External Failure Costs Flashcards, test questions and answers

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What is External Failure Costs?

External failure costs are the costs associated with quality defects in products or services that are discovered after the product or service has been delivered to the customer. External failure costs can include lost sales, liability claims, warranty repairs and replacements, customer complaints and support services. They also include any losses due to poor customer satisfaction, damaged reputation and legal fees associated with defending against a claim arising from an external failure.Lost sales are a type of external failure cost resulting when customers refuse to purchase a product due to quality problems. This can be caused by consumer dissatisfaction with product defects such as design flaws, incorrect labeling or bad packaging. Lost sales could also occur if customers switch to another provider due to poor customer service or higher prices elsewhere. Liability claims arise when customers believe they have suffered economic loss because of an external failure on the part of a company’s products or services. Such claims may include compensation for medical expenses arising from injury caused by faulty products; property damage resulting from incorrect installation of equipment; or financial losses due to missed deadlines for delivery of goods. Warranty repairs and replacements form another type of external failure cost that is incurred when defective products require repair or replacement within the warranty period specified by the manufacturer/supplier prior to their delivery date. This is necessary if customers experience difficulties with operation, performance levels, safety issues etc., which were not apparent at time of delivery. Customer complaints are yet another form of external failure cost that result when unsatisfied customers take their grievances directly to a company instead of seeking compensation through legal channels such as court proceedings. Such complaints may be related to product design flaws, user-unfriendly features and lengthy repair timescales etc., which cause inconvenience for customers who expect better performance from their purchases than was initially promised by manufacturers/suppliers at time of sale/delivery date. Finally, companies may incur additional costs associated with providing support services such as technical assistance for fixing bugs in software applications; arranging return visits for repairs; providing extra training sessions etc., where these were not originally included in the original purchase terms & conditions between buyer & seller all these add up as ˜external failures’ in terms of additional financial burden on businesses running them such services & thus have negative impact on profitability margins over time as well.