Quality in the Purchasing Process Supply Chain Quality Training

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Quality in the Purchasing Process

Supply Chain Quality Training

FreeQuality.orgJeff Nelson

November 28, 2012Marriott School of Management, BYU

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This Training Will Include• Importance of Quality in Purchasing• Cost of Low Quality (COLQ) in Purchasing• Avoiding the COLQ and Increasing Quality• Determining the Specifics of Items to Purchase• Choosing and Selecting Suppliers• Quality and Purchasing Tools

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Quality Purchasing… DefinedThe purchasing process is the series of steps required to procure either materials, finished products, or services. Purchasing from suppliers plays a vital role in the supply chain of every business and when driven by quality, can lead to saved time, increased profits, and higher levels of customer trust.

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Your Organization’s Purchasing• Brainstorm how Quality Purchasing applies

to your organization:– Do You Purchase:

• Raw Materials?• Finished Product?• Outsourced Services?

• How has Quality Management played a role in your purchasing process?

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Quality in the Purchasing Process• Why is it important?

– Reduces Costs, Saves Money– Saves Time– Prevents Larger Problems– Maintains and Increases Goodwill (reputation)

with those further downstream in the supply chain (customers)

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The Cost of Low Quality (COLQ)(Cost of Noncomformance)

• Loss of defective product or material• Loss of any and all products or services

associated or connected with the defective product or material

• Loss of goodwill and reputation with customer(s)

• Potential loss of sale(s)

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The Bullwhip Effect of Cost• Bullwhip Effect – the damage or cost is

more intense the further you are away from that event (purchase) in the supply chain.Supplier(s) Production Processes End Consumer

Cost of Faulty Product/Material

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The Bullwhip Effect in Action• The Widget Corp:

– Material-1 from Supplier-A = $5– Material-2 from Supplier-B = $15– Manufacturing Cost = $30– Warehousing & Final Transportation Fees = $5

• What is the cost of damage if the end consumer finds that material-1 is defective?

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The Bullwhip Effect in Action• The total cost of the defective $5 material is

$55 plus any lost goodwill/business from that customer.

Simple, But True

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Evaluate Your Own Bullwhip Effect

• Discuss in groups how one damaged input translates to final output in your business model.

• Discuss what the cost could be if the defect is found early in the supply chain and compare to the bullwhipped cost.

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Avoiding the Bullwhip Effect

• “Quality at the Source” Attitude• Sourcing the Correct Materials• Choosing and Building up the right suppliers• Product Traceability• Quality Inspections, Acceptance Sampling

“Our problem is not just the outgoing; it starts with

the incoming” – S. Thomas Foster, Managing Quality

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Determining What to Purchase• Arguably most important• Voice of the Customer (VOC)• During the design process• Collaboration of Marketing, Engineering,

and Supply Chain

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Supplier Relations• Relationships are everything in the supply

chain world… The relationships make all the difference.

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Choosing a Quality Supplier• Consider the Following:

– Total Cost of Ownership (TCO)– Location

• Cheaper Logistics and Traditionally Better Quality Control

– Customized Factor-Weight Scale• Determine Factors, apply weights to each factor,

rate each supplier independently for each factor.

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Sourcing Pricing• Catalog Pricing (for simple goods)• Request for Proposal (RFP)

- Price is set in proposal• Reverse Auction

- Request for bids

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Purchase Order Efficiency• Purchase agreement document• Ensure filled out correctly• Electronic sourcing systems can help

streamline the PO process.• Blanket Order PO’s

– Traditionally lower price with higher volume

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Electronic Sourcing• Reduces human errors in purchasing

process.• Connects supplier and buyer to enable a

lean automatic Just-In-Time (JIT) Purchasing process.

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Supplier Awards• Motivation for suppliers to perform• Increases competition among suppliers• Establish Stronger Relationships• Rewards and Recognizes Excellence• Helps identity most valuable suppliers• Low cost to implement award program

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A Real-World Example of Award Recognition

“We are honored to be recognized by Walmart for this outstanding accomplishment,” said Patrick J. Connor, vice president at Hormel Foods and senior vice president of sales-Walmart. “This award recognizes the extraordinary efforts of our entire team throughout the U.S. and symbolizes our long-term growth and strategic alignment with one of our top customers.”

http://www.hormelfoods.com/Newsroom/Press-Releases/2012/03/20120319

Hormel Receives Supplier of the Year Award from Walmart

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Procurement Standards• Establish in-house standards for the

purchasing process– Suppliers must agree on standards– Can be in the form of performance

measurements (defined,measureable specs)

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Product Traceability• Essential in achieving “Quality at the

Source”• Consider traceability components as a

requirement in procurement.– Can be in the form of code on product

indicating supplier, date, factory, etc.

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Acceptance Sampling• Tool used for quality inspections• Upon receiving large quantities of

purchased good or materials, inspect a sample for quality.

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Continuous Improvement• Supply Chains can always be improved

even if not Broken• NO: “If it ain’t broke, don’t fix it.”• YES: “If it ain’t perfect, continue to

improve it.”• Develop a Continuous

Improvement Attitude

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Summary• Attention to quality is essential to a successful

purchasing process with higher efficiency.• The cost of purchasing low quality goods is often

higher than anticipated if not controlled.• Supplier relationships are the key to purchasing and

maintaining quality in procurement.• Use quality control techniques such as acceptance

sampling and product traceability.• Develop a “Quality at the Source” attitude and always

continue to improve.

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Excellent Readings• Managing Quality: Integrating the Supply Chain by S.

Thomas Foster, Fourth Edition (Educational Textbook)• Proactive Procurement by David N. Burt, 1984• Supply Chain Management: From Vision to

Implementation by Fawcett, Ellram, and Ogden, 2007 (Educational Textbook)

• TQM for Purchasing Management by James F. Cali, 1993• Operations and Supply Management: The Core by Jacobs

and Chase, Second Edition (Educational Textbook)