ISQA 4/539 Specifications Sourcing Strategy Supplier Selection

Specifications  Responsibility  Purchasing’s Role  How Described  Descriptive  Design  Performance  Statements of Work

Specification Provides  Performance Requirements  Parameters Which Describe Including Units of Measure  Materials to be Used  Production Processes  Inspection, Test Requirements  Reference to Other Documents or Specifications  Mil Specs, Drawings, SAE Specs, etc.

Elements of Specifications  Intended Use, Quality Requirements  Standardization  Value Analysis  Internal Negotiation Opportunities

Quality  How would you define ‘Quality’?

Quality  Definitions  Quality - Quality Control  PROCESS Controls  Rule of 10  Quality and Multiple Sourcing  Supplier Certification

Quality Definitions  Manufacturing-Based - Philip Crosby  “Quality means conformance to requirements”  Value-Based - Feigenbaum  “Quality means best for certain customer conditions. These conditions are (a) the actual use, and (b) the selling price of the product”

Quality Definitions  Customer-Based - Juran  “Quality is fitness for use”  Customer-Based - AT&T  Quality is meeting customer expectations.”

Philip Crosby Quality is Free, pp Quality has much in common with sex. Everyone is for it (under certain conditions, of course). Everyone feels they understand it (even though they wouldn’t want to explain it). Everyone thinks execution is only a matter of following natural inclinations. (After all, we do get along somehow). And, of course most people feel that all problems in these areas are caused by other people. (If only they would take time to do things right).

Quality  Is Quality Free?  Can We Achieve 100% Quality?

Total Quality Management  TQM Principles  Know/Understand Customers and Requirements  Satisfy/Delight Customers  Continuous Improvement Elements of TQM  Process Identification  Process Mapping  Process Simplification  Process Controls  Track - Monitor  Continuous Improvement  TQM and Six Sigma

Value Analysis  Begun by Larry Miles at GE  Basic Objectives  Reduce Cost While Maintaining Function or  Increase Function While Maintaining Cost  NEVER Cheapen Product While Reducing Cost  Focus is Always on Function and Value

Value Analysis, cont.  Exploded View Parts Diagram  Question Each Part  Really Necessary?  An Industry Standard?  If Custom,  of Most Suitable Material?  Do Specs Reflect Need  Manufactured in Most Efficient Way?  Assembled in Most Efficient Way?  Does Each Component “Match” Overall Design?  An Example

Standardization  Internal  Processes  Materials  Equipment  External  Industry Standards (Materials)  Industrial Standardization (SAE)  Multi-Industry (ANSI, ASTM)  International (ISO, Metrics)

Standardization  Industry Standards  Company Standardization  Impacts on Inventory  Impacts on Purchasing  Impacts on Maintenance and Repair  Impacts on Quality  Implementation

Why Involve Purchasing in the Design Process?  Define Requirements  Generic or Proprietary  Determine Availability and Lead Times  Examine Alternative Goods  Make/Buy Analysis  Minimize Total Cost  Early Supplier Involvement

Suppliers and New Product Development  Create Competitive Advantage  Early Supplier Involvement  Supplier Expertise and Cost  Latest Technology  Faster to Market  Improved Quality  Fewer Changes, Change Orders

Sourcing Strategies

General Supply Chain Strategies  Supply Base Reduction  Supply Base Addition  Supplier Development  Inventory Strategies  VMI  Consignments  Lean Operations  Simplification  Standardization  Automation  Risk Management  Identification  Mitigation  Cost Reduction  Administrative  Commodities  Services  Leveraging Technology  Lead Time Management  Sustainability

Sourcing Strategies  Industry Standard or Custom?  Criticality  Term of Agreement  Automation  Risk Mitigation  Sustainability

Supplier Selection

Dave Hoover’s Purchasing Axioms  A Firm Has The Suppliers It Deserves  A Supplier Will Only Be As Good As It Has To Be  The Best Way To Get More From Suppliers Is To Ask For It

Supplier Selection  Goal: Long Term, Close Relationship with World Class Suppliers  Create Competitive Advantage from Supply Base  Capabilities  Performance  Future Considerations

Capabilities  Financial Capabilities  Today  To Grow With Us  Technical Capabilities  Engineering  Buyer Support  Quality Process Controls  Manufacturing Capabilities  Production Capabilities  Capacity

Supplier Characteristics  Proximity  Access to Infrastructure  Union Shop  Forecasting  Others  Own Trucks  Engineering  Maintenance and Service  Terms  2/10, Net 30?

