Basics of Supply Chain Management

Unit 1
UUnit
nit 11
BBasics
asics ooff SSupply
upply CChain
hain
M anagement
Management
Lesson 9
Quality and Purchasing
 Basics of Supply Chain Management

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Preface............................................................................................................3
Course Description................................................................................................................. 3
Lesson 9 – Quality and Purchasing .................................................................4
Introduction and Objectives.................................................................................................. 4
Total Quality Management (TQM) ...................................................................................... 4
Drivers for Quality Improvements ....................................................................................... 5
Variation ................................................................................................................................. 6
Manufacturing and Specifications ........................................................................................ 7
Solving Quality Issues ............................................................................................................ 8
Product Inspection ............................................................................................................... 12
Process Control..................................................................................................................... 13
Purchasing ............................................................................................................................. 13
Request for Information (RFI)............................................................................................ 16
Summary ............................................................................................................................... 21
Further Reading ................................................................................................................... 21
Review ................................................................................................................................... 22
What’s Next? ........................................................................................................................ 24
Appendix.......................................................................................................25
Answers to Review Questions .............................................................................................. 26
Glossary ........................................................................................................28

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Preface
Course Description
This document contains the ninth lesson in the Basics of Supply Chain Management unit, which
is one of five units designed to prepare students to take the APICS CPIM examination. The
Basics of Supply Chain Management unit provides the foundation upon which the other four
units build. It is necessary to complete this unit, or gain equivalent knowledge, before
progressing to the other units. The five units, which together cover the CPIM syllabus, are:
Basics of Supply Chain Management
Master Planning of Resources
Detailed Scheduling and Planning
Execution and Control of Operations
Strategic Management of Resources
Please refer to the preface of Lesson 1 for further details about the support available to you
during this course of study.

This publication has been prepared by E-SCP under the guidance of Yvonne Delaney MBA,
CFPIM, CPIM. It has not been reviewed nor endorsed by APICS nor the APICS Curricula and
Certification Council for use as study material for the APICS CPIM certification examination.

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Lesson 9 – Quality and Purchasing
Introduction and Objectives
This lesson looks at the costs of quality and explores the tools and techniques used to solve
quality issues, including Pareto analysis, fishbone diagrams and control charts. The lesson also
looks at the importance of purchasing, and the factors that lead to successful purchasing, such as
establishing clear specifications, evaluating suppliers against identified requirements, and
establishing supplier agreements.
On completion of this lesson you will be able to:
Identify drivers of high quality in manufacturing
Identify costs of quality
Explain basic attributes of normal variability
Define quality in manufactured products
Identify advantages of Pareto analysis, control charts, and fishbone diagrams
Differentiate between process control and product inspection
State the importance and purpose of purchasing
Record the steps involved in purchasing
Identify considerations for establishing specifications
Identify guidelines for selecting suppliers
Explain factors for consideration when establishing a supplier agreement

Total Quality Management (TQM)

Total quality management (TQM) is a holistic approach to improving everything in an
organization, with the ultimate aim of improving custome r satisfaction. Continuous improvement
is a necessity due to the stiff competition faced in all areas in today’s marketplace. Any
organization can be confident that its competitors will be constantly improving and refining their
processes.
Additionally, customer expectations tend to increase rapidly, so that what is an
order winner on one day will only be an order qualifier on another day. For
example, remote controls were once considered a luxury or extra feature on a
television. Now, it is unlikely that you would be able to buy a television without
one. Remote controls were popular with customers, all manufacturers began to
produce them until eventually they became a requirement rather than an extra.
The APICS dictionary defines TQM as ‘a management approach to long-term success through
customer satisfaction. TQM is based on the participation of all members of an organization in
improving processes, goods, services, and the culture in which they work.’
TQM starts with the customer and results in improved processes and products. It is a circular
process which constantly maintains customer focus.

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TQM Principles
The TQM approach is above all customer focused. That is, it constantly aims to meet or exceed
the user’s expectations. Quality of product and the related costs of quality are a central issue. All
costs associated with quality must be identified. TQM also encompasses the user of problem-
solving tools in order to take action and continuously improve the process through group efforts
that involve the emp loyee.
The TQM principles are well illustrated by the 3 Xs of quality as described by Ben Schlussel. He
expects quality to be:
Explicit (A customer wants to buy a 2 door sports car)
Expected (The customer expects the car to run well)
Exciting (The custome r finds the acceleration speed greater than expected and is very
impressed with the interior design of the car)

Drivers for Quality Improvements

Customer Demands
Customers continue to demand higher quality due to several factors. Firstly, as prices generally
rise, customers expect more from their money. In addition, everything is more complicated and
so more is expected of it. Conditions of employment are not as secure as they once were and
world competitors are producing better quality products.
High qua lity is demanded from both end users and major manufacturers. Manufacturing plants
expect that suppliers will provide parts of high quality with the minimum number of defects.
This is essential for efficient production and the survival of both manufacturer and supplier. Just-
in- Time (JIT) manufacturing systems need quality rates approaching 100%. Extra inventory
cannot be used as a buffer to hide insufficient quality of materials. Additionally, the cost of
carrying finished goods inventory prohibits the use of an inventory buffer at the customer end to
guard against missed delivery dates.

