failure costs

failure costs

the cost to a firm of manufacturing defective products. Internal failure costs result from defects which arise during the production process, and include the cost of defective items which have to be scrapped (yield loss); the cost of reworking faulty items which have to be corrected (rework costs); and the loss of revenue from having to downgrade a product which has been identified as second quality and has to be sold as substandard at a lower than normal price.

External failure costs result from defects which arise after the product has reached the customer and include the cost of replacing or repairing defective products (GUARANTEE OR WARRANTY costs); and legal costs or damages to customers who have suffered physical or financial injury from defective products. An additional external failure cost is the loss of consumer goodwill and cancelled orders which, although difficult to quantify, can have a significant potential impact on sales and profits. See QUALITY COSTS, QUALITY CONTROL.

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