Supply Chain Procurement and Manufacturing

By Bowersox, D.J., Closs, Cooper, M.B.

Edited by Paul Ducham

DIMENSIONS OF PRODUCT QUALITY

In the context of physical product form, quality is not as simple as it may first appear. In fact, the term quality means different things to different people. While everyone wants a quality product, not all may agree that a particular item or brand has all of the quality attributes desired. Quality is traditionally viewed in terms of eight different competitive dimensions.

Performance

Perhaps the most obvious aspect of quality from a customer’s viewpoint is performance, or how well the product actually performs in comparison to how it was designed to perform. For example, personal computers may be judged with respect to their processing speed; audio components, in terms of sound clarity and lack of noise; or dishwashers, relative to how clean and spotless the dishes. Superior performance in a product is generally an objective attribute, which can be compared between items and brands. Of course, an item may actually have several performance dimensions, which complicates comparison. The personal computer is judged not only in terms of processing speed but also by such characteristics as internal memory, hard disk capacity, and numerous other performance features.

Reliability

Reliability refers to the likelihood that a product will perform throughout its expected life. It is also concerned with the number of breakdowns or repairs that a customer experiences after purchase. Consider, for example, Maytag’s slogan “The Dependability People” and long-running advertising campaign featuring a company repairman as “the loneliest person in town.” Maytag stresses its products are more reliable than those of competitors by showing that the Maytag repairman is never needed to fix a broken appliance. Like performance, reliability is a characteristic of quality that can be objectively measured.

Durability

While related to reliability, durability is a somewhat different attribute. It refers to the actual life expectancy of a product. An automobile with a life expectancy of 10 years may be judged by many consumers to be of higher durability than one with a projected 5-year life. Of course, life span may be extended through repair or preventive maintenance. Thus, durability and reliability are distinct but interrelated aspects of quality.

Conformance

Conformance refers to whether a firm’s products actually meet the precise description or specifications as designed. It is frequently measured by looking at an organization’s scrap, rework, or rate of defects. Conformance quality measurement is usually internal in an organization. For example, if 95 percent of a firm’s products meet the specifications as designed, it has a 5 percent defect rate. Defective products may be scrapped or reworked to bring them into conformance. Features Customers frequently judge quality of specific products on the basis of the number of functions or tasks that they perform independent of reliability or durability. For example, a television receiver with features such as remote control, picture-in-picture, and on-screen programming is typically perceived to be of higher quality than a basic model. But, in general, the more features a product contains, the greater is the likelihood that another quality attribute may be lacking, such as reliability. Aesthetics Aesthetics, the styling and specific materials used in a product, is used by many consumers to judge quality. In clothing, cashmere sweaters are considered of higher quality than poly- ester fabrics. In automobiles, the use of leather rather than cloth for seats, wood or metal rather than plastic, is an aesthetic that implies quality. Included in aesthetics is the notion of fit and finish such as high-gloss paint on an automobile or seams having no overlap. Product designs that are unique or innovative are frequently regarded by customers to be of higher quality. Serviceability Serviceability, the ease of fixing or repairing a product that fails, is an important aspect of quality for some customers. Consider, for example, how some new appliances contain diagnostic capability, which alerts users or service technicians that a failure is about to occur. Ideally, serviceability would allow the customer to fix the product with little or no cost or time lost. In the absence of such serviceability, customers generally consider those items or brands that can be repaired quickest at least cost to have superior quality. Perceived Quality As noted earlier, customers are the ultimate judges of product quality through their perception of how well the product meets their requirements. Perceived quality is based on customers’ experience before, during, and after they purchase a product. Total product quality is a combination of the eight dimensions, how they are blended by an organization, and how that blend is perceived by the customer. It is perfectly plausible that two different customers may perceive two different brands as each having best quality, depending upon which blend of elements each considers most critical.

