Procurement and Manufacturing Final

Chapter 4Chapter 4

Procurement and ManufacturingProcurement and Manufacturing

Copyright 2006 John Wiley & Sons, Inc. 3-2

Lecture OutlineLecture Outline

Meaning of QualityMeaning of Quality Total Quality ManagementTotal Quality Management Quality Improvement and Role of Quality Improvement and Role of

EmployeesEmployees Strategic Implications of TQMStrategic Implications of TQM Six SigmaSix Sigma


Lecture Outline (cont.)Lecture Outline (cont.)

TQM in Service CompaniesTQM in Service Companies Cost of QualityCost of Quality Quality Management and ProductivityQuality Management and Productivity Identifying Quality Problems and CausesIdentifying Quality Problems and Causes Quality Awards and Setting Quality Quality Awards and Setting Quality

StandardsStandards ISO 9000ISO 9000

The Quality ImperativeThe Quality Imperative

Dimensions of Product QualityDimensions of Product Quality TQMTQM Quality StandardsQuality Standards


Meaning of QualityMeaning of Quality

Webster’s DictionaryWebster’s Dictionary degree of excellence of a thingdegree of excellence of a thing

American Society for QualityAmerican Society for Quality totality of features and characteristics totality of features and characteristics

that satisfy needsthat satisfy needs Consumer’s and Producer’s Consumer’s and Producer’s

PerspectivePerspective


Meaning of Quality:Meaning of Quality:Consumer’s PerspectiveConsumer’s Perspective

Fitness for useFitness for use how well product or how well product or

service does what it is service does what it is supposed tosupposed to

Quality of designQuality of design designing quality designing quality

characteristics into a characteristics into a product or serviceproduct or service

A Mercedes and a Ford are A Mercedes and a Ford are equally “fit for use,” but with equally “fit for use,” but with different design dimensionsdifferent design dimensions


Dimensions of Quality:Dimensions of Quality:Manufactured ProductsManufactured Products

Performance Performance basic operating characteristics of a product; how basic operating characteristics of a product; how

well a car is handled or its gas mileagewell a car is handled or its gas mileage Features Features

““extra” items added to basic features, such as a extra” items added to basic features, such as a stereo CD or a leather interior in a carstereo CD or a leather interior in a car

ReliabilityReliability probability that a product will operate properly probability that a product will operate properly

within an expected time frame; that is, a TV will within an expected time frame; that is, a TV will work without repair for about seven yearswork without repair for about seven years


ConformanceConformance degree to which a product meets pre–established degree to which a product meets pre–established

standardsstandards DurabilityDurability

how long product lasts before replacementhow long product lasts before replacement ServiceabilityServiceability

ease of getting repairs, speed of repairs, courtesy ease of getting repairs, speed of repairs, courtesy and competence of repair personand competence of repair person

Dimensions of Quality:Dimensions of Quality:Manufactured Products (cont.)Manufactured Products (cont.)


AestheticsAesthetics how a product looks, feels, sounds, how a product looks, feels, sounds,

smells, or tastessmells, or tastes Safety Safety

assurance that customer will not suffer assurance that customer will not suffer injury or harm from a product; an injury or harm from a product; an especially important consideration for especially important consideration for automobilesautomobiles

PerceptionsPerceptions subjective perceptions based on brand subjective perceptions based on brand

name, advertising, and the likename, advertising, and the like

Dimensions of Quality:Dimensions of Quality:Manufactured Products (cont.)Manufactured Products (cont.)


Dimensions of Quality:Dimensions of Quality:ServiceService

Time and TimelinessTime and Timeliness How long must a customer wait for service, How long must a customer wait for service,

and is it completed on time?and is it completed on time? Is an overnight package delivered overnight?Is an overnight package delivered overnight?

Completeness:Completeness: Is everything customer asked for provided?Is everything customer asked for provided? Is a mail order from a catalogue company Is a mail order from a catalogue company

complete when delivered?complete when delivered?


Dimensions of Quality:Dimensions of Quality:Service (cont.)Service (cont.)

