From Dr. W. Edwards Deming’s 14 Points: End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.  

In one of the classes I teach on lean and Six Sigma, as part of a business simulation, I separate a few of the class members into another room. They are asked to use markers to copy a design onto a paper product that the rest of the class is producing.

At the beginning of the exercise, these participants work hard to get the design just right so the finished product will pass a final quality inspection. However, as time moves forward, the quality of the product these participants receive from the rest of the class begins to deteriorate. At first, they complain to their supervisor (who is also played by someone in the class) but nothing improves. In fact, the quality usually gets worse. They might try to rework the parts before putting on the design, but they are told that they do not have time for rework if they want to keep up with demand. The quality of the design they are adding begins to suffer, and by the end of the exercise, it is barely recognizable. The total time of the activity: 30 minutes.

After the exercise, I ask the class members who were putting on the design why they did such poor workmanship, especially in the last 10 minutes. The most common response: “I figured no one else cared about doing a quality job, so why should I?” The participants might be mechanics, engineers, management, or even quality professionals; it does not matter. The response is usually the same. Thirty minutes. It does not take long to go from focusing on doing good quality work to just not caring any more.

So, if your company is focused on a low price buying strategy and defective parts keep showing up from a few suppliers (and no one seems to be doing anything about the problem), what message does that send to the employees in your company? Why should they get excited about achieving excellence through the use of lean and Six Sigma if some of the parts they receive are wretched?

The sad thing is that the $800,000 is going to hit our ‘manufacturing variance’ account..."

Dr. Deming spoke about the need to partner with suppliers and to focus on total cost instead of price. What does it mean to partner with a supplier? How is total cost calculated and how can it be used to make sound business decisions? The following might shed some light on these questions. (The scenario below is based on an actual example.)

Dave Robinson glanced at the clock in his office. “4:15 on a Friday afternoon,” he thought. “Less than an hour till my first full weekend in months.” As the quality manager of a major manufacturing plant, Dave felt that if the production lines were running, he needed to be there as well. Demand for their product was unexpectedly high and the production lines were struggling to keep up. So, the plant had been working mandatory Saturdays and volunteer Sundays for over three months. It was getting old.

Just when Dave thought he might get home at a decent hour, his phone rang. “Why would Jim, in the purchasing department, be calling me at this late hour on a Friday afternoon?” he thought as he picked up the phone.

...and the purchasing folks are going to get credit for the $90,000 in savings."

“Hey, Dave, we’ve got a bit of a problem I need your help with,” said Jim. “We have a new supplier producing the x1z component and he has a question about the engineering specs. I suggested he give you a call.”

“Wait a minute. We have a new supplier for one of the most critical components used in all of our assemblies? Why wasn’t my department involved? Who certified this new supplier?”

“Don’t worry about all of that,” said Jim. “One of our purchasing folks verified that this supplier can meet our needs. They just need a little help getting up and running. This supplier’s price came in 11% below our previous supplier, so this is a big win for the company.”

After agreeing to do what he could to help, Dave waited for the phone call from the new supplier. He did not have to wait long.

“Yes, this is Dave from the quality department. What can I do to help?”

“Hi, Dave. My name is Frank. I am the plant manager and I understand we will start supplying your x1z part. Everything is set up on our end and we have passed an internal first piece inspection. We just have one question you might be able to help us with.”

“Wow. That is a relief. I am glad to hear you guys are up and running. We keep our supply chains pretty lean, so we only have a day’s worth of x1z parts on hand. What is your question?” asked Dave.

We Have a Small Problem

“We noticed that there are several words stamped on the x1z with all sorts of safety information.”

“Yes, it is required by law that those words are there and can be easily read,” said Dave.

“Yes, we figured as much,” said Frank. “Do you guys stamp the words into the metal or do you want me to send them to someone else?”

“Uhhh. No. Neither one,” stammered Dave with concern creeping into his voice. “The supplier of the x1z component stamps those words. That is part of the print, which means it is included in the price when you quoted the job.”

“Hmmm. That is going to be a bit of a problem,” said Frank. “We don’t have that kind of equipment on site and have no experience stamping words into metal. I think I can borrow an old stamping press. Do you have some folks who can come down to our plant and help us figure this out?”

“I will try to catch a flight tonight and bring along one of our manufacturing engineers and a QC inspector,” said Dave. At that moment, he realized that it would be a while longer before he could enjoy a full weekend away from work.

Oh, the Havoc

It took Dave and the rest of the team three long days to get the word stamping process operational. The plant ran out of x1z parts and was shut down for over a day, resulting in several orders being shipped late. The stamping operation also caused another key dimension to drift out of spec on 20% of the parts. So, a 100% sort was set up in the incoming inspection area to try and keep any defective parts from making it to the assembly line. Even with this inspection, however, a few bad parts did sneak through resulting in sporadic line stoppages. Some defective parts even made it to the customers’ locations, causing field failures. Dave decided to do a “post mortem” a few months later to see what could be learned from this fiasco.

“So, let’s try and calculate how much money we lost on the x1z part transfer to a new supplier,” said Dave to start the discussion. “The plant was down for a day resulting in 500 employees being sent home. This resulted in several late shipments with late charges kicking in from our customers. The employees have had to work every weekend since, racking up a ton of overtime pay, in order to address the backlog.” Dave wrote the amount of the late charges and overtime on a whiteboard. “Also, we have two inspectors working full time to sort parts and share quality information with the supplier. I figure they will be in place for at least a year until we can get some confidence built up about this part. The assembly lines have had multiple line stoppages, and morale on the assemble lines has taken a hit as the workers struggle to make the x1z parts fit.”

“This does not include the ‘ill will’ we now have with several of our key customers,” said the V.P. of sales. “We are giving them deep discounts so they will continue to buy from us, plus my sales guys are spending so much time keeping our current customers happy that they are not selling to new customers. We will never be able to put a real dollar amount to all of this.”

After adding up all of the costs that could be captured, the result stunned the audience. Over $800,000 had been lost. “So, how much did we save moving this part?” wondered Dave.

“I heard we saved about $90,000,” said the V.P. of manufacturing. “The sad thing is that the $800,000 is going to hit our ‘manufacturing variance’ account, and the purchasing folks are going to get credit for the $90,000 in savings. They will easily meet their productivity goals for the year since they do not get penalized with any of the costs.”

“So, departmental goals are driving sub optimization to the point where we are all going to fail and our customers will eventually leave us in frustration.  What a way to run a company,” said Dave.