Managing Quality

Integrating the Supply Chain

Chapter 9
Managing Supplier Quality in the Supply Chain
Chapter Objectives
• Explain why the concept of the value chain is important for quality
management
• Discuss how quality approaches are used to manage supplier alliances
• Explain how IATF 16949 is used to improve supplier performance in the
auto industry

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THE VALUE CHAIN
• Michael Porter identified a systematic means for examining all the activities
a firm performs and how those activities interact
• The value chain is a tool that disaggregates a firm into its core activities to
help reduce costs and identify sources of competitiveness

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THE VALUE CHAIN Continued
• The value chain includes inbound logistics, operations, outbound logistics,
marketing and sales, and service
• It is a chain for a single firm; however, the firm’s suppliers also have value
chains
• It is part of the value system that consists of a network of value chains

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THE VALUE CHAIN Continued
• The core activities shown in the figure are termed value-chain activities
because they are the tasks that add value for the customer
• Non-value-chain activities typically have costs but no effect on the
customer and are referred to as the hidden factory
• E.g., all the bureaucratic processes, rework due to defects, unnecessary paperwork

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THE VALUE CHAIN Continued

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THE VALUE CHAIN Continued

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The Chain of Customers
• From a quality perspective, an interesting variation of the value chain is the
concept of the chain of customers
• The chain of customers is revealed when you view the step in the chain
after you as your own customer
o If you work at workstation 4 in a process at the core of the value chain, you will make
sure that the work you do is absolutely impeccable before you release it to your
“customer” in workstation 5
• If each of us along a chain works to satisfy our own customer, the final
customer will be very satisfied, and our products and services will be free
of defects and mistakes

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Managing the Supply Chain
• The concept of supply chain
management extends the economic
concept of the value chain
• The supply chain at right includes
several suppliers, plants, distribution
centers, and customer groups
• Notice that the value chain focuses
on activities such as inbound and
outbound logistics, which are
supply-chain activities

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Value Chain vs Supply Chain

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Value Chain vs Supply Chain Continued

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SUPPLIER ALLIANCES
• Managing inbound logistics in the supply chain involves working with
suppliers who provide parts, raw materials, components, and services
• There has been a trend toward developing closer working relationships
with fewer suppliers
o A big part of quality improvement requires developing and assisting suppliers so they
can provide needed products with low levels of defects, in a reliable manner, while
conforming to requirements
• Several approaches to improving suppliers result in what are called supplier
alliances
o A supply alliance is a business relationship between a buyer and a supplier, with both
focus on achieving continuous improvements while squeezing costs out
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Supplier Development Approaches
• Single sourcing
• Dual sourcing
• Supplier evaluation
• Sole-source filters
o ISO 9000
o Baldrige Award
• Supplier certification or qualification programs
• Supplier development programs
• Supplier audits
• Alliances

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Supplier Development Approaches Continued
• Single sourcing refers to narrowing down the list of approved suppliers for
a single component to just one supplier
o There is more exposure to supply interruption
• Dual sourcing means the number of approved suppliers is reduced to a few
o Dual sourcing reduces the exposure of having a single supplier

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Supplier Development Approaches Continued
• Supplier evaluation is a tool used by many firms to differentiate and
discriminate between suppliers
o Supplier evaluations are often recorded on report cards in which potential suppliers
are rated based on criteria such as quality, technical capability, and ability to meet
schedule demands
• Sole-source filters rely on external validation of quality programs
o The external validation comes from outside examiners and registrars
o Two of the most used filters are the Baldrige criteria and ISO 9000
o Companies must show either that they are using the Baldrige criteria to improve
quality or that they have become ISO 9000 registered
o The ISO 9000 filter is commonly used in the international community

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Supplier Development Approaches Continued
• Many companies perform lengthy inspections of their suppliers that involve
long-term visits and evaluations
o These programs are often called supplier certification or qualification programs if
the focus is entirely on evaluation
o If the focus is on helping the supplier to improve by training the supplier over long
periods of time, they are termed supplier development programs
• A supplier audit is similar to supplier certification except that a team of
auditors visits the supplier and then provides results of the audit to the
customer
o The audits are performed to ensure that product quality and procedural objectives
are being met

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Supply Chain Disruption and Risk Mitigation
• What factors can lead to
supply chain disruption
and how to mitigate the
disruption risk?