TOTAL QUALITY MANAGEMENT

Interestingly, quality is not always clearly defined within some firms. Moreover, different functional managers tend to emphasize different aspects of quality. Marketing managers, for example, care a lot about aesthetics and features, whereas manufacturing executives often focus on conformance. Of specific concern in logistics are the quality dimensions related to service, satisfaction, and success. From the customer’s perspective, not only does the physical product incorporate the desired elements, but also the product must be available in a timely and suitable manner.

Total Quality Management (TQM) is a philosophy supported by a managerial system focused on meeting Customer Expectations with respect to all needs, from all departments or functions of an organization, whether the customer is internal or external, a supply chain partner, or a consumer. While the specific tools and methodologies employed in TQM are beyond the scope of logistics, the basic conceptual elements are: (1) top management commitment and support; (2) maintaining a customer focus in product, service, and process performance; (3) integrated operations within and between organizations; and (4) commitment to continuous improvement.

QUALITY STANDARDS

Establishing global quality standards is extremely difficult as a result of different circumstances, practices, and procedures around the world. As a simple example, engineer- ing tolerances in one country might be measured in millimeters, while in another, they are measured in tenths of an inch. Nevertheless, a set of standards has emerged from the International Organization for Standardization (ISO) and has gained worldwide acceptance.

A series of Quality Standards have been issued under the name ISO 9000. Incorporating several subsets (ISO 9001, 9002, etc.), these standards provide basic definitions for quality assurance and quality management. ISO 9001, for example, deals with the quality system in place for product design, development, production, installation, and service. Several organizations around the world are authorized to perform audits of companies and their practices and procedures for TQM. A company that conforms to the ISO guidelines can receive certification. In 1998, another set of guidelines, ISO 14000, was released. ISO 14000 deals with guidelines and procedures for managing a firm’s environmental impact. Certification in both ISO 9000 and ISO 14000 indicates a company conforms to both quality and environmental standards. Most major countries today have accepted the ISO standards, and, in many instances, companies will not purchase from a supplier who has not received ISO certification.

PROCUREMENT STRATEGIES

Effective procurement strategy to support supply chain operations requires a much closer working relationship between buyers and sellers than was traditionally practiced. Specifically, three strategies have emerged: volume consolidation, supplier operational integration, and value management. Each of these strategies requires substantial collaboration between supply chain partners and should be considered as stages of continuous improvement.

Volume Consolidation

An important step in developing an effective procurement strategy is volume consolidation through reduction in the number of suppliers. Beginning in the 1980s many firms faced the reality that they dealt with a large number of suppliers for almost every material or input used. In fact, purchasing literature prior to that time emphasized that multiple sources of supply constituted best procurement practice. First, potential suppliers were continually bidding for a buyer’s business, ensuring constant pressure to quote low prices. Second, maintaining multiple sources reduced the buyer’s dependence on any one supplier. This in turn served to reduce the buyer’s risk should a specific supplier encounter supply disruptions such as a strike, a fire, or internal quality problems.

By consolidating volumes with a limited number of suppliers, procurement is also positioned to leverage its share of a supplier’s business. At the very least, it increases the buyer’s negotiating strength in relationship to the supplier. More important, volume consolidation with a reduced number of suppliers provides a number of advantages for those suppliers. The most obvious advantage of concentrating a larger volume of purchases with a supplier is that it allows the supplier to improve economies of scale by spreading fixed cost over a larger volume of output. Additionally, assured of a volume of purchases, a supplier is more likely to make investments in capacity or processes to improve customer service. When a buyer is constantly switching suppliers, no one firm has an incentive to make such investment.

Clearly, when a single source of supply is used, risk increases. For this reason, supply base reduction programs are almost always accompanied by rigorous supplier screening, selection, and certification programs. In many instances, procurement executives work closely with others in their organization to develop preferred or certified suppliers. It should be noted that volume consolidation does not necessarily mean that a single source of supply is utilized for every, or any, purchased input. It does mean that a substantially smaller number of suppliers are used than was traditionally the case in most organizations. Even when a single source is chosen, it is essential to have a contingency plan.

