My April 1 column article focused on a strategy of reducing “true” lead time (Manufacturing Critical-path Time or MCT) for both driving lean activity and measuring a product’s lean-ness. It also discussed how application of this strategy to supply chain continuous improvement efforts helps develop a lean-performing supply chain. A lean-performing supply chain should be the primary goal of purchasing departments. The strategy, once applied, can have many positive impacts on company financial results.
The article expressed the hope that once OEMs understood the magnitude of financial benefits available from managing suppliers in a different way, they would be open to adjusting or even changing their strategies and processes so they could take advantage of those benefits. For example, slight revisions in the OEM Request for Quote process and sourcing decisions could make a big difference. But this is not the only instance where changes to procurement practices can produce significant financial benefit to OEMs.
In this column, I’ll cover a second way OEMs can differentiate supplier capability and better identify suppliers that will facilitate them reducing their own internal quality costs. To set the stage, let me share an experience I had early in my career.
One of my early jobs was supervising a layout inspection department of four inspectors who primarily conducted their work on Coordinate Measurement Machines (CMMs). Their type of inspection didn’t involve approving production parts. Rather, it measured parts off new and revised tooling to confirm that the tools themselves would produce parts-to-spec on an ongoing basis. This involved measuring and calculating the CpK values of part specifications important to fit, function, reliability and safety based on the data from consecutive 30-piece samples. Once a tool was approved for production, only the first piece of every subsequent lot would then need to be inspected for that tool be approved to produce production parts. No further inspection would then be required. Our factory included a large stamping facility; consequently, the approval of stamping tools made up the bulk of our work.
At the same time, though, our factory also purchased a lot of stampings. One day while walking through the receiving inspection department, I noticed purchased stampings being inspected prior to being released to production. In talking to the inspector, I learned that every shipment of stampings had specifications, and a sample of parts was measured to verify the load was to spec. This required significant time and effort, to the point that the factory required a workforce of over two dozen receiving inspectors. Because our factory required weekly shipments—i.e., relatively small lot sizes—a lot of loads were coming into the factory. I was also told that quality engineers put together inspection plans that detailed which critical features would need to be checked on each of the inspected parts, and that this took up a significant portion of each of our three quality engineers’ workload.
I’m no genius, but it didn’t take one to realize there was a disconnect here. Specifically, our approval process for internal stampings was different than that used for purchased stampings, and, it required a lot fewer resources. I pointed this out to a purchasing supervisor and made a proposal that all external suppliers be required to follow our internal process—in other words, have a process capability rather than inspection-based quality system—and was told that would be impossible because while suppliers could be given quality performance metrics, they couldn’t be told how to deliver that level of quality. Hmmm.
I next went to the purchasing manager and made the same pitch. Although he was dubious, he said he’d allow me a test run with stamping suppliers. Since our factory believed in an “optimized” supply chain, this meant we only had six stamping suppliers. The first thing I did is put together a supplier presentation that not only defined what we’d be asking for but also quantified the positive impact on their bottom line. Let me explain.
At the time, suppliers’ parts were approved for production through a single-piece inspection of all part features, which included critical dimensions (as outlined above) plus non-critical ones. Any out-of-spec feature would result in rejection of the suppliers’ entire lot. On top of this, the approval measurement allowed use of an entire specification tolerance for approval purposes. As one can suspect, this was ineffective in ensuring ongoing quality. So suppliers were also expected to inspect each lot prior to shipment and include their inspection results with the shipment—I guess just to make sure they had done the inspections. So in addition to our receiving inspection costs, the supplier had its own shipping inspection costs.
In the presentation to our suppliers, I laid out the process we used in-house to approve our tools and all parts made off of them, and asked if they’d be willing to use the same approach. They all reacted as if I’d delivered manna from heaven. They couldn’t believe we’d let them replace their current resource-intensive process with a more streamlined one. And they were even more impressed when I was able to show them that this new, lower-cost approach would ensure significantly higher quality that what was being delivered through inspection.
We next taught them how to conduct variability studies, including CpK values X-bar and R Charts for every critical feature. We then confirmed that they had the measurement capability to measure the types of features and tolerances normally found on stampings. Finally, we implemented receiving purchased stamped parts through this new framework.
Guess what? Quality improved (we compared “before” and “after” supplier quality performance) and the inspection savings was significant. Transitioning our approach to receiving inspection became a purchasing priority, and over two years this same approach was implemented with the 20% of the commodities that made up 80% of the receiving inspection work. Over that period, the number of our inspectors in receiving inspection was reduced to the lower single digits. Where were the other savings?
- Elimination of the need quality engineers to create receiving inspection plans.
- Reduction in reject resolution; i.e., sorting, reworking or shipping back to the supplier.
- Reduction in production downtime.
And my favorite;
- The need for fewer brass hammers on the assembly line to pound parts into place when they were only slightly out-of-spec.
I need to point out that all of the costs above—with the exception of reducing the need to purchase brass hammers—are a financial exhibit that is already tracked and easily given visibility to executive management.
Getting Credit for Cost Cuts
The only remaining challenge, then, would be for procurers to get purchasing credit for the cost reduction in the same way that they get credit for piece-price reduction. How is this done? It isn’t easy because of the turf battles that ensue when changes are proposed. Data is usually convincing, though, and I suggest that when you make your pitch you come loaded-for-bear.
What do I mean by this? Take raw material. When a supplier’s true lead-time is reduced, there is less need for raw material inventory safety stock, as well as less need for suppliers to pre-build inventory; i.e., lower overall cost.
Similarly, when part quality is improved, less raw material safety stock is required. So if you have a supplier lower their MCT and switch from an inspection-based to a process-capability-based quality program, you should be able to lower raw material safety stock. All you need to do is outline your quality process expectations on the RFQ form and ask whether the supplier can comply with it. What’s the issue then?
Traditionally, raw material is owned by operations. If it goes up or down, operations gets blamed or given credit; i.e., raw material is tracked as a financial exhibit. The purchasing function needs to position itself to get the credit when increased supplier capability is the basis for a reduction in raw material.
So for all of the internal OEM costs that can be associated with more capable suppliers—identified in this and the April article—purchasing management must put together a strategy to make the case for receiving credit where credit is due relative to those costs.
If I was a purchasing manager at an OEM and read this and the previous article, I would be energized. These types of changes are step-function—versus incremental—and with such costs available for harvesting, it is a kind of dereliction of duty to ignore them. If you are a supplier to OEMs and they don’t operate as above, you might suggest that they read these two articles.
I’ll also point you in the direction of two presentations I participated in at IndustryWeek’s recent M & T conference in Pittsburgh. If you check them out, be sure to look at the comments section below the actual slide, which contains most of the verbiage used in supporting what is on the slide itself.
You might have noticed that I did not mention logistics, transportation or warehousing above. There is a lot of waste in these areas, too. They will be the subject of the June article.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.