Estimating Cost of Customer Return - How Do You Do It?

J

jmp4429

#1
Long story short, I need to determine the cost (to us and the customer) of a customer return so that I can demonstrate a cost savings for the reduction of customer returns. Presently, we don’t have a dollar value associated with it, we just go by the “they’re bad so we need to reduce them” method.

I’ve started brainstorming what I need to find a dollar value for. Here’s what I’ve come up with so far:

Cost of Scrapped Unit (components and labor)
Cost of Shipping (shipping unit to customer, expedited shipping of returned unit, expedited shipping of sorted units to customer)
Cost of Internal Sorting
Cost of Sorting at Customer’s Location (to include payroll, travel, lodging, and meals of our employees sent on site)
Cost of Investigation (what customer charges us to determine it was our fault)
Cost of Teardown/Analysis at our site
Cost of Meetings, etc… to discuss issue
Cost of Warranty Repair if bad part makes it into a vehicle

And of course, the trickiest one, the “cost” of ticking off the customer and resulting loss of business, etc…

Can some of you experts tell me if I’m missing anything?
 
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Jen Kirley

Quality and Auditing Expert
Staff member
Admin
#2
A not-too-distant Quality Progress article pointed out the dollar-heavy time management spends in resolving issues, even such as phone calls. So I'd be sure to include that, along with engineers that spend time resolving problems and revising the product, service or process to get it right. That time value really adds up.

As for cost of customer angst, I once read (wish I could remember where) that it costed about 7 dollars to regain a lost customer, for every dollar spent getting a customer in the first place. For the sake of graphing, unless you come up with a better idea you could graph a cost curve of likelihood to defect to a competitor according to type of defect, recurrence or the like.

Making repeated calculations seems mind boggling. I would not do a lot of math over and over, because your time is also money.

In charting change, I would instead try to develop an averaged value for each defect or type of defect, based on the average time the various people spend on the problems. Once that has been done, follow up can be done with counts that automatically add up prices in a spreadsheet, and send the data to a table to make a graph.

Contact me personally if you'd like to test run a quality cost calculator I made with Excel.
 

Jim Wynne

Staff member
Admin
#3
Jennifer Kirley said:
A not-too-distant Quality Progress article pointed out the dollar-heavy time management spends in resolving issues, even such as phone calls. So I'd be sure to include that, along with engineers that spend time resolving problems and revising the product, service or process to get it right. That time value really adds up. .
You have to tread carefully in this area, because things may not be what they seem. For example, if work (time-->money) is needed because of a design defect, the costs incurred which would have reasonably been incurred anyway had the design been done correctly should not be counted as costs caused by the defect(s) in the product. What we should be trying to discern is the cost of not doing it right the first time.
 

Jen Kirley

Quality and Auditing Expert
Staff member
Admin
#4
JSW05 said:
You have to tread carefully in this area, because things may not be what they seem. For example, if work (time-->money) is needed because of a design defect, the costs incurred which would have reasonably been incurred anyway had the design been done correctly should not be counted as costs caused by the defect(s) in the product. What we should be trying to discern is the cost of not doing it right the first time.
You are right. For the sake of strategy and correctly addressing the root cause the costs should be approached separately. My bad.
 
J

jmp4429

#5
Lucky for me, our product lines are similar enough that the cost of a return should be pretty constant. Same with defect type - pretty much no matter what goes wrong, we'll deal with it in the same way. I’m taking one particular product to use as a baseline, and our most common defect.

Thankfully, we are not design-responsible, so if there were to be a design-related issue the financial and responsibility burden is on the customer, not us.
 

Jim Wynne

Staff member
Admin
#6
jmp4429 said:
Thankfully, we are not design-responsible, so if there were to be a design-related issue the financial and responsibility burden is on the customer, not us.
You may not be design-responsible in the ISO 9000 sense, but you (your company) is/are undoubtedly responsible for process design, and my earlier remarks are still relevant. In other words, if a process has to be fixed, and the fix could reasonably have been anticipated in advance and designed into the process, you should not consider those costs when adding up costs related to product defects. You should consider, however, costs relative to any upheaval caused by the process rework, if you can identify them (it's assumed that those costs wouldn't have been incurred had the process been designed correctly to begin with).
 