The savings potential from volume consolidation is not trivial. One consulting firm has estimated that savings in purchase price and other elements of cost can range from 5 to 15 percent of purchases.  If the typical manufacturing firm spends 55 percent of its revenue on purchased items and can save 10 percent through volume consolidation, the potential exists to deliver a $5.5 million improvement on revenue of $100 million to the bottom line.

Supplier Operational Integration

The next stage of development occurs when buyers and sellers begin to integrate their processes and activities in an attempt to achieve substantial performance improvement. Such integration typically involves alliances or partnerships with selected suppliers to reduce total cost and improve operational integration.

Such integration takes many different forms. For example, the buyer may allow the supplier to have access to sales and ordering information, thereby giving the supplier continuous knowledge of which products are selling. Detailed sales information allows the supplier to be better positioned to effectively meet buyer requirements at a reduced cost. Cost reduction occurs because the supplier has more information to plan and can reduce reliance on cost-inefficient practices, such as forecasting and expediting.

Further operational integration can result for buyers and suppliers working together to identify processes involved in maintaining supply and searching for ways to redesign those processes. Establishing direct communication linkages to reduce order time and eliminate communication errors is a common benefit of such integration. More sophisticated integrative efforts may involve eliminating redundant activities that both parties perform. For example, in some sophisticated relationships, activities such as buyer counting and inspection of incoming deliveries have been eliminated as greater reliance and responsibility are assumed by suppliers. Many firms have achieved operational integration focused on logistical arrangements, such as continuous replenishment programs and vendor-managed inventory.  Such integration has considerable potential for reducing TCO.

Some of the efforts in operational integration strive to reduce total cost through two-way learning. For example, Honda of America works closely with its suppliers to improve their quality management. Honda visits supplier facilities and helps identify ways to increase quality. Such improvements ultimately benefit Honda by reducing the supplier’s costs of rework and by providing Honda with higher levels of quality materials.

The primary objective of operational integration is to cut waste, reduce cost, and develop a relationship that allows both buyer and seller to achieve mutual improvements. Combined creativity across organizations can create synergy that one firm, operating in isolation, would be unable to achieve. It has been estimated that operational integration with a supplier can provide incremental savings of 5 to 25 percent over and above the benefits of volume consolidation.

Value Management

Achieving operational integration with suppliers creates the opportunity for value management. Value management is an even more intense aspect of supplier integration, going beyond a focus on buyer-seller operations to a more comprehensive and sustainable relationship. Value engineering, reduced complexity, and early supplier involvement in new product design represent some of the ways a company can work with suppliers to reduce TCO.

Value engineering is a concept that involves closely examining material and component requirements at the early stage of product design to ensure that a balance of lowest total cost and quality is incorporated into new product design. Figure 4.2 shows how early supplier involvement can be critical in achieving cost reductions. As a firm’s new product development process proceeds from idea generation through the various stages to commercialization, the company’s flexibility in making design changes decreases. Design changes are easily accommodated in the early stages, but by the time prototypes have been developed, a design change becomes difficult and expensive. The earlier a supplier is involved in the design process, the more likely an organization is to capitalize on that supplier’s knowledge and capabilities.

An example from an automobile manufacturer demonstrates the benefit of early supplier involvement. In designing the front bumper for a new model, the design engineer was completing design of the bracket assembly for the bumper. During the process, an engineer from the assembly supplier, which had already been identified even though actual production was in the future, asked if the bracket location could be moved by about ½ inch. The design engineer, after some consideration, replied that it could be done with no impact on the final product. The design engineer was interested to know why the supplier requested the change. The answer was that by moving the bracket, the supplier would be able to use existing tools and dies to manufacture the bracket. Under the original design, major capital investment would have been required for new tooling. The result was approximately a 25 to 30 percent reduction in cost of the bracket.

