ISQA 510Outsourcing, Quality & Metrics

Lecture 2

Agenda-Thoughts on Port of GZ? Questions?-Outsourcing & Scott’s case-Intro to Quality & Metrics-Incentives & metrics-Tour Nike Shoe-Town

Definitions Off-shoring: Off-shoring relates to the commissioning of

work and ownership to another country. Maintain ownership.

Partial outsourcing: only a part of an integrated function is outsourced. The coordination of the function, activities, and decision rights still lie with the client (the buyer).

Turnkey outsourcing: applies when the responsibility for the execution of the entire function (or activities) lies with the external provider. This includes not only the execution of the activities, but also the coordination of these activities. May also include decision rights and design.

Rationales for outsourcing

Strategic reasons for outsourcing

1. Improve company focus2. Gain access to world class capabilities & Markets3. Get access to resources that are not available

internally4. Accelerate reengineering benefits5. Improve customer satisfaction6. Increase flexibility7. Sharing risks

Tactical reasons for outsourcing

1. Reduce control costs and operating costs2. Free up internal resources3. Receive an important cash infusion (next slide)4. Improve performance5. Ability to manage functions that are out of control

All these reasons underlie one overall objective: to improve the overall performance of the outsourcing firm

Critical success factors of outsourcing

Understanding company goals and objectivesInclusion of outsourcing in the strategic vision and planSelecting the right supplierA properly structured contractOpen communication with the individual groups involvedOngoing management of the relationship (not embeddedness)Senior executive support and involvementCareful attention to personnel issues & resourcesConstant reflection on core competencies and IP versus

outsourcing, including decision and alienable rights

www.theoutsourcinginstitute.com

Scotts Miracle Gro Case

In-House, Outsource, or Off-Shore?

Scott’s Case

My Numbers: - Temecula: $61,234,227 - Outsource: $55,003,263 - Offshore: $60,003,275

Scott’s CaseOffshore is burdened: by $8M up front investment

minus the savings in EMS GM%Outsourcing is burdened:

Risk for currency exchange of 5% annually Start-up costs of $1.5M Lease buy-back $1.5M Freight costs of $7M

Temecula is burdened:High labor, electricity, lease of building, etc.

What is beyond the numbers?????

Scott’s caseVariables:- Ramp- Inventory- SKU proliferation- Closing time of Temecula- Seasonality- Made in USA- China market?- What did they do? Keep Temecula (Read

their 10K)

Sourcing and quality controlDefinition of terms: quality and quality control

IBM defines quality as the degree in which customer requirements are met. We speak of a quality product or quality service when both supplier and customer agree on requirements and these requirements are met.

Quality control: making sure that the requirements are met and being able to demonstrate this repeatedly.

Sourcing and quality controlThe cost of quality- Prevention costs - the costs of preventing quality

errors

- Assessment costs - the costs related to the timely recognition of quality errors

- Correction costs - the cost that result from (rectifying) mistakes

Internal error costs: result from mistakes noticed in time

External error costs: are result of flaws identified by the customer

Supplier quality assurance (SQA)Internal quality assurance regarding suppliers

-Preparing the purchase order specification-Preliminary qualification of (potential) suppliers-Sample inspection procedure-Delivery of first and subsequent preproduction

series-Manufacture of the first production series-Quality agreement and certification-Periodic verification

Implementing supplier quality assuranceClear task descriptions and performance measures

Maximum rejection percentage per article code or per supplierThe average term in which rejection reports must be dealt with (per

buyer)Number of quality agreements closed with suppliersNumber of certified suppliers

Clarity concerning supplier selection Who in the company is competent to enter into relationships with

suppliers?Who is responsible for ultimate selection of suppliers?Communication to suppliers from one central point (supplier account

management)Quality first

Take responsibility for quality and being accountableRejection percentages and number of quality agreements becoming part

of the buyer’s annual assessmentTo measure is to know

Essential that suppliers receive feedback on their performance (e.g. vendor rating system)

Sourcing performance measurement

Alternative viewpoints

Hierarchical position sourcing

Performance indicators

Operational and administrative activity

Low in the organization Number of orders, order backlog, authorization, …

Commercial activity Reporting to management

Savings, price variances, number of RFQ’s, number of single/sole sources,…

Part of integrated Logistics

Sourcing is integrated with other materials related functions

Quality, purchasing lead time, delivery reliability, …

Strategic business area Sourcing is represented in top-management

Early involvement in purchasing process, ‘Should cost’ analysis, make-or-buy, number of tenders and e-auctions, changes in its supply base, …

Why measure any performance?