World Competition
Consumer demand for improved quality would be of little concern if a
company thought it had cornered the market. In reality, that is never likely to
be the case. No company can afford to rest on its laurels as it is constantly
battling on the world stage with its competitors. Market share must be
increased against competitors. One way to do that is to provide a better quality
product than the competitor.

Cost Advantage
Quality products are more cost effective in the long run. For example, if a part costs $8 to make
and sells for $12 with a scrap rate of 10%, production must make 110% of the order size to
ensure that the customer demand is fulfilled. When scrap rates are reduced, production rates are
reduced while still meeting customer demand. Therefore, profit is increased.

Costs of Poor Quality

Poor quality results in scrap and rework of materials, wasted time and
materials and wasted capacity. Beyond these internal costs, poor quality
also incurs more serious costs on warranties, field service, and lost sales
or customers due to lack of confidence in the product.

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On the other hand, there are many costs associated with ensuring a high quality product. The
approach an organization takes to quality will largely determine the cost of the exercise.
It is better to be ‘Right First Time’ as it is usually less expensive to prevent quality problems
before they occur rather than trying to fix them afterwards. Right First Time is more achievable
when production processes are continually assessed and refined to ensure efficiency and
minimum waste or potential for mistakes.
Quality costs fall into two categories: prevention and appraisal. Costs or appraisal are linked to
activities required to discover the condition of a product, for example, receiving inspection, in-
process inspection and testing processes. Costs associated with prevention (Right First Time
approach) include training, statistical process control and quality plans.
Costs of Appraisal Costs of Prevention
Inspectors Machine maintenance
Gauges and other inspection or testing Operator training
equipment
Lost product due to poor quality Scheduled downtime
detected.
Higher levels of work in process Skilled machine technicians

1. To improve quality in a manufacturing process, where should the greatest

effort and expense be focused?
A. Process improvement
B. Product inspection and testing
Review Q
C. Customer Service
D. Extended warranties

Comparing Costs Before and After Improvements

Preventative maintenance and other activities aimed at preventing quality problems before they
occur can appear very expensive initially, when failure rates and therefore the need for quality
appraisal are still quite high.
In the longer term such costs are likely to be recouped as a result of dramatic reductions in
quality problems. As up to 20% of sales dollars may be spent on inspecting product, rework,
scrap, and covering warranties, the potential for savings with higher quality and reduced error is
substantial.

Variation
Variation occurs in all things: the weather, the growth rate of plants, and the progress of children
in school. Although these examples are all very different they tend to share a similar pattern of
distribution.
Generally, there will be few examples of extremes and most items sampled will fall into the
middle range. Take for example, the height of children in a classroom. There may be one or two

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very tall or very short children, but most will be in or
around the same height, close to the average height.
This type of pattern is known as normal distribution. It
is also referred to as the normal curve or bell curve.
The normal distribution was originally studied by
DeMoivre (1667-1754), who was curious about its use
in predicting the probabilities in gambling.

Process Variation
Variation also occurs in manufacturing. Products will never be entirely uniform. Take for
example, the production of aspirin tablets, which must be packaged in a bottle with a heat-sealed
layer of foil inside the cap.
When the process begins, the machines are cold, and the heat-sealer
has only just reached the required temperature range. Some of the
bottles that go through at the beginning may not by fully sealed and
will need to go through the machine again. As production continues,
the heat-sealer gradually approaches its maximum allowable
temperature. At this point, some of the foil tops may get slightly
burnt or melted and must be rejected.
Once the maximum temperature is reached, the machine self- regulates by switching off the
heating mechanism until the lowest allowable temperature is reached. Although always working
within specified allowable limits, the qua lity of the heat seal will vary, following the normal
distribution curve.

2. Ultimately, Total Quality Management is:

A. Process- focused
B. Production- focused

Review Q C. Workforce- focused

D. Customer- focused

Manufacturing and Specifications

For most products, an ideal specification exists which describes the product in its most perfect
state. As normal variation is a fact of life and of manufacturing, this ideal will not be met
consistently. Usually, an acceptable range is identified, where product is suitable for the
customer.

Definition of Quality in Manufactured products

The APICS dictionary defines quality as ‘conformance to
requirements or fitness for use’. In manufacturing, the Ideal product
product specification will identify a range within which
products must fall to meet requirements and be
considered fit for use. However, product which only just
falls inside the allowable range is obviously not as good
as product which is close to the ideal specification.

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Specification Range
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The APICS definition is therefore a definition of minimum quality. A more complete definition
is the following: t the very least parts must be within specified ranges. The less the variation
from the center of the specification, the better the product.