Clearly, value management extends beyond procurement in an organization and requires cooperation between numerous participants, both internal and external. Teams representing procurement, engineering, manufacturing, marketing, and logistics as well as key supplier personnel jointly seek solutions to lower total cost, improve performance, or improved accomodation of customer requirements.

Figure 4.2

PURCHASE REQUIREMENT SEGMENTATION

The Pareto effect applies in procurement just as it applies in almost every facet of business activity. In procurement, it can be stated simply: A small percentage of the materials, items, and services acquired account for a large percentage of the dollars spent. The point is that all procured inputs are not equal. However, many organizations use the same approach and procedures for procuring small-volume items that they do for acquiring their most strategic purchases. As a result, they spend as much in acquiring a $10,000 order of raw materials as they do for a $100 order of copy paper. Since all purchased inputs are not equal, many firms have begun to pay attention to segmented purchase requirements and prioritizing resources and expertise to handle those requirements.

It would be a mistake, though, to simply use dollar expenditure as the basis for segmenting requirements. Some inputs are strategic materials. Others are not. Some inputs have potential for high impact on the business success. Others do not. Some purchases are very complex and high risk. Others are not. For example, failure to have seat assemblies delivered to an auto assembly line on time could be catastrophic, while failure to have cleaning supplies might constitute a nuisance. The key is for an organization to apply a segmented approach to procurement. Volume consolidation and supply base reduction most likely can be justified for almost every material and service. The benefits described earlier can be enjoyed for office supplies as well as raw materials. Operational integration and value management may be reserved for more strategic purchase requirements.

ECOMMERCE

The explosion in technology and information systems is having a major impact on the procurement activity of most organizations. Much of the actual day-to-day work in procurement has traditionally been accomplished manually with significant amounts of paperwork, resulting in slow processes subject to considerable human error. Applying technology to procurement has considerable potential to speed the process, reduce errors, and lower acquisition cost.

Probably the most common technology used in procurement is Electronic Data Interchange (EDI). EDI involves the electronic transmission of data between a firm and its suppliers. This allows two or more companies to obtain and provide timely and accurate information. Using EDI there are many types of data being directly transmitted, including purchase requisitions, purchase orders, purchase order acknowledgment, order status, advanced shipment notification, and tracking and tracing information. The explosion in EDI usage is a direct recognition of associated benefits, including standardization of data, more accurate information, more timely information, shortening of lead times with associated reductions in inventories, and reduced TCOs.

Another procurement application of electronic commerce is the development of electronic catalogs. In fact, making information available about products and who can supply them is a natural application for Internet-based communications. Electronic catalogs allow buyers to gain rapid access to product information, specifications, and pricing, allowing buyers to quickly identify products and place orders. Many companies have developed their own online electronic catalogs and efforts have also been devoted to developing catalogs containing products from multiple suppliers, which permits buyers to rapidly compare features, specifications, and prices.

Buying exchanges are another technology-based purchasing development. Typically, buying exchanges allow users to look for sellers or buyers of specific goods or services. Depending on the approach, a buyer may post a request for proposal, post a request for quotation, or invite bids for specified products and services. Transactions can be initiated and completed electronically.

The potential volume of procurement activity through buying exchanges is enormous. Exchanges have been developed in the aircraft parts industry, chemicals, steel building products, food distribution, and even retailing. However, there is a potential downside. Many suppliers fear that the exchanges will become a mechanism that ultimately will reinforce past practice of buyers to focus strictly on purchase price. If buyers post their requirements and needs on the Internet primarily for the purpose of soliciting bids from alternative suppliers, or use the technology to have suppliers enter into an auctioning process, some fear many of the advances in supplier integration and value management will suffer.

