Strategic procurement management

Chapter four: Supplier Quality Management

Learning Objectives: After completing this chapter, you should be able to:

 Provide a working definition of supplier quality management

 Recognize the factors that influence supply management’s role in managing supplier
quality
 Link the principles of total quality management to supply management practices
 Understand the basic principles of Six Sigma quality
 Understand how the Malcolm Baldrige National Quality Award, ISO 9000:2000, and
ISO 14000 can help assess and improve supply quality systems and performance

4.1. Overview of Supplier Quality Management

4.1.1 What Is Supplier Quality?

Before discussing supplier quality, we should define the generic term “quality.” One renowned
quality expert, Armand Feigenbaum, defines quality as the total composite of product and
service characteristics of marketing, engineering, manufacturing, and maintenance through
which the product or service in use will meet or exceed the expectations of the customer. Joseph
Juran, perhaps the foremost expert on quality, defined quality simply as fitness for use. Philip
Crosby, another well-known total quality expert, defined quality as conformance to
requirements. In recent years, the concept of quality has changed radically from meeting
customer requirements or expectations to exceeding them.

Customer expectations are dynamic and constantly shifting. Not surprisingly, many actions taken
by a firm’s competitors can change the user’s quality expectations. The challenge with customer
expectations is the company’s ability to specifically define them and then translate those
expectations upstream throughout its supply chain.

From these quality perspectives, we can begin to define what we mean by supplier quality.
Supplier quality represents the ability to meet or exceed current and future customer (i.e., buyer

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and eventually end customer) expectations or requirements within critical performance areas on a
consistent basis. There are three major parts to this definition:

1. Ability to meet or exceed. This means that suppliers satisfy or exceed buyer
expectations or requirements each and every time. Inconsistent supplier performance,
whether in physical product quality or on-time delivery, is not a characteristic of a quality
supplier.
2. Current and future customer expectations or requirements. Suppliers must meet or
exceed today’s demanding requirements while also possessing the ability to anticipate
and satisfy future customer requirements. Suppliers must be capable of demonstrating
continuous performance improvement. A supplier that can satisfy today’s requirements
but cannot keep pace with future requirements is not a quality supplier.
3. Within critical performance areas on a consistent basis. Supplier quality does not
apply only to the physical attributes of a product. Quality suppliers satisfy a buyer’s
expectations or requirements in many areas, including product or service delivery,
product or service conformance, after-sale support, current technology and features, and
total cost management.

4.1.2 Why Be Concerned with Supplier Quality?

Lapses in managing supplier quality can tarnish/discolor the reputation of even the world’s best
brands. As the opening vignette made clear, any firm that does not effectively manage quality
throughout its supply chain is risking long-term customer dissatisfaction, reduced market share,
and increased costs, as well as negative public relations.

i. Supplier Impact on Quality

The late quality expert Philip Crosby estimated that suppliers are responsible for 50% of a firm’s
product-related quality problems. Furthermore, the average manufacturing firm spends more than
55% of its sales dollar on purchased goods and services; some manufacturers spend even more.
A firm that focuses only on its own internal quality issues will usually fail to recognize and take
appropriate action on the true underlying root causes of many quality-related problems. Poor
supplier quality can quickly undermine a firm’s total quality improvement effort.

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ii. Continuous-Improvement Requirements

Most firms plan to achieve continuous quality improvements in all aspects of their business. One
way to do this is through the effective management of supplier quality. Quality improvement
requirements are a function of a company’s industry along with how well its performance
compares to that of its competitors. Regardless of the companies, all industries experience at
least some pressure from customers to achieve continuous quality improvement.

iii. Outsourcing of Purchase Requirements

Reliance on a firm’s suppliers for raw materials, components, subassemblies, and even finished
products is steadily increasing. It is no longer an advantage in some industries to make most of
the components of a product or to provide their own services. For example, Dell Computer is
primarily an assembly operation that purchases most of its PC components (monitor, hard drive,
keyboard, micro-processors, power unit, and so on) from external suppliers. The larger the
proportion of the final product that suppliers provide, the greater the impact they will have on
overall product cost and quality.

4.2 . Factors Affecting Supply Management’s Role in Managing Supplier Quality

Supply management must assume primary organizational leadership for managing quality with
its external suppliers. A number of factors influence how much attention supply management
should commit to managing supplier quality:

 The ability of a supplier to affect a buyer’s total quality. Certain suppliers will provide
items that are highly critical to a firm’s success. Supply management must manage the
suppliers of these critical items more intently than those providing lower-value,
standardized, or easy-to-obtain items or commodities.
 The resources available to support supplier quality management and improvement.
Firms with limited resources and minimal expertise in quality management and supplier
improvement must carefully select where to budget their resources. Resource availability
will greatly influence the overall scope of the firm’s quality management efforts. These
resources typically include personnel, budget, time, and information technology.