Manufacturing quality
Within the specification range, manufacturing quality should follow the normal distribution
curve. Where the highest part of the curve is not at the middle of the specification this indicates a
quality problem that should be solved.
For example, a bottling plant filling bottles of iced tea has specified the acceptable
volume of tea in each bottle is between 245 ml and 260 ml. However, analysis of
production against the allowed specification range provides the following curve:

90
80
70
60
50
Series1
40
30
20
10
0
245 1ml 2 3 4 5 6 7 8 9 10 25511ml
250 ml

All product is falling within the acceptable range of the specification. However, this is not the
normal distribution curve : it is skewed to the right, indicating that there is a continual problem of
overfilling. The average fill level should be reduced slightly so that the ideal specification level
of 250 ml is achieved more often.

Solving Quality Issues

It is important to have at yo ur disposal a wide variety of tools and techniques for identifying,
analyzing and solving quality issues. Problems with product can vary greatly. It is important not
to rush to conclusions regarding the probable causes of problems but to examine
comprehens ively and objectively all possible causes.

“If the only tool you have is a hammer, you tend to

see every problem as a nail.”

Abraham Maslow

Many tools can be used to aid quality control These include:

Pareto analysis Cause and effect diagrams

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Scatter diagrams or stratification Check sheets
Histograms Graph and control charts

Pareto
Pareto’s principle, as explained in a previous lesson, states that only a few items (around 20% of
the total number of items) account for most of the cost or quality issues. Identifying and
improving these significant items will therefore lead to the greatest increase in quality with the
least amount of effort. Conversely, the gains in cost and quality achieved by trying to improve
the more trivial items may not be worth the effort involved.
Pareto analysis does not report what the problems are.
Rather it helps to illustrate where they occur. It is a good
starting point for further quality analysis.
The parameters you choose to measure by are important
to the effectiveness of Pareto analysis. It may be more
useful to look at the types of problems occurring rather
than the number of problems occurring in any one
product. For example, it is more important to know the
breakdown of types of problems occurring rather than
the number of problems detected in each product. You
can then isolate the most frequently occurring type of
problem and work on resolving these problems in order
of priority.

Pareto Analysis Procedure

To effectively use Pareto analysis you first define what you want to measure and the criteria you
want to measure it with. You then compile appropriate data and record the number of instances
of each measurement. You then rank the items in descending order according to the selected
measurement units and calculate each as a percentage of the entire set. The steps to do this are
laid out below:
1. Define the category you want to analyze
2. Select the measurement, for example dollars
3. Record the occurrences by the selected measurement unit and calculate the total in each
category
4. Rank the items in descending order according to the selected measurement units
5. Calculate the total cost
6. Calculate the percentage by category
7. Calculate the cumulative or running total of the percentages
8. Transfer the data to a bar graph showing the percentage for each category and a line graph
for the cumulative percentage.

Pareto Analysis Example

A regional hospital continually analyzes the quality of its patient care, particularly delays in care.
The quality team use Pareto analysis to rank the causes delay according to frequency.

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The following graph shows that only about a quarter of the problems identified are responsible
for 80% of the delays. These problems should be the focus of any quality improvement efforts.

Causes of Delay

5000
Delay in Minutes

4000
3000 Series1
Series2
2000
1000
0
1 3 5 7 9 11 13 15 17 19
Causes

3. Once you have decided what to analyze and the measurement to use, and
recorded all occurences by the selected measurement unit, what is the next step
in Pareto analysis?
A. Calculate the total in each category and the total overall, then calculate the
Review Q percentage by category
B. Calculate the total in each category, rank the items in desending order and
calculate the total cost.
C. Calculate the total in each category and the total overall, then calculate a
running total
D. Calculate the total in each category and rank in descending order, and, after
calculating the overall total, calculate a running total

Fishbone Analysis
Fishbone analysis is used to clearly identify the suspected or known source of a given problem. It
helps users organize their thoughts and structure the quality improvement process. It is a first
step in identifying problems, but does not provide solutions. Fishbone diagrams are used to
identify possible causes of a problem and help to ensure that no area is overlooked. Once the
cause of a problem has been identified it is easier to alleviate.
For example, if a car is leaking oil, it can be treated by checking the oil level daily and refilling
as often as needed. This ensures the car still runs but is time consuming and costly. By
identifying the cause of the leak, the leak may be fixed and maintenance costs reduce.

Fishbone Analysis Procedure

This procedure is best approached as a group exercise involving participation from several
functional areas. It is important to list as many possible causes as the group can suggest as all
potential causes should be considered.