Courtesy:Courtesy: How are customers treated by employees?How are customers treated by employees? Are catalogue phone operators nice and are Are catalogue phone operators nice and are

their voices pleasant?their voices pleasant? ConsistencyConsistency

Is the same level of service provided to each Is the same level of service provided to each customer each time?customer each time?

Is your newspaper delivered on time every Is your newspaper delivered on time every morning?morning?


Accessibility and convenienceAccessibility and convenience How easy is it to obtain service?How easy is it to obtain service? Does a service representative answer you calls quickly?Does a service representative answer you calls quickly?

AccuracyAccuracy Is the service performed right every time?Is the service performed right every time? Is your bank or credit card statement correct every month?Is your bank or credit card statement correct every month?

ResponsivenessResponsiveness How well does the company react to unusual situations?How well does the company react to unusual situations? How well is a telephone operator able to respond to a How well is a telephone operator able to respond to a

customer’s questions?customer’s questions?

Dimensions of Quality:Dimensions of Quality:Service (cont.)Service (cont.)

Garvin’s Eight Dimensions of Product Quality is an industry Garvin’s Eight Dimensions of Product Quality is an industry standard when a company wants to sell a product that has standard when a company wants to sell a product that has excellence in value. The Honda Civic is a good example of excellence in value. The Honda Civic is a good example of Garvin’s standard. The standards and Honda’s claims per its own Garvin’s standard. The standards and Honda’s claims per its own website are as follows:website are as follows:

1. Performance – It’s 2.0 liter aluminum alloy engine kicks out 197 1. Performance – It’s 2.0 liter aluminum alloy engine kicks out 197 horses, but still offers an estimated 29 mpg highway.horses, but still offers an estimated 29 mpg highway.

2. Features - Slip inside, and you’re immediately in performance 2. Features - Slip inside, and you’re immediately in performance mode. Grab the 6 speed shifter, step on the drilled aluminum mode. Grab the 6 speed shifter, step on the drilled aluminum pedals and take off. Find it fast; the available Honda Satellite-pedals and take off. Find it fast; the available Honda Satellite-Linked Navigation System features Bluetooth Handsfreelink, so Linked Navigation System features Bluetooth Handsfreelink, so you can call ahead without taking your hands off the wheel.you can call ahead without taking your hands off the wheel.

3. Reliability – The Civic features safety technologies designed 3. Reliability – The Civic features safety technologies designed not only to help you stay out of trouble, but also to help protect not only to help you stay out of trouble, but also to help protect you in the unlikely event of an accident. The Advanced you in the unlikely event of an accident. The Advanced Compatibility Engineering body structure is a Honda exclusive Compatibility Engineering body structure is a Honda exclusive body design that enhances occupant protection and crash body design that enhances occupant protection and crash compatibility in frontal collisions.compatibility in frontal collisions.

4. Conformance – Even while boasting of its unique chrome 4. Conformance – Even while boasting of its unique chrome exhaust finisher and exclusive SI badging that tell the world this is exhaust finisher and exclusive SI badging that tell the world this is no ordinary sedan; the Civic looks like every other sedan in its no ordinary sedan; the Civic looks like every other sedan in its price range. This car offers the comfort and reassurance to price range. This car offers the comfort and reassurance to someone who is looking for this “middle of the road” type car, that someone who is looking for this “middle of the road” type car, that it is neither flashy not plain.it is neither flashy not plain.


5 Durability – The Advance Compatibility Engineering body 5 Durability – The Advance Compatibility Engineering body structure is a Honda exclusive body design that enhances structure is a Honda exclusive body design that enhances occupant protection and crash compatibility in frontal collisions. occupant protection and crash compatibility in frontal collisions.

