External Failure Costs

External Failure Costs are costs associated with deficiencies that are found after product is received by the customer.

External Failure Costs included are lost opportunities for sales revenue. These costs also would disappear if there were no deficiencies.

Failure to Meet Customer Requirements and Needs :

-Warranty charges:

The costs involved in replacing or making repairs to products that are stillwithin the warranty period.

-Complaint adjustment:

The costs of investigation and adjustment of justified complaints attributableto defective product or installation.

-Returned material:

The costs associated with receipt and replacement of defective productreceived from the field.

-Allowances:

The costs of concessions made to customers due to substandard products accepted by the customer as is or to conforming product that does not meet customer needs.

-Penalties due to poor quality:

This applies to goods or services delivered or to internal processessuch as late payment of an invoice resulting in a lost discount for paying on time.

-Rework on support operations:

Correcting errors on billing and other external processes.

-Revenue losses in support operations:

An example is the failure to collect on receivables from some customers.

Lost Opportunities for Sales Revenue , Examples are:

-Customer defections:

Profit margin on current revenue lost due to customers who switch for reasons of quality. An important example of this category is current contracts that are canceled due to quality.

-New customers lost because of quality:

Profit on potential customers lost because of poor quality.

External Failure Costs