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Materials Machines Policies

shortage Downtime Not documented

Write off No spares No ISO

Quality
Issue
Not focused unclear Not available

Not documented
untrained Too low
People Procedures Measurements

Figure 1 Fishbone Analysis

1. Put the quality characteristic under consideration as the heading of the diagram.
2. Label the fish skeleton with several ‘ribs’, showing the main causes of the problem (usually
people, method, machines, materials, environment, and measurements).
3. Identify possible factors under each cause and connect them to the main causes, until the
situation has been comprehensively explored.
4. Identify the most likely root causes and work on these. If the problem is not found, return to
the fishbone diagram and look for other ‘most likely’ causes.

Control Charts
There are many variations on the theme of control charts used in manufacturing activities.
Generally, they are all tracked using line graphs. Two of the most popular types of control chart
are shown below. The first chart measures the average results of small samples (usually five
readings) taken from the process throughout a period of manufacture. This is tracked against
upper and lower control limits. As long as the average stays within these control limits, the
process is considered to be in control and within specification.
Take for example, the process of pasteurizing milk. The specification for the
pasteurization process requires the milk to be heated to at least 72o C for not less
than 16 seconds. The allowed temperature range is between 72o and 73o C. When
sample averages are tracked over time the graph shows that the process is in control.

Pasteurization Temperatures

73.2
73
72.8
Degrees C

72.6 Sample averages

72.4
72.2 upper limit
72 lower limit
71.8
71.6
71.4
1 2 3 4 5 6 7 8
Sample

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Another useful measurement is the range of variation present in each sample. This is usually
measured by subtracting the lowest reading in the sample from the highest reading. This gives
the range of variation within the sample. An upper limit for this can also be set. Ideally the range
of variation will be very low.

Range of variation

0.6
0.5
Variation

0.4
Range of Variation
0.3
Upper range limit
0.2
0.1
0
1 2 3 4 5 6 7 8
Sample

Control charts generally record measurements taken from a process at regular intervals
throughout the day. These measurements are compared against upper and lower limits to ensure
the process remains within specification. If the sample readings fall outside the limits, action
must be taken to correct the process. When average values begin to consistently approach either
limit, it is important to look for possible causes that may lead to product outside the
specification.
Note that control charts generally focus on measuring the process of
manufacturing rather than the product itself. If you measure the process it is
more likely that potential problems will be detected before problems occur. For
example, if you measure the temperature of an oven, you can predict that a
batch of bread is likely to burn. If you simply monitor the quality of bread as it
leaves the oven, you are likely to burn bread before you realise there is a problem.

Product Inspection
Product inspection often costs up to five percent of sales for a product. It can only detect defects
in finished product but cannot identify problems in time to prevent them. Additionally, product
inspection often misses problems. Depending on the system used (human or automated
inspection), defect rates may be between 3 and 5 %.
In some manufacturing processes it is possible to use a go/no- go gauge as a
simple means of product inspection. Items built within specification will fit in
the gauge while others will not. For example, the gauge might measure the
weight of a packet of cereal and will only pass those packets that fall within the
acceptable limits.
Product inspection is limited in its usefulness by several factors:
It is not dependable
It gives no information at the source of the problem
It cannot prevent further defects.
It does not add value
It is expensive

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Process Control
The advantages of process control over product control are several. Firstly, process control
identifies issues at source. Secondly, it is often possible to anticipate potential problems by
following the trend of the process control graph. Therefore, problems may be solved before they
cause scrap or rework. Often process control can be automated as it involves recording
temperatures, times, weights and other parameters that can easily be measured by machine. This
makes process control generally less expensive and more reliable than product control.

Purchasing
The APICS dictionary defines purchasing as ‘the function of and responsibility for procuring
material, supplies, and services.’ Basically, it is the process of buying in supplies and usually
involves all departments in a company although many companies have a specific purchasing
section.
The objectives of purchasing are to:
Obtain goods and services of the quality and in the quantity required
Negotiate an acceptable cost for goods and services
Ensure the best possible service
Search for qualified suppliers
Maintain good relationships with suppliers
In most organizations, the person who requires a particular product
will never actually talk to a supplier. For example, a company
supplying bespoke automated control solutions will design a control
system that makes use of several off- the-shelf software and hardware
components. The team that designs the solution may make a list of
these requirements and pass them on to the purchasing department
which negotiates the price and follows through with the purchase.
The accounts department will then handle the necessary transactions.

Purchasing Cycle
The purchasing cycle involves several steps:
Selecting and maintaining suitable suppliers
Generating requisitions from planned order releases in the MRP system and other sources
Issuing purchase orders and requests for proposals
Following up on purchases to expedite delivery
Receiving goods
Authorizing payment for goods

Selecting Suppliers
When selecting suppliers you need to consider a great many factors. The supplier selection
criteria should be identified in advance of searching for suppliers to ensure clear understanding
of what is critically important in the areas of:

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Price and Pricing Strategies Responsiveness
After-sales service Innovation
Location Size
Financial strength Product Offerings
Past performance Balance of power in the buyer/supplier
relationship
Evaluation – Criteria
The issues indicated in the table below should be assessed and weighted in importance by the
relevant functional areas of your organization to help evaluate each supplier.
Evaluation - Issues to Consider by Key Areas