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 The ability of a buying firm to practice world-class quality. A buying firm can help its
suppliers understand the use and application of quality concepts, tools, and techniques only
after the buying firm itself understands and correctly applies these concepts and tools
internally.
 A supplier’s willingness to work jointly to improve quality. Not all suppliers are willing
to work closely and collaboratively with a buying firm. Instead, some suppliers may prefer a
traditional purchase arrangement characterized by limited buyer involvement and a more
hand’s-off or laissez-faire management style. Others will enthusiastically embrace a long-
term, collaborative partnership.
 A supplier’s current quality levels. A supplier’s current performance level influences the
amount and type of attention required from a buying firm. World-class suppliers will require
less attention, whereas suppliers providing less-than-desirable quality will require even
greater attention.
 A buyer’s ability to collect and analyze quality-related data. Supply management must
utilize an effective monitoring system and collect the proper metrics to track how well a
supplier is meeting quality performance expectations.
4.3 .Supplier Quality Management Using a Total Quality Management Perspective

Supply management professionals at all organizational levels must fully understand and commit
themselves to the principles of total quality management if they expect to create upstream value
in the supply chain that benefits downstream customers. Applying these principles to supplier
quality management becomes critical if firms want to avoid embarrassing and costly errors.

The principles that comprise TQM make up perhaps the most robust and powerful business
philosophy ever developed. Unfortunately, merely reciting these principles is far easier than
embracing and practicing them on a day-to-day basis.

Exhibit 4.1 presents an integrated set of quality principles based on the thinking of W. Edwards
Deming, Philip Crosby, and Joseph Juran.

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Exhibit 4.1

The following sections present each principle along with a selected (but certainly not
comprehensive) set of activities that, if fully put into place, will help ensure that firms truly
practice TQM in their pursuit of superior supplier quality.

Principle 1. Defining Quality in Terms of Customers and Their Requirements

In a buyer-seller relationship, the buyer is the supplier’s direct customer in the supply chain. One
of the primary causes of nonconforming supplier quality involves inconsistent communication
and the resulting misunderstanding of specifications, expectations, and requirements between
supply chain members. Supply managers, working closely with engineers and other internal
customers, must provide clear specifications and unambiguous performance requirements
regarding the design and operation of a product, as well as any other relevant information that
will ultimately affect the quality or delivery of a purchased input.

Keki Bhote, a leading quality expert, argues that the incomplete or inaccurate development and
communication of specifications has a disproportionate effect on supplier quality.

At least half or even more of the quality problems between customer [i.e., the buyer] and
supplier are caused by poor specifications, for which the customer company is largely
responsible. Most specifications are vague or arbitrary. They are generally determined

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unilaterally by engineering, which lifts them from some boiler-plate document and embellishes
them with factors of safety to protect its hide. When bids go out to suppliers, the latter are
seldom consulted on specifications, and most suppliers are afraid to challenge specifications for
fear of losing the bid....So the first cure for poor supplier quality is to eliminate the oppression of
capricious specifications.

Developing a clear understanding of a buyer’s expectations and requirements has two

dimensions. The first is the ability of the buying company to succinctly identify, clearly define,
quantify, or specify its technical and sourcing requirements. The second dimension is the buyer’s
ability to effectively communicate these requirements, which means that both parties completely
understand the requirements.

The ability of a supplier to fulfill requirements is partly a function of the buyer’s explicitly
informing the supplier about what the buyer expects.

Deming’s 14 Points

Dr. W. Edwards Deming, widely considered to be the father of the modern quality movement,
developed a comprehensive 14-point management philosophy as the basis for his views on
achieving performance excellence in the modern organization, which is applicable to
manufacturing and service industries alike, as well as government and education.

His philosophy dictates that all 14 are complementary and necessary to successfully implement a
TQM culture. Let us see them one by one the 14 points of Deming’s

Point 1: Create a Vision and Demonstrate Commitment: The top managers and executives in
an organization are responsible for delineating its future strategic direction: mission, vision, and
values. Not only do businesses exist to make a profit for their shareholders and owners, but they
must also consider and be good stewards of the overall social and physical environment in which
they operate. This requires a long-term view and commitment of sufficient resources by the
organization: time, money, and effort.

