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 ‘Defects on Arrival’ (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.
Thijs Canjels, Business Innovation Manager: “If we purely apply the definition of a Defect On Arrival, we often find that the amount of DOAs is much higher. DOAs thus represent an invisible but serious cost!”
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%!
The studies showed that the direct costs include part damage, additional transportation costs and inventory management costs . Just by eliminating these direct costs, you can increase the profit margin on this business 20%.
Using Activity Based Costing analysis, a way to calculate costs and cost prices more accurately, Faes and the university mapped the following in addition to the initial direct cost study:
So the indirect costs of a DOA include the costs incurred by all departments involved in diagnosing a DOA and spending time on it. These amount to 10% of the profit.
Taken together, the investigated direct and indirect costs that DOAs cause thus amount to 30% of the profit over the parts sold! Since it was not possible to quantify all components of a DOA in the study, we are talking about a lower limit.
Although these figures are significant costs at the companies surveyed, the companies cited customer satisfaction as the main motivator for addressing DOAs. Which is justified, we think. Because while our surveys have allowed us to bring many costs to the surface, a customer who starts to doubt your image and, as a result, may drop their choice to someone else in the future… What would that cost?
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 analyze your current packaging process and discuss how we can design it to be more efficient, effective and simple to optimize and secure.
Request the free maturity assessment or contact directly.
