Procurement Management and Global Sourcing

Topic 9 – Supplier Quality and Supply Base Management

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Topic 9 – Supplier Quality and Supply Base Management i

Contents

Contents ii

Introduction 1
Learning objectives 1

Quality 2

Importance of Quality Management 3

Dimensions of Goods Quality 3

Dimensions of Service Quality 4

Quality Criteria 4

Supplier Quality Management 4

Managing Supplier Quality with TQM 5

Total Quality Management & Principles 5

ISO 9000 6

Six Sigma Supplier Quality 7

Six Sigma Objectives 7

Costs of Quality 7

Inspections 8

Supply Base Management 9

Summary 9

ii Procurement Management and Global Sourcing

Introduction
Quality, supplier quality and supply base management become strategic
necessities where product is outsourced or suppliers provide value-added
activities to an organisation. There is a direct relationship between supplier
quality and product quality, therefore, it is important to select suppliers
who supply quality products, and at the same time, we also have to look at
the quality of supplier in terms of their other capabilities and the way they
perform. Buyers need to work with the suppliers to ensure a better fit
between buyer and supplier. Buyers also need to focus on managing the
supply base for a better procurement outcome.

Learning objectives
At the conclusion of this topic you should be able to:
• Assess quality and its several aspects including the following:
• Quality and Importance of Quality Management
• Dimensions of Goods and Service Quality
• Supplier Quality Management
• Six Sigma
• Costs of Quality
• Appraise and administer supply base management including its following
aspects:
• Phases and Activities
• Buying from World-Class Suppliers
• Reduction of Supply Base Risk
• Supplier Development Categories

Reading
Prescribed Text: Monczka, R.M., Handfield, R.B., Giunipero, L.C. and
Patterson, James L. (2014), Purchasing and Supply Chain
Management, South-Western, Cengage Learning. 6th Edition. Chapter
6, 8.

Topic 9 – Supplier Quality and Supply Base Management 1

Quality
Quality can be defined as the totality of features and characteristics of a
product/service that bears on its ability to satisfy its stated or implied
needs (ISO). It includes, a product’s fitness for use, its success in offering
features that consumers want, the degree to which a product conforms to
designated specifications and innate excellence (appearance, style,
performance, delivery, after sales service).
• How important is the quality level of the product or service you are
seeking?
• Does it need to be of very high standard, and meet very strict tolerance
standards?
• Is its appearance important?
• What function is the product or service going to perform?
• How many defects (if any) are allowable?
These are but a few of the questions which should be asked. Before you
select a vendor and product/service, you must know what level of quality
has to be met. This is often written in the product/service specification.
You must also consider whether you require the vendor to be certified to ISO
or other standards, and which ones. This aspect is sometimes part of your
company’s purchasing policy, so be sure whether this is crucial to your
decision ‐ it may shorten your list dramatically.
Your company may incur high indirect costs (in labour, time, and delays)
through having to inspect all incoming goods. If you have reliable, quality
suppliers who have appropriate systems and checks in place, the suppliers
may be able to certify the quality of their own products. You should,
whenever possible, visit the vendors from whom you are considering
purchasing, to make an assessment not only of their quality systems, but the
quality of their overall business ‐ cleanliness, attitude, professionalism, etc.
Your purchase decisions affect the profitability and reliability of your
company.
Quality is an expectation which must be met to satisfy customers, and assist
companies to remain competitive in business. It is no longer a situation of
“cheap products are always poor quality” and “highly priced products are
always good quality”. By minimising mistakes, and performing tasks
appropriately the first time, costs can usually be reduced, and increased
sales opportunities may also result.
The interpretation of “what is Quality?” will differ from one organisation to
another. However, increasingly organisations are seeking quality
accreditation to international standards, so much more emphasis is now
being placed on quality of products and services. Formal management
systems enable quality to be measured, and identify actions to be taken if
the performance being achieved does not meet the standards required.
A range of tracking mechanisms are available to assess quality performance,
including histograms, scatters grams, and statistical process charts. Some
organisations still follow the “old” method of performing all of the
processes or tasks, and then making a final check at the end of the
production line. If quality problems are discovered at that stage, money has
already been spent in performing several processes, and the product may
not be able to be repaired satisfactorily. In this situation, there would
probably be no option but to dispose of the product, which is the equivalent

