6
Quality, Cost, Service, and Delivery

Competitive quality, cost, service, and delivery have always been fundamental requirements of suppliers. They are still the cornerstones of integrated supply chain requirements for SME participation, although some aspects of these requirements are changing as integration levels increase.

QUALITY

Customer expectations are rising, and to remain competitive, OEMs are demanding higher quality from their suppliers. Automobiles last far longer than they did 20 years ago. Electronics, although they are orders of magnitude more complex than they were a decade ago (which should result in greater opportunities for failure), are far more reliable. The demand for six-sigma1 and other quality initiatives is an emerging trend. The aerospace industry, among others, will almost certainly require improvements in supply chain quality as OEMs and prime contractors work towards the goal of producing defect-free work on the first try.

It is a fundamental premise of manufacturing that high-quality end products cannot be built cost effectively from low-quality components. Most suppliers operate in a tolerance range of two to three sigma. OEMs cannot achieve six-sigma quality with three-sigma suppliers. Suppliers

1  

 Sigma is a statistical measure of the capability of a business or manufacturing process to perform defect-free work. The common measurement index is defects per unit. A unit can be virtually anything (e.g., a component, a line of code, or a customer invoice). At the six-sigma level, the incidence of defects is nearly zero (Velocci, 1998).



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Surviving Supply Chain Integration: Strategies for Small Manufacturers 6 Quality, Cost, Service, and Delivery Competitive quality, cost, service, and delivery have always been fundamental requirements of suppliers. They are still the cornerstones of integrated supply chain requirements for SME participation, although some aspects of these requirements are changing as integration levels increase. QUALITY Customer expectations are rising, and to remain competitive, OEMs are demanding higher quality from their suppliers. Automobiles last far longer than they did 20 years ago. Electronics, although they are orders of magnitude more complex than they were a decade ago (which should result in greater opportunities for failure), are far more reliable. The demand for six-sigma1 and other quality initiatives is an emerging trend. The aerospace industry, among others, will almost certainly require improvements in supply chain quality as OEMs and prime contractors work towards the goal of producing defect-free work on the first try. It is a fundamental premise of manufacturing that high-quality end products cannot be built cost effectively from low-quality components. Most suppliers operate in a tolerance range of two to three sigma. OEMs cannot achieve six-sigma quality with three-sigma suppliers. Suppliers 1    Sigma is a statistical measure of the capability of a business or manufacturing process to perform defect-free work. The common measurement index is defects per unit. A unit can be virtually anything (e.g., a component, a line of code, or a customer invoice). At the six-sigma level, the incidence of defects is nearly zero (Velocci, 1998).

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Surviving Supply Chain Integration: Strategies for Small Manufacturers with quality deficiencies weaken the entire chain and, unless they improve, are vulnerable to being phased out. Supply chain integration requires that quality be more than a set of abstract standards. Quality must be a systemic way of doing business that is instilled in all participants in the chain. Quality has become critical in supply chains using just-in-time manufacturing with low inventory levels because they have very few buffers to protect against quality failures. SMEs should not consider quality only as a requirement for continued supply chain participation, but as a strategic capability. SMEs that adopt quality as a competitive strategy are finding that they are better able to weather cyclical swings in their businesses and that their product costs are lower. Thus, SMEs may reap benefits by exceeding the quality levels required by supply chains. Most integrated supply chains require that participants have a carefully reasoned and executed quality plan that includes concerted efforts to provide levels of quality appropriate to the market being served. Proficient problem identification and problem solving capabilities are fundamental elements of the quality plan. Although six sigma and other quality programs may be of strategic benefit, they can be expensive to implement. Thus, SMEs must carefully target and prioritize improvements in terms of their effect on the company's operational and financial goals, as well as overall business objectives. Delivering a quality product requires, at a minimum, well established and well documented manufacturing processes and controls that meet impartial standards and customer requirements. Six-sigma is one such standard, but other, less exacting standards may be adequate. SMEs are increasingly being required to identify, capture, analyze, and act on process data in conformance with SPC. Many of these requirements are based on quality standards, such as ISO-9000, QS-9000, and ISO-14000. SMEs should discuss with their supply chain partners how quality improvements can affect the overall performance of the supply chain. Together, the partners should identify and prioritize SME actions that will have the greatest impact on overall supply chain quality, cost, and cycle time and determine how these actions will translate into increased competitiveness and profitability for the SME. Properly implemented quality procedures can reduce rework, scrap, testing, and inspection and improve on-time deliveries. The result can be substantial savings and fewer schedule variances. For example, in the development and pilot production phases of new electronic products, two new quality techniques, highly-accelerated life testing (HALT) and highly-accelerated stress screening (HASS) have yielded substantial benefits. Although they are somewhat expensive, these techniques have been shown to be effective in debugging new products and identifying

