External failure costs

Line Pulls and Associated Failures. If an internal failure occurs, the line is stopped and the problem is resolved. This causes downtime and associated problems with getting the correct parts or correcting the problems that have been encountered. 

Warranty Costs. These costs can be a major expense and in many cases they are not really monitored. The cost systems that exist in many organizations do not have the capability to tie warranty costs back to the parts, the supplier, and the buyer. In the automobile industry this cost becomes very large as the warranties get extended. 

Rework/Scrap Costs. Scrap and rework can consume significant amounts of labor in trying to recover the material. Scrap recovery savings are always less than the cost of the original material. This is a good candidate for continuous improvement, and I have seen a lot of low-hanging fruit to be picked in the area of scrap reduction. 

Impositions on Bottleneck Operations. If a process is a bottleneck, it will cause capacity problems as well as scheduling issues. The concept of synchronous manufacturing needs to be implemented along with work on reducing inventories. Bottlenecks need to be removed so that processes can run smoothly. 

As you consider changes to your oiganization and its supply base, the first area that needs to be looked at is the decision whether you will make a product or whether you will buy that product. This is the first decision that is involved in the supply chain management process. Chapter 4 will deal with this topic in detail. 

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Failure costs - Internal failure costs are essentially the cost of failures identified and rectified before the final product gets to the external customer, such as rework, scrap, design changes. External failure costs include product recall, warranty and product liability claims. 

External failure costs and lost opportunities are potentially the most damaging costs to a business. Several examples commonly quoted in the literature are given below. 

Pc - internal failure cost due to rework at the end of the production line Pc - external failure cost for return from customer inspection 10 Pc - external failure cost for warranty return due to failure with customer in use. 

They are the operating quality costs of prevention and appraisal that are considered to be controllable quality costs. Add that in year 2000 the IRS decided to let companies deduct ISO 9000 costs as a business expense. Also there are the internal and external failure costs. As the controllable cost of prevention and appraisal increases, the uncontrollable cost of internal and external failure decreases. At some point the cost of prevention and appraising defective product exceeds the cost of correcting for the product failure. This point is the optimum operating quality cost. 

External failure cost is where an analysis result or certificate reach the customer before you discover that something has gone wrong. 

What gets measured gets done. The health of the quality system and the effectiveness of the quality plan need to be monitored. Therefore selecting the right set of quality metrics is important.Traditionally quality costs are broken down into preventive, appraisal, internal failure, and external failure costs. A commonly used indirect measure of internal failure costs is not-right-first time. Cycle time is another useful indirect measure of quality. Process quality can be measured. Processes can be rated on a 1-5 scale where ... 

Cost must be understood in the context of quahty. If quahty means conformance to requirements, then quality costs must be understood in terms of costs of conformance and costs of nonconformance, , as illustrated in Figure 19-1. In industrial terms, costs of conformance are divided into prevention costs and appraisal costs. Costs of nonconformance consist of internal and external failure costs. For a laboratory testing process, calibration is a good example of a cost incurred to prevent problems. Lhcewise, quality control is a cost for appraising performance, a repeat run is an internal failure cost for poor analytical performance, and repeat requests for tests because of poor analytical quality are an external failure cost. 

Prevention costs Appraisal costs Internal failure costs External failure costs... 

External failure costs are associated with efforts to regain cnstomer satisfaction and confidence if nnacceptable data leave the laboratory. 

The ultimate consequence of this approach is that quality improvement wUl lead to cost reduction (Crosby 1979 Garvin 1984b), which is achieved by lowering internal failure costs (e.g., scrap, rework, and spoilage) and external failure costs (e.g., warranty costs, complaint adjustments, service calls, and loss of goodwill and future sales) through prevention and inspection. 

Internal/external failure costs. These are costs incurred because of failures that are identified before they reach the customer and failures that have reached the customer. 

Process mapping Supply chain management Supply chain map Acquisition costs Possession costs Application costs Inspection costs Internal/external failure costs... 

List the key elements of the internal and external failure costs in your organization. 

