The rule explains how failure to take notice of one cost escalates the loss in terms of dollars. There are many costs of non-quality such as: (1) prevention, (2) appraisal, (3) internal failure, and (4) external failure. Of these types of costs, prevention cost should probably take priority because it is much less costly to prevent a defect than to correct one.
The principle is not unlike the traditional medical axiom: “An ounce of prevention s worth a pound of cure.” The relationship between these costs is reflected in 1-10-100 rule as depicted in the following illustration:
In the above illustration it is attempted to show that one dollar spent on prevention will save 10 dollars on correction and 100 dollar on failure costs. As one moves along the streams of events from design to delivery or “dock-to-stock,” the cost of errors escalates as failure costs becomes greater.
Source: Total Quality Management, Joel E.Ross