Supply Chain Management and Supplier Quality Control Ankush Kaul

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Supply Chain Managementand Supplier
Quality Control Ankush Kaul

• March 21, 2007

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AGENDA

• Supply Chain Management (SCM)
• Introduction
• History
• Logistics Management
• Supply Chain Vs. Logistics Management
• Supply Chain Requirements and Uncertainties
• Bullwhip Effect
• Strategic Partnership
• Examples of Strategic Partnership
• Supplier Quality Control (SQC)
• Introduction
• Why SQC?
• SQC Techniques
• SCM and SQC at Praxair

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Agenda (Contd..)

• SCM and SQC _at_ Praxair
• Introduction to Praxair
• Supply Chain Management _at_ Praxair
• Supplier Quality Control _at_ Praxair
• References

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Introduction to SCM

• SCM is the integration of key business processes
  from end user through original suppliers that
  provides products, services, and information that
  add value for customers and other stakeholders
• - Global Supply Chain Forum (GSCF)

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Introduction (Contd..)
Customer wants detergent
Albertsons Supermarket
Third party distributor
PG or other manufacturer
Plastic Producer
Tenneco Packaging
Chemical manufacturer (e.g. Oil Company)
Paper Manufacturer
Timber Industry
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Elements of SCM
Typical Issues
Element
Determining what customers want
Customers
Predicting quantity and timing of demand
Forecasting
Incorporating customer wants, time etc.
Design
Controlling quality, scheduling work
Processing
Meeting demand while managing inventory costs
Inventory
Evaluating suppliers and supporting operations
Purchasing
Suppliers
Monitoring supplier quality, delivery and
relations
Determining location of facilities
Location
Deciding how to best move and store materials
Logistics
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History

• 1750 - 1800
• Industrial Revolution
• Era of Mechanical Inventions
• Product and process complexity increase
• 1800s
• Increased factory complexity
• Birth of Industrial Engineering movement
• 1900s
• Assembly line, Mass production
• Henry Gantt Gantt charts, Scheduling
• Human factors
• Statistical Quality Control
• 1989 - 1993
• Business Process Reengineering

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History (Contd)

• Traditional

DEPT. 2
DEPT. 3
DEPT. 1
Re-engineered
Process Cross-Functional Team
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Onset of Supply Chain Management

• The term SCM was introduced by consultants in
  early 1980s
• Era of inter-network competition SC vs. SC
  Brand vs. brand, or store vs. store gt
  ltsuppliers-brand-storegt vs. ltsuppliers-brand-store
  gt type of competition.
• Common goals for the entire supply chain
• A supply chain consists of facilities, functions,
  activities for producing delivering product or
  service all the way from early suppliers to
  eventual customers
• The new focus is the entire supply chain

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Logistics Management

• Logistics Management is that part of Supply Chain
  Management that plans, implements, and controls
  the efficient, effective forward and reverse flow
  and storage of goods, services and related
  information between the point of origin and the
  point of consumption in order to meet customers'
  requirements.
• - Council of Supply Chain Management
  
  http//www.cscmp.org

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Movement Within a Facility
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SCM VS. Logistics Management

• Focus of logistics was on making each firm in the
  distribution channel more efficient, productive
  and profitable
• Each firm operated on its own, maximizing profits
  with little attention to others in the chain
• Within each firm, each function preoccupied with
  optimizing its own performance
• Intra-functional (silo) orientation cost
  tradeoffs and managing customer service levels

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Supply Chain Requirements and Uncertainties

• Requirements for a Successful Supply Chain
• Trust among trading partners
• Effective communications
• Supply chain visibility
• Event management capability
• Performance metrics
• Sources of Uncertainty in Supply Chains
• Wrong forecasts
• Late deliveries
• Poor quality
• Machine breakdowns
• Canceled orders
• Erroneous information
• Price uncertainties

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Bullwhip Effect

• Distortion of demand information of a product
  while it passes from one firm to the next across
  SC
• The information transferred in the form of
  orders tend to be distorted and can misguide
  upstream members in their inventory and
  production decisions.
• In particular, variance of orders gt variance
  of sales
• Information sharing in SCs is important
• Sales Information available in the form of orders
  received from the downstream member should be
  used with great caution.

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Bullwhip Effect (Contd..)