Issues to
Responsiveness

Consider:

Financial and
→
Capabilities

Capabilities

References
Technical
Tracking

Capacity
Location

Business
By
Delivery

Stability
Quality

Project

Functional
Price

Areas: ↓

Business √ √ √ √ √ √
Technical √ √ √ √ √ √ √
Quality √ √ √ √

Evaluation Criteria - Issues to Consider

Delivery
Past Delivery Performance
Quick Response Capability
Process Flexibility
Statusing Capabilities
Risk Management
Lead Time
Price
Best Value Justification
Value Analysis
Joint Cost Reduction
History of No Surprises
Quality
Total Quality Management / Continuous Improvement

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Near Zero Defects
Quality Assurance Guarantees
Evidence of Corrective and Preventive Action
Organizational Responsibility
High MTBF, Uptime, Field Reliability
Capacity
Current v. Forecast
Preventive Maintenance
Capital Equipment Investment
Tracking and Statusing
Delivery and Responsiveness
Extent of Expediting
Responsiveness
Philosophy Toward Customer Satisfaction
Management Commitment
Technical Support
Ability to Respond to Sudden Surge in Demand
Timeliness
Philosophy Toward Customer Satisfaction
Management Commitment
Technical Support
Ability to Respond to Sudden Surge in Demand
Project Tracking Capabilities
Reporting and Corrective Action
Program Management Support
Location
Service-capable Sites
Breadth of technical assistance available
Technical talent available
Potential to expand
Global presence, local execution
Technical Capabilities
Leader / follower in technology advances
Track record for bringing on new technologies / products

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Quality management in R&D
Technical and product strategy
Intellectual depth
References
References play a critical role in the decision to do business with a supplier. If a supplier is
delivering late or poor quality to others customers, you can expect similar problems. Ask for a
list of all similar customers over the last six to twelve months.
References can be received from:
Other customers
Suppliers
Competitors

4. Once you have selected and set up contracts with suitable suppliers, what
other activities are involved in the purchasing cycle?
A. Generating requisitions from planned order releases in MRP and other
sources
Review Q B. Performing inventory audits.
C. Issuing purchase orders and requests for proposals
D. Following up on purchases to expedite delivery

Request for Information (RFI)

When such complex evaluations are required, it is important to clearly define the process to be
used. Many manufacturers send out a Request for Information (RFI) to potential suppliers. This
is a formal document that asks suppliers to provide information on many of the factors listed
above. Typically the process of supplier evaluation using an RFI would be as follows:
Buyer creates a shortlist of required data from suppliers
Buyer lists suppliers to whom the RFI will be sent
Buyer releases RFI to all listed suppliers
Supplier prepares a response to the RFI
Supplier submits RFI response
Buyer team evaluates and scores responses
Buyer prepares a supplier shortlist

Occasionally, clarification on certain points may be required from the supplier during the team
evaluation step.
The following diagram shows a typical example of a purchasing activity: that of sourcing
suppliers and forming service level agreements with them:

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1
Sourcing
Sourcing
Opportunity
Opportunityand
and
Team
Team
7 2
Implementation
Implementation Sourcing
Sourcing
Strategy
Strategy

6 3
Strategic Supplier
Agreement
Agreement Supplier
Negotiation
Negotiation Sourcing Identification
Identification

5 4
Supplier
Supplier
Evaluation Develop
Develop thethe
Evaluation and
and
Selection Solicitation
Solicitation
Selection

5. Select some of the key rules of supplier identification.

A. Make one functional area solely responsible.
B. Know your industry before attempting to find capable suppliers.

Review Q C. Define the data you need about prospective suppliers and assimilate it using
standard checklists.
D. Search databases, external resources, and interview internal / external
sources.

Developing Specifications
The material a company purchases is determined by the quantity needed, the cost requirements,
what the material is required for, the level of quality required and the specific characteristics it
must have to fulfil its purpose. The elements of function, quality, service, and price are all
interrelated. There is no point in considering a product because it is cheaper than the others
available, if it does not fulfil requirements.
For example, buying low-cost paper for an office will be a false economy if the paper is so thin
that it jams in the office printers, copiers and fax machines.
Your specification for a purchase should detail all the characteristics you require from that
product in terms of quality, functionality, performance requirements, methods of manufacture,
quantity, price range, and delivery times.

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There are several ways of describing specifications:
By brand: your company has identified a cleaning product that meets requirements in its
food manufacturing facility and continues to order that brand.
Listing physical or chemical characteristics, material, or method of manufacture: a
furniture company that provides outdoor garden tables orders in a specific type of
pressure-treated hardwood, specifying the width, depth and length required.
Performance requirements : you need to find protective overalls for your employees
that are resistant to stains and water penetration, disposable and within a particular price
range
Engineering drawings: a pharmaceutical manufacturing plant requires a new tank with
certain types and positions of valves. These are specified in engineering drawings.
Samples: you want to find a supplier capable of providing a bespoke tool required for
your process. You send samples, which can be copied to potential suppliers.
Repeat orders : you are happy with previous orders of print cartridges and send repeat
orders for the same product to the same supplier.