In a supply chain management context, the link between a company and its external suppliers is critical. It provides for the integration of materials and resources from outside the organization into internal operations. Procurement is charged with the responsibility of ensuring that this transition is accomplished as efficiently and as effectively as possible. Much of the concern in procurement is focused on the logistical interface between the organization and its supply base. Ultimately, the purpose of procurement is to integrate material flow in accordance with requirements. It’s the job of logistics to efficiently move purchases to the desired location. In the next section, alternative manufacturing strategies are discussed with a focus on identifying their logistical requirements.

MANUFACTURING STRATEGIES

The unique nature of each manufacturing process and customer requirements limit the practical range of alternative manufacturing strategies. Manufacturing strategic range is constrained by both marketing and technological forces. Prevailing marketing practices serve to ground manufacturing strategy in terms of customer acceptability. Technology drives strategy to a manufacturing model that is competitive. For example, a manufacturer having a process dominated by economy of scale may desire to improve process flexibility. However, significant investment will typically be required to increase frequency and repetition.

Over time, the changing nature of the market and available technology serve to alter a firm’s strategic posture. Consider, for example, the steel industry, which was long dominated by processes highly dependent on economy of scale. Recent years have witnessed market acceptance of a wide range of new steel-based materials combined with value- added services. The Steel Service Center introduced cutting and shaping postponement to steel distribution as a way to increase Customer Accommodation. The nature of basic steel production has also undergone dramatic change. New process methods are being perfected that reduce long-time dependence on high-scale manufacturing processes. The combined impact of these changes in market and process has shifted the strategic posture of steel producers.

Manufacturing Processes

Manufacturers must design processes based on the work that needs to be done. Since different processes provide different capabilities, a firm’s process structures must be appropriate for the volume and variety of the products it produces. There are four common types of manufacturing process structures.

In a job shop products are typically customized for a specific customer. Each order or “job” can involve different materials and inputs. A tool and die shop that makes customized equipment for an automobile manufacturer is an example of a job shop. A more familiar example is a tailor who makes customized suits and other clothes for consumers.

A batch process typically is used to manufacture a small quantity of an item in a single production run before changing over to produce another item. John Deere and Caterpillar tend to use batch processes in manufacturing construction and agricultural equipment. A local bakery that produces cookies, cakes, and pies uses a batch process. A batch process structure works well when there is a high variety of products but each has a relatively low volume.

When there are many customers who want a similar product such as automobiles, appliances, and cell phones, a line flow process structure is typically used. In line flow processes standard products with a limited number of variations typically move on an assembly line through various stages of production, where pieces or components are added at each stage.

A continuous process is typically used to manufacture such items as gasoline, chemicals, laundry detergent, and aluminum soda cans. Many food products such as pasta and cereal are made using continuous processes. These products offer customers very little variety and are often referred to as commodities.

These four general process structures can be modified to create more options. For example, changes in management practices and technology have led to the cost advantages of high-volume continuous and line flow processes while increasing variety through mass customization, where a product is produced quickly and at a low cost using a high-volume production process. Dell Computers is an example of mass customization. Selecting from a range of components and warranty options, customers can design a computer system that best meets their needs at the price they want to pay and have delivery within about a week. Standardizing parts, using modular designs, and postponing product differentiation are practices used with mass customization.

Matching Manufacturing Strategy to Market Requirements

Typical marketing strategies were classified as being mass, segmental and focused, or one-on-one. These strategies are differentiated, in part, in terms of the desired degree of product and service accommodation. Mass marketing requires limited product/ service differentiation. In contrast, one-on-one marketing strategy builds on unique or customized product/service offerings for each and every customer. A firm’s strategic marketing posture concerning flexibility and agility to accommodate specific customer requirements is directly related to manufacturing capability. To a significant degree, a firm’s manufacturing capability drives the feasible range of effective marketing strategy. For a manufacturing firm to effectively compete, it must be able to integrate manufacturing capability into a meaningful marketing value proposition.

