Materials Management BUS 3 – 141 Quality and Specification Leveraging Technical Excellence Feb 4, 2008

1. Materials ManagementBUS 3 – 141Quality and Specification Leveraging Technical Excellence Feb 4, 2008

2. Agenda • Case Study • Project Groups • Elements of the Supply Management Process • Quality • Specifications

3. Case: Connecticut Circuit Manufacturers p 173 Due Feb 18

4. Tactical Elements of theSupply Management Process

5. The 9 Elements of the Supply Management Process Supply Mgmt Customer Service Production Customer Demand Shipping Production Schedule Maintain Records Process Payment Receive & Verify Follow-Up & Expedite Issue Purchase Order Select Supplier(s) Assess Suppliers Establish Specifications Identify Requirements

6. 1. Identify Requirements Identify Requirements Maintain Records Process Payment Follow-Up & Expedite Receive & Verify Issue Purchase Order Select Supplier(s) Identify Suppliers Establish Specifications • Direct and Indirect • Material Requisitions • MRP Output • Impact of Lead Time • Other items to consider • As availability becomes scarce, Purchasing alerts users • Recommending subassemblies instead of components • Proposing substitute items, where appropriate

7. 2. Establish Specifications Establish Specifications Maintain Records Process Payment Follow-Up & Expedite Receive & Verify Issue Purchase Order Identify Requirements Select Supplier(s) Identify Suppliers • Engineering Drawings and Specifications • Samples • Requisition Details (electronic or paper) • Date originated, Document Number, Dept, Account Number, Signature(s) • Complete description of material or service required • Quantity and date required • Shipping / delivery instructions • Authorization to Buy • Impact of Lead Time • Other items to consider • Understanding ultimate purpose (Are they asking for a Mercedes or just a car?) • Catalogues and standard items • Supplier Input

8. 3. Identify Suppliers Identify Suppliers Process Payment Maintain Records Follow-Up & Expedite Receive & Verify Issue Purchase Order Establish Specifications Identify Requirements Select Supplier(s) • History and Geography • Request for Quotation • Request for Proposal • Request for Bid • Other items to consider • Input from Technical Staff • Other

9. 4. Select Suppliers Select Supplier(s) Maintain Records Process Payment Identify Suppliers Follow-Up & Expedite Receive & Verify Issue Purchase Order Establish Specifications Identify Requirements • Supply Capability • Quality • Capacity • Reliability • Many other factors to be covered later in semester

10. 5. Issue Purchase Order Issue Purchase Order Identify Suppliers Maintain Records Select Supplier(s) Follow-Up & Expedite Process Payment Establish Specifications Identify Requirements Receive & Verify • Relationship to Material Requisition • The Requisition provides the information that populates several Purchase Order data fields (see Requisition Details) • Ensure Risk Management • Acknowledgement • Internal Controls • Budgets • Approvals • Recurring Purchase Order Releases • Pre-negotiated contracts • Other items to consider • ALWAYS ensure that the terms and conditions are in WRITING. A Purchase Order is a CONTRACT Continued on next Slide

11. 5. Issue Purchase Order, continued Issue Purchase Order Identify Suppliers Maintain Records Select Supplier(s) Follow-Up & Expedite Process Payment Establish Specifications Identify Requirements Receive & Verify • Discrete Orders • Pre-negotiated Blanket • Pre-negotiated Vendor-Managed • Maintenance, Repair, and Operating Supplies (MRO) • Bid and Auction • Corporate Purchase Card (pCard)

12. 6. Follow-Up and Expedite Follow-Up & Expedite Process Payment Identify Suppliers Maintain Records Select Supplier(s) Issue Purchase Order Receive & Verify Establish Specifications Identify Requirements • ERP Applications assume that scheduled dates will be received on time • A Scheduled delivery date needs to be monitored and managed • Possible missed dates must be identified in advance and avoided • If delays are inevitable, recovery plans must be developed and managed • Other items to consider • An understanding of the Supplier’s production process, capacity, and constraints is critical to collaborative problem solving • Expediting should be on an exception basis. If it is determined that a particular supplier is consistently being expedited, corrective action should be initiated

13. 7. Receive and Verify Receive and Verify Process Payment Identify Suppliers Maintain Records Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Establish Specifications Identify Requirements • Relationship to Material Requisition and Purchase Order • Key data elements travel throughout • Key objectives • Confirm receipt of goods • Ensure proper physical condition, quantity, documentation • Quality parameters met • Cross functional activity among Purchasing, Receiving, Materials, and Finance • Other items to consider • Receiving is technically a “non-value-added” activity. It is designed to ensure that something that should have been done properly actually was. The goal is to ensure quality throughout, and eliminate the need for inspection

14. 8. Process Payment Process Payment Receive & Verify Identify Suppliers Maintain Records Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Establish Specifications Identify Requirements Key Document Flow Payment Requisition Purchase Order Packing Slip (Receiving) Invoice • Match the data in the Purchase Order, Packing Slip, and Invoice • Discrepancies must be reconciled before payment is issued • Some level of discrepancies can be ignored (e.g. if +/- 5% or +/- $25) • Audits of all • Discounts for early payment are often available and should be taken whenever possible • Other items to consider • Chronic discrepancies from a single Supplier could lead to a change