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Surviving Supply Chain Integration: Strategies for Small Manufacturers weaknesses that could lead to operational failures. In many cases, these new techniques have been better able to identify problems in advance of full-scale production than previous methods, including MIL Standard tests. Used in conjunction with other quality techniques, such as SPC, HALT and HASS can provide substantial returns on investment. SPC has advanced beyond its early role as an after-the-fact application of statistics to production and inspection data, when it served primarily as a means of creating a report verifying compliance with customer requirements. Today, SPC can provide opportunities for real-time assessment of manufacturing processes and can enable response to the causes of process variations as they happen. Thus, processes can be adjusted before more nonconforming products are produced. The savings are immediate and quantifiable, not just in direct costs, but also in more timely shipments, improved product quality, and increased customer satisfaction, all of which reflect favorably on SMEs seeking long-term supply chain partnerships. Participants in a supply chain need a common language to facilitate accurate communication on issues of quality. Because such languages are not universally defined and can vary from chain to chain, quality standards, such as ISO, can be helpful. SMEs may wish to adopt such standards voluntarily. SME participation in integrated supply chains can facilitate quality improvements through the exchange of ''best practices" among partners, which can enhance understanding and provide examples of proven techniques. More advanced participants in the chain can assist those who are less advanced to adopt and use appropriate quality techniques. Recommendation. In response to the requirements of integrated supply chains for improved quality, small and medium-sized manufacturing enterprises should adopt quality as a competitive strategy and consider implementing techniques, such as six sigma, ISO certification, and statistical process controls, to comply with customer demands, improve overall business performance, and provide a common language for communication on quality issues. COST AND VALUE Global bidding on the Internet has forced suppliers in many industries to slash prices dramatically. Costs have always been critical, and in the increasingly global economy it is not unusual for SMEs to find sudden gaps between their prices and the prices of competitors from low-cost areas. The convergence of (1) improvements in high-speed communications, (2) reduced transportation costs, (3) widespread adoption of

