In today’s competitive business environment, companies need to maintain a high level of quality to retain their customers and stay ahead of the competition. However, even with the most rigorous quality control processes in place, errors and defects can still occur, leading to external failure costs. In this blog post, we will explore what external failure cost is and its impact on the reputation of an organization, the pattern of communication from dissatisfied customers, the impact of warranty/repair costs, litigation costs, and the 1-10-100 rule.
What does external failure cost mean?
External failure cost is the cost incurred by an organization due to the failure of its product or service in the hands of its customers. This can include warranty and repair costs, litigation costs, loss of sales, and damage to the reputation of the organization.
What happens when a customer finds an error or defect in a product?
When a customer finds an error or defect in a product, it can lead to dissatisfaction, negative reviews, and even litigation. This can be particularly damaging to the reputation of the organization, leading to a loss of customer loyalty and trust.
How do dissatisfied customers communicate their experience of failed product or service?
Dissatisfied customers can communicate their experience through various channels, including social media, online review platforms, and word-of-mouth. In today’s digital age, negative reviews and comments can spread rapidly, making it essential for organizations to address any issues promptly and effectively.
How do warranty/repair costs hurt the organization?
Warranty/repair costs can significantly impact the bottom line of an organization, reducing profit margins and increasing operational costs. In addition, frequent warranty/repair claims can damage the reputation of the organization and lead to customer dissatisfaction.
How do litigation costs affect a firm?
Litigation costs can be significant and can impact the financial stability of an organization. In addition, litigation can damage the reputation of the organization and lead to a loss of customer trust and loyalty.
Examples of external failure cost in manufacturing and service sectors: One of the most well-known examples of external failure cost in the manufacturing sector is the Ford Pinto case. In the 1970s, Ford launched its Pinto model, which had a design flaw that made it prone to catching fire in rear-end collisions. As a result, the company faced numerous lawsuits and had to pay millions of dollars in compensation.
In the service sector, a notable example is the Equifax data breach in 2017, which exposed the personal information of millions of customers. The company faced numerous lawsuits and had to pay significant compensation to affected customers.
Why should companies understand the 1-10-100 rule?
The 1-10-100 rule states that it costs $1 to prevent a problem, $10 to correct it, and $100 to deal with the consequences of a problem. By understanding this rule, companies can prioritize quality control and invest in prevention measures to avoid costly external failure costs.
How effective quality assurance and quality control systems can help to avoid external failure costs?
Quality assurance and quality control systems can help to identify potential problems early on, allowing organizations to address them before they lead to external failure costs. By implementing these systems, companies can reduce the risk of errors and defects, increase customer satisfaction, and enhance their reputation.
The external failure costs can significantly impact the financial stability and reputation of an organization. By prioritizing quality control and implementing effective quality assurance and quality control systems, companies can avoid costly external failure costs and enhance customer satisfaction and loyalty.
References:
- ASQ. (n.d.). External Failure Costs. https://asq.org/quality-resources/external-failure-costs
- The Balance Small Business. (2020). External Failure Costs. https://www.the
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