DOAs take 30 per cent off profits

Erik Drissen
Erik Drissen
Business Consultant
More articles by Erik Drissen

Research into the effects of DOAs

It happens to every high-tech manufacturer and can cause annoying 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 already did a first study in 2013, together with the University of Groningen (RUG), into this phenomenon at the spare parts within some High-Tech Original Equipment Manufacturer (OEM) manufacturers. Together they mapped out the direct costs and the numbers of DOAs. This was followed in 2014 by a follow-up study on the indirect costs of DOAs.

Costs and numbers of DOAs often underestimated

The main conclusions of the studies were that as many as 2 percent of all spare parts sold are DOA and that the direct costs of this are up to 4 percent of the spare part turnover.

Bart van Dijck, Senior Project Manager: “If we apply the definition of a Defect On Arrival pure and simple, it often turns out that the quantity of DOAs is much higher. DOAs are thus an invisible, but serious cost item!”

If we apply the definition of a Defect On Arrival pure and simple, it often turns out that the quantity of DOAs is much higher. DOAs are thus an invisible, but serious cost item!

Erik Drissen | Business Consultant at Faes

Does your company recognise itself in a DOA percentage of 2% and do you think that the problem does not apply to you? This could be because DOA’s are wrongly excluded because your customer did not notice the defect or because you count the direct parts deliveries from suppliers and not from your own deliveries. For example, one of the companies investigated reported a percentage of 0.1% during the first investigation, while in practice this turned out to be 1.9%!

Direct and indirect costs and customer satisfaction

The studies showed that the direct costs consisted of parts damage, extra transport costs and stock management costs. Just by eliminating these direct costs, you can increase the profit margin on this business by 20%.

With an Activity Based Costing analysis, a way of calculating costs and cost prices more accurately, Faes and the university mapped out the following, in addition to the initial research into direct costs:

  • Logistics; manufacturers worldwide keep stocks in order to be on the spot quickly and some parts are sent around the world from warehouse to warehouse up to ten times!
  • Diagnosis; the service engineer must deliver a good report and customer service ensures a correct intake and registration.
  • Analysis; DOAs are investigated for cause.
  • Prevention; the analysis may show that stock purges are necessary or that the manufacturer must carry out bin checks.
  • Management; the manufacturer must make improvements and take measures to prevent DOAs and keep the customers satisfied.

The indirect costs of a DOA therefore include the costs incurred by all departments involved in diagnosing a DOA and spending time on it. These amount to 10 % of profits.

The sum total of the direct and indirect costs of DOAs thus amounts to 30% of the profit on parts sold! Since it was not possible to quantify all the components of a DOA in the study, we are talking about a minimum limit.

Although these figures are significant costs for the companies surveyed, the companies cited customer satisfaction as the most important motivator for tackling DOAs. Which is right, we think. Because our surveys may have revealed many costs, but a customer who starts to doubt your image and therefore may choose someone else in the future… What would that cost?

Improving the packaging process leads to DOA reduction

Error-free and damage-free delivery is the basis for good cooperation between supplier and customer, but unfortunately this does not go without saying. A solid packaging can strongly reduce errors and DOA’s, but often the problem is deeper. An unambiguous policy and instructions are lacking, and a human error is easily made.

Faes offers supply chain management with special attention to packaging. We help you to improve your packaging processes in the chain and to reduce the number of DOA’s (demonstrably) from 50 to 90%.

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