Failure costs are the costs that arise due to errors (failure) in the production process. Due to these errors, the product or service you provide was delivered late or not according to the agreed quality.
Most of the causes of all unnecessary costs lie in the lack of communication with unclear data exchange. For example, these can occur during the purchasing process, during invoicing, during training, during project discussions – in short, potential failure costs arise at numerous moments. The number of parties involved also increases the risk of failure costs.
The salesman who sells a project that the organization is not good at increases the chance of failure costs. It ensures stress and carelessness in the project preparation. Keeping track of the preparation hours is often insufficient. A good insight into hours spent is therefore lacking. Ultimately, the failure costs become particularly visible during the execution of the work. Failure costs can also arise due to the late ordering of necessary materials, by insufficiently qualified personnel, by too full a schedule or by the client himself. In short, the quality of the preparation largely determines the final costs.
Partly because of the high amount of money, construction is regularly used as an example, but every organization in every industry has its own failure costs.
Construction studies show failure cost estimates worth 10% or more of total sales, while earnings barely reach 2-5%. Other calculations indicate that this percentage easily hits 40% due to waste of materials, inefficient use of hours and, for example, accidents. Larger organizations are more susceptible to these unnecessary costs due to the complexity of the projects. Smaller organizations can of course also increase their profit by focusing more on preventing repair costs.
The fragmented approach to specialisms in projects irrevocably leads to greater complexity and dynamism. If you want to reduce the failure costs, it seems inevitable that you first have to incur costs. For example in a software system, in training, in the method of business management or, among other things, in determining the actual causes of the ‘slips’ in the organization / project.
However, a faultless system is expensive. Too expensive sometimes. Risks are part of daily practice. The cost of the solution is therefore preferably lower than the total of the expected repair costs.
Suitable ERP software makes information accessible in a smart way. Everyone knows the financial software, the purchasing packages and inventory management systems. To effectively reduce failure costs, it is important that everyone in the organization actively cooperates. Internal and external failure costs are mainly reduced by clear work instructions to prevent repair costs and (near) accidents. Organizations often play with the questions “What …” and “Why …”. How do organizations deal with the question “How ….”?
The power of clear work instructions lies precisely in answering this question. How should the (sub) tasks be performed for the best result?
Unnecessary costs also arise during the execution of work on location. Project management and professionals on location like to have unambiguous work instructions and clear project information. The Instruct-Pro software meets that need. All functions to work processes are within reach with this powerful software 24/7.