J

jmp4429

#7
JSW05 said:
You may not be design-responsible in the ISO 9000 sense, but you (your company) is/are undoubtedly responsible for process design, and my earlier remarks are still relevant. In other words, if a process has to be fixed, and the fix could reasonably have been anticipated in advance and designed into the process, you should not consider those costs when adding up costs related to product defects. You should consider, however, costs relative to any upheaval caused by the process rework, if you can identify them (it's assumed that those costs wouldn't have been incurred had the process been designed correctly to begin with).

Hmmm... Basically what I am doing is saying “Here is what customer returns cost us per year and here is what it cost to implement this solution” Then we’ll say “We reduced customer returns by 50% by implementing the solution.” Then we have a metric where you divide Cost Savings by Cost of Solution, and find the Cost Savings Ratio.

That’s what I’m looking for, so I would say that process design changes would be included in the Cost of Solution, not the Cost of Customer Returns.

Am I making sense, or have I confused myself again?
 

Wes Bucey

Quite Involved in Discussions
#8
This is a great idea, jmp4429!

I used this concept effectively as a marketing tool in getting new customers and keeping old customers in the face of "me too, only cheaper" upstarts.

What I did was lay out a grid that displayed "soft cost" factors (time of folks involved in inspecting, phoning, faxing, downtime waiting for response, etc.) for both me and my customer if a "suspected" nonconformance arose, progressing to costs of "he said, she said" during the investigation, to costs of return, rework, or scrap, and making replacement parts. I plugged in my own numbers and let the customer plug in his own to see the TRUE COST of "nonquality." I made a point of showing how "obsessiveness" in the contract review and concurrent engineering phase of an order eliminated most of the "what if" costs during production by leaving nothing to chance.

Using this technique, I managed to demonstrate a customer was getting a bargain paying us $12.50 for a part he "thought" he could purchase for $7.50. He's the one who made the determination after he plugged in his historical costs of dealing with the "cheap" supplier.

Returns from customers were so rare in my organization, I didn't have a "return authorization" form and merely gave fax approval to return and/or confirm scrap at customer's site. In ten years, I think we had four or five returns and one "scrap at customer's site." Every one of the returns was due to "hidden" plating problems (hydrogen embrittlement) we had not detected when we took delivery from our plater, which only became apparent during customer's processing of the part as the plating flaked and peeled or the part broke.
 
J

jmp4429

#9
Wes Bucey said:
This is a great idea, jmp4429!

I made a point of showing how "obsessiveness" in the contract review and concurrent engineering phase of an order eliminated most of the "what if" costs during production by leaving nothing to chance.

Using this technique, I managed to demonstrate a customer was getting a bargain paying us $12.50 for a part he "thought" he could purchase for $7.50. He's the one who made the determination after he plugged in his historical costs of dealing with the "cheap" supplier.
How cool is that!? :agree1:

That's definitely a lesson learned all around. What a great negotiation tool, and a reminder that cutting costs isn't everything!

Later in the week (after our ISO 14001 audit is over - whew!) I'm going to start gathering data and crunching numbers (using Jennifer's awesome Excel spreadsheet) and see what I come up with.

Right now all I've got is, "Oh, a scrapped part costs about this, sorting costs about this an hour..." and so on. From a shallow look like we've got now, it looks like it doesn't really cost us that much, a few hundred per return.

However, from past experience at my old facility, I know that sending a single bad part worth $50 could easily cost $5,000 to $10,000 depending on which customer got it and how mad they were at us.

For some sick reason, I'm excited to crunch the numbers and find out. I guess maybe because then implementing this solution will prove itself to be a *WOW* cost savings instead of an "oh, that's nice" cost savings.
 
S

Skywonder97

#10
Great contents~

:agree1:
The contents seems reasonably covering every details.
The only problem is how to enreal it with the current manpower to analysis or evaluate it.
Can't it be completed by the company's system work?
I mean with ERP or SAP.
 
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