Pricing
The price of a material is a key point although not the only
consideration. A fair price is one that is competitive, provides the seller
with a profit and allows the buyer to sell at a profit. The market decides
the maximum price to be paid. The seller may set a lower price but will
aim to stay above the break-even point, which is the point at which the
total revenue for a product is equal to the total cost of making it.
Total cost may be broken down into fixed and variable costs. Fixed costs are the same regardless
of the sales volume. These include tax, insurance, equipment depreciation and rental of premises.
Variable costs change according to the amount sold. For example, labor costs, raw material
costs, and sales costs will rise as the volume of product rises. The total cost is equal to the fixed
cost plus the variable cost per unit times the number of units.

Supplier Service Level Agreements

Supplier Agreements are vital to the smooth running of the purchasing department. These are
contracts undertaken between a manufacturing company and its most significant suppliers. The
contract covers pricing, payment terms, responsibilities for defective products, delivery, product
quality and other conditions. The agreements clarify what is expected from each side and help to
ensure a smooth working relationship. The following is an example of a service level agreement
with a supplier covering several aspects of quality.
Customer (C) ABC Beverages Supplier (S)VJ Customer

Service Metric Who? Review Agreed Goal T.O.A.

Period Qtr Target 2004
All Customer orders will be shipped CORD v Weekly 85% 92%% <75%
OTD on the day REQUESTED by the OTDD
Customer

All Customer orders will be shipped COPD v KM Weekly 95% 100% <90%

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OTD on the day COMMITTED to the OTTD
Customer.

Customer Complaints will be not # logged / KM Monthly 80% 100% <75%

exceed 1% of orders shipped.
# orders
shipped

Customer complaints corrective action Date KM Monthly 90% 95% 80%

plans will be implemented and received -
communicated to the customer within date
X days of complaint receipt implemented

Customer order shipping # Customer KM Monthly 100% 100% <100%

documentation will be complete at Invoice /
time of OTD shipment price
complaints

Customer orders shipped will be # SRN’s KM Monthly 99% 100% <100%

100% line item accurate

Customer order / line item reschedule- KM Monthly 95% 100% <90%

in Flexibility will be weeks;
0-2=0%, 3-6=X%, 6-12=Y%,
>12=100%

Customer order / line item reschedule- KM Monthly 98% 100% <90%

out Flexibility will be weeks;
0-1=0%, 2-4=70%, >5= 100%

Customer order / line item KM Monthly 98% 100% <95%

Cancellation flexibility will be weeks;
0-3=0%, >3=100%

Customer product unit forecast Monthly JB Monthly 78% 85%

accuracy by month will be >80% forecast v
Actual by
SKU

Customer order requested dates will JB

not be within 3 weeks of current date

Customer and Supplier will review this BOTH

SLA performance every month and
agree corrective action plans,
ownership & timelines

All breaches of agreed TOA limits will BOTH

be escalated for review, corrective
action & resolution

Controlling Orders
Active purchase orders are called open orders. Once all the material has been received for a
particular purchase order, the order should be closed. Closing an order involves the purchasing
department and finance. Purchasing should check the order is correct against the terms of the
original agreement and finance should prepare payment for the order.

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Open orders are:
Released by purchasing
Kept on file in purchasing
Used by the receiving function to check order and receipt, receive and track partial
shipments and forward goods to the user who requested them
Closed orders are orders where all requirements have been fulfilled. These are filed in
purchasing for future reference.

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Summary
This lesson explored the costs of quality and the tools and techniques used to solve quality
issues, such as Pareto analysis, fishbone diagrams, and control charts. The second part of the
lesson examined the importance of purchasing and the factors that lead to successful purchasing,
such as establishing clear specifications, evaluating suppliers against identified requirements,
and establishing supplier agreements.
You should be able to:
Identify drivers of high quality in manufacturing
Identify costs of quality
Explain basic attributes of normal variability
Define quality in manufactured products
Identify advantages of Pareto analysis, control charts, and fishbone diagrams
Differentiate between process control and product inspection
State the importance and purpose of purchasing
Record the steps involved in purchasing
Identify considerations for establishing specifications
Identify guidelines for selecting suppliers
Explain factors for consideration when establishing a supplier agreement

Further Reading
Introduction to Materials Management, JR Tony Arnold, CFPIM,
CIRM and Stephen Chapman CFPIM

APICS Dictionary
10th edition, 2002

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Review
The following questions are designed to test your recall of the material covered in
lesson 9. The answers are available in the appendix of this workbook.

