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Cost recovery through better systems

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September 12, 2013


As we discussed above, the total COPQ is equal to the COPQ of OEM plus inherited COPQ of suppliers. As a result, companies need to proactively work with their suppliers to improve their quality, so that they can reduce their own COPQ. Hence a cost-recovery system, where suppliers are charged back for providing poor quality of components, is an effective way to introduce business discipline and accountability into the supply chain.


However, based on our findings, less than 50% of companies pursue cost recovery with their suppliers. And majority of these companies only recover material costs from their suppliers. According to a recent report by AMR, an industry analyst group, about 65% of the costs attributed to the poor supplier quality are non-material related – see an example in the picture below. If a company institutes a quality management system to aggregate such costs and use it for charge-backs, not only would they be able to fully recover the costs of poor quality from their suppliers, they would be able to institute a discipline that forces the suppliers to quickly improve their quality of products shipped.