Best Practices in Supplier Quality Management

Supplier quality management has emerged as one of the leading business practices in the past few years. World-class manufacturers are making significant investments in systems and processes to improve supplier quality. This white paper briefly outlines some of the best practices implemented by such manufacturers in supplier quality management.

Why Supplier Quality is critical?
With companies outsourcing their manufacturing to strategic partners across the globe, the supply chains have become very long. Many consumer products are manufactured in Mexico or the Far East and then shipped to North American markets using multiple logistics providers via ocean, air and trucks. It can take weeks for a finished product to reach the store shelves from a supplier in the Far East. In addition, many of these manufacturers have streamlined their supply chain and implemented lean inventory techniques. As a result, any issue in supplier quality can quickly result in stock outs.

Companies that sell industrial products need to preserve their preferred supplier status to continue to be considered for future business. As a result, they are under pressure to ensure that their products continue to meet or exceed acceptable PPM and Corrective Action thresholds set by their customers. Hence, managing their own supplier’s quality is very high on the agenda for these companies.

The following best practices enable these companies to improve their own quality by improving their supplier’s product and delivery quality.

Best Practice #1: Measuring & tracking cost of poor supplier quality
Most organizations do not track and measure the cost of poor supplier quality (COPQ) attributed to their suppliers. Such COPQ may add up to over 10% of the organization’s revenue. Some companies only track supplier COPQ by measuring scrap and increase in MRB inventory. Results have shown that materials account for less than 50% of the total COPQ. The following should be taken into account to calculate the actual COPQ.

• Scrap, rework, sorting and processing costs due to poor quality
• MRB inventory and processing costs due to inspection failure
• Line shutdown attributed to poor quality
• Using equipment that is capacity constrained for rework due to poor quality, reducing the overall utilization of the production line
• Freight costs due to expedited shipment to customers/downstream plants
• Warranty expenses due to poor quality
• Recall expenses due to poor quality of products shipped to customers

Quality Management Systems (QMS) or manufacturing systems can track whenever any of the above costs are incurred due to supplier quality issues. World-class manufacturers are using all of the above factors to track actual supplier-related COPQ.

Best Practice #2: Cost recovery
As we discussed above, the total COPQ is equal to the COPQ of OEM plus inherited COPQ of suppliers. As a result, companies need to proactively work with their suppliers to improve their quality, so that they can reduce their own COPQ. Hence a cost-recovery system, where suppliers are charged back for providing poor quality of components, is an effective way to introduce business discipline and accountability into the supply chain.

However, based on our findings, less than 50% of companies pursue cost recovery with their suppliers. And majority of these companies only recover material costs from their suppliers. According to a recent report by AMR, an industry analyst group, about 65% of the costs attributed to the poor supplier quality are non-material related – see an example in the picture below. If a company institutes a quality management system to aggregate such costs and use it for charge-backs, not only would they be able to fully recover the costs of poor quality from their suppliers, they would be able to institute a discipline that forces the suppliers to quickly improve their quality of products shipped.

Please click on image for enhanced version

Best Practice #3: Supplier Audit
Supplier Audits are one of the best ways to ensure that supplier is following the processes and procedures that you agreed to during the selection processes. The supplier audit identifies non-conformances in manufacturing process, shipment process, engineering change process, invoicing process and quality process at the supplier. After the audit, the supplier and manufacturer jointly identify corrective actions which must be implemented by the supplier within an agreed-upon timeframe. A future audit ensures that these corrective actions have been successfully implemented.

In our research, over 50% of the manufacturers do not follow the best practices in audit, while engaging with their suppliers. By implementing best practices, manufacturers ensure that the audit process is effective and efficient and allows them to audit their entire supplier base at least once a year while maintaining a lean staff of auditors. The following picture shows the best practices process for internal auditing.

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Best Practice #4: Supplier Scorecard
Supplier Scorecards are one of the best techniques in using facts to rank the supplier’s relative performance within the supply base and tracking improvement in supplier’s quality over time. Scorecards also provide a data point into any future business negotiations. Following are the key operational metrics that leading manufacturers track in their supplier scorecard:

• PPM of Supplier Components
• # of Corrective Actions Last Quarter
• Average Response and Resolution time for Corrective actions
• # RMAs Processed per month
• MRB Inventory Levels
• # of Rework Hours due to Supplier Components
• % of Actual COPQ Recovered from Suppliers
• # of Customer Complaints on Product Quality
• Warranty Reserves
• Relative ranking of supplier
• Performance against benchmark

Best Practice #5: Closed Loop Corrective Action
Systematic reductions in the Cost of Poor quality can be attained by implementing a Quality Management System (QMS) that provides an integrated and closed loop corrective action process. In a manufacturing organization, when deviations, nonconformance, out of specifications, quality incidents or customer complaints occur, corrective and preventive actions need to be initiated to remedy the problems.

Once a quality problem has been identified, the first step is to initiate an investigation and to properly identify the root cause of the problem. After the root cause has been identified, Corrective Action (CAPA) items are created and routed for approval. When approved, appropriate changes are implemented in the environment and then the CAPA is closed out. These changes may include amendments to a documented procedure, upgrading the skill set of an employee through a training and certification process, or recalibrating the manufacturing equipment. In addition, the system may capture COPQ associated with that non-conformance and use that information to initiate and complete a cost recovery process with a supplier.

It is critical to deploy a closed-loop, integrated quality management system, rather than a set of loosely connected modules from one or more vendors. Integration ensures that the information flows out the corrective action process with a high degree of accuracy and velocity without falling through the cracks. It also ensures that the entire change control process is auditable from end-to-end - a critical requirement to support 21CFR Part 11 requirement in FDA regulated industries. Finally an integrated system ensures that audits become a core driver into the corrective action process and become a key tool for continuous improvement.

Please click on image for enhanced version

Best Practice #6: Engaging Suppliers in quality systems
It is critical for manufacturers to engage suppliers in all aspects of their quality management system, so that the supply-base is fully integrated into the QMS being rolled out. Key requirements include:

• Supplier should be able to provide quality-related data to the manufacturer without having to deploy a mandated quality management system within their environment. This can be achieved by feeding information from supplier’s quality system into manufacturer’s quality system (for larger suppliers or ones sharing their production line with multiple customers) or getting the supplier to use a manufacturer’s web-based quality management system (for smaller suppliers or ones with dedicated lines for a customer). A web-based quality management system dramatically reduces the cost of ownership for a supplier by providing the right information to a key customer without having to deploy software in-house.
• Manufacturer should be able to get every relevant stakeholder within the supply base to use the quality system without having to train every casual user. Emerging capability includes a scenario where an application form is embedded within an email delivered by the system to the casual user at a supplier. When the user opens an email, they hit reply, enter the data in the embedded form and hit send. The data in the form is processed by the system as if it came from the screen. As a result the user does not need to learn to navigate the quality application, yet can participate in the quality system.

By deploying these best practices, manufacturers can dramatically improve their supplier quality and achieve their own business objectives. Such practices have been implemented by world-class manufacturers using enterprise quality management software. We invite you to take a look at MetricStream’s software suite and see how our solution can help you deploy such practices within your environment.