Alternative Manufacturing Strategies

The most common manufacturing strategies are make-to-plan (MTP), make-to-order (MTO), and assemble-to-order (ATO). It is also common to refer to MTP as make-to-stock (MTS).

As a general rule, MTP strategies are characteristic of industries exploiting economy of scale gained from long production runs. Significant finished goods inventory is typically manufactured in anticipation of future customer requirements. The logistical requirement to support MTP is warehousing capacity to store finished product and to facilitate product assortment to meet specific customer requirements. When flexible manufacturing is introduced to speed up switchover, the inventory lots produced are typically smaller in quantity. However, warehouses are still required for temporary storage and to facilitate product assortment.

In contrast, MTO manufacturing strategies seek to manufacture to customer specification. While MTO may not be as limited as the traditional job shop, exact quantities and configurations are produced in relatively small quantities. Logistical capacity may be required for temporary storage and to achieve outbound transportation Consolidation, but most product produced in an MTO environment is shipped direct to customers.

In ATO situations, base products and components are partially manufactured in anticipation of future customer orders; however, the products are not fully assembled or customized until a customer’s order is received. Such final assembly reflects implementation of the principle of manufacturing or form postponement. The need for logistical capacity is critical in ATO operations. In fact, an increasing amount of ATO product finalization is being performed in supply chain logistics warehouses. The attractiveness of an ATO manufacturing strategy is that it has the potential to combine some facets of economy of scale typical of MTP with a degree of flexibility characteristic of MTO. Full implementation of an ATO strategy requires that warehouse operations be integrated in the value creation process to perform customizing and assembly operations.

Manufacturing strategy clearly has a significant impact on the leadtime experienced by customers. The choice of MTO, ATO, or MTP determines whether a customer will bear the cost of waiting for completion of one or more of the three performance cycles. For MTP items such as most fast-moving consumer goods, customers essentially only experience the customer accommodation cycle, the time from placing an order until the product is received from the supplier. An ATO strategy choice by a manufacturer requires that customers also wait during the time that the product is actually configured to their requirements. Generally, an MTO strategy requires that customers incur the additional time of the manufacturer purchasing the needed components and materials to make the product.

Table 4.1 summarizes the essential characteristics of manufacturing processes and strategies. Each process is associated with the product variety and volume generally produced as well as the strategy generally employed and the resulting impact on customers in terms of their expected total leadtimes. Keep in mind, however, that creative organizations implementing mass customization are exploiting ways to blend different process and strategy combinations.

Table 4.1

TOTAL COST OF MANUFACTURING

The marketing and manufacturing strategies of a firm drive logistical service requirements. For example, MTO manufacturing strategies typically require less finished goods inventory than MTP and ATO strategies. However, MTO strategies typically require significant component inventory and may result in high-cost customer accommodation. In light of such cost trade-offs, the design of a logistics support system should be based on the Total Cost of Manufacturing (TCM).

Total cost of manufacturing consists of production/procurement, inventory/warehousing, and transportation. All of the above costs are impacted by manufacturing strategy. As such, TCM represents the foundation for formulating a customer accommodation strategy. Figure 4.4 represents a generalized model of the TCM per unit ranging across strategic alternatives from MTO to ATO to MTP. Naturally, exact cost relationships will depend upon specifics related to individual business situations. The design objective is to identify the manufacturing strategy that best fits the marketing opportunity confronted.

In Figure 4.4 , the per unit cost of manufacturing and procurement declines as quantity increases, reflecting economy of scale associated with MTP. Inventory and warehousing costs increase, reflecting the impact of larger manufacturing lot sizes. Transportation cost per unit decreases as a result of Shipment Consolidation. In contrast, MTO strategies reflect high per unit manufacturing and procurement costs which are, in part, offset by lower inventory and warehousing costs. In the MTO strategy, transportation cost per unit is higher, reflecting small shipment and/or premium transportation. The value of Figure 4.4 is to generalize relationships and visualize important cross-functional trade-offs. The TCM results from functional integration of manufacturing, procurement, and logistics. From a perspective of integrated management it is important for manufacturing firms to design a supply chain strategy that achieves lowest total cost of manufacturing across the entire process.

