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Quality in an Outsourced Economy

Many companies across all industries have decided to focus on their core competencies and have outsourced manufacturing of some components, as well as specialty services to a partner, who may only be a driving distance away. Others have off-shored manufacturing to lower cost countries through their outsourced partners or by building captive manufacturing capacity in countries such as Malaysia, China, Taiwan and Thailand. These outsourced partners can perform these activities better, cheaper and faster than the organization. However, ensuring quality of the outsourced components and services is a challenge for most organizations. This article addresses the various practices companies have put in place to ensure the quality of product and service delivery from their outsourced partner.

Baseline Quality Processes: As the saying goes - if you know how to do something well, you can get others to do it better. Same is true about the product/service quality. An organization must have a quality system of its own that enables it to measure key indicators and ensure continuous improvement of those indicators over time. With a good understanding of how quality for an outsourced product or service will be measured (key metrics), the organization will be able to define very clearly where and how it expects quality improvement from the outsourced partner. The scope and capabilities of partner's quality system and the metrics it reports and format they are reported in and their reporting frequency should be specified by the organization in a quality guidelines manual and given to the partner. If an organization has a good automated process for audits, inspections, corrective action/change control, metrics reporting/tracking and process control with clear visibility and control, it will be able to get the outsourcing partner to adopt similar practices and deliver accurate metrics in a timely manner.

Clearly Specified Contracts: A stipulation must be included in the outsourcing contract that they show "X percent or more" improvement every X months on specified metrics. The tools such as supplier scorecard must be developed to measure these metrics on a periodic basis (weekly, monthly etc.), so the outsourced partner has early warning that it will fall below the specified contractual level and can take appropriate action on a proactive basis to accelerate the improvement process. The contract typically includes a penalty clause if they don't comply with their improvement goals. Typical metrics include:

  • PPM
  • # of Material CARs in the last <period>
  • Average CAR Response time
  • Average CAR Resolution time
  • # Past due CARs
  • On-time 4D/8Ds

Reduced Latency: Many organizations allow their outsourced partner to send process/product quality-related information to them in an electronic format (typically a spreadsheet) containing at least a couple of days of quality data. While such information enables quality/process managers at the organization to get a good feel of process control and quality control issues and limitations at the outsourcer, the data is frequently too old to do much about the batch being produced or the service being currently delivered. By leveraging their quality management software to reduce the latency of the data, an organization can ensure on-going visibility into issues with their partner's product/process quality within a timeframe where such issues can be addressed before the product is shipped or service delivery is completed. As an example, TaylorMade Golf-adidas uses an outsourcing partner for some of the components. Their outsourced partner used to send data once a week via Microsoft Excel and it took a couple of days for TaylorMade's quality engineers to process that information into meaningful charts before they did any analysis. It was too late for them to do anything about a batch even if the data showed potential quality issues, leading to high scrap costs when the components were delivered. In order to proactively manage their environment, they needed to reduce data latency. They deployed a web-based quality system in-house and made the web screens available to their outsourced partner. The partner enters the inspection data at their Asian plant directly into the web-based system and the quality engineers in Carlsbad, California have access to quality charts within no time. As a result, TaylorMade was able to increase Cpk (process capability index) of the outsourced partner's manufacturing line by 70% in 18 months and dramatically improve their product quality.

Annual Audits: Outsourcing partners should be audited on a periodic basis to assess their quality systems against quality guidelines set by the organization - at least once a year. These audits, conducted by the organization or its designated partners, must review all aspects of an outsourcing partner's processes that affect the product or service delivery quality. It is recommended that the organization use technology to drive audits so they can ensure that the audit follows the recommended 'script' for assessments, and the results are tabulated and reported in a consistent manner across all suppliers and outsourcing partners. The organization must leverage technology to ensure that the outsourcer follows through on all "issues" discovered from the audit and drives the corrective actions process. In addition, the technology should be able to easily highlight and escalate any issues from the audit that have not been addressed in a defined timeframe.

Such techniques can enable an organization to outsource manufacturing and/or service delivery, while simultaneously improving quality.