Quantifying Quality in Lean Sourcing Initiatives

Today I’d like to welcome guest contributor Lisa Reisman, the Managing Director of Aptium Global, a direct materials advisory sourcing advisory firm. Lisa Reisman can be reached by email at lreisman<at>aptiumglobal<dot>com.

I’m sure that a good number of readers of this blog are familiar with the basic concepts of lean manufacturing, which is all about eliminating waste and removing any steps in a process for which a customer would not explicitly pay for. But even more readers of this blog are schooled in the art of strategic sourcing.

Lean Sourcing blends both lean and strategic sourcing. In our view, the result is total enterprise cost reduction, as opposed to line item or category cost reduction which typically does not include many operational and quality factors that add costs outside of procurement. If you aren’t measuring quality from your supply base, you aren’t practicing Lean Sourcing.

Many organizations use supplier scorecards — but few really establish baselines of performance from their incumbent suppliers. The reason incumbent suppliers typically win “bids or ebids” is because buying organizations think they have a good handle on quality. Or, they choose to deploy the “I’d rather work with the devil I know vs. the devil I don’t.” But if you don’t measure, you don’t know. And if you don’t know, you have no idea if your current vendors are your lowest total cost suppliers.

From a Lean Sourcing perspective, at a minimum, companies should deploy a scorecard which measures the following: Material Acceptability (NPT’s — Non Conforming Product Tickets Issued), Quantity/Purchase Order Reliability, Timeliness, CAR Response time (Corrective Action Request), and Packaging. These metrics certainly cover the basics. But the question becomes: how do companies use this data to weight suppliers when making award decisions?

Many companies use the scorecard for on-going quality assurance and certainly as a means for addressing potential problem issues. But few create a linkage of supplier quality and performance as a factor into sourcing decisions. True, most sourcing platforms take into consideration quality elements (e.g. most platforms allow the buyer to “weight” quality performance parameters). In the real world, however, many of these methods end up being quite qualitative and in some cases, arbitrary. Let’s face the facts — buyers like to use their incumbent suppliers not only because they have a relationship with them but because they feel their operations folks are content and/or pleased with the quality levels received from their current suppliers.

But let’s take a look at this in a little more detail. Automotive companies rely heavily on PPM (or Parts Per Million) or DPMO (Defective Parts per Million Opportunities) data. By examining a year’s worth (or more) of supplier scorecards which measure NPT’s (above) a sourcing professional can assign a sigma value or DPMO value to any incumbent supplier. A six sigma supplier would be supplying parts at a rate of <3.4 DPMO, or less than 3.4 defects per million parts received.

The truth is that while many companies claim their suppliers are “six sigma”, when one really tracks the data over a 12 month period, in reality PPM numbers are actually much higher. In the case of low cost country sourcing, it is not uncommon to receive a couple of defective parts per shipment (and there aren’t too many parts that are shipping at the rate of over 1,000,000 pieces per shipment!) These defects can begin to add substantial cost quite quickly. More sophisticated organizations have conducted activity based costing analyses to quantify the cost of poor quality from every step within the production process. Of course an error caught earlier in the process (e.g. during incoming inspection) is a lot cheaper to correct than identifying an error caught later in the process say after production (e.g. when the part would likely need to be re-made).

In our view, manufacturing organizations of all sizes can better incorporate quality into the sourcing process. As a foundation, we recommend:

  1. Implementing supplier score-cards, and at a minimum, tracking every shipment using the 5 metrics discussed above. If you have been using supplier scorecards already, assign a sigma value or a DPMP/PPM number to all of your suppliers to understand your baseline.
  2. Communicating to your supply base your quality intentions. For example, if you are in the automotive industry, you are probably being told by your OEM customers that you need to be shipping 0 ppm parts. Hold your supply base accountable to the same standards.
  3. When deploying sourcing initiatives, look at your largest categories by dollars and by quality and focus Lean Sourcing efforts on those categories where your cost of quality has eroded organizational cost savings on a total cost basis.
  4. If you want to dig further into the concept of Lean Sourcing and how it can reduce your total enterprise costs, let me refer you to a whitepaper that I co-wrote on the subject that is available for free download on the Aptium Global Site.