Focus. That's what savvy buyers are telling suppliers about supply chain expectations for 2009—even if the amount purchased is going to be less than in years past. Surveys and interviews find buyers insisting that "cost of quality" has to be lowered this year—but that won't happen unless their best suppliers focus on meeting supply contract specifications, on exceeding quality measurement goals and on meeting continuous improvement of deliveries goals.
In other words, buyers want their suppliers to focus on reduced costs—not just lowered prices—as they provide North American manufacturing firms in 2009 with commodities, components and systems. This meshes with American Society for Quality (ASQ) tenets that the cost of quality isn't the price of creating a quality product or service; instead, it's the cost of not creating a quality product or service. In short, any cost that would not have occurred if quality were perfect contributes to the cost of quality.
Warminster, Pa.-based CRC Industries produces specialty chemicals for the industrial, automotive, marine, aviation and electrical markets. A white paper prepared for ASQ notes that CRC uses the term "failure dollars" to describe the different kinds of expenses—from the cost of materials and labor for rework, to the cost of correct shipping and customer service errors, to the cost of product replacement and waste—that make up the total cost of quality.
Susanne Donovan, the director of quality systems at CRC in 2006, when the white paper was written, says the "cost of quality journey" allowed the firm to directly or indirectly link cost of quality improvements to shipping error reductions, customer service order entry error reductions, productivity increases, hazardous waste reduction and profitability. In other words, CRC became a better and less costly supplier to its customers.
In other words, buyers want their suppliers to focus on reduced costs—not just lowered prices—as they provide North American manufacturing firms in 2009 with commodities, components and systems. This meshes with American Society for Quality (ASQ) tenets that the cost of quality isn't the price of creating a quality product or service; instead, it's the cost of not creating a quality product or service. In short, any cost that would not have occurred if quality were perfect contributes to the cost of quality.
Warminster, Pa.-based CRC Industries produces specialty chemicals for the industrial, automotive, marine, aviation and electrical markets. A white paper prepared for ASQ notes that CRC uses the term "failure dollars" to describe the different kinds of expenses—from the cost of materials and labor for rework, to the cost of correct shipping and customer service errors, to the cost of product replacement and waste—that make up the total cost of quality.
Susanne Donovan, the director of quality systems at CRC in 2006, when the white paper was written, says the "cost of quality journey" allowed the firm to directly or indirectly link cost of quality improvements to shipping error reductions, customer service order entry error reductions, productivity increases, hazardous waste reduction and profitability. In other words, CRC became a better and less costly supplier to its customers.
Lots of renegotiations are planned
With the economy down, renegotiations of existing supply chain contracts are planned for early 2009, according to a survey of buyers, who admit they will be looking to lower prices to be paid. The latest survey of buyers finds purchasing professionals relieved that energy, steel, nonferrous metals, some chemicals, resins, glass and building materials are sliding in price. And they want to see the overall "cost of materials purchased" lower in 2009—especially since many buyers believe their companies' production levels will be reduced.
A typical comment comes from Jim Swearington at RAM Winch & Hoist, the Houston-based manufacturer of air winches and hoists, who says "this deflationary period is an opportunity to pursue cost reductions thru negotiations and renegotiations with suppliers." Larry Moloney at Cobasys in Orion, Mich., says "cost reduction is a priority" for the firm that is working very closely with major automotive companies to incorporate advanced energy storage systems using nickel metal hydride batteries.
But, it isn't just an attempt to reduce prices, according to the buyers polled, who also say they will need to fine-tune their supply base to reduce purchasing costs and improve the quality of the materials bought. They acknowledge that every time work on a manufactured item or the retesting of an assembly is redone because of incorrect or poor materials or components, the corporate cost of quality increases.
However, "global economic downturns are creating new supply uncertainties," says the supply chain manager for a major petrochemical company in Houston responding to the Purchasing survey. "So, we will have to intensify our reviews of supplier performance." Otherwise, he says, supply-driven costs could explode from late deliveries, incomplete deliveries, poor quality materials or damaged products. In fact, it's estimated that the lack of continuous improvement efforts in reducing the cost of quality will waste as much as 30% of a manufacturing company's revenue stream or bloat a product's selling price by 20%.
In a nutshell, the survey finds that supplier quality measurement from 2008 will be used this year to reduce certified supplier lists, reduce the total cost of ownership of direct and indirect purchases and guarantee quality to internal customers. "Decisions are being made to de-source some suppliers, as well as to award new business or issue supplier certifications to better-performing vendors," says another survey respondent, the purchasing manager of a plastic parts producer in Indiana.
With durable and nondurable goods manufacturing in a slump, there is expected to be even more pressures on suppliers to meet customer satisfaction goals this year on spot purchases and well as contract deliveries so the industrial and commercial producers can reduce the cost of quality while guaranteeing high-quality end products that are competitive in an economically challenged marketplace. Buyers believe measurement programs help keep suppliers honest, preventing them from concealing chronic quality glitches.
