Category Archives: Lean

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, now the CEO of MetalMiner, can be reached by email at lreisman<at>metalminer<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.

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.

Make my cut Lean, please.

Lean Sourcing is important, and I am quite pleased to see that the blogs are not the only medium extolling its virtues. Recently, the IACCM, Supply & Demand Chain Executive, and Industry Week have tackled lean and its impacts on the supply chain.

According to Supply and Demand Chain Executive, lean within your four walls isn’t enough – you need to take lean outside your company and I have to agree. After all, it doesn’t matter how lean your operations are if your suppliers are unable to keep up with you or your customers are not able to accept deliveries when you have completed their order, forcing you to either suspend production or hold extra inventory. Make sure to work with your suppliers and customers in your lean initiatives and help them be as lean as you are.

IndustryWeek states that lean begins with asking the tough questions. Organizations need a unified and quantified understanding of the issues with a coordinated vision and efforts to address them. When undertaking a lean initiative, be sure to ask the following questions:

  • How do we find opportunities for improvement while managing the business?
  • Should we be satisfied with maintaining last year’s performance?
  • What are the main barriers to success we face today?

The goal is to “transform value stream mapping from a one-time, static activity to an ongoing and dynamic process modeling of production and the extended supply chain is one very effective way to advance from merely doing Lean to truly running Lean — day in, day out.” In other words, like the last article it points out that you need to look outside your four walls in the implementation of a successful lean initiative. As the article says, the most successful Lean initiatives are not really about achieving a single business goal, such as inventory cost reduction, but are about driving sustainable process improvement and agility all across the value stream enabling manufacturers to balance multiple concerns effectively — delighting customers, steering the business flexibly through change, with Lean cost and inventory management, while doing the job right for each of the stakeholders.

Finally, the IACCM examines lean in the context of contracting, and points out that by the time services oriented contracts are signed, often many of the terms and requirements on which the contract was based are out of date and that today’s contracts require continuing and active governance as well as rigourous discipline. The key to survival in the 21st century is the development of organizational competence through superior use of information and knowledge. In addition, relationships across the supply chain must be kept aligned through terms that create flexibility to adapt.

In short, lean is a global supply chain process, not a local one.  Now, I know this still does not answer some of your questions on lean sourcing, and how it differs from strategic sourcing, so here’ s one way to look at it.  Lean Sourcing is a type of strategic sourcing focussed on making the most efficient decision overall.  By Wikipedia definition, strategic sourcing “is a systematic corporate/institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company”.  However, this “improvement” does not have to be lean.  If you took a purely risk-mitigation focus, then any decision that reduced your risk would be an “improvement” and if you took a purely cost-centric focus, than any decision that reduced your overall Total Cost of Ownership on your purchases would be an “improvement”.  However, both of these decisions could have negative impacts such as increasing cost in the first case, increasing risk in the second case, and increasing delivery times (and inventory requirements) in both cases.  Lean is a holistic view of sourcing that takes a broader supply chain and operational view and makes the best overall decision for each purchase with respect to the supply chain and not just the commodity or service being purchased at the time.  In this way, Lean Sourcing can be viewed as strategic sourcing, but since strategic sourcing is not necessarily Lean Sourcing, they are not necessarily one in the same.    (The set of Lean Sourcing activities must contain strategic sourcing but strategic sourcing does not have to be based on lean principles or take a holistic supply chain view since you can always define strategy from operational, marketing, or financial foci.)

And if you’re still confused, since one could argue that good strategic sourcing is Lean Sourcing, I invite you to stay tuned for next month’s guest post on the subject from Lisa Reisman, Managing Director of Aptium Global.