In complex supply chains, achieving high service levels is often a matter of tight inventory management, reliable suppliers and well-tuned transportation flows. But there is a creeping factor that can unexpectedly upset this balance: Dead-On-Arrival (DOA) products.
At first glance, a DOA appears to be a pure quality problem: a product or part that turns out to be defective immediately upon receipt. In reality, the consequences extend much further. Every DOA not only causes direct replacement costs but also puts pressure on fill-rates and ready-rates, the core indicators of delivery reliability and operational availability.
The impact is often disproportionate. A single DOA can lead to additional rush shipments, higher inventory costs and longer downtime at the customer. This makes DOAs not only a challenge for the quality department, but also a strategic risk that directly impacts customer satisfaction, contractual KPIs and profitability throughout the supply chain.
In this article, based on research we conducted with the University of Groningen, we examine how DOAs undermine the performance of service chains. We additionally show what steps companies can take to break the negative spiral.
Fill-rate and ready-rate are two of the most critical performance indicators in service chains. The fill-rate indicates the percentage of requested parts that can be delivered directly from stock. The ready-rate measures the availability of operationally deployable assets or parts at the customer’s site. Both are heavily influenced by the presence of DOAs.
When a part is DOA, it immediately creates additional, unexpected demand for a replacement product. This creates a sudden spike in demand, also known as “lumpy demand.” Because these spikes are not included in the regular demand forecast, inventory is depleted faster and the likelihood that other orders cannot be fully delivered increases. The result is a drop in the fill rate, sometimes after only a few incidents in critical parts.
On the customer side, a DOA leads to delays in repair or installation. Even when the replacement part is shipped quickly, additional downtime inevitably occurs. This depresses the readiness rate, especially in plants or systems where every hour of downtime means immediate loss of sales or production. In the cases studied, this effect was found to be greatest for parts with long lead times or complex assembly, where a single DOA can cause several days of operational downtime.
The interplay of lower fill-rates and ready-rates creates a chain reaction: increased pressure on rush logistics, rising inventory costs, and ultimately a noticeable decline in customer satisfaction and contractual performance scores.
The impact of DOAs on service levels makes itself felt not only in performance indicators, but also in the cost structure. The study makes clear that the financial impact can be traced to three main categories, which, moreover, reinforce each other.
Any DOA results in direct costs for replacement or repair. This can range from completely writing off the defective part to labor hours for repair and testing. The efforts of field service engineers, who spend additional time resolving DOA-related issues, also add up. In practice, these hours are often underestimated, especially when the DOA is only discovered on site.
A large proportion of DOAs require expedited transportation to reduce the impact on the customer. The study shows that these shipments are on average 50 to 150 percent more expensive than regular deliveries. This difference is mainly caused by the higher proportion of express or same-day deliveries, which are necessary to meet contractual response times and avoid further disruption to the ready rate.
To deal with the risk of DOAs, some companies opt for additional safety stock. While this can protect the fill-rate in the short term, it entails structurally higher inventory costs. The study shows that these costs are often not visible in regular reports, underestimating the true financial impact of DOAs. Moreover, additional inventory does not prevent DOAs, but only mitigates the symptoms.
Together, these three pillars make it clear that DOAs are not just a quality issue, but a driving factor behind rising operational costs. The link between service levels and cost control is undeniable here: the longer the DOA rate remains high, the stronger the negative financial spiral becomes.
The material reviewed shows that the impact of DOAs on service levels translates directly into significant financial losses. On average, the total cost burden amounts to about 4 percent of spare parts sales. While this percentage may seem small at first glance, the impact on the profit and loss statement is substantial. In a situation where the profit margin is 20 percent, a loss of 4 percentage points can mean one-fifth of profit evaporates.
The model calculations in the study make it clear that even a small increase in the DOA rate can have disproportionate effects. For example, an increase of only a few tenths of a percentage point can lead to noticeable decreases in fill-rate and ready-rate, especially for parts with low turnover rates or long lead times. This increases the risk that critical service level agreements will not be met.
An important insight is the existence of so-called service level cliffs. These occur when an established fill-rate target results in inventory levels having to be increased in leaps and bounds to maintain the target with an increasing DOA rate. One additional DOA in such a case can mean that several additional units have to be kept in stock, with all the costs that entails.
The study further shows that transportation costs due to DOAs are on average 69 percent higher than for regular shipments. This is mainly due to the high proportion of emergency transportation required to maintain the ready rate. This cost is often felt immediately in the profit and loss statement, while rising inventory costs only become apparent in the longer term.
Together, these figures underscore that DOAs pose a far greater threat to both operational performance and profitability than is often assumed. Prevention and targeted process improvement are thus not optimization issues, but strategic imperatives.
The research shows that DOAs do not disappear on their own and that simply increasing inventory is only symptom control. Protecting service levels and reducing costs requires an integrated approach in which prevention, process improvement and inventory optimization reinforce each other.
A large proportion of DOAs arise from shipping damage or improper handling. Taking a critical look at packaging design, shock absorption and clear handling instructions can prevent a significant portion of defects. Actively involve service engineers and logistics partners in packaging design and evaluation so that practical experience is translated directly into improvements.
Without reliable data, it is impossible to plan targeted improvement actions. Therefore, ensure one unambiguous definition of a DOA and record each incident in the same way, including cause, product category, transport modality and lead time to replacement. This makes it possible to recognize patterns and address structural causes.
Adding additional inventory seems like a logical response, but structurally higher costs. Better to match safety stock per SKU to actual DOA risk, rather than a fixed rule of thumb. This prevents valuable capital from being unnecessarily tied up in low-risk parts, while protecting critical parts with a high DOA rate.
When a DOA does occur, transparent communication with the customer can prevent much reputational damage. Provide insight into the replacement procedure, expected delivery time and preventive measures taken. This reinforces trust and shows that service levels are actively monitored.
As a Fourth Party Packaging partner, Faes offers the expertise and execution to manage the complete packaging and returns process around critical parts. From designing shock- and transport-resistant packaging to analyzing DOA data and optimizing inventory strategies: we take the process off your hands. In this way, we relieve you of all your worries, structurally reduce DOA risk and ensure that your service levels and profitability remain sustainable.
DOAs are more than a quality problem. They pose a structural threat to fill and ready rates, depress profit and loss accounts, and can undermine contractual performance. The research shows that the effects accumulate in three cost pillars: parts and repair, transportation and inventory. Even small fluctuations in DOA rates can lead to disproportionate cost increases and sharp declines in service levels.
Companies that commit to prevention, uniform registration and smart inventory strategies break this negative spiral. In doing so, they not only protect their KPIs, but also strengthen their competitive position.
