Quality costs in the production value chain – Rules of how much to charge for extra work
I was recently asked to act as an arbitrator in a case to determine the sound level of compensation for extra work caused by a quality issue.
A publisher had broken down the production of a print marketing campaign in to two different suppliers. The later (supplier B) in the value chain, noticed quality issues in the products caused by the previous supplier (supplier A). The issue caused extra manual sorting work. Supplier B informed the publisher on Monday about the problem and that they will charge for the extra work they had done as overtime during Sunday to secure the production. The publisher informed supplier A about the problem and that the costs will be charged supplier A.
Supplier B sent an invoice of 3.840 €. 4 persons, 8 hours Sunday work, normal hourly charge 60 € raised by 100 % for Sunday compensation. Supplier A admitted that part of the products they had delivered had quality problems but that the invoiced sum was way too high. Supplier B was not willing to lower the price. This led to a deadlock that I was asked to settle.
The situation was not totally unfamiliar to me. During my time as production manager in heatset printing we sometimes had to outsource the binding of magazines. A few times there were too big variations in the fold accuracy that caused production disturbances by the binder. In such cases it was not uncommon that the binder sent an “juicy invoice” for the lowered productivity in binding.
A similar situation is when there is a problem in the “print ready pdf” sent by the customer to the printer. The problem might cause waiting time at the press and extra make ready waste. How much should the printer charge for this?
Should we have predetermined rules how to act in these cases?
In my mediation proposal in the case I had, the basic principle was that supplier A that had delivered products with the quality issue should pay all real direct costs for solving the problem, but not a profit margin. I calculated the real salary costs according to our local union agreement for printing work, taking the Sunday overtime compensation and salary-related expenses into account. The cost in my proposal was about 1.400 €. The parties accepted my proposal.
In this case there was no extra material costs involved, but if a quality issue causes the use of extra material these should also be invoiced and payed for. But how about the machine costs? I hope every company knows what the hourly costs for their key production machines are. Should also these costs be invoiced? My basic principle is that all real direct costs shall be invoiced. The machine hourly cost is a calculated cost based on the estimated production years and yearly production hours. As this is not a direct cost it should not be invoiced, according to my basic principle.
I feel the question of what the fair and sound principle for invoicing costs caused by quality issues is, should be discussed and agreed on in the industry. You are welcome to e-mail me your thoughts about this. I am more than happy to continue the discussion in a coming newsletter if I will get your comments and points of view.