Managing Quality Integrating the Supply Chain S. Thomas Foster

Managing QualityIntegrating the Supply ChainS. Thomas Foster Chapter 4 Strategic Quality Planning Quality is not just a control system, quality is a management function. 9/02 – 9:00AM © 2007 Pearson Education

Strategic Quality PlanningStrategic Planning and Quality Improvement • Strategic planning for quality improvement involves: • identifying potential improvements • prioritizing potential improvements • planning the implementation of projects to accomplish the improvements • Quality has become an order qualifier. High quality production is an essential ingredient to participation in the market. © 2007 Pearson Education

Strategic Quality PlanningQuality and time The time it takes to achieve business goals related to quality is a function of the speed at which can companies improve processes. The speed at which companies can improve processes depends on the rate at which employees can learn. This interdependence between employee learning and process improvement is a key variable inimproving quality because employee learning and freezing of learning have to take place for process improvement to occur. The key to employee learning for process improvement is to put in place a process that will improve the rate at which employees cansystematically learn, such as the Deming plan-do-check-act cycle. However, plants that improve quality more quickly did not see costs improve as much as plants that improved more slowly because theimprovements were not real. Setting short-term goals for higher quality levels and managing toward those goals actually may prove detrimental to the firm. © 2007 Pearson Education

Strategic Quality PlanningQuality andtime • When the culture is “management by dictate” then numeric goals are set each year. When these numeric goals are set, then people will: • achieve the goals and incur positive results • distort the data • distort the system • In a “management by dictate” culture, achieving the goals is what management hopes will occur. Management truly would like to think that a goal can be dictated and accomplished without providing appropriate systems to support employee learning. • In a “management by dictate culture,” techniques fordistorting the data may range from: • creative “cooking of the data” to • finding honest data that shed the best light on the system in question. © 2007 Pearson Education

Strategic Quality PlanningQuality costs • Two categories of quality costs: • Costs due to poor quality • Costs associated with improving quality • Accounting for quality-related costs – The collection of quality cost data has been constrained by the accounting standards. Accounting rules require definitions which are not open-ended or open to alternative interpretations. These constraints relate most directly in classifying prevention costs. © 2007 Pearson Education

Strategic Quality PlanningQuality costs • PAF Paradigm – translates quality costs into three broad categories which are then subdivided into other categories: • Prevention costs – those costs associated with preventing defects and imperfections from occurring. Prevention costs are the most subjective of the three categories of costs. • Appraisal costs – those costs associated with the direct costs of measuring quality. • Failure costs – when failure costs are significantly higher than the sum of prevention plus appraisal costs, increasing prevention and appraisal activities (and costs) could result in a significant decrease in failure costs • Internal failure costs – those costs caused by on-line failure • External failure – those costs caused by product failure after the production process © 2007 Pearson Education

Strategic Quality PlanningQuality costs Prevention Costs - subjective • The cost of setting up, planning, and maintaining a documented quality system • Quality planning – establishing production process conformance to design specification procedures, and designing test procedures and test equipment • Quality and process engineering (including preventive maintenance) • Supplier quality assurance • Supplier assessment • All training • Robust design • Defect data analysis for corrective action purposes • Time spent on quality system audits © 2007 Pearson Education

Laboratory acceptance testing Inspection and tests by inspectors Inspection and tests by non-inspectors Setup for inspection and test Inspection and test materials Product quality audits Review of test and inspection data On-site performance tests Internal test and release Evaluation of materials and spares Supplier monitoring ISO 9000:2000 qualification activities Quality award assessments Strategic Quality PlanningQuality costs Appraisal Costs © 2007 Pearson Education