Point 2: Learn the New Philosophy: Quality must be learned (and relearned continually) by
everyone in the organization, which then serves as the pervasive thread that is woven throughout
everything the organization does. The focal point of the Deming philosophy is that the entire

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organization should be focused on satisfying customer needs, whether the customer is internal or
external.

Point 3: Understand Inspection: Inspecting for defects has been the traditional method of
controlling quality since the Industrial Revolution. The underlying consideration has been that an
organization recognizes that defects are inevitable/ expected and therefore must be inspected out
of the process. Deming indicates that the proper way to deal with defects is to design and operate
the process such that defects never occur. This point requires that everyone, from the production
line worker all the way through the executive suite, understands the concept of process variation
and how it affects every production process. Rework and disposal efforts (also known as the
“hidden factory”) increase cost and decrease productivity.

Point 4: Stop Making Decisions Purely on the Basis of Price: The lowest purchase price of an
item may be good in the short run for the supply management department but may cause
increased costs somewhere else in the production system over the long run: scrap, defects,
warranty claims, and so on. The focus should be on reducing total system costs, not just purchase
price.

Point 5: Improve constantly and forever: The quality-oriented organization must intimately
understand its customers’ needs and wants as they evolve. If the firm remains static in its quality
performance, its competition will eventually improve and bypass it. Continuous improvement, or
kaizen, must be built into every single process in the organization. There is always room for
improvement whether the organization is a market leader or not. In addition to maintaining
continuous communication with its customers, the TQM organization must also look at reducing
process variation and seeking innovation in both product and process.

Point 6: Institute Training: It is very important that management provide its employees and
suppliers with the necessary knowledge, skills, and tools to do their jobs efficiently and
effectively. Well-developed and specifically targeted training and development can enhance
quality and worker productivity, as well as improve morale. Quality-wise, training should
address diagnostic and analytic tools, decision making, and problem-solving skills.

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Point 7: Institute Leadership: There is a significant gap between leadership and what we
traditionally think of as management or supervision. Managers and supervisors are more
involved in the day-to-day oversight and direction of workers. Leadership goes well beyond
management and supervision by guiding and coaching employees to improve their skills and
abilities with an eye to becoming more productive and delivering higher quality.

Point 8: Drive Out Fear: In the workplace, fear is obvious in a variety of ways. Employees may
be fearful of making a mistake and being reprimanded for it. Most people have a fear of failure,
so they don’t want to try anything new or different. They are also creatures of habit and don’t
like to make changes to their routines. Managers may be fearful of letting go of their traditional
control-based power. Departments may not want to collaborate with other departments. Fear-free
organizations are rare; it takes a long time to develop a culture that promotes risk taking and
change. Eliminating fear encourages employee and supplier trial-and-error experimentation,
which can lead to greater productivity and higher-quality processes.

Point 9: Optimize the Efforts of Teams: Teams are becoming more and more a part of day-to-day
organizational life. When implemented and operated correctly, teams can be useful in
eliminating cross functional barriers by taking people from different departments and having
them work together on a common task or project. Dysfunctional teams can have the opposite
effect; they may actually create additional barriers and reinforce existing ones..

Point 10: Eliminate Exhortations/urge : Slogans, signs, and posters are meant to change
people’s behavior. However, they are seldom effective because they assume that most, if not all,
quality problems are due to human behavior. “Do it right the first time” and “Zero defects” are
catchy motivational sayings, but they don’t help workers know what to do or how to do it better.
Most quality deficiencies are based on the innate design and operation of the systems that create
goods and services, not on worker motivation. Designed-in systemic variation is a managerial
concern, not a labor issue.

Point 11: Eliminate Numerical Quotas and Measurement by Objective: Workers may avoid
the system to make their production and output goals. These goals do not provide the necessary
incentives for workers or suppliers to improve quality. In addition, many numerically based
goals and objectives are often arbitrary and beyond the control of the worker.

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Goals should be developed in conjunction with the skills and means to achieve them. Lastly,
goals are often short-term in their focus, whereas quality improvement, by design, must take a
longer-term perspective.

Point 12: Remove Barriers to Pride in Workmanship: Too often, workers are treated as a
commodity simply interchangeable with each other with no uniqueness or consideration. When
given the proper climate in which to work, most people want to do a good job. Unfortunately, the
evaluation and reward systems in many companies do not stimulate the right kind of culture to
allow the workers to take pride in their efforts. For example, we assign people to work in teams
but appraise and pay them as individuals.