Figure 4.4

LEAN SYSTEMS

Lean has been defined in several different ways, but, in general, it is a philosophy of manufacturing that emphasizes the minimization of the amount of all the resources (including time) used in the operations of a company. Operational processes are considered to be lean when they are very efficient and have few wasted resources. The elimination of “waste” is actually the defining principle of lean.

By eliminating wastes of all sorts in the system, the lean approach lowers labor, materials, and energy costs of production. Lean also emphasizes building exactly the products customers want, exactly when they need them. When lean capabilities are introduced in a firm it can produce smaller quantities, and it can change outputs more quickly in response to changes in customer demand.

The primary objectives of lean systems are to

1. Produce only the products (goods or services) that customers want.

2. Produce products only as quickly as customers want to use them.

3. Produce products with perfect quality.

4. Produce in the minimum possible leadtimes.

5. Produce products with features that customers want, and no others.

6. Produce with no waste of labor, materials, or equipment; designate a purpose for every movement to leave zero idle inventory.

7. Produce with methods that reinforce the occupational development of workers.

Note that the first two objectives emphasize producing “just-in-time,” that is, building products only when customers want them and at the same rate that customers demand them. If operations managers can synchronize their production systems with the rate of demand in this way, they can eliminate many sorts of waste. The other five objectives are frequently associated with the operation of lean systems—emphasis on perfect quality, reduce amount of leadtime, eliminate unwanted product offerings, and place a greater emphasis on employees as the primary agents for improving operations.

SIX SIGMA

In the recent years, the six-sigma program for quality and process improvements has been adopted by many of the larger firms in the United States and around the world. From statistics, the term “sigma” refers to standard deviation of values for the out- put a process and is an indicator of variability. While traditional quality management programs defined three sigma as the objective, in a six-sigma approach, the goal is to achieve a process standard deviation that is six times smaller than the range of outputs allowed by the product’s design specification. A primary objective of six-sigma programs is to design and improve products and processes so that variability is reduced. For example, imagine a grinding process that automatically grinds metal parts to a specified width. As the grinding wheel wears, the average width of the processed parts increases. It is this type of movement that creates quality problems. When a process is stable and centered within specification limits, a three-sigma quality level means that the firm produces defect-free product 99.74 percent of the time. A six-sigma process that is centered produces defect-free product 99.99966 percent of the time. Thus, a six-sigma process produces only 3.4 defects per million parts, while a three-sigma process produces 66,807 defects per million parts.

The six-sigma approach is actually a structured process for first identifying sources of variability and then reducing them. Early developers of the six-sigma approach at Motorola originally chose six standard deviations as an appropriate goal given the nature of their manufacturing processes. In truth, very few business operations ever attain a six-sigma level of quality. More important than the absolute goal are the quality improvement processes that comprise a six-sigma program.

JUST-IN-TIME

Just-in-Time (JIT) techniques have received considerable attention and discussion in recent years in all areas related to supply chain management. Sometimes referred to as Just-in-Time purchasing, and frequently referred to as just-in-time delivery, the goal of JIT is to time-phase activities so that purchased materials and components arrive at the manufacturing or assembly point just at the time they are required for the transformation process. Ideally, raw material and work-in-process inventories are minimized as a result of reducing or eliminating reserve stocks. The key to JIT operations is that demand for components and materials depends on the finalized production schedule. Requirements can be determined by focusing on the finished product being manufactured. Once the production schedule is established, just-in-time arrival of components and materials can be planned to coincide with those requirements, resulting in reduced handling and minimal inventories.