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Surviving Supply Chain Integration: Strategies for Small Manufacturers English as the language of business, and (4) universal access to technology and effective management practices has enabled companies in areas with low labor costs to become competitive regardless of location. Thus, many SMEs must substantially reduce costs to remain competitive, and they are finding that competing on the basis of cost alone is becoming a losing game. Case Study: On-Line Commodity Buying In some industries, geographic proximity is no longer an advantage. The Internet and modern transportation capabilities have combined to enable on-line businesses with low labor costs and appropriate capabilities to compete from anywhere in the world. These capabilities have eliminated two traditional advantages of local suppliers: their physical proximity and customer ignorance of comparison prices. Large OEMs, including the Boeing Company and United Technologies Corporation (UTC), are taking advantage of these trends by turning to on-line bidding for the procurement of low-technology, pre-engineered items, such as nuts, bolts, and steel shafts, for which there are a large number of suppliers. Several companies have sprung up to conduct online auctions that pair worldwide buyers and sellers. FreeMarkets, for example, which conducts structured bidding events for industrial products, brokered more then $500 million worth of goods in 1998 and expects to handle three times as much in 1999. In a similar manner, MetalSite, conducts steel auctions; FastParts, Inc., auctions computer components; Inventory Locator Service LP auctions airplane parts; and Affiliated Networks, Inc., auctions marine supplies and boats. Although price is important, buyers may consider other factors in their final decision or may reject all bids. New suppliers are required to demonstrate appropriate capabilities prior to bidding. Unless the bids of new suppliers are substantially below those of incumbent suppliers, the jobs may go to incumbents because the buyer is more familiar with their capabilities or wants to retain a small base of the most competent suppliers. In 1999, for example, FreeMarkets structured a daylong bidding event for UTC that included numerous lots of simple machined metal parts. Prior to the bidding, FreeMarkets analyzed a list of preapproved suppliers and selected ones acceptable to the buyer. The buyer was able to specify preferences, such as the inclusion of small and disadvantaged businesses. Each supplier was sent a package in advance detailing the parts being sought, pertinent quality requirements, and delivery dates. In this example, the bidding was conducted on a secure network. Suppliers were not informed of the names of their competitors or the prices paid for similar items in the past. They could, however, see rival bids in real time.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers Bidding was described as "bare-knuckled," with low bids coming from qualified suppliers in India and elsewhere. UTC purchased $7 million worth of goods that day; savings totaled 25 percent. In one lot, an incumbent supplier was forced to reduce its price by more than 50 percent from its previous contract to retain the business. These and other auction services are opening new worldwide markets to SMEs that have competitive costs and capabilities. Once they have become qualified suppliers, only a PC and a modem are required to participate. However, Internet bidding can dramatically reduce the profit margins of SMEs that have not properly positioned themselves in terms of cost, product differentiation, or added value. Because few SMEs have sufficient margins to withstand such competition, it is essential for their survival that they prepare in advance for such eventualities. COST REDUCTION Opportunities for internal cost reductions include direct labor, materials, scrap, and rework. Other opportunities can be found through creative reductions in overhead. The Boeing Company, for example, reports saving hundreds of millions of dollars by moving its system of spare parts sales and aircraft maintenance manuals to the Internet. Techniques, such as just-in-time manufacturing, activity-based costing (ABC), vendor-managed inventory, and lean manufacturing, can be used effectively to reduce non-value-added costs. SMEs may find ABC especially helpful. Traditional accounting systems accumulate costs, such as engineering and material handling, into overhead accounts, which are then allocated to products based on the amount of direct labor each product requires. This approach is useful when there are long manufacturing runs and direct labor is a large part of total costs. However, traditional accounting systems are less useful for firms with substantial investments in information, product design, and agile manufacturing technologies. ABC assigns job costs based on the actual use of resources, enabling firms to price their products appropriately, determine in which markets they can compete effectively, make better capital allocation decisions, and calculate the incremental costs associated with potential courses of action. The implementation of ABC requires the following steps: creation of a conceptual outline of the firm's cost-flow patterns development of a day-to-day activity-based cost accounting system that collects the costs associated with each product or process construction of a computer-based cost accumulation model that simulates the activity-based cost flows

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Surviving Supply Chain Integration: Strategies for Small Manufacturers analysis of the differences between the new and old systems to validate the usefulness of the new system for gathering accurate job costs Just as OEMs use outsourcing, SMEs must consider creating and integrating their own supply chains to optimize their own cost structures. The benefits available to OEMs from integrating supply chains are also available (on a smaller scale) to SMEs. This potential for cost improvement has yet to be exploited by most SMEs. Participants may, for instance, reallocate work among themselves to improve the overall efficiency of the supply chain. Several personal computer companies have implemented "channel assembly," delegating responsibility for final assembly to distributors with specific customer knowledge and lower labor rates. This practice can be used to reduce inventory levels and the probability of obsolete inventories. Other supply chains have succeeded in redeploying, consolidating, or sharing warehouse space and inventories among participants to reduce overall costs to the chain. Participants in integrated supply chains may also be able to share (or preferably eliminate) some administrative procedures. Although cost reductions are critical, additional efforts will be required to maintain competitive advantage and meet the challenge of increasingly competent global competition. ADDED VALUE Many SMEs will have to do more than provide low-cost parts if they want to become partners with demanding customers. They may have to simultaneously maximize the value and minimize the total cost of the goods and services they provide. Competitive advantage can be achieved through value-added services, including low-cost storage, rapid response in dealing with warranty issues, ready access to spare parts, and improved logistics. Investment in enhanced product design capabilities can create other opportunities for adding value, linking an SME more closely to the OEM. SMEs should also investigate other innovative opportunities, such as building subassemblies instead of just parts. Although integrated supply chains are increasingly recognizing the benefits of added value, some customers may be unwilling to pay for it. Thus, SMEs may have to reposition themselves in new industries and find new customers that are willing to pay for value-added products and services. SMEs must carefully identify customer preferences, buying habits, and unfulfilled needs and determine whether efforts to meet them would be appropriately rewarded.

