Ultra Electronics Ocean Systems delivered a finished assembly to a customer on-time and on-budget, but the product failed the customer's tests. The customer requested repair or replacement at Ultra's cost, which the company agreed to. The recovery cost, less the repair or replacement cost, was approximately $60,000. Ultra's own failure analysis pointed to a major component as the culprit. Ultra had supplied the component to its contract manufacturer, who integrated it with other components from other sources.

Problem: Ultra Purchasing Manager Dick Adams and his team had to determine who was ultimately responsible for the problem: Ultra, because it supplied the component to the contract manufacturer; the supplier who provided the component to Ultra; or the contract manufacturer. Testing revealed there was a latent defect in the component, one that would not normally be discovered in routine testing. The supplier said it wasn't responsible for problems that occur after its component is integrated into assemblies.

Solution:

Here is what Ultra Purchasing Manager Dick Adams and his team did:

Adams arranged for the technical staff at Ultra to do further tests on the part. What they discovered was that there was a “latent” defect in the part. It was “latent” in the sense that it would not normally be detected during standard testing. Adams pointed out that the suppliers terms and conditions didn’t cover such “latent” defects.

Ultra had a longstanding relationship with the supplier, whose quality generally had been outstanding. That plus the fact that the supplier had used tests Ultra specified led Adams to believe that Ultra should bear some of the burden of the cost—but not all the cost. Nevertheless, he asked the supplier to reimburse Ultra for the $60,000 recovery cost. The supplier countered with an offer to pick up $20,000 of the cost, saying it had delivered a functional product that had passed Ultra’s tests. Adams insisted that the “latent” defect should have been corrected by the supplier.

Result: The supplier agreed to reimburse Ultra $30,000, half the recovery cost.

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