Insights
Understanding, experience and technology for success

Supplier Charge-backs

Most manufacturers have implemented a Supplier charge-back program, where a supplier is charged for the additional cost incurred by a manufacturer due to non-conforming components, materials and late deliveries from suppliers. A charge-back system is an effective way to introduce business discipline and accountability into the supply chain.

However, most manufacturers only end up recovering the material costs of non-conforming components from their supplier. This is primarily attributed to lack of ability of their information systems to capture non-material costs associated with the non-conforming component. These non-material costs normally exceed the costs of non-conforming material and can end up costing manufacturers millions of dollars a year on accumulated basis due to supplier poor quality.

Supplier manual of a major consumer electronics manufacturer suggests that as a result of non-conformance, the following activities will charge back to the supplier on per-hour wage-costs:

  • Operator/Foreman handling
  • Eventual disassembly of the part
  • Administration to take the part out of stock
  • Quality department handling
  • Handling by the planner to get a new part
  • Transportation back to the receiving area
  • Communications with the supplier - what shall be done with the part?
  • New instructions
  • Attention from engineers
  • Packing and arranging transport back to the supplier
  • Invoice handling

Supplier Quality Management

Our research shows that current ERP systems or departmental quality management systems do not support this process well. Hence, most companies end up using manual systems such as spreadsheets to calculate charge-backs. As a result, the actual COPQ (Cost of Poor Quality) costs are always higher than what charged back is. Before investing in "add-on" software applications, we recommend that you design a quality management process that spans the entire organization and includes relevant suppliers. This step should incorporate key quality processes including audit, non-conformance tracking, corrective action, change control and charge backs. Once a sound non-conformance process workflow is outlined, you should then evaluate and select software applications that provide a standardized platform for automating dispute discovery and capture. The system should enable charge-backs to be more easily itemized, categorized, routed and escalated. In contrast to manually tracking data on spreadsheets, which allows only a periodic, after-the-fact review of charge-backs, a new system should provide an integrated, real-time solution that enables deductions to be managed and addressed at any level of detail and resolved in a timely manner. Such a system also exposes the actual cost of poor quality and provides a backdrop for the manufacturer to work closely with the supplier in identifying the root cause of the problem and implementing Corrective Actions.

If you would like to get more information on a software solution that enables you to reduce supplier-related Cost of Poor Quality (COPQ) through event capture, measurement and charge-back capability, please click here