Many scholars define quality in many approaches but in general quality is defined as fitness for use/consumption/purpose. In other words the a quality product must be able to fulfill its purpose. In an organization quality can give rise 04 types of costs and these costs should be well managed to avoid any kind of quality failures resulting in loss of customers and loss of reputation of the firm.
Costs of quality are:
Internal Failure Costs
This is where the a quality failure occurs before it reaches the customer resulting in a cost to the organization. In other words if a quality failure is identified before it was sold to the customer within organizational premises it is categorized as internal failure costs. Internal failure cost results only in monetary cost as its the information of failure is only known to the internal organization. Typical examples of internal failure costs would be cost of rework of defects and disposal cost of defected goods.
External Failure Costs
This is where a quality failure results in cost to the organization after the sale of the product. In other words if the good is sold and customer encounter a quality failure it is named as external failure cost. External failure costs will result in monetary costs to ther organization. Additionally external failure will bring loss such as loss of reputation and loss of customer which range beyond just another financial loss. Typical examples of external failure costs would be claims on warranties, repair/replace defected items and any other benits provided to the unsatisfied customers to avoid them spreading bad news.
This is the cost of activities that are aimed at identifying the defects. In other words appraisal cost includes cost related to quality appraisal. In modern quality procedures appraisal costs are not encouraged as modern quality policies encourages “Get it right first time” and concepts such as zero defects and quality is a concern of every body in the organization. The best example of appraisal costs are the activities carried out by quality control department of an organization. These activities typically include sample checks, quality check points and inspection costs.
This are the costs of activities that are carried out to prevent any quality failures. This takes an approach of “prevention is better than cure” where the modern quality concepts encourages the organizations to prevent quality failures occurring rather than spending on internal failure costs, external failure costs and appraisal costs. Typical costs of prevention would be quality-planning, customer feedback obtaning process, process control and implementation of total quality management.