What benefits can be derived from a systematic performance

evaluation?

Better decision making Better communication with other departments Better visibility of performance Better motivation of cross departments

Collectively, these comments indicate that sourcing performance evaluation should result in higher added

value of all functions

Collectively, these comments indicate that sourcing performance evaluation should result in higher added

value of all functions

Sourcing Product/Quality dimension

This dimension refers to sourcing responsibility to secure that products and services are delivered by suppliers in conformance with specifications and requirements. Sourcing involvement in new product

development Examples of measures: number of man hours spent by operations on innovation projects, number of technical change orders and initial sampling reject rate

Sourcing contribution to Total Quality Control Examples of measures: reject rates on incoming goods, number of approved / certified suppliers, contract parameters

What should be measured?

For ex: Sourcing Logistics dimension

This dimension refers to sourcing role to contribute to an efficient incoming flow of purchased materials and services. This includes the following major activities: Strategy to reduce inventory and period expenses Control of timely delivery by suppliers Control of quantities delivered, on-time, proper

specifications Cost reductions, less so avoidance Continuity of supply, factory downtime

Supplier evaluation and rating are techniques used to monitor and improve supplier performance in terms of quality and

delivery reliability.

What should be measured?

Metrics – Right ones?

Quality SystemsTQM / Lean / ISO

Above the Shop Floor – Value stream mapping can be applied everywhere

“What is measured improves”Overemphasis on a few can be riskyToo many? (Attention span?)

IncentivesOn time shipments metric:

Hoard inventoryReduce inventory metric:

Buy based on historyImprove quality metric:

Test & quality check growthImprove forecasting metric:

Pay sales people based on on-time shipments

Some Performance Measurements

Quality – PPM, FPY, IC, FMEACost to Target – OPEX & ProcurementOn Time DeliveryFlexibility – cycle time improvementProductivity Improvement – output / hourSupplier’s Management ProgramProgress Toward Certification ISO 14,000Technology roadmap (products & IT infrastructure)

Measuring Performance – Cont.

Forecast AccuracyFormal Sharing of Information – Markets & customersMinimize expediting and Schedule ChangesFocus on Total Cost - Not PriceOn Time A/P & A/RProgram to Manage Supplier Relationships

– NPI -> ObsolescenceContractual Protection and LiabilitiesPeriod Expenses - Variances

The hp way: TQRDCEB:

Technology

Quality Responsiveness Delivery Cost Environment Business

Kropf, W. C. & Russell, P. L. (N.D.). Hewlett-Packard's Packaging Supplier Evaluation Process and Criteria. Retrieved May 24, 2009 from: http://www.hp.com/packaging/Procurement/paper.doc

Incentives- Awareness of problems- Sharing information is key- Conducting audits- Changing periodically- Developing trust- Not too many / not too few- Openly discuss bad performance

Manfield CoatingsWhat do we know? Add to this list….- Short lead-times- Strong niche player- Uses quality as comparative

advantage- Cost containment and speed for

customers- Satisfy customers, not surpass

expectations

Manfield Coatings – 5 Questions

1. How does quality help Manfield?2. What made the Q-S successful?3. What metrics would have made Manfield

more successful?4. Are they moving in the right direction?5. Seven deadly sins & aligning incentives;

how does this relate?

7 Deadly Sins of Performance Measurements

1. Vanity – cognitive dissonance (IBM PC)2. Provincialism – only measure within an org group3. Narcissism – measure from your point of view, not the

customer4. Laziness – We know best5. Pettiness – only a small component of what matters6. Inanity – Measure what you want to change7. Frivolity – Not taking metrics seriously

Scientific GlassHelpful Hints:1. What are the Options & savings with

each?1. Fill rate lowered & trunk stock

eliminated2. One Warehouse vs. logistics costs3. Outsource 4. Combination of the above?5. What about Cash????6. Look at incentives

Nike (A Light Industry)- Nike has never produced a shoe in Oregon. Beginning in the 1960s, Nike contracted with an Asian firm to produce its shoes.

Skopje, Macedonia-The swoosh is ubiquitous, but where is the shoe produced? Nike has a global network of international manufacturing and sales.