Supply Chain Management and Supplier Quality Control Ankush Kaul

1. March 21, 2007 Supply Chain Managementand Supplier Quality ControlAnkush Kaul

2. 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

3. SCM and SQC @ Praxair Introduction to Praxair Supply Chain Management @ Praxair Supplier Quality Control @ Praxair References Agenda (Cont’d..)

4. Supplier Manufacturer Distributor Retailer Customer Upstream Downstream 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)

5. Introduction (Cont’d..) P&G or other manufacturer Third party distributor Albertson’s Supermarket Customer wants detergent Plastic Producer Tenneco Packaging Chemical manufacturer (e.g. Oil Company) Paper Manufacturer Timber Industry

6. Elements of SCM Element Typical Issues Customers Determining what customers want Forecasting Predicting quantity and timing of demand Design Incorporating customer wants, time etc. Processing Controlling quality, scheduling work Inventory Meeting demand while managing inventory costs Purchasing Evaluating suppliers and supporting operations Suppliers Monitoring supplier quality, delivery and relations Location Determining location of facilities Logistics Deciding how to best move and store materials

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

8. History (Cont’d…) Traditional DEPT. 2 DEPT. 3 DEPT. 1 Re-engineered Process: Cross-Functional Team

9. 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 => <suppliers-brand-store> vs. <suppliers-brand-store> 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

10. 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

11. Work center Work center Work center Storage Work center Storage Storage RECEIVING Shipping Movement Within a Facility

12. 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

13. 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

14. 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” > “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.

15. Bullwhip Effect (Cont’d..) • 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

16. Bullwhip Effect (Cont’d…)

17. Bullwhip Effect (Cont’d…) Retailer Supplier Distributor Manufacturer Order Order Order Order Stock Stock Stock Stock Increased Variability

18. 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

19. Bullwhip Effect (Cont’d..) • 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

20. 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 Strategic Partnership in Supply Chain

21. 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%

22. Strategic Partnership Examples (Cont’d..) • Seven Eleven Stores • Retailer determines order sizes and timing but in addition passes POS (point of sales) data to the supplier. POS improves supplier’s 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 Milliken’s 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.

23. 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

24. Improved Product Quality Reduced Lead Times Decreased Overall Life Cycle Costs Increased Customer Satisfaction Faster and Cheaper can still be Better! Why is SQC Required??

25. 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 Why is SQC required? (Cont’d...)

26. 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) SQC Techniques

27. 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 Praxair - Introduction

28. 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%

29. SCM @ Praxair Plant Site Field Contractors Praxair Plant Customer needs Liquid Nitrogen Cold Box Fabricator Valves Supplier Cold Box fabricator Sub Supplier Valve Sub Supplier Metal Shop

30. 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 SCM @ Praxair (Cont’d..) PRAXAIR SUPPLIER NAIG GPMM GSS PST CUSTOMER SUB- SUPPLIER

31. Historical Qualification To ensure products and services consistently meet the organization’s 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 SQC @ Praxair

32. Standard Method Historically qualified Suppliers Database of specifications, requirements and guidelines Due to cost cutting initiatives in 1990’s 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 SQC @ Praxair (Cont’d..)

33. New Initiative for SQC @ 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

34. SQC @ 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

35. Designated Inspection Points

36. 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”

37. Quality Engineering Team @ 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 North America 5 Quality Engineers in North American region Asia 4 Quality Engineers in Asia region South America 2 Quality Engineers in South America Europe 2 Quality Engineers in Europe

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