In previous articles, I have previously focused on the effects of DOAs (Defect On Arrival or Dead On Arrival). Together with the University of Groningen (RUG), we conducted a first study in 2013 on this phenomenon in spare parts within some High-Tech OEM manufacturers. The direct costs caused by a DOA were mapped here:
- Partial damage
- Additional transport costs
- Inventory management
The main conclusions were that around 2% of all spare parts sold are DOA and that the direct costs added up to as much as 4% of spare-part sales. Eliminating these direct costs alone could increase the profit margin on this business by 20%! Addressing logistical DOAs by improving packaging processes in the chain leads (demonstrably) to a DOA reduction of 50 to 90%.
DOA: A part delivered in a non-functional state
Many companies do not initially recognise a 2% DOA rate and think this problem passes their door. But often a DOA is not counted when the customer does not notice it, or when direct parts deliveries are counted from suppliers and not from their own deliveries.
For instance, in the first study, one of the companies surveyed reported a rate of 0.1%, while in practice it turned out to be 1.9%! When the definition of a Defect On Arrival is purely applied, it is often found that the amount of DOAs is much higher. DOAs thus represent an invisible but serious cost!
Activity Based Costing
Because not all cost components had yet been identified, a follow-up study was launched by the RUG in late 2014. This mapped the indirect costs of a DOA. Who are all involved in the diagnosis of a DOA? And how much time do they subsequently spend on it? With this Activity Based Costing analysis, the following were identified in addition to the first study:
- Logistics; stocks are held worldwide in order to be on site quickly and some parts are sent around the world from warehouse to warehouse as much as 10x;
- Diagnosis; the service engineer should deliver a proper report and customer service ensures proper intake and registration;
- Analysis; DOAs are investigated for cause;
- Prevention; the analysis may show that stock purges are needed or that bin checks need to be done;
- Management; a component not to be underestimated from which corrective and preventive measures follow and actions are taken towards the customer.
Conclusions
On 16 June, FPC organised a seminar where the results of the second RUG study were presented in detail. In short, it turns out that indirect costs amount to another 10% of profits. Taken together, the direct and indirect costs investigated that DOAs cause therefore amount to 30% of the profit on the parts sold. And since it was not possible to quantify all components of a DOA, we are talking about a lower limit.
And although these figures are significant costs at the companies surveyed, customer satisfaction was cited as the main motivator to tackle DOAs. And rightly so, 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 another in the future... What would that cost?
(Nb: If you would like to receive the summary of the results of the full study, please feel free to request it via our website).
Ed Klijsen - packaging in logistics