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Supply Chain Disruption and Risk Mitigation Continued
• What factors can lead to
supply chain disruption
and how to mitigate the
disruption risk?

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Methods for Responding to Supply Chain Disruptions
• Prepare for the worst and hope for the best
• Use reputable supply chain brokers, 3PLs, and freight forwarders
• Develop an understanding of your company’s exposures and mitigate these
risks through planning
• Have transparent and highly visible supply chains
• Implement quick “sense and response”
• Insurance

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Single-Sourcing Examples
• In the 1980s, a defective rate of 5% for a supplier was acceptable
• In this new century, parts-per-million levels of quality are expected from
suppliers
• Many companies such as Mercedes-Benz are moving to single-source
suppliers
• However, outsourcing is not without its difficulties

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Difficulties in Single-Sourcing
• What difficulties can firms
face in single-sourcing?

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Difficulties in Single-Sourcing Continued
• What difficulties can
firms face in single-
sourcing?

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Difficulties in Single-Sourcing Continued
• Insufficient supplier evaluation
• Lack of fit with company culture
• Loss of control over processes and outcomes
• Hidden or unexpected costs
• Maintaining data security
• Protecting intellectual property
• Working across multiple time zones
• Difficulty coordinating multiple vendors

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More on Supplier Alliances
• Single sourcing has dramatically changed purchasing by lowering the
number of suppliers
o Xerox went from 5,000 suppliers before single sourcing to 300 after
• Electronic data interchange (EDI) is a system that aids customer and
supplier communication by linking together supplier and customer
information systems
o Customers help suppliers to isolate bottlenecks in the operation, balance production
systems, and reduce setup times in an effort to reduce lead times
• Vendor-managed inventory (VMI) is making the suppliers responsible for
managing inventories and keeping inventory costs low
o Customers empower suppliers to write their own purchase orders
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SUPPLIER DEVELOPMENT
• Supplier development has to do with the activities a buyer undertakes to
improve the performance of its suppliers
o Include supplier evaluation, supplier training, consultation, data sharing, and
processes sharing
o Although companies such as Toyota and Honeywell have become very good at
developing suppliers, recent data suggests that many companies do not have
adequate supplier development programs

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Steps for Supplier Development
1. Identify critical products and services
o This involves identifying strategic products and components (those that are difficult
to obtain, have high costs, or are high volume)
2. Identify critical suppliers
o They may be suppliers who provide strategic components but do not meet quality or
reliability objectives, or suppliers who do not meet schedules
3. Form cross-functional teams
o The buyer forms a cross-functional team to work with the supplier
4. Meet with supplier top management
o This meeting is held to discuss details of strategic alignment, performance
expectations and measurement, and processes for improving
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Steps for Supplier Development Continued
5. Identify key projects
o These occur when there is agreement about how the supplier needs to improve and
where
o Projects are selected in the same way Six Sigma projects are selected, by criteria
such as impact, ROI, feasibility, and required investments
6. Define details of agreement
o This definition involves cost and benefit sharing, commitments of resources, metrics
for improvement, project charters, accountability, and deliverables
7. Monitor status and modify strategies
o To ensure success, management must actively monitor progress and revise strategies
as needed
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Supplier Development Continued
• There are some dimensions of supplier development that have emerged in
the literature
o Providing resources for development programs
o Trying to determine the right numbers of suppliers to use
o Finding ways to measure procurement efficacy
• Many companies mistakenly confuse supplier evaluation with supplier
development
o Implicit to supplier development is the expenditure of resources designed to improve
supplier performance, which may occur over a long period of time—sometimes
months or years

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Supplier Relationship Management System (SRMS)
• Supplier relationship management systems (SRMS) include spend
analytics, sourcing execution, procurement execution, payment, supplier
scorecarding, and performance monitoring

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Supplier Relationship Management System (SRMS)
• In SAP ERP systems, the SRMS has the following capabilities:
o Create complete spend transparency
o Develop a comprehensive, accurate profile of the supplier base
o Identify opportunities for optimal sourcing of materials, equipment, and services
o Consolidate and prioritize suppliers based on quality, performance, and on-time
delivery
o Ensure contract compliance and reduce maverick spending
o Ensure the quality of purchased items
o Ensure appropriate levels of supply

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Supplier Relationship Management System (SRMS)