2 Procurement Management and Global Sourcing

 of just throwing money away.
Increasingly, organisations are encouraging each step in the process, each
operator, to be responsible for the quality of output from that process.
Operators are given the authority to stop production if necessary, and call in
additional assistance to resolve the problem. Operators must therefore be
appropriately trained in identifying what is acceptable quality and what is
not, how to monitor quality, and what to do when a problem arises.
Quality is a team effort, comprising people from within the organisation,
and those external to the organisation (e.g. suppliers and customers).

Importance of Quality Management

The first and foremost importance of quality is to remain competitive in
business. Other important parts that quality plays are to, retain / expand
market share, maintain profitability, achieve customer satisfaction,
produce high quality products / services into the market at the cheapest
cost, meet or comply with world trade demands, standards and regulations
and globalisation requirements, establish a quality management system at
work place and to improve productivity, efficiency and to maximize
resources by reducing wastes.

Dimensions of Goods Quality

There are several dimensions that customers or users may perceive quality
of a physical product (goods). These are as follows:
• Visual appearance, cosmetics: colour, texture, shapes, effects
• Features: memory size, fast speed, buttons, key pads, volume
• Functions: visual, audio quality, mechanical, physical functions
• Reliability: consistent performance with respect to time
• Durability: physical properties with respect to time; robust
• Conformance: meet product specifications, product manuals
• Safety: meets safety and legal standards, certification
• Aesthetics: beauty in the eyes of beholder, memory values
• Serviceability: after sales services for computers, electrical, cars
• Perceived quality: quality is judgmental based on individual
• Delivery: on time delivery, JIT
• Price: reasonable, competitive price
• Product liability: manufacturer’s accountability for products

Topic 9 – Supplier Quality and Supply Base Management 3

Dimensions of Service Quality
• Courtesy: smile, greetings
• Credibility: reputation, trust, confidence
• Communications: clear communications, orders
• Creativity: ideas, contributions, captivating
• Consistent: deliver regular expected services
• Reliability: ability to deliver services consistently at all times
• Understanding customer’s needs: empathy, attentive to customer’s needs
• Security: free from risks, danger, threat
• Tangibles: image, physical layout appearance, décor

Quality Criteria
• Judgmental based criteria: subjective and individual perceptions on
“goodness” of product.
• Product based criteria: a function of specific attributes, features
• User based criteria: based in user’s needs and wants, use of customers,
customer says.
• Value based criteria: comparing with price factor
• Manufacturing based criteria: conformance to specifications, drawings,
control limits.

Supplier Quality Management

Supplier quality is the ability to consistently meet or exceed current and
future customer expectations or requirements within critical performance
areas on a consistent basis. Critical Performance Areas include product or
service delivery, product or service conformance, after-sale service,
technology, cost management. Poor supplier quality can undermine a firm’s
total quality improvement effort. The more suppliers contribute to final
product, the greater the impact they have on overall quality. Factors
influencing purchasing’s commitment to this role are supplier’s ability to
affect buyer’s total quality, resources available to support this role,
supplier’s willingness to support quality and buyer’s ability to support
quality-performance measurements.

