Quality in the Purchasing Process Supply Chain Quality Training FreeQuality.org Jeff Nelson November 28, 2012 Marriott School of Management, BYU 1

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 2

Quality Purchasing… Defined The 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. 3

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? 4

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) 5

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) 6

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 7

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? 8

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 9

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. 10

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 11

Determining What to Purchase Arguably most important Voice of the Customer (VOC) During the design process Collaboration of Marketing, Engineering, and Supply Chain 12

Supplier Relations Relationships are everything in the supply chain world… The relationships make all the difference. 13

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. 14

Sourcing Pricing Catalog Pricing (for simple goods) Request for Proposal (RFP) -Price is set in proposal Reverse Auction - Request for bids 15

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 16

Electronic Sourcing Reduces human errors in purchasing process. Connects supplier and buyer to enable a lean automatic Just-In-Time (JIT) Purchasing process. 17

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 18

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.” Hormel Receives Supplier of the Year Award from Walmart 19

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) 20

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. 21

Acceptance Sampling Tool used for quality inspections Upon receiving large quantities of purchased good or materials, inspect a sample for quality. 22

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 23

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. 24

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) 25