For example, there is an ongoing effort to reduce the production costs of parts supplied by Dana Corp. to makers of automotive, commercial and off-highway vehicles, says a survey respondent, a purchasing manager at corporate headquarters in Toledo, Ohio. However, he says "the problem lately has been to maintain high service levels from the suppliers because of layoffs, capacity cutbacks and lengthening leadtimes."
"One goal is minimizing scrap, rework and returned materials," says the strategic sourcing manager at another automotive parts producer in Michigan. "Another goal is building in complete product and process traceability into the production process." To accomplish this, however, "requires improved communication and collaboration across the supplier networks and inside between engineering, procurement and manufacturing."
With the economy down, renegotiations of existing supply chain contracts are planned for early 2009, according to a survey of buyers, who admit they will be looking to lower prices to be paid. The latest survey of buyers finds purchasing professionals relieved that energy, steel, nonferrous metals, some chemicals, resins, glass and building materials are sliding in price. And they want to see the overall "cost of materials purchased" lower in 2009—especially since many buyers believe their companies' production levels will be reduced.
A typical comment comes from Jim Swearington at RAM Winch & Hoist, the Houston-based manufacturer of air winches and hoists, who says "this deflationary period is an opportunity to pursue cost reductions thru negotiations and renegotiations with suppliers." Larry Moloney at Cobasys in Orion, Mich., says "cost reduction is a priority" for the firm that is working very closely with major automotive companies to incorporate advanced energy storage systems using nickel metal hydride batteries.
But, it isn't just an attempt to reduce prices, according to the buyers polled, who also say they will need to fine-tune their supply base to reduce purchasing costs and improve the quality of the materials bought. They acknowledge that every time work on a manufactured item or the retesting of an assembly is redone because of incorrect or poor materials or components, the corporate cost of quality increases.
However, "global economic downturns are creating new supply uncertainties," says the supply chain manager for a major petrochemical company in Houston responding to the Purchasing survey. "So, we will have to intensify our reviews of supplier performance." Otherwise, he says, supply-driven costs could explode from late deliveries, incomplete deliveries, poor quality materials or damaged products. In fact, it's estimated that the lack of continuous improvement efforts in reducing the cost of quality will waste as much as 30% of a manufacturing company's revenue stream or bloat a product's selling price by 20%.
In a nutshell, the survey finds that supplier quality measurement from 2008 will be used this year to reduce certified supplier lists, reduce the total cost of ownership of direct and indirect purchases and guarantee quality to internal customers. "Decisions are being made to de-source some suppliers, as well as to award new business or issue supplier certifications to better-performing vendors," says another survey respondent, the purchasing manager of a plastic parts producer in Indiana.
With durable and nondurable goods manufacturing in a slump, there is expected to be even more pressures on suppliers to meet customer satisfaction goals this year on spot purchases and well as contract deliveries so the industrial and commercial producers can reduce the cost of quality while guaranteeing high-quality end products that are competitive in an economically challenged marketplace. Buyers believe measurement programs help keep suppliers honest, preventing them from concealing chronic quality glitches.
For example, there is an ongoing effort to reduce the production costs of parts supplied by Dana Corp. to makers of automotive, commercial and off-highway vehicles, says a survey respondent, a purchasing manager at corporate headquarters in Toledo, Ohio. However, he says "the problem lately has been to maintain high service levels from the suppliers because of layoffs, capacity cutbacks and lengthening leadtimes."
"One goal is minimizing scrap, rework and returned materials," says the strategic sourcing manager at another automotive parts producer in Michigan. "Another goal is building in complete product and process traceability into the production process." To accomplish this, however, "requires improved communication and collaboration across the supplier networks and inside between engineering, procurement and manufacturing."
Eliminate weak-sister suppliers
The buyers suggest that lowering the cost of quality will require the elimination of poor-performing and high-cost suppliers. However, the high costs of energy and materials for most of 2008 also have made some purchasing groups gun shy about such strategic sourcing efforts in early 2009—or at least until the North American manufacturing economy stabilizes and resumes a growth pattern and there is a more complete picture of financially secure suppliers.
Purchasing personnel agree they can help deflate the cost of quality but it requires cooperation internally with manufacturing engineers and externally with the supply chain. They also say that no matter how well-intentioned or comprehensive the cost-avoidance and cost-reduction strategies, efficient execution isn't so easy. That's because the cost of quality concept continues to be misunderstood in the board room.
A recent Aberdeen Group survey found only slightly more than half of senior executives are planning to address the cost of quality by their purchasing and manufacturing operations and across their supply chains. This doesn't surprise buyers polled by Purchasing, who point out that the cost of quality is a complex issue that takes into consideration not only the cost of bad quality due to internal and external failures, such as scrap, rework, warranty, and product recalls, among other factors, but also includes the cost of good quality that ensures the production of better quality products such as the cost of training, testing, corrective action, and audits.
"Manufacturers applying Six Sigma and Lean are eager to remove waste completely from their value streams, which includes avoiding the production of defective materials in the first place," states John Fishell, director of product management at the Apriso manufacturing management software firm in Long Beach, Calif. "Quality sampling performed after production may improve customer satisfaction, but does little to reduce the total cost of quality." That's something that discerning purchasing professionals have known for some time, which is why reducing the cost of quality begins at the start of the supply chain when suppliers get their marching orders.
