In this article, you will learn how Dead On Arrival's (DOAs) consume an average of 30 per cent of profits and why the actual costs are often underestimated. You will also discover how better packaging management and process improvement can drastically reduce damage and increase customer satisfaction.
Summary of this article
It happens to every high-tech manufacturer and can cause unpleasant discussions with customers; a part that is delivered in a non-functional state. These so-called 'Dead on Arrival's' (DOAs) mean extra costs for manufacturers and can damage their image. Research shows that, as a manufacturer, you can increase your profit margin by 30 percent by reducing the number of DOAs. Moreover, your company's good image remains intact!
Faes, together with the University of Groningen (RUG), conducted an initial study of this phenomenon in spare parts within some High-Tech Original Equipment Manufacturer (OEM) manufacturers. Together they mapped the direct costs and numbers of DOAs. This was followed by a follow-up study of the indirect costs of DOAs.
The main conclusions of the studies were that as much as 2 percent of all spare parts sold are DOA and that their direct cost is as much as 4 percent of spare part sales.
Does your company not recognize a DOA rate of 2% and do you think the problem does not apply to you? This could be because DOAs are unfairly not counted because your customer did not notice the defect or because you count direct parts deliveries from suppliers and not from your own deliveries. For example, one of the surveyed companies reported a percentage of 0.1% during the first survey, while in practice it turned out to be 1.9%!
If we purely apply the definition of a Dead On Arrival, we often find that the amount of DOAs is much higher. DOAs thus represent an invisible but serious cost!
The studies showed that direct costs include component damage, additional transport costs and inventory management costs. Eliminating these direct costs alone could increase the profit margin of this business by 20%.
Using an Activity Based Costing analysis, a method for calculating costs and cost prices more accurately, Faes and the university expanded on the initial study into direct costs and identified the following factors:
The indirect costs of a DOA therefore include the costs incurred by all departments involved in diagnosing a DOA and the time they spend on it. These costs amount to 10% of profit.
Combined, the direct and indirect costs caused by DOAs account for 30% of the profit generated from the parts sold. Since it was not possible to quantify every component of a DOA in the study, this figure should be regarded as a minimum estimate.
Although these figures represent substantial costs for the companies included in the study, they identified customer satisfaction as the main reason for addressing DOAs. We believe this is justified. Our studies may have uncovered many hidden costs, but what would it cost if a customer began to question your reputation and decided to choose another supplier in the future?
Error-free and damage-free delivery is the basis for good cooperation between supplier and customer, unfortunately this is not self-evident. Solid packaging can greatly reduce errors and DOAs, but often the problem runs deeper. An unambiguous policy and instructions are lacking, and human error is easily made.
Faes offers supply chain management with a special focus on packaging. We help you improve your packaging processes in the supply chain and thereby reduce the number of DOAs (demonstrably) from 50 to 90%.
We analyse your current packaging process and discuss how it can be made more efficient, effective and straightforward, helping you optimise and safeguard it.
Request the free maturity assessment or contact us directly.
Thijs Canjels is Business Innovation Manager at Faes and specializes in packaging management and supply chain optimization. In his blogs, he shares insights on efficiency improvements, cost savings and the strategic role of packaging in modern supply chains.
More articles by Thijs CanjelsGood packaging doesn’t just happen by chance. Using a tried-and-tested approach, our specialists guide you step by step from the initial idea to the finished product.