4 Procurement Management and Global Sourcing

Managing Supplier Quality with TQM
In order to ensure the products satisfy the ultimate customer, the following
points are to be kept in mind:
1. Define Quality in Terms of Customers and their Requirements: Buyer must
clearly quantify or specify requirements, clearly communicate
requirements through RFPs, negotiation process, and performance feedback
sessions.
2. Pursue Quality at the Source: Cross-functional teams should visit and
evaluate potential suppliers; suppliers should be involved in the
development stage of the buyer’s requirements.
3. Stress objective rather than subjective analysis: Develop objective supplier
measurements, use data from measurements to award future business,
identify performance improvement opportunities, and provide feedback
and quality expectations to the supplier.
4. Emphasize Prevention Rather than Detection of Defects: Avoid
nonconformance of products, select suppliers that have systems, processes
and methods in place to prevent defects, use of supplier quality
certifications and corrective action requests support prevention of defects.
5. Focus on process rather than output: Shift from a product to process
orientation, Focus on the process that creates the output rather than the
output. If the process is correct, the output should be quality and suppliers
must provide evidence of process capability.
6. Strive for zero defects: Philip Crosby defines zero defects as conformance
to requirements. Optimize your supply base to ensure capable suppliers.
Average supplier quality should increase as lower performers are
eliminated.
7. Establish continuous improvement as a way of life: Shift performance
targets upward once a supplier achieves current levels. Work to develop
your supplier’s performance capabilities.
8. Make quality everyone’s responsibility: Buyers and sellers must assume
ownership for total quality across the supply chain. Making quality each
participant’s responsibility is essential for total supply chain quality.

Total Quality Management & Principles

Total quality management principles are based on customer focus, top
management commitment and leadership, employee’s involvement and
participation, education and training, process and system approach, tools of
QC, continual improvement, and organisational culture. Factors involved in
each of them are discussed mentioned below:
• Customer focus
• Define who are your customers
• Identify customers’ needs and wants
• Products/services are customer driven
• Internal and external customers

Topic 9 – Supplier Quality and Supply Base Management 5

 • Customer pledge
• Top management commitment and leadership
• Set quality policy, quality objectives, goals and directions
• Provides resources towards quality matter/issues
• Establish quality management system and quality programs
• Provide priorities and examples in quality
• Employees involvement and participation
• Provide quality programs, quality campaigns that involve employees
and participation
• Encourage individuals and teams: QCC, working groups to solve
quality problems and quality contributions
• Establish suggestion system, feedbacks, recognition and award for
quality achievements
• Education and training
• Management to provide education and training in quality matters and
quality system
• Quality programs that cater all levels of workforce, operators and
managers: quality awareness, QCC problem solving tools, quality
auditors training, benchmarking, 6 Sigma
• Process and system approach
• Establish a quality management system based on processes
• Emphasize plan- do- check- act approach in all activities
• Encourage ISO 9001 certification
• Tools of qc
• Companywide programs on qc tools trainings
• Train workers the use of qc tools
• Implement the use of 7 qc tools in the work areas
• Continual improvement
• Management and workers to strive for continual improvements in
operations
• Small, incremental changes that improves processes, operations,
values, rejection, wastes, errors, reduce costs
• Organisational culture
• Instil quality culture at work place
• Quality culture practice by all workers

ISO 9000
ISO 9000 registration is world renown – International Standard Organisation.
It was developed in Europe in 1987; updated regularly
([Link] ISO 9000 recognizes product quality is
6 Procurement Management and Global Sourcing
 a result of a quality process. ISO 9004:2009 - focuses on how to make a
quality management system more efficient and effective.

Six Sigma Supplier Quality

Six Sigma is another quality dimension. Sigma is a statistical unit of
measure that reflects process capability. The sigma scale of measure is
perfectly correlated to such characteristics as defects-per-unit, parts-per-
million defective and the probability of a failure/error. A rigorous, focused,
highly effective implementation of proven quality principles and
techniques. Six Sigma practitioners spend significantly less revenues fixing
problems. Six Sigma can improve quality and reduce costs of upstream tiers
in the supply chain as well.
The massage from Six Sigma is 99% good is not good enough. Consider the
following examples,
• 5,000 incorrect surgical procedures each week
• 20,000 lost articles of mail each hour
• No electricity for almost 7 hours each month
• Unsafe drinking water for almost 15 minutes each day

Six Sigma Objectives

• Products
• Improve time to market for all products
• Lead the industry in key technologies
• Operations
• Create world-class manufacturing processes
• Develop strategic vendor relationships
• Customer
• Provide best-in-class product and process quality
• Develop strategic relationships with key customers
• Management: Become an employer of choice

Costs of Quality
• Prevention costs
• Costs incurred to prevent defective goods from being produced or
delivered