Point 13: Encourage Education and Self-Improvement: Organizations that invest in

education and self-improvement initiatives often find that their employees are more highly
motivated and bring additional benefits to both the organization and the individual in terms of
productivity and quality.

Point 14: Take Action: Top management must initiate and invest in those activities that result in
improved quality, productivity, and quality of work life. Appropriate support may include time
and monetary investments in process design, education, and training; new evaluation, reward,
and compensation systems; and a changed organization culture. The key for success is to
maintain the momentum over the long term.

Principle 2. Pursuing Quality at the Source

Quality at the source occurs whenever value is added to a product or service as it moves through
the supply chain. The value-adding points or activities in a process represent potential defect
originations that require careful management and attention to detail. Perhaps more than any other
group, supply management has the ability to affect quality at the source because of its ability to
determine and manage the external source for many supply chain inputs. Although the cost of
making international supplier site visits is quite substantial, the cost of making a poor supplier
selection decision can be significantly higher.

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Principle 3. Stressing Objective Rather Than Subjective Measurement and Analysis

However, many organizations, large and small, have not sufficiently developed objective or
rigorous supplier measurement systems, during either supplier selection or post selection
measurement and evaluation. Even today, there are wide differences in the quality and capability
of supply chain performance measurement.

Why is measurement so important to supplier quality? Performance data allow supply

managers to develop a preferred supplier list for awarding future business, identify continuous
performance improvement opportunities, provide feedback that supports corrective action or
future development, and track the results from improvement initiatives. Effective supplier
performance measurement systems are also an excellent way to communicate a buyer’s quality
and performance expectations.

Principle 4. Emphasizing Prevention Rather Than Detection of Defects

Prevention is the avoidance of nonconformance in products and services by not allowing errors
or defects to occur in the first place. Although preventive activities take many forms, each
stresses the need for consistency and reduced variation in the process. A thorough emphasis on
defect prevention reduces reliance on appraisal, inspection, and other detection activities.

A supplier certification program, another prime way to prevent defects, is the formal process of
verifying, usually through an intensive cross-functional site audit, that a supplier’s processes and
methods produce consistent and conforming quality. Certification demands that suppliers
demonstrate process capability, use of statistical process control, and conformance to other
accepted TQM practices. The objective of supplier certification is to ensure that nonconforming
items do not leave a supplier’s facility. Supplier certification usually applies only to a specific
part, process, or site rather than an entire company or product.

Principle 5. Focusing on Process Rather Than Output:

Perhaps the most dramatic difference between traditional methods and total quality management
thinking involves a shift from a product orientation to a process orientation. Total quality
management puts the focus on the processes that create output rather than the output itself.

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Because quality processes create quality output, a logical focus is on the process of creation
rather than the result. It is far less expensive and more efficient in the long run to avoid the defect
than it is to inspect for it once it is created. Focusing on process means minimizing over-reliance
on samples unless there is a timely and comprehensive method of validating sample
conformance

Principle 6. Striving for Zero Defects

Philip Crosby: argued that the only performance standard that defines total quality is zero
defects, which he defined as conformance to requirements. Genichi Taguchi further argued that
any deviation from a target value carries with it some level of opportunity loss due to scrap,
rework, and customer dissatisfaction. Each method recognizes the importance of eliminating
product and process variability.

As mentioned, a well-designed and rigorous/precise supplier evaluation and selection process is

one way to identify and do business only with suppliers that strive for zero defects. Another
major approach, and one of the fastest and most effective ways to improve supply chain quality,
is supply base rationalization. Supply base rationalization or optimization, is the process of
determining the right mix and number of suppliers to maintain for a given purchase category or
commodity. Optimization is a continuous activity.

Principle 7. Establishing Continuous Improvement as a Way of Life

The pressure for continuous improvement is severe and persistent. Fortunately, there are a
variety of ways to make supplier improvement part of the prevailing organizational culture. One
approach involves using a supplier measurement system to shift performance targets. The
upward shifting of performance targets takes effect once a supplier demonstrates that it can
achieve current performance expectations and is willing to improve.

Value analysis/value engineering (VA/VE), is the organized and systematic study of every
element of cost in a part, material, process, or service to ensure that it fulfills its design function
at the lowest possible total cost. Suppliers that are an active part of the VA/VE process actively
review customer specifications, submit ideas on materials and process improvements, and work

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with the buyer to identify and remove nonconformance costs. This approach represents one of
the better ways of institutionalizing continuous improvement in the supply base.