15. 9. Maintain Records Maintain Records Receive & Verify Identify Suppliers Process Payments Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Establish Specifications Identify Requirements • Purchase Orders should be archived for up to 7 years • Key Records to be Maintained (from p.77) • Purchase Order Log of all PO’s • Copies of Purchase Orders • Commodity file • Supplier history file • Outstanding Contracts against which PO’s are placed • Other items to consider • Can be electronic or paper • Paper can be managed by a third party

16. The Role of Quality in Supply Management

17. How this Course supports Supply Chain Objective & Process The Right PRICE The Right SERVICE paying The Right SUPPLIER and The Right PLACE with the The Right TIME at the The Right QUANTITY at the The Right QUALITY with the

18. Quality Defined Eight (8) Quality Dimensions * • Performance • Features • Reliability • Durability • Conformance to specifications • Serviceability • Aesthetics • Perceived quality in the eyes of the Customer * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

19. Basic Assumptions The HIGHER the Quality, the higher the Customer Service, the lower the Inventory, and the lower the Cost The LOWER the Quality, the lower the Customer Service, the higher the Inventory, and the higher the Cost

20. Highest Level Supply Chain Objective Revenue Utilization of Assets (People, Plant, Equip) Cash Inventory BALANCING keeping Customers completely satisfied and Resources optimally utilized ……. against spending the least amount of Cash and carrying the least amount of Inventory

21. Variability requires Inventory to Compensate Supply Demand • Forecast variance • Market Conditions • Global Supply (Allocation) • Competitor Pricing • Competitor Supply • Customer Returns (Quality) • Other • Build variance • Scrap • Rework • Shortages • Delays • Other Requires excess Finished Goods and component Inventory to eliminate (minimize) impact on Customers

22. Illustration of Process Capability vs. Product Specifications The Supplier is likely to produce conforming parts all the time 36 USL UCL 34 32 X Key Characteristic (dimension, functionality, delivery, etc..) 30 28 LCL 26 LSL 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Observation

23. Illustration of Process Capability vs. Product Specifications The Supplier is likely to produce a quantity of non-conforming parts 36 UCL 34 USL 32 X Key Characteristic (dimension, functionality, delivery, etc..) 30 LSL 28 LCL 26 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Observation

24. If a Supplier CAN miss, the Supplier WILL miss! Applying Process Capability to Supplier Selection • If a Supplier’s process consistently meets or exceeds Customer Specifications, consider the following: • Increasing spend on the items (if not Single Source) • Introducing new items to be supplied • Partnerships and collaborative design where appropriate • If a Supplier’s process misses Customer Specifications, consider: • Changing the Supplier • Changing the Specification (when possible) • Improving the Supplier (if business case justifies)

25. Other Quality Considerations • Quality is relevant far beyond product characteristics and specifications (e.g. delivery, paperwork, billing, responsiveness, etc..) • The cost of mitigating the effects of poor quality is much higher than the cost to prevent poor quality…. “Get it right the first time” • Relying on Inspection to prevent poor quality items from reaching Customers or the production line will inevitably fail. Some percentage will always escape through • Quality is a key determinant in Supplier Selection: • Partnering with key suppliers as single source providers • Use of approved Suppliers • Qualifying Suppliers While understanding all the complexities of Quality Management and Statistical Process Control may be out of scope to Materials Management practitioners, an understanding of the critical importance of Product Quality cannot be overlooked. It is important to partner with Quality Management experts to assure that all technical and quality aspects are optimized with Suppliers

26. EstablishingProduct Specifications

27. Selected Methods of Description • By Brand • Predictable quality • Can be expensive • Limits ability to source other Suppliers • Specification • Physical or Chemical characteristics (most common) • Material and Manufacturing Method • By performance or function (focus is on results or end use) • Engineering Drawings • Blueprints • CAD output • Requires Non-Disclosue Agreements (NDA) • Protection of Intellectual Property

28. The Standardization Challenge Standard parts are generally lower cost, more abundantly available, provide the largest number of potential suppliers, drive efficiencies in design, and provide other benefits BUT… Unique parts often differentiate products and performance, and can provide competitive advantage to the seller

29. Opportunity to Affect Value during the Buying Process* High Opportunity to affect value Low 3. Potential suppliers 4. Selection 5. Receipt 6. Payment 1. Need recognition 2. Description Acquisition Process Steps * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

30. Other Design and Spec Considerations • Decisions made EARLY affect Dollars spent LATER • Whenever possible it is recommended to re-use existing components when developing new products (rather than creating numerous new components whenever creating a new subassembly) • Several software applications are available to enable designers to re-use existing components when developing new products • CAD systems are integrated with Component and Supply Management systems to minimize the amount of new Items introduced • CAD systems are integrated with Quality systems to capture performance and reliability data to determine suitability for re-use in future products • Partnering with proven Suppliers during the Design process is a major opportunity to reduce both Time To Market and Cost • Expertise in analyzing requirements and generating a list of new product ideas • Understanding of the manufacturing costs, with the dollar impact of alternative design concepts and components