October 2013

The Electronic Materials Report
Increase Profit Margins 5-10% with Supply Chain Optimization
Case Study: The benefits of using a CoQ indicator to reduce costs

Increase Profit Margins 5-10% with Supply Chain Optimization

The cost of failure to meet quality expectations estimated at 20 - 40% of business costs for materials suppliers. Yet, the cost to eliminate failure mode at the customer is only 5 - 10X the preventative cost. The bottom line results? Improving quality reduces costs and increases profit margins.

Supply Chain Optimization (SCO) will give your business a 5-10% of revenue operational advantage over 5 Years. Although world-class materials suppliers recognize the value of appraisal and mitigation early, many smaller suppliers ignore the cost of failure because they don't have the resources to monitor the effectiveness of existing quality systems.

Linx Supply Chain Optimization Service is designed to help materials suppliers develop quality operating systems (QOS) using cost of quality (CoQ) models to identify gaps. Linx supply optimization services include:

Supply Chain Optimization Scenarios

Here are some examples of Linx SCO solutions that can be implemented to help companies monitor and track the cost of quality:

Bring desired supplier up to required quality standards

Solution: Linx performs client supplier initial gap assessment, assessed supplier then hires Linx to address gap areas and prep for qualification audit.

Due diligence for acquisition of materials supplier

Solution: Linx performs technical assessment of targets capability to meet proposed industry technical deliverables, report serves as a component of due diligence.

Identify critical supply chain baseline

Solution: Linx performs baseline assessment on list of suppliers, ranking them and highlighting areas for improvement vs. industry normal.

Not enough staff to complete detailed assessments in short time frame

Solution: Linx supplements existing quality team, acting as an extension of internal team to complete audits and establish roadmaps for gap closure.

Small supplier with limited quality staff

Solution: Linx acts as quality representative on a contract basis.

For more information about Linx Supply Chain Optimization Service, call supply chain optimization expert Kyle Flanigan at 503-519-8776 or email him to learn how a CoQ model can increase your bottom line.

Case Study in Supply Chain Optimization

The Benefits of Using a CoQ Indicator to Reduce Costs

A leading materials manufacturer developed a cost of quality (CoQ) model to determine the cost of quality to their company and evaluate the benefits of developing a supply chain optimization program. The CoQ cost model implemented was developed by a world leading chip manufacturer, and is analogous to the model used by Linx Consulting supply chain optimization expert Kyle Flanigan.

What is the cost of quality (CoQ)?
CoQ is any cost that would not have been realized if quality were perfect. In a perfect world, the product would be flawless every time, and there would be no reworking costs. Unfortunately, in the real world, this is rarely the case. It's when the product doesn't meet requirements on the first attempt that the costs start to mount. Every time work is redone or a product fails to meet requirements, the cost of quality increases.

Research shows that COPQ can be 15-40% of business costs due to:

Rework
Returns/complaints
Lost revenue
Reduced service levels

Can you afford to ignore the cost of quality?

Finding and correcting mistakes can be costly, and as a result, most businesses don't know their CoQ. Without a clear understanding of what the actual CoQ is, it's difficult to fully understand the impact quality has on the bottom line.

In the long run, materials suppliers that invest more time and money in the beginning of the process to improve quality are more profitable. The cost to eliminate supplier failure is typically 5x greater than in development or manufacturing. Consequently, the earlier an error is found and corrected, the less it costs. With a little forethought and planning, quality can significantly improve profit margins, reducing failure and rework costs for both supplier and manufacturer.

Case Study Results

The materials supplier created a standard cost model to be applied to all product lines with cost targets for all quality costs to assess impact of quality on profit margins. The cost model was mapped to the PLC and tracked over a two-year period with the following results:

Customer Compensation for product performance was reduced 6%
Total cost of quality was reduced 51%
Appraisal costs were reduced 45%
Total failure costs were reduced 80%
External Failure costs were reduced 83%
Total return on quality was 345%

CoQ Trends as % of Total Revenue

Learn how supply chain optimization can reduce costs for your company

Read the entire case study to see how the CoQ model was developed and implemented. For more information about Linx Supply Chain Optimization Service, call supply chain optimization expert Kyle Flanigan at 503-519-8776 or email him to learn how a CoQ model can increase your bottom line.

Mike Corbett & Mark Thirsk
Linx Consulting
www.linx-consulting.com