Internal Failure Costs
Internal failure costs are one of the components of the Cost of Quality, which is a methodology used to quantify the total cost of producing a quality product.
Internal failure costs are costs incurred when a product fails to meet quality standards and the failure is discovered before the product reaches customers. These costs arise as a result of deficiencies found before delivery, which are revealed during inspection and testing.
These costs can include:
- Scrap: These are the products or components that are so poor in quality that they cannot be repaired and must be discarded.
- Rework or Rectification: These are costs associated with correcting the defective product. This can include labor and material costs.
- Failure Analysis: This is the cost related to the investigation of the causes of defects in the production process.
- Downgrading: Sometimes a product can still be sold, but not for its original purpose or at its original price. The loss is considered an internal failure cost.
- Product Testing and Inspection: These are costs related to the testing and inspection of products to ensure they meet the required quality standards. While some inspection is always necessary, excessively high inspection costs may be a sign of poor quality control during the production process.
Reducing internal failure costs can lead to significant improvements in profitability. By implementing effective quality control measures early in the production process, companies can identify and address issues before products reach the final stages of production, reducing the need for rework and scrap.
Example of Internal Failure Costs
Let’s consider a hypothetical example of a company that manufactures electronic devices, let’s call it “TechGadgets Inc.”
TechGadgets Inc. has just launched a new smartphone model. However, during the final inspection before the phones are shipped to retailers, the quality assurance team discovers that 5% of the devices have a faulty microphone due to a production error.
Here are some of the internal failure costs that TechGadgets Inc. might incur:
- Rework or Rectification: The faulty smartphones need to be repaired before they can be sold. This involves labor costs for the technicians who repair the devices and the cost of replacement microphones.
- Scrap: Some of the smartphones are so badly damaged during the production process that they can’t be repaired and have to be discarded. The cost of the wasted materials and labor that went into these phones is a scrap cost.
- Failure Analysis: TechGadgets Inc. decides to investigate the cause of the production error to prevent it from happening in the future. They hire an external consultant to analyze their production process, which is an additional cost.
- Downgrading: Some of the smartphones have minor defects that don’t affect their functionality, but because they don’t meet TechGadgets Inc.’s usual quality standards, they’re sold at a lower price. The difference in price is a downgrading cost.
- Product Testing and Inspection: Because of the production error, TechGadgets Inc. decides to test and inspect all of their new smartphones, not just a sample. The additional labor and time this takes is an increase in their testing and inspection costs.
By identifying the sources of these costs, TechGadgets Inc. can work on improving their production processes, with the goal of reducing these internal failure costs in the future.
