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Overview
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.
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 suppliers 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 suppliers 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 organizations 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 chargebacks, 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.