Cost of failure may result from either internal failure or external failure. Internal failures are those that occur before the product is delivered, internal failure cost is mainly associated with scrap and rework. At the end of some process, a product may not be in accordance to the prescribed specifications. The degree of non conformance may be so severe that there is no way to fix the product and has to be discarded; hence the cost associated with production will be lost. This is called scrap.
In certain cases the degree of non-conformance may not be very severe, additional effort will help bring the product back to conformance, the additional effort adds to the overall cost of production. This is called as rework. The costs of scrap and rework are more than the sum of disposed products and additional work. The total cost includes, costs associated with disposal, storage, inventory and transportation.
External failures, these are errors that occur after a product has been delivered to a customer. The cost for repair is in accordance with product warranty obligations. External failures may also lead to product recalls, which may be far more expensive. The cost of fixing a defective part during assembly line is very less when compared to the cost of replacing the entire product. External failure may also result in liability costs that are very expensive. For example if a poor quality break system of an automobile fails, it would cause damage to both the driver and the vehicle. The company has to pay the cost of damage.
Cost associated with complaints and complaint handling also falls under external failure. Specially trained staff members are hired to address customer complaints, this adds to the cost.
Another important cost of failure is loss of customers. For example suppose a customer buys a music system, a careless guest spills something on the music system. The music system does not work, he tries to get it repaired from the local electronic store, but since the circuit is burnt, it does not work. He takes it back to the store where his money is promptly returned because the shop stands by its products. The customer did get the money back, but it did cause him a lot of inconvenience and disappointment. There is no way to tell if the customer will ever shop there gain. The customer may also tell his friends about his bad experience and they will be hesitant to shop there.
Apart from costs, the effects of failure are many. The effects begin with dissatisfied customers. Satisfied customers help in spreading a good-word and they indirectly are your ambassadors. Recent project management literature says that quality is part of a quadruple constraint, which comprises of time, scope cost and quality. They will tell their good experience to all who will listen. This happens with dissatisfied customers as well, who will share their bad experience as a result organisations loose customers, which in turn leads to loss of business, revenue, jobs and eventually failure of the organisation.