In this classification of cost of quality the last item here is External Failure. 2
This is something that you need to avoid at any cost whatever you do, whatever money you spent in top 3
three it's still worth rather than going through this amount of money which will be spending in External Failure. 4
When it comes to external failure 5
let's look at some examples of those. Examples could be sales, returns and allowances whatever returns 6
you get because of repairs and rejection. 7
Those would be considered as the external failure cost. 8
And if you have a service level agreement the penalties because of that would be the external failure 9
cost. 10
For example my website host gives me a warranty that my website will be up and running for ninety nine 11
point ninety nine percent of time. 12
But if that company fails to maintain that the service level agreement there's a penalty involved 13
related to that and the cost of that would be considered as the external failure cost. External failure 14
cost will include complaints handling, whatever complaints you are getting from your customers handling 15
those, managing those the department which you have set up for that all that cost is related to external 16
failure cost. 17
Because if your product was good you could have avoided all these costs related to complain handling. 18
**** 19
The another example here could be the field service labor and parts costs because you have some warranty 20
obligation. 21
So you need to send your technician get that thing repaired. 22
That's a cost related to external failure cost, much bigger than these costs would be the cost of a recall. 23
You would have heard number of cases related to recall where because of the problem company 24
had to recall their products back. 25
Whether that's Toyota, Toyota has gone to a big recall. 26
A number of other companies have gone through big recalls which have costed them maybe millions, maybe 27
billions of dollars for handling those complaints, handling those quality issues. 28
And then there could be some legal claims lawsuits which you have to fight because of the problem because 29
of the quality issues which were in the product. 30
So these costs really could be very big and could really affect the company as a whole. 31
So whatever you want to do you look at these four costs and see how much you're spending in these categories 32
and where you can spend more. 33
Many a times it's not really practical to maintain all these cost, this many a times still remains a theoretical 34
concept but it gives a very strong indication that you need to avoid internal and external cost. 35
If you spend a little bit more on prevention, a little bit more on appraisal 36
it is still worth doing that because that way you can avoid the big cost which could be related to internal 37
or external failures. 38
Number of times people have a question that how much percent of cost should be in each of these categories. 39
How much money we should be spending in prevention. 40
How much money we should be spending in appraisal. 41
There is no direct answer to that because it all depends from industry to industry. 42
The company the company and many a times as I said earlier that might not be a very good accounting mechanism 43
to maintain all these costs. 44
But the point here is that each employee in the organization should understand these that there are costs 45
related to these four categories and they need to understand that any attempt to avoid internal and 46
external failure cost will be good for the organization. 47
Management need to understand that they need to spend more money in prevention and some money in appraisal 48
rather than spending a lots and lots of money in Internal and External Failure. 49
So these were four categories of costs of quality. On the next slide 50
very quickly look at why do we need this.