• Who is affected?
• Nearly all industries are affected !
• Firms that experience large variations in demand
  are at risk
• Firms that depend on suppliers upstream or
  distributors and retailers downstream may be at
  risk
• Causes of Bullwhip Effect
• Finite supply shared by many retailers
• Rationing game retailer orders more than demand
• Fixed order cost
• Wholesale price varies over time
• Inflationary / deflationary environment
• Prices with no trend but variability

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Bullwhip Effect (Contd)
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Bullwhip Effect (Contd)
Retailer
Supplier
Distributor
Manufacturer
Order
Order
Order
Order
Stock
Stock
Stock
Stock
Increased Variability
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Bullwhip Effect - Disrupted Supply Chain
Customer Demand forecast 20 units
Information Flow
Suppliers
Producers
Distributors
Retailers
Products Services
Products Services
Products Services
80 Units
40 Units
20 Units
160 Units
80 Units
40 Units
Cash Flow

• As demand increases, the distributor decides to
  accommodate the forecasted
• demand and increase inventory to buffer
  against unforeseen problems in demand.
• Each step along the supply chain increases their
  inventory (double in this example)
• to accommodate demand fluctuations.
• The top of the supply chain receives the
  harshest impact of the whip effect.

Key

Inventory Levels
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Bullwhip Effect (Contd..)

• Results of Bullwhip effect
• Excess inventories
• Problems with quality
• Increased raw material costs
• Overtime expenses
• Increased shipping costs
• Lost customer service
• Lengthened lead time
• Solutions
• Improve communication along the supply chain
• Improve sources of forecast data
• Work with firms upstream and downstream in the
  supply chain

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Strategic Partnership in Supply Chain

• Business partnering occurs through a pooling of
  resources in a trusting atmosphere focused on
  continuous, mutual improvement
• 
  Source Robson, Rawnsley (2001)
  
• Benefits of strategic partnerships
• Improved supplier product quality
• On-time shipments
• Lower costs, less inventory
• Improved logistics
• Customer satisfaction
•  Increased business because of customer
  satisfaction
• Vendor management inventory
• Lean extended enterprise

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Strategic Partnership Examples

• Blockbuster
• Demand for newly released movies at blockbuster
  typically starts high and decreases rapidly. Peak
  demand last about 10 weeks
• Blockbuster purchases a copy from a studio for
  65 and rent for 3. Hence, retailer must rent
  the tape at least 22 times before earning profit
• Retailers cannot justify purchasing enough to
  cover the peak demand
• In 1998, 20 of surveyed customers reported that
  they could not rent the movie they wanted
• Starting in 1998 Blockbuster entered a revenue
  sharing agreement with the major studios. Studio
  charges 8 per copy, Blockbuster pays 30 - 45 of
  its rental income
• Even if Blockbuster keeps only half of the rental
  income, the breakeven point is 6 rental per copy
• The impact of revenue sharing on Blockbuster was
  dramatic, Rentals increased by 75 in test market
  and market share increased from 25 to 31

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Strategic Partnership Examples (Contd..)

• Seven Eleven Stores
• Retailer determines order sizes and timing but in
  addition passes POS (point of sales) data to the
  supplier. POS improves suppliers forecasts.
• Wal-Mart, K-Mart (Vendor Managed Inventory)
• Supplier maintain the inventory levels at the
  customer site and continuously replenish as and
  when required. This has resulted in 30 inventory
  turnover improvement.
• Milliken and Company
• The lead time from order receipt at Millikens
  textile plants to final clothing receipt at the
  department stores was reduced from 18 weeks to 3
  weeks. The POS data was used by the supplier to
  improve forecasting and scheduling.

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Supplier Quality Control

• A methodology to
• Select/Qualify the correct supplier
• Develop/Launch the item being sourced
• Monitor ongoing performance

I. Select/Qualify
II. Develop/Launch
III. Monitor Performance
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Why is SQC Required??

• Improved Product Quality
• Reduced Lead Times
• Decreased Overall Life Cycle Costs
• Increased Customer Satisfaction

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Why is SQC required? (Contd...)