The implications of JIT are numerous. Obviously, it is necessary to deal with suppliers who have high and consistent levels of quality, as their components will go directly into the finished product. Absolutely reliable logistical performance is required and eliminates, or at least reduces, the need for buffer stocks of materials. JIT generally requires more frequent deliveries of smaller quantities of purchased inputs, which may require modification of inbound transportation. Clearly, to make JIT work, there must be very close cooperation and communication between a manufacturer’s purchasing organization and suppliers. In JIT operations, companies attempt to gain the benefits of backward vertical integration but avoid the formal tie of ownership. They achieve many of the same ends through coordination and process integration with suppliers.

Originally, JIT was applied to manufacturing processes characterized as MTP, since the effective functioning of the system is dependent upon a finalized production schedule. However, as manufacturing strategies have evolved with more emphasis on flexibility, reduced lot-size production quantities, and quick changeovers, JIT concepts have evolved to accommodate ATO and MTO manufacturing as well and in manufacturing is now refered to as lean, as discussed above. In many situations, lead suppliers are used by manufacturers to sort, segregate, and sequence materials as they flow into assembly operations. The goal is to reduce handling and facilitate continuous JIT.

Some organizations, seeing the benefits of JIT systems and recognizing the benefits of supplier integration, have gone so far as to bring their suppliers’ personnel into their production plants. The supplier personnel are empowered to use the customer’s purchase orders, have full access to production schedules, and have responsibility for scheduling arrival of materials. Originally introduced by the Bose Corporation, the term JIT II has been applied to these efforts to reduce leadtimes and cost.

REQUIREMENTS PLANNING

In complex manufacturing organizations a process known as materials requirements planning (MRP) is frequently used to aid in the interface between purchaser and supplier. MRP systems attempt to gain benefits similar to those of JIT, minimize inventory, maintain high utilization of manufacturing capacity, and coordinate delivery with procurement and manufacturing activities. Implementation of MRP systems requires a high level of technological sophistication. Software applications such as advanced planning and scheduling systems deal with the complexity of information required, such as leadtimes, quantities on-hand and on-order, and machine capacities for literally thousands of materials across multiple manufacturing locations.

DESIGN FOR LOGISTICS

The logistics interface with procurement and manufacturing, as well as with engineering and marketing, can be greatly enhanced by incorporating a concept known as design for logistics into the early phases of product development. Recall that the objectives of JIT and MRP are to minimize inventories and handling, with materials and components being ready for assembly or transformation as they are needed. How a product is designed and the design of the components and materials themselves can have a significant impact on this process. In particular, product packaging and transportation requirements need to be incorporated into the design process. For example, if inbound components are packaged in containers with a standard quantity of 50 but only 30 components are needed to meet production requirements, then waste will occur. Additionally, product and component design must have consideration of transportation and internal materials handling methods to ensure that cost-efficient, damage-free logistics performance can be achieved. Similar design considerations must be made for the finished product itself.

PERFORMANCE BASED LOGISTICS

Initiated by the U. S. Department of Defense (DoD), a new approach to dealing with suppliers called performance-based logistics has recently emerged. PBL is used to buy what the military has traditionally referred to as logistics support. The most interesting aspect of PBL is that the military buys performance outcomes instead of what has historically been individual transactions defined by product specifications.

Historically, the DoD told contractors what products to produce, when to produce them, and what activities to perform, and then paid them upon completion. In this traditional arrangement, the more the contractor produced, the more money it made. With PBL, the government simply tells the contractor what the desired outcomes are and lets the supplier determine the best way to meet those requirements. The government has found PBL to be an effective means for obtaining higher quality while simultaneously achieving lower cost. While PBL has been limited thus far to government purchasing, it is expected that business organizations may begin to adopt the practice in the future.

Table 4.2 summarizes the critical relationships between customer accommodation, manufacturing/procurement, and logistical requirements. The framework is useful in positioning how logistical requirements flow from the customer accommodation, manufacturing, and Procurement Strategies.

Table 4.2