Re-inspection of stocks after defect detection Disruption of production schedules Costs of trouble-shooting Complaint handling and replacements plus extra time with customers Warranty (taking care not to duplicate previous item) Cost of holding higher levels of stock as a buffer against quality failure Cost of corrective maintenance to plant Cost associated with disposition of all scrap Cost of corrective action to product (redesign, repair) Lost production because of manpower availability problems (this refers to idle time brought about by failure to plan manpower efficiently) Lost production caused by system problems (material or instructions not available, cost of idle time only) Concessions (design and engineering time) Process waste (including the waste commonly regarded as avoidable) Cost of product scrapped at product audit Strategic Quality PlanningQuality costs Failure Costs © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • What is the ultimate goal of all supply chains? The ultimate goal in all supply chains is to have • spontaneous re-supply, • build-to-order, and • mass customization to provide a • continuous, • level, • linear, • uninterrupted, • one-piece flowwhich exactly matches the • mix, • volume, and • timing of customer demand within your supply chain. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • Why is this ultimate goal of all supply chains impossible to achieve? We cannot get the information to have perfect visibility about our supply chain to make the best decisions and we cannot control all of the factors in our supply chain in the execution of our decisions to have instant responses, perfect velocity. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • Why should we try to get our supply chain as close to this goal as possible? The firms which are the closest to providing, just-in-time, the exact mix, volume, and timing of products or services which customers demand will have the lowest costs and the most profit. These firms will dominate the market after several shake-outs of firms which have greater waste, non-value-added time, just-in-case buffers, and variances. These shake-outs will eliminate firms which fail to havecompetitive cost structures and which fail to competitively match the mix, volume, and timing of customer demand. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • To reach this goal, how do you first simplify and streamline your supply chain before you begin process improvement and correction efforts? You eliminate or outsource the 80% of the products and services which contributeonly 20% of the profit. This reduces the complexity of your processes which simplifies your improvement and correction efforts to exactly match the mix, volume, and timing of customer demand. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • Why do you insource the 20% of your products and services which contribute 80% of your profit? You will in-source and focus on the 20% of the products and services which contribute 80% or your profit so you can control the quality, mix, volume, timing, and innovation of these products and services. • Why do you need to outsource the 80% of your products and services which contribute just 20% of your profit? The 80% of your products and services which provide just 20% of your profit will distract you and needlessly complicate your supply chain. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • Why do we need to move from a build-to-forecast strategy to a build-to-order strategy? In a build-to-forecast strategy, you build to inventory according to a forecasted schedule and not to sold orders. Therefore, you will have the waste of over or under production, in relation to sales. In a build-to-order strategy, you do not have the waste caused by over- and under-production. You only build what you have sold. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • What are the requirements for a build-to-order strategy? A build-to-order strategy to meet spontaneous, instantaneous demand without waste requires you to have: • spontaneous re-supply of standardized parts and raw materialsfrom supply partners to create a high velocity, high visibility supply chain • continuous, level, linear, uninterrupted one-piece flow manufacturing (i.e., mass customization) which exactly matches the mix, volume, and timing of customer demand, to eliminate the waste from over- and under-production • cellular manufacturing to eliminate interruptions caused by setups • concurrent engineering to integrate the needs of all stakeholders. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • Why do you want to create a high velocity, high visibility supply chain?You want to reduce or eliminate just-in-case buffers (e.g., manpower, materials, machinery, time, and technology)because they are expensive. For example, inventory costs you 30% of its purchase cost per year. This cost includes obsolescence, damage, pilferage, insurance, storage, labor, management, etc. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • What are the steps you must take to simplify your supply chain to reduce inventory costs? You need to take the following steps in the order provided to simplify your end products, parts, raw materials, and suppliers. • You need to rationalize yourproduct lines. Rationalize means you eliminate or outsource the 80% that you occasionally sell to reduce the variety you produce. When you eliminate or outsource this 80% that you occasionally sell, you will eliminate the related parts, raw materials, and suppliers, and you will immediately reduce the complexity of your supply chain. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • You need to standardize theparts and raw materials required for your rationalized product lines. Develop and use parts and raw materials that will work across all product lines to reduce the variety you need to forecast, order, inspect, move, and store. • You need to standardize on 2 or 3suppliers for each of your standard parts and raw materials. You do not want to manage many vendors competing with each other to provide you with the lowest bid. You want to manage a few partners with the lowest operating cost who will continuously help you cut your costs by customizing their offerings for your needs with regard to quality, mix, volume, timing, and innovation. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • For the 20% of your products and services which provide you 80% of your profit, you need to in-source outsourced operations that constrain your quality, mix, volume, timing, and innovation to attain continuous, level, linear, one-piece flow manufacturing that responds spontaneously to immediate demand. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • You need to implement spontaneous resupply of standardized parts and raw materials. You need to cut costs and throughput time throughout the complete supply chain. The weakest link in the supply chain will constrain the remaining links. Firms do not compete today. Supply chains compete and they compete on the basis of cost, velocity, and value-added. You want spontaneous resupply to reduce or eliminate inventory because inventory costs 30% per year of the purchase cost to maintain. You also want spontaneous resupply to reduce or eliminate lead time because forecasting demand during lead becomes more difficult as the lead time increases. © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • You need to implement continuous, level, linear, uninterrupted one-piece flow manufacturing which exactly matches the mix, volume, and timing of customer demand to eliminate the waste of over- and under-production. • You need to implement cellular lines based on product families which will eliminate the need for setups that interrupt process flows which, in turn, will eliminate batches and queues (i.e., work-in-process and delays). © 2007 Pearson Education

Strategic Quality PlanningSupply Chain Strategy • You need to implement concurrent engineering for product development to achieve manufacturability and to use standard, readily available, off-the-shelf parts and raw materials. Concurrent engineering means that all factors involved in researching, designing, and producing a product communicate, coordinate, and collaborate in real time to assure the resulting product will meet the needs of all of the factors (i.e., stakeholders). • You need to continuously repeat this supply chain simplificationprocess because your supply chain will continuously become more complicated because of changes in your products and services. © 2007 Pearson Education

Managing Quality Integrating the Supply Chain S. Thomas Foster