• Process maintained under control
• Quality Built-In Not Added On!
• Achieve earlier corrective action on deficiencies
• Less waste Minimizes rework
• Material protected from deterioration
• Especially Applicable to Bulk Metals
• Quality Control established at point of supply

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SQC Techniques

• Some of the techniques used are
• Supplier Scorecard Supplier Evaluation
• Regular supplier site visits Supplier site
  inspection during the equipment build
• Supplier quality systems evaluation Vendor
  quality system evaluation
• Non Conformance reporting process Documentation
  of issues and source of Lessons Learnt before
  and after the equipment build
• Supplier training Training the supplier by the
  customer (especially if the supplier is
  fabricating the equipment for the first time)

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Praxair - Introduction

• A Fortune 500 company with sales of 8.3 billion
  (2006)
• Leader in industrial gases supply systems and
  equipment, and in applications technologies
  almost 3,000 active patents
• One of the three largest industrial gases
  companies worldwide and the largest in North and
  South America
• Operations in 40 countries with over 27,000
  employees
• Services include on-site gas handling and
  monitoring systems, pipeline and plant services,
  turnkey design and construction

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Praxair Introduction- Sales by Served Markets
Aerospace 4
Healthcare 11
Manufacturing 21
Energy 12
Electronics 7
Metals 16
Food and Beverage 7
Chemicals 10
Other 12
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SCM _at_ Praxair
Customer needs Liquid Nitrogen
Praxair Plant
Field Contractors
Plant Site
Cold Box Fabricator
Valves Supplier
Cold Box fabricator Sub Supplier
Valve Sub Supplier
Metal Shop
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SCM _at_ Praxair (Contd..)

• Partnership with suppliers and customers for
  mutual benefit
• 6 Sigma projects with suppliers and customers
• Strategic agreements with competitors
• Core competency used to help suppliers as well as
  customers
• Process improvements by streamlining internal
  supply chain

PRAXAIR
NAIG GPMM GSS PST
SUPPLIER
CUSTOMER
SUB- SUPPLIER
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SQC _at_ Praxair

• Historical Qualification
• To ensure products and services consistently meet
  the organizations acceptance criteria
• To implement a reduced testing regime for
  incoming goods
• To maintain precise and up-to-date supplier
  records, well-known partners, and improved
  quality of products and services
• Low Cost Country Sourcing (LCCS)
• To establish a competitive capital cost advantage
• To include a low cost country sourcing for
  equipment, fabrication and engineering design
• To identify, qualify and select new equipment
  suppliers worldwide and evaluate based on
  technical and low-cost evaluation criteria

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SQC _at_ Praxair (Contd..)

• Standard Method
• Historically qualified Suppliers
• Database of specifications, requirements and
  guidelines
• Due to cost cutting initiatives in 1990s and
  post 9/11, supplier quality control was given
  less importance- this led to reliability and
  other issues in field
• LCCS program was another driver for the
  development of a structured supplier quality
  control program

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New Initiative for SQC _at_ Praxair

• Commodities were
• divided into Tier-1,Tier-2
• and Tier-3 depending on
• their criticality in terms of
• their time impact on
• project, cost and sourcing status
• Tier 1 Build relationships
• Critical supplier
• Safety Critical
• Routine surveillance
• Tier 2 Periodic surveillance
• Tier 3 Infrequent contact

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SQC _at_ Praxair - Inspection Plan

• Developed a method to ensure that the suppliers
  adhere to specifications mentioned as a part of
  the purchase order-
• Comprehensive and easy to use commodity specific
  quality control checklist containing key
  specifications questions
• Discussions with a cross functional group of
  equipment engineers, process engineers,
  procurement and quality engineers followed to
  finalize the format of the checklist

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Designated Inspection Points
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Non- Conformance Tracking

• One of the most important tools to keep track of
  suppliers performance
• Helps to see supplier trends as well as defect
  trends over time
• Also useful as a repository for lessons learned

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Quality Engineering Team _at_ Praxair

• The projects at Praxair have helped me see the
  implementation of academic knowledge as well as
  the importance of people skills in an
  organization. Overall, it continues to been a
  great learning experience

Asia 4 Quality Engineers in Asia region
South America 2 Quality Engineers in South America
North America 5 Quality Engineers in North
American region
Europe 2 Quality Engineers in Europe
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References

• Lecture notes from Supply Chain and Global
  Operations
• Praxair database
• www.google.com (The best invention of 20th
  Century!!!)
• Experience