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EXECUTIVE1.
2.
3.
4.
5.Rework costs
Freight costs
Chargebacks
Product returns (replacement or cancelled orders)
Lost sales (probation or permanent loss of customer)
Rework Costs: If you ship a defective product, the customer may ask for it to be reworked in your
warehouse. For instance, if a garment is incorrectly labeled, you may need to spend $1, $2, or more per
piece to open the packages, cut out old labels, print and attach new labels, and ship it back to the
customer. Further, if the product itself needs rework, the roundtrip transport and repair costs at a local
rework facility can easily exceed $3-$7 per piece.
Freight Costs: How many of us have supply chains that generate up to 20 percent late shipments,
forcing us to incur millions of dollars annually in airfreight to deliver products on time? Even worse, how
many of us have suffered from the delivery of a defective product that is the showcase item for our top
customer’s key campaign, requiring a rush replacement production order that includes hundreds of thou-
sands of dollars in airfreight? In addition, how frequently do we negatively impact our bottom line by
having to invest in additional in-land freight to pick up defective products from disgruntled customers?
Whenever there’s an error, companies face the costs of transferring product back and forth. If you ship
the wrong product to a store and the store decides they don’t want it, even if you’re able to ship the goods
to someone else, you’re going to lose on that freight cost.
Chargebacks: In today’s difficult retail environment, where consumers are demanding more value for
their purchases, including product quality, retail customers are rightly requesting substantial chargebacks
for un-conforming products. It has become commonplace for a seller to receive a claim for $25,000,
$50,000, or $100,000 for even the slightest of product variances.
Product Returns (Replacement or Cancelled Orders): If a customer chooses not to keep a defective
shipment of garments or shoes, at best you may be able to negotiate a quick replacement. At worst, you
receive a cancelled order. Should we not keep track of the loss gross margins that defective product
returns have on our profitability?
Lost Sales (Probation or Permanent Loss of Customer): Finally, a pattern of defective shipments may
lead a major retailer to put your brand on probation, lowering your subsequent order volumes. If the retailer
represents a significant portion of your sales, the cost of this action can be devastating. Even worse, the
retailer may decide to sever the relationship altogether. The impact this continuous erosion of your topline
sales have on the future growth, or even the survivability of your company, could be substantial.
The Fallacy of Passing Charges on to Factories
While the true cost of poor quality can be staggering, corporate finance departments often do not capture
these costs. Further, even those that do often assume that the costs are of little consequence to their
bottom line, as the general philosophy in our industry is that we “simply pass them on to the factories.”
In the world of operational excellence, this is called “fools gold,” as factories will need to “pad” their future
costs with those chargebacks to maintain their financial viability. As a result, you will end up paying a
higher price per piece, as the factory is assuming there will be future quality claims. Also, in the current
business climate, where consumers reward those brands that are eco-friendly, is it commercially sound
to accept that billions of dollars are being wasted on our planet’s limited resources for un-saleable returns
sitting in our warehouses or being sold at a discount?
The Path Forward: Working with Factories to Eliminate Quality Errors
To successfully reduce the product cost of poor quality, companies must:
-Accurately keep track of the five major costs incurred because of poor quality
-Identify key errors throughout their production-chains
-Implement corrective action plans to significantly reduce such waste from having a corrosive impact
on the bottom line
In addition, companies must invest time and money in the hiring of process-minded professionals who
can work with their factories to implement effective quality systems. Ultimately, for brands that achieve
the final step of quality management, remaining errors may drop to 2.5 percent of total sales - the
equivalent of millions of dollars in savings for a company and its shareholders.
NCM-APRIL 2020
34