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A SUPPLIER DEVELOPMENT PROGRAM: IATF 16949
• In the late 1980s, U.S. automakers developed certification programs for
suppliers
o The General Motors program was called “Targets for Excellence”
o Ford used a program called “Q1”
• With the increase in popularity of ISO 9000, suppliers asked auto companies
to adopt a single standard for certifying suppliers
o The result, called QS 9000, provided a common standard for DaimlerChrysler, General
Motors, and Ford
• This standard has gone through updates and was supplanted by ISO/TS
16949 and then IATF 16949

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IATF 16949
• The IATF 16949 standard applies only to automotive companies
• It is an International Standards Organization (ISO) Technical Specification
that aligns existing automotive quality system requirements within the
global automotive industry
• It specifies the quality system requirements for the design/development,
production, installation and servicing of automotive-related products
• It was written by the International Automotive Task Force (IATF)

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IATF 16949 Continued
• This model shows that IATF 16949
is closely aligned with ISO 9000 in
that it is founded on a systems
view of automotive production
• This system for continual
improvement involves
management responsibility;
resource management; product
realization; and measurement,
analysis, and improvement

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IATF 16949 Continued

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IATF 16949 Sections
0. Introduction 6. Resource management
1. Scope 7. Product realization
2. Normative reference 8. Measurement, analysis, and improvement
3. Terms and definitions Annex—Control plan
4. Quality management system Bibliography
5. Management responsibility

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IATF 16949 Sections Continued
• Section 4: Quality management system
o For the quality management system, suppliers must recognize key processes and
document these processes
o They must establish sequences and linkages for these processes
o The suppliers must determine how effective their operations are; make resources
and information available in sufficient quality and quantity to run the business;
monitor, measure, and analyze the business to ensure effective operations; and take
actions to ensure that the planned results are attained and continual improvements
are being made

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IATF 16949 Sections Continued
• Section 5: Management responsibility
o The extent to which management is committed to the development and
implementation of quality management and continuous improvement is documented
o Management tier is responsible for developing policy, communicating with the
organization relative to customer service, establishing quality objectives, conducting
managerial reviews, and providing resources
o For example, managers with responsibility and authority for corrective actions will
need to be informed when products do not meet specifications and see that
corrective action is taken to ameliorate the problems

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IATF 16949 Sections Continued
• Section 6: Resource management
o For management to fulfill its responsibility, it must provide resources
o These resources are used to maintain the quality management system and meet
customer requirements, including training and development for human resources
o Management is required to provide infrastructure such as bricks and mortar,
equipment, and support systems
o They must be planned and implemented properly; a safe, clean, and adequate work
environment is established for worker satisfaction

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IATF 16949 Sections Continued
• Section 7: Product realization
o Products and processes should be adequately planned, including quality objectives
for the products
o Customer-related processes should be designed so that customer needs are fully
considered and regulatory requirements are met
o This section considers all aspects of product and process design as well as purchasing,
suppliers, control plans, setups, preventive maintenance, traceability, and many
other aspects of designing and producing products

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IATF 16949 Sections Continued
• Section 8: Measurement, analysis, and improvement
o For this requirement, the company needs to provide documentation that it can
demonstrate product conformity, quality management system conformity, and
continual improvement of the quality management system
o This requirement includes aspects such as statistical tools, measurement systems,
customer satisfaction measurement, internal audits, and other considerations

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SUPPLY CHAIN QUALITY MANAGEMENT
• Recent work has been performed in Variable Ranking
the area of supply chain quality Training 1
management that is helping us Data management 2
better understand this field Supply chain management 3
Customer relationship management 4
• Supply chain quality management Leadership 5
(SCQM) is defined as a systems- Benchmarking 6
based approach to performance Project management 7
improvement that leverages Surveys 8
opportunities created by upstream Complaint resolution 9
and downstream linkages with Supplier development 10
suppliers and customers
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Key Terms
• Acceptance sampling • Supplier alliances • Supply chain
• Chain of customers • Supplier audit • Supply chain quality
• Dual sourcing • Supplier certification or management (SCQM)
• Electronic data qualification programs • Value chain
interchange (EDI) • Supplier development • Value-chain activities
• Hidden factory • Supplier development • Value system
• IATF 16949 programs • Vendor-managed
• QS 9000 • Supplier evaluation inventory (VMI)
• Single sourcing • Supplier relationship
management systems
• Sole-source filters (SRMS)
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