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Surviving Supply Chain Integration: Strategies for Small Manufacturers Recommendation. Small and medium-sized manufacturing enterprises should rigorously reduce costs internally and throughout their supply chains. They should also seek ways to increase the value-added to their products and services and find customers willing to reward such value. DELIVERY As levels of supply chain integration have increased and inventory levels have been reduced, reliable, on-time deliveries have become increasingly critical for success. Large inventories and production capacities were traditionally required to ensure on-time delivery. However, with advanced information systems, deregulation, agile manufacturing organizations with flexible equipment and tooling, and sophisticated logistics systems, integrated supply chains no longer need large, costly inventory buffers to respond to unexpected events and variations in demand. Manufacturing supply chains can benefit from integration with logistics providers/carriers, many of whom offer services that can reduce supply chain costs and increase overall performance. Reduced transportation costs, shorter in-transit times, and value-added services can be major factors in improving the competitive position of the supply chain. For example, by outsourcing logistics to the FDX Corporation, Vishay Intertechnology has reduced cycle times from factory to customer from as long as 12 days to 2 days (Tanzer, 1999). At a FedEx warehouse in Subic Bay, the Philippines, $1-per-hour labor picks and packs components manufactured in Taiwan, China, and the Philippines for same-day shipment to customers around the world. The international air express industry is a key enabler of many trends in today's global manufacturing, including shorter product cycles, e-commerce, just-in-time manufacturing, mass customization, reduced inventories (especially of high-technology products that can rapidly become obsolete), and global sourcing and selling. Air freight is increasingly being used, not just to deliver electronics, but also to deliver pharmaceuticals, medical equipment, automotive parts, designer clothing, perishable agricultural products, and replacement parts of all kinds. Both FedEx and DHL International have made extensive investments, not only in logistics and information systems, but also in parts centers and assembly operations. For instance, in Brussels, DHL performs upgrading, repair, and final configuration of computers for Fujitsu and Stratus, projectors for InFocus, and medical equipment for Johnson & Johnson. DHL also stores and supplies parts for EMC and Hewlett-Packard and replaces mobile phones for Philips and Nokia. Many OEMs have reduced their own inventories by foisting

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Surviving Supply Chain Integration: Strategies for Small Manufacturers inventory ownership on suppliers, leaving them with the physical and financial responsibility for maintaining inventories. Unless suppliers can perform these services at lower costs and are appropriately compensated, this practice only moves costs around and potentially weakens suppliers. Improved communications and coordinated materials and capacity planning are required for the cost-effective reduction of inventories, the elimination of bottlenecks and idle capacities, and matching of capacity to demand. To participate at this level of planning, an SME must be able to articulate capacity plans and strategies and understand their implications up and down the supply chain. Worldwide transportation costs can be low compared to costs associated with inventories and labor. For instance, suppliers in regions with low labor costs routinely ship heavy rolls of steel all over the world. Although transportation can provide added value and competitive advantage, the costs and benefits of using advanced transportation methods must be monitored carefully. Reliance on overnight deliveries can be an expensive alternative to on-time production. Some companies are finding that the transportation costs required to enable low inventories and just-in-time manufacturing exceed the savings. Thus, SMEs should attempt to implement the "right" logistics strategies to minimize overall costs. Recommendation. In response to increasing demands for rapid delivery and customized products, small and medium-sized manufacturing enterprises should consider using advanced supply chain communication systems, flexible manufacturing techniques, and modern transportation capabilities as alternatives to investing in large inventories and production capacities. SERVICE Customer expectations for timely service before, during, and after a sale continue to increase and, aided by the Internet and modern transportation methods, suppliers are responding to these demands. Web sites are being used to post all manner of nonproprietary information, including maintenance manuals, service bulletins, and responses to frequently asked questions. e-Commerce enables customers to place orders around the clock from anywhere in the world without incurring the cost of long-distance calls. Replacement parts can be delivered overnight in the United States and within a few days almost anywhere else. In February 1999, Boeing executives warned Graybar Electric, Inc., that it would soon eliminate suppliers that did not have a Web presence. In March, Motorola warned Graybar that suppliers that did not implement Web-based commerce within the next year would probably be

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Surviving Supply Chain Integration: Strategies for Small Manufacturers locked out of their business for good (Royal, 1999). Graybar introduced its extranet just in time to meet customer demands. For some businesses, however, going on line may not provide a competitive advantage. Phoning a local restaurant for carry out is still quicker and simpler than ordering carry out on the Internet. Recommendation. In response to increasing customer expectations for service and support, small and medium-sized manufacturing enterprises (SMEs) should reassess their service and support capabilities and revise them, as needed, to remain competitive and to seize new market opportunities. SMEs should develop an understanding of the opportunities provided by various Web technologies and, if appropriate, create a Web presence.