities: Cost due to redundant operations, sorting inspections, and other non-value added activities. A value-added activity increases the usefulness of a product to the customer; a non-value-added activity does not.
Appraisal Costs
Appraisal costs constitute all costs that go testing and inspection of products. The detection of defective parts and products should be caught as early as possible in the manufacturing process. Appraisal costs are sometimes called inspection costs and are incurred to identify defective products before the products are shipped to customers. The problem with appraial costs is in the fact that they are not true “value added” activitives since the generally inspection and testing are not requirements of the customer. The customer just expects the product to function as advertised with no requirement for the product to be tested. The fact that the product is tested and advertised as such may make the customer feel better about the product but the expectation is for the product to, “just work” and if the product was never tested then the customer would not care anyway.
There are exceptions to this rule when customers require product testing as part of their purchase order / contract. So, why do we spend so many resources on testing and inspecting products? The answer is in the failure costs associated with allowing a defect to escape to the next process or customer.
Another unfortunate aspect of performing appraisal activities is that it doesn’t keep defects from happening again. Due to this managers see that maintaining an army of inspectors can be very costly and ineffective approach to quality control.
Today’s quality initiatives are increasingly asking employees and suppliers to be responsible for their own quality control. Further innovations are being put into designing products to be manufactured in ways to eliminate the need for inspections or testing. Engineering reliability into a product is the most efficient process to reduct quality costs.
Raw Material Quality Costs
Raw material critical to manufacturing of any product. The final product is a direct result of the quality of the raw material and the potential cost of poor quality can be drastically reduced by ensuring high quality in raw materials. In the business of metal fabrication and assembly the quality of the metal has an enormous impact on the overall function and design limitation of the final product.
There is a wide variety of mills and foundries to produce metal bars, sheets, tubes, and castings according to the specifications of the customer to meet the required Chemical and Mechanical properties. Both chemical and mechanical properties can impact the final product.
Chemistry is generally performed at all mills and foundries by using spectrometry. Good metal produces often have 2 such machines in case one machine goes down for any reason.
Physical properties generally include metal hardness, impact tests, yield strength, and ultimate tensile strength. The most common methods to measure such properties are by using Rockwell and Brinell hardness testers, IZOD tester, and tensile bars for pull tests.
Something for quality professionals to keep in mind is that it is important to check incoming raw material from any distributor, mill, or foundry since there is always a possibility that a mix up may occur. One of the most economical methods of performing a quick quality check is via a Rockwell or Brinell hardness test. More often a Brinell Hardness test is performed due to the ability to perform more easily on raw materal since the tester can actually accomidate large bars and sheets and is more portable than a Rockwell tester. Digital hardness testers are not recommended since they do not fit the ASTM E10 or ASTM E18 requirements for Brinell and Rockwell testing.
Keep in mind it is the responsibility of the customer to provide well defined raw material specifications to the supplier. Most mills and foundries try to produce metal in a range that will satisfy multiple customer specifications so that it is most efficient for them. This process can produce materal that may be boardline to a particular customer’s needs. It is important to always check the mill test report (also known as an MTR) to determine what specifications the metal actually is.
Prevention Costs
Prevention Costs are any costs that are incurred in an effort to minimize appraisal and failure costs. This category is where most quality professionals want to live. They say an ounce of prevention is worth a pound of cure and they is what this category is all about. This includes the activities that contribute to creation of the overall quality plan and the numerous specialized plans. Examples include:
Review of new products: The quality planing and inspection planning for new products and design of new products.
Process planning: Inspection planning, Process capability studies, various other work associated with the manufacturing and service processes.
Process control: Evaluation of in-process inspection procedures and and testing to determine the current status of a process
Quality audits: Evaluating adherence and execution of the overall quality plan.
Supplier quality selection and evaluation: Analyzing supplier quality activities prior to supplier selection, perform auditing of processes during the contract, education and training of suppliers.
Quality Training: Preparation and implementation of quality training programs. Similar to appraisal costs some of this work may be executed by personell that are not in the quality assurance department. For accounting perposes it’s important to separate this by the type of work being performed and not the department of the employees performing the work. Activity based costing accounting lends itself to this.
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