6. Which of the following is not a driver of high quality production?

A. Customer demand.
B. ISO procedures
C. Competition
D. Costs associated with poor quality

7. Select the best definition of the break-even point.

A. Current assets are equal to current liabilities
B. Revenue is equal to total cost
C. Required capacity is equal to available capacity
D. The point at which a product fails

8. All of the following relate to the cost of quality except:

A. Internal failures
B. Appraisal costs
C. Cost of prevention
D. Setup costs

9. What are the elements that should be considered when developing specifications for
required materials?
1. Quality requirements
2. Price requirements
3. Functional requirements
4. Operational requirements

A. 1 and 2
B. 1, 2, and 3
C. 2 only
D. 3 only

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10. Which of the following could be considered objectives of purchasing?
1. Obtaining goods and services of the required quantity and quality
2. Obtaining appropriate goods and services at the lowest cost
3. Ensuring the best possible service and prompt delivery by suppliers
4. Developing and maintaining good supplier relations and developing potential suppliers
5. Setting up product specifications

A. 1 only
B. 1 and 2
C. 1, 2, 3, and 4
D. All 5

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What’s Next?
Lesson 9 covered aspects of quality control and purchasing and explained useful tools in each
area. At this point you have almost completed the ten lessons in the Basics of Supply Chain
Management Module.
You should review your work before progressing to the next lesson, which is:
Basics of Supply Chain Management – Lesson 10 Just-in-Time

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Appendix

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Answers to Review Questions
Lesson 2 Review
1. A
It is usually less expensive to prevent quality problems before they occur rather than trying to fix
them afterwards. Right First Time is more achievable when production processes are continually
assessed and refined to ensure efficiency and minimum waste or potential for mistakes.
2. D.
The TQM approach is customer- focused in that it constantly aims to meet or exceed the user’s
expectations. All costs associated with quality must be identified. TQM also encompasses the
user of problem-solving tools in order to take action and continuously improve the process
through group efforts that involve the employee.
3. B
To perform Pareto analysis you must first define the category you want to analyze and select an
appropriate measurement. Then, you record the occurrences by the selected measurement unit
and calculate the total in each category. Next, you rank the items in descending order according
to the selected measurement units.
Then, you calculate the total cost, find the percentage of total cost for each category and record a
running total of the percentages.
Finally, you transfer the data to a bar graph showing the percentage for each category and add a
line graph that tracks the cumulative percentage.
4. A, C, and D
Inventory audits are not part of the purchasing cycle, which involves the following steps:
Selecting and maintaining suitable suppliers
Generating requisitions from planned order releases in the MRP system and other sources
Issuing purchase orders and requests for proposals
Following up on purchases to expedite delivery
Receiving goods
Authorizing payment for goods
5. B, C, and D
The search for new suppliers should involve the functions of the organization that will be
impacted by the effectiveness of the supplier. It is a mistake to leave the responsibility to the
purchasing group alone. It is also important that the focus is wider than just existing suppliers.
6. A, C, and D
Customer demand, competition, and costs associated with poor quality are all drivers of high
quality production. ISO procedures are a tool to help ensure high quality production. They are
not drivers of quality.

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7. B
The break-even point is the point at which the total revenue for a product is equal to the total cost
of making it.
8. E
Poor quality control results in scrap and rework of materials, wasted time and materials and
wasted capacity. Beyond these internal costs, poor quality also incurs more serious costs on
warranties, field service, and lost sales or customers due to lack of confidence in the product.
There are also costs associated with maintaining high quality standards, such as training,
scheduled downtime, inspection of product etc. Setup costs are an integral part of the
manufacturing cost regardless of the level of quality of the product. These costs are not costs of
quality.
9. B
The material a company purchases is determined by the quantity needed, the cost requirements,
what the material is required for, the level of quality required and the specific characteristics it
must have to fulfil its purpose. The elements of function, quality, service, and price are all
interrelated. There is no point in considering a product because it is cheaper than the others
available, if it does not fulfil requirements. In general, the operational requirements of a material
are the concern of the supplier, not the purchaser.
10. C
The objectives of purchasing are to obtain goods and services of the quality and in the quantity
required, negotiate an acceptable cost for goods and services, ensure the best possible service,
search for qualified suppliers and maintain good relationships with suppliers. Product
specifications are established as a means of communication between purchaser and supplier, the
establishment of these specifications is a necessary activity in purchasing but not the objective of
purchasing.

