Internal failure cost is a cost of quality that relates to the cost of producing goods not conforming to the prescribed standards. Product rework, scrap, wasted labor or machine, etc. are some examples. When a quality inspection team rejects an item, it is either trashed or sent back for rework. The reworked product’s manufacturing costs get doubled, as the laborer or the entire team works on the item either from scratch or toils hard to rectify the errors. A company that usually spends more time, money and effort on prevention cost is likely to put up with lesser defective units or internal failures.  

All the errors take place within the manufacturing unit, which explains why the cost is termed “internal”. The only positive takeaway is that these defects are detected before the product reaches the customer. Besides the aforementioned costs, expenses pertaining to retrieving missing or lost information, retesting products, changing process design or layout, redesigning software and/or hardware, decreasing product price for its sub-par quality, unplanned equipment downtime, materials shortages leading to missed delivery dates, etc. are also examples of internal failure costs.

Internal Failure Cost in the Service Industry

Unlike the manufacturing industry, internal failure costs are low in service-based companies as those organizations have little scope for examining and rectifying a faulty internal process. Service is essentially interacting with the customer, which happens outside the company. And this is why a service-based company’s external failure costs are usually higher than a manufacturing setup’s external costs.