Supplier Selection Process  Clear Specification  Marketplace Surveys  Identification of Available Suppliers  Determining Supplier Qualifications  Make/Buy Analysis  Selecting from Qualified Suppliers  Reverse Auctions

Supply Base Analysis  Industry Average Numbers of Suppliers  How Many Suppliers Do You Have?  How Many Suppliers Do You NEED?  Risk  View Suppliers as You View Investments  Is the Supplier Making Money For You?  Is the Supplier a Good Return on Your Investment

Supply Base Reduction  Maximize Leverage  Increase Quality and Reduce Variability  Utilization of Resources  Minimization of Administrative Cost  Create Stable Supply Base  Develop Synergy  Create Competitive Advantage Through Supply Base  Manage Risk

Supplier Performance  Quality  On Time Delivery  Flexibility  Problem Resolution  Productivity Improvement  Their Supplier Management Program  Progress Toward Certification  Other Important Criteria

Buyer Performance  Forecast Accurately  Share Information  Minimize Rush Orders and Schedule Changes  Focus on Total Cost - Not Price  Pay Bills On Time  Manage Supplier Relationships

Supplier Visits  Housekeeping  Inventories  Order Processing Procedure  Quality Processes  Their Purchasing Process  Financial Statements  Other Capabilities  Engineering, Logistics, Technology  Logistics, Process Improvement  Credit Policies and Terms

Other Supplier Selection Criteria  Social Goals  Minority/Women Owned  Small Business  Buying Local (Governmental Set-Asides)  Manufacturer vs Distributor  Environmental Considerations  Supply Chain Risk

Intangibles  Intuition  Personality Types  Corporate Philosophy  Reputation  References

Global Sourcing

 Domestic Sourcing  Same Language  Same Cultural/Ethical Expectations  Same Legal System  Same Banking System  Same Transportation  No Customs, Tariffs

Global Sourcing  Why Look for Global Sources?  Lower Total Cost (Landed)  Access to Markets (Countertrade)  Access to Raw Materials  Access to Technologies  Other Reasons  Quality  Competition

Global Sourcing  Finding Global Suppliers  Directories  Trading Companies  Embassies/Consulates  Trade Shows  Countertrade  Logistics Issues  INCOTERMS  Other Logistics Costs

Global Sourcing  Problems With Global Sourcing  Good Specifications  Cultural Issues  Language Difficulties  Long Lead Times  Paperwork  Payment Issues  Political Risk  Currency Risk  Security Issues  Sustainability

Global Sourcing  Methods  Intermediaries  Foreign Subsidiaries  International Purchasing Offices  Direct Purchases  Inspection Services  Customs Brokers and Freight Forwarders

Global Sourcing: Communication  Understanding the True Barriers  Speaking  Reading and Writing  Slang and Colloquialisms  Two Word Verbs  Vocabulary  Conversational  Business  Technical

Global Sourcing: Communication  Translators  Local,  At Destination  Types  Translating Written Materials  Business Cards and Titles

Global Sourcing: Payment  Domestic Payment  Payment Up Front (Avoid)  COD  On Account  International Payment  Payment Up Front (Avoid)  Against Documents  Letters of Credit  On Account

International Negotiation  Age, Gender  Status, Authority  Formality  Numbers and Team Composition  Professionalism  “Yes” and “No”

International Negotiation  Silence  Subtleties  Deadlines  Cultural Respect  On Being Alone

Make/Buy and Outsourcing

Make/Buy  Products We Never Make  Products We Always Make  In Between Products: Make/Buy

Make/Buy  Industry Standards, Proprietary Products and Make/Buy  Procurement from Suppliers  Procurement by Manufacture  Fluid Decision  Revisit at Regular Intervals  As Economic Conditions Change  As Internal Conditions Change  Always Maintain Internal Capability

Reasons to Make  Quantities Too Small  Quality Too Critical  Timing Too Critical  Trade Secrets (for a time)  Cheaper  Keep Crew Busy  Avoid Sole Source (perhaps)  Union Shop  Unreliable Supplier

Reasons to Buy  Quantities Too Large  Supplier Quality Acceptable  Have Sufficient Lead Time  Lack of Necessary Competencies  Lack of Capacity  Cheaper  Reciprocity

Vertical Integration  Cost and Responsiveness  Insure Performance  Scheduling  Control  Boeing

Outsourcing  Strategic Decision  Activity is Not Core Competency  Will, In Future Completely Depend on Suppliers  Will No Longer Maintain Internal Capability  Management of Outsourced Activities

Outsourcing  Our Core Competencies  Suppliers’ Core Competencies  Dependence on Suppliers  Strategic Vulnerability  Technology Transfer  Source from Competitors’ Suppliers  Supplier Exploitation  Price Creep  Service

Outsourcing  Firms Rethinking Outsourcing  Rising Wage Rates  Rising Transportation Costs  Currency Exchange Rates  Long Lead Times  Recent Survey (Global Retail Goods Firms):  50% of firms in survey are considering moving out of China  26% actually doing it