Role of Quality in Supply Chain Management
SCM (Supply Chain Management) is driven and motivated to achieve “least cost possible” when identifying and qualifying new suppliers. In the past two decade the focus of SCM is to contract with suppliers from low cost countries. The SCM department is often recognized for exceeding their annual goals for cost savings. Unfortunately in the life cycle of the final product the initial cost savings by SCM ends up in extra costs when the final product is manufactured and delivered.
The cost increase results from rework in manufacturing and poor Quality of products delivered because the SCM negotiations focused on price and not quality. This problem is widespread for both products and services, e.g. parts, software providers, transportation, etc. Historical data and experts claim that quality impacts 30-70 percent of the final cost of the product. Factors that impact increased in cost of products are:
• Rejected parts which will need to be replaced, returned, scrapped or fixed;
• Part or software failure during quality testing, and/or and the next level of integration or assembly;
• Delays in re-work and replacement impacting production schedule;
• Customer dissatisfaction after product delivery and warranty Costs
The Six Sigma rule of thumb is “least waste possible”, which counters the SCM goal of “least cost possible” which leads to increased costs at every step of the final product. The “rule of 10” is that the cost to replace or fix an assembly increases by 10X at each step of progression due to the poor quality of the low cost product. For example; a casting costing $100 is tested on site and at the first step the casting fails. The replacement for shipping costs, delays, etc. will cost 10X or about $1000. If the casting passed the first step, and was installed in the assembly as the next step, the cost would increase by 10X to $10,000 because the assembly could not be completed due the casting being out of tolerance specified by the engineering drawings.
Another example is in the development of web based software, which has a number of modules being developed in parallel. During the quality check an individual module (for scheduling) that took 50 hours at a rate of $60/hour ($3,000) fails the tests. The time and delay costs at the first step could cost as much as $30,000. If the module (for scheduling) passes the first step of the quality tests, but when the module (for scheduling) is integrated with other modules, it causes failure and these impacts the overall software development which could cost $300,000 by the “rule of 10”.
Quality must and needs to be an integral part of SCM supplier evaluation and qualification to achieve life cycle cost avoidance. It is best practice to establish a Management Operating System (MOS) that has typical Key Performance Indicators (KPI’s) as follows:
• On-time delivery
• Scrap rate, re-work, and spills or escapes at supplier (ppm or per batch product) at supplier
• Quality of product received by customer
• Cycle time for resolution of customer complaints
• Supplier quality assessment major and minor findings
In addition to financial, regulatory, and other company qualification data, the MOS will demonstrate the health of the supplier operation.
The MOS needs to be agreed at the corporate level and the KPI acceptance targets clearly communicated within the organization and potential new suppliers with the big picture in mind to evaluate supplier’s products or services for the life cycle of the product. On-time delivery or completion of services targets of >98 percent are acceptable, >99 percent are good, and 1 00 percent are expected by the customer. Early on time delivery is a double edge sword as customers welcome that the products have been delivered or services completed and the project could be completed ahead of schedule, while in other cases the customers will be unhappy because inventory will build up until the product is needed.
While Six sigma is the target, Four Sigma level of 99.4 percent defect free is acceptable. It is critical that scrap rates be minimized and should be <500 ppm for mass production, while conforming batch parts or services targets of >98 percent are acceptable quality. Resolution of customer complaints with >97 percent customer satisfaction is acceptable.
Supplier quality assessments are expected to be completed by industry recognized global registrar bodies. At minimum suppliers compliance to ISO 9000 or equivalent is acceptable for a 3 year period. Specialized processes or services will require additional assessments for OHS (Occupation, Health, and Safety), and specific industry/product requirements. SCM review of the assessment findings of suppliers is critical and no supplier should be contracted with Major (product critical, OHS, fraud, etc.) findings.
The journey to “least waste possible” does not end with supplier qualification, negotiations, evaluation of KPI’s, and contract. The rubber meets the road when the supplier begins to manufacture or provide services. It will be rare for supplier to achieve the KPI targets noted in this article with the first round of product or services. The supplier will need to be benchmarked to the KPI’s and continually monitored through the MOS via production data or on-site monthly or quarterly meetings as needed. The ability for suppliers to achieve the KPI targets will be monitored and those suppliers improving or exceeding the KPI’s will deliver high quality products ontime and “least waste possible”.
In conclusion, quality impacts nearly every step in the process for final product assembly or services provided. Pre-emptive measures and verification at each step avoids costs to re-work and fix issues, hence cost avoidance. Resolving customer issues and seriously acting on customer feedback should be woven in the fabric of the organization. Quality is common sense and the fingerprint of suppliers’ quality culture can be determined by target measured and reported KPI’s.