Defect Processing Value Model

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Capital equipment can be used to handle defects in the profit-making process. Defect processing equipment often finds itself in failure analysis labs and quality assurance departments.  It typically receives a workpiece anytime that a defect takes down the profit-making process or causes it to run inefficiently. See the figure below.

Diagram of the defect processing value model

Differences in defect-processing-equipment-cycle times often manifest as differences in throughput, uptime, yield, or costs in a portion of or all of the profit-making process. Therefore, the value model for defect processing equipment must consider a portion or all of the profit-making process, not just the defect processing equipment.

For example, let’s say your equipment type processes a certain catastrophic defect in the production of solar cells. When this defect occurs, the solar cell manufacturer must stop the production line and resolve it. In this case, the defect-processing equipment affects the solar cell manufacturer’s profit in two ways. First, the cycle time of the defect processing equipment affects the overall throughput of the factory, and therefore its revenue potential. Second, the defect processing equipment’s depreciation expense and operating costs will affect the manufacturer’s profit margin. See the example below.

UnitsYour EquipmentCompetitor’s Equipment
Defect frequency#/Year5050
Time to resolve defectDays0.51.0
Factory downtime/yearDays2550
Gross capacity – cells/yearM10.010.0
Net capacity cells/yearM9.38.6
Price per cell$12.012.0
Total revenue$M111.8103.6
Your equipment type cost$M10.05.0
All other equipment costs$M100.0100.0
Total equipment cost$M110.0105.0
Depreciation expense (5 Year)$M22.021.0
All other costs of goods$M50.050.0
Total cost of goods sold$M72.071.0
Total gross profit$M39.832.6