Exhibit 4.2

If a firm has streamlined its supply base to a manageable level, and if remaining suppliers
receive longer-term, higher-volume contracts, then it becomes clear that switching suppliers will
be increasingly difficult and costly.

Principle 8. Making Quality Everyone’s Responsibility

This principle requires that buyers and suppliers assume ownership for total quality across the
supply chain.

Physically co-locating with suppliers is a powerful way to make quality everyone’s responsibility
and improve buyer-supplier communication. There are a number of ways to create physical
coexistence with suppliers. For example, Volkswagen (VW) built a truck assembly plant in
Brazil with seven suppliers located within the assembly facility. These suppliers produce
components and subassemblies in the VW facility using their own equipment, with their own
labor assembling those items into finished trucks and buses.

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4.4 Using ISO Standards and MBNQA Criteria to Assess Supplier Quality Systems

Three widely accepted quality management frameworks are ISO 9000:2000, ISO 14000, and the
Malcolm Baldrige National Quality Award. it is important to have a basic understanding of all
three programs.

1. ISO 9000:2000 Registration

A quality management process gaining widespread acceptance throughout the world is ISO
9000:2000. Developed in 1987 to standardize quality requirements in the European Common
Market. Meeting these standards, not an easy task, is often portrayed as a minimum requirement
for competing globally.

In December 2000, the International Organization for Standardization released its most recent
version of ISO 9000 standards. The revised ISO 9000 document, now called ISO 9000:2000,
minimally resembles/looks like the previous standards, which were last updated in 1994.
Although companies use ISO 9000:2000 standards for guidance and clarification of vocabulary
terms, the actual registration that a company earns is ISO 9001:2000. The language in the new
standard is less complex; the text follows an outline format rather than paragraphs; and ISO 9002
and ISO 9003 registrations no longer exist. ISO 9004:2000 remains a document that offers
guidelines for performance improvements above the basic requirements of ISO 9001:2000. To
remain current, registration must be accomplished every three years.

Each supplier that earns ISO 9000:2000 registrations is included on a master list of companies
satisfying the ISO standard. Inclusion on this list may lead to interest from other potential
customers wanting to do business with ISO-registered companies. Suppliers that earn ISO
registration will also be in a better position to satisfy corresponding U.S. ANSI standards as well.

Perhaps most importantly, suppliers that earn ISO 9001:2000 registration demonstrate higher
quality than those suppliers that do not. The buyer may have higher confidence in the supplier’s
ability to meet or exceed quality requirements.

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2. ISO 14000 Standards

The ISO 14000 standards, established in 1993, are designed to promote environmental protection
and pollution prevention. They are an excellent way to analyze and document an organization’s
ability to proactively manage its environmental impact. The standards cover a broad perspective
of environmental disciplines, ranging from the organization’s environmental management system
(EMS) to addressing auditing, labeling, and product standards. Benefits achieved through ISO
14000 certification include fewer pollutants generated, reduced liability, improved regulatory
compliance, better public and community relations, and lowered insurance premiums.

Another primary result of pursuing ISO 14000 certification is enhanced profitability through
improved resource management and reduced waste generation. ISO 14000 is a set of voluntary
standards and consists of two general classifications: process-oriented and product-oriented
standards. It does not build upon existing governmental regulations, establish emissions and
pollution levels, or detail any specific testing methods. Many buying firms now require their
suppliers to become ISO 14000 certified.

3. The Malcolm Baldrige National Quality Award (MBNQA)

In 1987, President Ronald Reagan signed the Malcolm Baldrige National Quality Improvement
Act, which established a national award to recognize quality improvement among
manufacturing, service, and small businesses in the United States. A group of recognized quality
professionals, including Dr. Joseph M. Juran, developed the initial award criteria. Since then,
the criteria have become a de facto definition of TQM, and the wide dissemination of the
application guidelines has exposed many managers to the Baldrige definition of TQM.

Some managers believe the MBNQA provides a more comprehensive set of quality related
criteria for North American based firms than does ISO 9000:2000.

The MBNQA is composed of seven weighted categories, together worth a total of 1,000 points:
leadership, strategic planning, customer and market focus, information and analysis, human
resource focus, process management, and business results. These categories are outlined in
Exhibit 4.3. Higher- performing companies, with scores of 700 or more, demonstrate balanced
and out-standing performance across each of these categories.

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Continuous improvement is the most basic and important tenet of the MBNQA criteria. In each
of the major categories, companies must demonstrate how they plan to improve in that area. The
MBNQA criteria are both process and results oriented, addressing operations, processes,
strategies, and requirements.

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