Internal and external failure. Internal costs are scrap, rework and the associated costs of not getting it right the first time. External failure costs are rectification after products have reached the final customer, such as warranty claims, returns and repairs. 

Internal failures must be thrown out or recycled. These should all be detected in products where a batch can be sampled and tested. External failures are much more serious and costly, although it is not always easy to quantify the cost. In the case of a "normal" product, the customer will return it. If he is really unhappy he will not buy it again. If a batch of medicine is faulty, the F.D.A. (to name but one national authority) may recall it. If the agency is really unhappy about the company s structures, procedures, and methods, it may well take stronger action. 

External failure Time spent cooperating with external investigation Time/revenue lost because of interruption of sample throughput Legal costs Cost of corrective action Loss of reputation... 

Another aspect of QA made apparent by Table 11.4 is that the elements categorized as Internal and External failure are fewer, but more expensive. If QA efforts in the Prevention and Appraisal categories are managed properly, the cost of failure can be avoided. 

Failure costs rework and bad planning, nonproductive times by errors in production, time to examine the causes and consequences of failures, lack of work and accidents, obsolete resources, deficient utilization of resources and external services, delays of supplies, inefficient communication and affections in computer systems, contract errors, bhhng errors, loss of income, imcollectable debt, discounts of fees, customer complaints, time consumed in internal complaints and solving the problem escalated by customer, penalties, loss of market and company reputation. 

Cost of poor quality (COPQ) The cost of poor quality is made up of costs arising from internal faUnres, external failures, appraisal, prevention and lost opportunity costs. In other words all the costs that arise from non-conformance to a standard. 

Up to 90% of the total quality cost is due to failure, both internal and external, with around 50% being the average (Crosby, 1969 Russell and Taylor, 1995 Smith, 1993). A survey of UK manufacturing companies in 1994 found that failure under the various categories was responsible for 40% of the total cost of quality, followed by appraisal at 25%, and then prevention costs at 18%. This is shown in Figure 1.6. Of the companies surveyed, 17% were unsure where their quality costs originated, but indicated that these costs could be attributable to failure, either internally or externally. 

Customer complaints Warranty claims Failure analysis reports Process capability studies Service reports Concessions Change requests Subcontractor assessments Performance analysis Deviations and waivers Contract change records Quality cost data External Quality Audit records... 

A lack of much-needed MU water softening, dealkalization, or similar external treatment capability is quite common in many small to midsized industrial facilities. It seldom produces a complete boiler failure or anything quite so dramatic, but it is nonetheless very costly in terms of additional fuel costs and maintenance. Personnel may learn to live with the resultant poor quality of FW for many years, accepting the position as normal until the facts are pointed out and alternative proposals are considered. 

Following an EAL approach, traditionally regulatory systems originate from the presence of market failure in our specific case, the environment appears as a "public good" that may not be appropriated and has no market price the damage to the environment is a case of "externality," in that it is fully or partly a social cost that is not internalized into the accounts of the parties causing it.2 So the comparison of different instruments can consider how they may play a role in correcting malfunction and subsequent inefficiencies [7]. 

Damages to human health and the environment are by economists most often considered as market failures since they are external costs not included in the price when a transaction is taking place on the market. If the damage were to be fully financially compensated in the transaction, the damage would not be an external cost and the market would function properly. A properly functioning market implies that there is no problem to be solved (from the point of view of an economist). Externalities is the term used by economists when exploring non-priced effects of transactions [6]. 

So, summarising the situation, the company s management on the strategic control level, had to decrease their costs under pressure from stockholders. Both, the current information and historical information from the transformation and its deviations were not available. These three types of latent conditions led to the ineffective observation on the strategic control level, i.e. the failure to realise the necessity that engineers with the necessary expertise should be present on site. So, the latent conditions that caused the ineffective observation element on the strategic control level, are transformation, history, and external environment. ... 

Only after acceptance/approval has been obtained in writing from all necessary external and internal agencies should the installation begin. The failure to do so could result in delay of the project, major changes after the system has already been installed, or inadequate protection. The contractor would likely wish to pass any additional costs along to the owner. 

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