Topic 9 – Supplier Quality and Supply Base Management 7

 • Costs spend on quality training programs to prevent occurrence of
defects
• Quality trainings, SPC training, ISO certification, investment in new
machines
• Appraisal costs
• Costs incurred to evaluate or assess products to ensure it meets
standards
• Inspection costs, testing, samplings, audits, destructive testing,
maintenance costs.
• Internal failure costs
• Costs of rejects, non-conformances, defects that are produced in the
organisation.
• Scraps, yield loss, repairs, reworks, material losses, downtimes,
retests
• External failure costs
• Costs incurred after products has reached customers in market
• Returned materials, replacements costs, warranties costs, legal
lawsuits, loss of sales, loss of revenues, concessions made to
customers.

Inspections
• Purpose of inspections
• To determine whether products meet or conform to certain standards
or specifications
• To detect non conformities, rejects, defects, substandard quality
parts, processes
• To rectify, rework or correct situations such as screening, 100% sorting
before proceed to next
• To isolate problems so as to enable corrective measures to be taken
• To maintain quality standards and to meet customers’ requirements
• To provide information on effectiveness of processes, workers and its
controls system
• To grade products for certain business sectors
• Types of inspections
• Source inspection
• Receiving inspection
• In process inspection
• 100% inspection
• Final, sampling inspection

8 Procurement Management and Global Sourcing

Supply Base Management
Supply base management refers to supplier performance measurement,
rationalisation and optimisation, supplier development and overcoming the
barriers to supplier development. Suppliers play critical roles in the success
of most organisations. A supply base that is too large and complex usually
constrains supplier development activities. Supplier development requires
more than slogans and demands for better performance.
Supplier performance management should be focused on how does a buyer
know how well any given supplier is performing? It consists of the methods
and systems to collect and provide information to measure, rate, or rank
ongoing supplier performance and acts as a supplier “report card”.
Supplier performance management decisions are based on the criteria to
measure, quantitative vs. qualitative variables, delivery, quality or cost
reduction. It also includes measurement and reporting frequency, uses of
measurement data.
Rationalisation and optimisation of supply base requires determining the
optimum number and quality of suppliers in the supply base. Rationalisation
refers to how many and which suppliers to maintain and optimisation refers
to analysis to ensure that only the most capable suppliers are kept. It
should a continuous process, usually results in a net reduction of suppliers
and may result in adding suppliers in some purchase categories. The key is
to determine the “right” number of suppliers, not just to arbitrarily reduce
the number.

Summary
There are many approaches to quality. Quality is a matter of choice –
depending on market selection. Quality is more than just perception –
measurable. Quality and supplier quality are interrelated and focussed on
ultimate customer’s satisfaction. Effective supply base management helps
organisations to remain competitive and more sustainable.

Topic 9 – Supplier Quality and Supply Base Management 9

 Online Discussion Activity
Theme is "Future of Healthcare System and impact on procurement
and supply chain”
Watch the following and write a paragraph or two on each of the
following aspects:
[Link]
1. List the three Healthcare Scenarios
2. Implication on Supply chain (compared to current practice based
on your experience)
- Healthcare system
- includes things such as patient visit, clinic location, supply of
medical products, disposal of medical waste, maintaining
patient records-privacy, usability, health carers (doctors
nurses and other services) location issue and many other
Discussion may be based on your knowledge of SCM from this
course and other related courses.
- Risk management
a. Risks involved (focus on a few main risks)
b. Mitigation strategy

Web resource
[Link]

References
Monczka, R M., Handfield, R. B., Giunipero, L. C and Patterson, James
L. (2014), Purchasing and Supply Chain Management, South-Western,
Cengage Leaming, Sixth Edition.
Monczka, R M., Handfield, R. B., Giunipero, L. C and Patterson, James
L. (2011), Purchasing and Supply Chain Management, South-Western,
Cengage Leaming, Fifth Edition.
Handfield, R. B., Monczka, R. M., Giunipero, L. C and Patterson,
James L. (2011), Sourcing and Supply Chain Management, Cengage
Learning, Fifth Edition (International Version).

10 Procurement Management and Global Sourcing