"What's needed is a multi-unit approach to reducing costs that brings together purchasing with engineering and manufacturing to specify quality materials to be purchased and used to make our products," says commodity specialist Paul Isley in the purchasing organization of Warner Electric in South Beloit, Ill. His firm makes clutches and brakes for machinery, elevators and escalators. "What's also needed is for suppliers to focus on continuous improvement of performance above the limits that got them listed as certified suppliers in the first place."
The Purchasing survey finds that suppliers continue to meet such standardized measurements as the ISO sequences, QS series, APICS standards or government/military values. However, the 2008 poll of buyers found more purchasing groups relying on home-grown supplier quality performance audits than in years past. Another big performance measurement is internal MRP systems to gauge on-time delivery performance, the number of non-conformances written and the overall supplier audit score. Several buyers say that while specialized supplier audit software is being considered, no purchases will be made until corporate cash flow improves.
Buyers also report that their procurement organizations are using data on supplier quality performance collected in 2008 to eliminate poor performers, first of all. They also are using this information to assign "status" to existing suppliers—that is, top of the heap, preferred, needs improvement, etc. A minority of the buyers polled are using the data to allocate or award business among preferred suppliers, or to determine total cost of doing business with suppliers.
In an interview, Isley says that "purchasing and the supply base will have to perform better (in 2009) because supply has become a major headache over time that has to be addressed." He suggests that buyers and suppliers "have to stay focused" on having materials and parts delivered on time that don't require downstream corrections or replacements. That will require stronger language in supply contracts, stricter audits on supplier performance and tougher supplier certification programs.
The buyers suggest that lowering the cost of quality will require the elimination of poor-performing and high-cost suppliers. However, the high costs of energy and materials for most of 2008 also have made some purchasing groups gun shy about such strategic sourcing efforts in early 2009—or at least until the North American manufacturing economy stabilizes and resumes a growth pattern and there is a more complete picture of financially secure suppliers.
Purchasing personnel agree they can help deflate the cost of quality but it requires cooperation internally with manufacturing engineers and externally with the supply chain. They also say that no matter how well-intentioned or comprehensive the cost-avoidance and cost-reduction strategies, efficient execution isn't so easy. That's because the cost of quality concept continues to be misunderstood in the board room.
A recent Aberdeen Group survey found only slightly more than half of senior executives are planning to address the cost of quality by their purchasing and manufacturing operations and across their supply chains. This doesn't surprise buyers polled by Purchasing, who point out that the cost of quality is a complex issue that takes into consideration not only the cost of bad quality due to internal and external failures, such as scrap, rework, warranty, and product recalls, among other factors, but also includes the cost of good quality that ensures the production of better quality products such as the cost of training, testing, corrective action, and audits.
"Manufacturers applying Six Sigma and Lean are eager to remove waste completely from their value streams, which includes avoiding the production of defective materials in the first place," states John Fishell, director of product management at the Apriso manufacturing management software firm in Long Beach, Calif. "Quality sampling performed after production may improve customer satisfaction, but does little to reduce the total cost of quality." That's something that discerning purchasing professionals have known for some time, which is why reducing the cost of quality begins at the start of the supply chain when suppliers get their marching orders.
"What's needed is a multi-unit approach to reducing costs that brings together purchasing with engineering and manufacturing to specify quality materials to be purchased and used to make our products," says commodity specialist Paul Isley in the purchasing organization of Warner Electric in South Beloit, Ill. His firm makes clutches and brakes for machinery, elevators and escalators. "What's also needed is for suppliers to focus on continuous improvement of performance above the limits that got them listed as certified suppliers in the first place."
The Purchasing survey finds that suppliers continue to meet such standardized measurements as the ISO sequences, QS series, APICS standards or government/military values. However, the 2008 poll of buyers found more purchasing groups relying on home-grown supplier quality performance audits than in years past. Another big performance measurement is internal MRP systems to gauge on-time delivery performance, the number of non-conformances written and the overall supplier audit score. Several buyers say that while specialized supplier audit software is being considered, no purchases will be made until corporate cash flow improves.
Buyers also report that their procurement organizations are using data on supplier quality performance collected in 2008 to eliminate poor performers, first of all. They also are using this information to assign "status" to existing suppliers—that is, top of the heap, preferred, needs improvement, etc. A minority of the buyers polled are using the data to allocate or award business among preferred suppliers, or to determine total cost of doing business with suppliers.
In an interview, Isley says that "purchasing and the supply base will have to perform better (in 2009) because supply has become a major headache over time that has to be addressed." He suggests that buyers and suppliers "have to stay focused" on having materials and parts delivered on time that don't require downstream corrections or replacements. That will require stronger language in supply contracts, stricter audits on supplier performance and tougher supplier certification programs.
By Tom Stundza -- Purchasing, 1/15/2009
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