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Glossary
Term Definition
Appraisal In TQM, the formal evaluation and audit of quality
Appraisal costs Costs associated with the formal evaluation and audit of quality in a
company. This may include the cost of inspection, quality audits, testing
procedures, machine calibration and checking time.
Cause and effect A quality tool used for analyzing process dispersion. It is sometimes called
diagram an Ishikawa diagram after its developer. It is also called a fishbone diagram
as the completed diagram looks like a fish skeleton. The head of the diagram
is labeled with a quality defect and all possible causes of this are enumerated
on the ‘ribs’ of the diagram.
Demand A need for a particular product or component which could come from a
customer order, forecast of market requirements, interplant requireme nt, or a
request from a branch warehouse for a service part
Distribution The activities associated with the movement of material, usually finished
goods or service parts from production plant to the customer. Distribution
incorporates functions such as transportation, warehousing, inventory
control, material handling, order administration, location analysis, packaging,
data processing, and communications networks.
Histogram A graph, used as a quality tool, of adjacent vertical bars representing a
freque ncy distribution in which the groups are marked on the X axis and the
number of items in each class is indicated on the y axis. This allows people
to see at a glance any recurring patterns.
Inventory Stocks or items used to support production (raw materials and work-in-
process items), activities that support production (operating supplies,
maintenance and repair), and customer service (finished goods and spare
parts).
Level of service A desired measure, usually a percentage, of satisfying demand through
inventory or by the current production schedule in time to satisfy the
customers’ requested delivery dates and quantities. In a make-to-stock
environment, level of service is often the percentage of orders picked
complete from stock on receipt of a custome r order. In make-to-order and
design-to-order environments, level of service is the percentage of time that
the customer-requested date was met by shipping complete product
quantities.
Normal A statistical distr4ibution where most of the observations fall quite close to
distribution the mean and deviations from mean fall more or less equally either side of
the mean. When depicted in a graph, normal distribution has a bell-shaped
curve.
Open order A released manufacturing or purchase order; or an unfilled customer order.
Pareto’s Law A concept developed by Vilfredo Pareto, the Italian economist. It states that a

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small percentage of a group accounts for the largest fraction of the impact or
value of the group. ABC classification is related to this princip le.
Prevention costs These are costs incurred due to improvement activities focused on the
reduction of failure and appraisal costs. Such costs may include training,
quality, and supplier certification.
Process control The function of maintaining a process within a given range of capability
using feedback.
Purchase order The purchaser’s authorization used to formalize a purchase transaction with
a supplier. A purchase order, when given to a supplier, should contain
statements of the name, part number, quantity, description, and price of the
goods or services ordered; agreed-to terms of payment, discounts, dates of
performance and transportation and all other agreements pertinent to the
purchase and its execution by the supplier.
Purchasing This is the term used in industry to refer to the function of and responsibility
for procuring materials, supplies, and services.
Quality Conformance to requirements or fitness for use. There are five principal
approaches to quality (1) Transcendent quality is an di eal, a condition of
excellence. (2) Product-based quality is based on a product attribute. (3)
User-based quality is fitness for use (4) Manufacturing-based quality is
conformance to requirements. (5) Value-based quality is a degree of
excellence at an acceptable price. Quality has two major components:
conformance to specification (absence of defects) and quality of design
measured by the degree of customer satisfaction with the product’s features.
Range The spread in a series of data. For example, the temperature of a vessel may
range between 4 degrees and 80 degrees depending on the stage of
production. The range of temperature is therefore 76 degrees.
Request for A document sent by large manufacturers to potential suppliers to aid in the
Information (RFI) supplier selection process. Key factors affecting selection will be outlined in
the document. Suppliers are then invited to make submissions of their own
situation in key areas. Returned RFIs are evaluated by the company and used
to draw up a shortlist of suitable suppliers.
Safety stock This is a quantity of stock that is planned for inventory to protect against
fluctuations in demand or supply. In the context of master production
scheduling, the additional inventory and capacity planned as protection
against forecast errors and short term changes in the backlog. Overplanning
can be used to create safety stock. Safety stock is also known as buffer or
reserve stock.
Scatter Chart A graphical technique to analyze the relationship between two variables. The
x axis is assigned to the variable that will be used in making predictions. The
y axis is used for the other variable. The graph shows potential relationships
between the two variables. The scatter chart is a quality tool. It is also
occasionally called a cross plot.
Service level or A desired measure (usually a percentage) of satisfying demand through
level of service inventory or by the current production schedule in time to satisfy the

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customers’ requested delivery dates and quantities. In a make-to-stock
environment, level of service is sometimes the percentage of orders picked
complete from stock upon receipt of customer order.
Service Level A contract drawn up between a company and its supplier, detailing the level
Agreement (SLA) of service required, pricing, responsibilities on either side and other terms
and conditions of service.
Specification A clear complete and accurate statement of the technical requirements of a
material, an item, or a service, and of the procedure to determine if the
requirements are met.
Stockout A lack of required materials components or finished goods.
Total Quality A term originally used to describe the Japanese approach to quality
Management improvement. It has since taken on several different meanings. TQM is a
(TQM) management approach to long-term success through achieving customer
satisfaction. It is based on the participation of all members of an organization
in improving processes, products, services, and the culture they work in.
There are several methods for implementing TQM.
Unit cost Total labor, material, and overhead cost for one unit of production.
Variation A change in a f unction, or characteristic, or other element caused by
structural variation, tampering, common causes or special causes.

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