6 Serviceability -The Honda Warranty includes:6 Serviceability -The Honda Warranty includes: · · Bumper-to-Bumper Limited Warranty (years/miles) = Bumper-to-Bumper Limited Warranty (years/miles) =

3/36,0003/36,000 ·· Powertrain Limited Warranty (years/miles) = 5/60,000 Powertrain Limited Warranty (years/miles) = 5/60,000 ·· Corrosion Limited Warranty (years/miles) = 5/unlimited Corrosion Limited Warranty (years/miles) = 5/unlimited · · Accessory Limited Warranty—All Honda accessories are Accessory Limited Warranty—All Honda accessories are

covered up to 3 years or 36,000 miles, depending on time of covered up to 3 years or 36,000 miles, depending on time of installationinstallation


7. Aesthetics – One glance at the racing-inspired Civic Si Sedan 7. Aesthetics – One glance at the racing-inspired Civic Si Sedan and you can tell that this car was born to perform. Its aerodynamic and you can tell that this car was born to perform. Its aerodynamic shape is accentuated by 17 inch alloy wheels and integrated fog shape is accentuated by 17 inch alloy wheels and integrated fog lights. Its racy rear wing spoiler enhances the rear deck appeal and lights. Its racy rear wing spoiler enhances the rear deck appeal and provides enhanced performance while a bold front grille flaunts the provides enhanced performance while a bold front grille flaunts the Si badge.Si badge.

8. Perceived Quality – The Civic Si Sedan is a 197-hp beast that’s 8. Perceived Quality – The Civic Si Sedan is a 197-hp beast that’s designed to attack the road. The Si’s engine boasts an impressive designed to attack the road. The Si’s engine boasts an impressive torque curve from idle all the way to its race car-like 8000-rpm torque curve from idle all the way to its race car-like 8000-rpm redline. A helical limited-slipredline. A helical limited-slip

differential channels power to the pavement. And vehicle stability differential channels power to the pavement. And vehicle stability assist with traction control enhances vehicle stability when cornering assist with traction control enhances vehicle stability when cornering in a vehicle that you can trustin a vehicle that you can trust



Meaning of Quality:Meaning of Quality:Producer’s PerspectiveProducer’s Perspective

Quality of ConformanceQuality of Conformance Making sure a product or service is Making sure a product or service is

produced according to designproduced according to design if new tires do not conform to specifications, they if new tires do not conform to specifications, they

wobblewobble if a hotel room is not clean when a guest checks if a hotel room is not clean when a guest checks

in, the hotel is not functioning according to in, the hotel is not functioning according to specifications of its designspecifications of its design


Meaning of Quality:Meaning of Quality:A Final PerspectiveA Final Perspective

Consumer’s and producer’s Consumer’s and producer’s perspectives depend on each otherperspectives depend on each other

Consumer’s perspective: PRICE Consumer’s perspective: PRICE Producer’s perspective: COSTProducer’s perspective: COST Consumer’s view must dominateConsumer’s view must dominate


Fitness forConsumer Use

Fitness forConsumer Use

Producer’s PerspectiveProducer’s Perspective Consumer’s PerspectiveConsumer’s Perspective

Quality of ConformanceQuality of Conformance

• Conformance to specifications

• Cost

Quality of DesignQuality of Design

• Quality characteristics• Price

MarketingMarketingProductionProduction

Meaning of Quality Meaning of Quality

Meaning of QualityMeaning of Quality

Total Quality Management

Why TQM?Why TQM?

Ford Motor Company had operating losses Ford Motor Company had operating losses of $3.3 billion between 1980 and 1982. of $3.3 billion between 1980 and 1982.

Xerox market share dropped from 93% in Xerox market share dropped from 93% in 1971 to 40% in 1981.1971 to 40% in 1981.

Attention to quality was seen as a way to Attention to quality was seen as a way to combat the competition. combat the competition.


TQM: A “Buzzword” Losing TQM: A “Buzzword” Losing PopularityPopularity

For many companies, the term TQM is associated For many companies, the term TQM is associated with corporate programs (mid 1980s ~ early 1990s) with corporate programs (mid 1980s ~ early 1990s) aimed at implementing employee teams and aimed at implementing employee teams and statistical process control.statistical process control.

Unfortunately, many companies were dissatisfied Unfortunately, many companies were dissatisfied with the perceived results of these programs, with the perceived results of these programs, concluding TQM does not work.concluding TQM does not work.

Question: Why were they dissatisfied?Question: Why were they dissatisfied? Were they justified? Were they justified?


TQMTQM

Total - made up of the wholeTotal - made up of the whole Quality - degree of excellence a product or Quality - degree of excellence a product or

service providesservice provides Management - act, art or manner of planning, Management - act, art or manner of planning,

controlling, directing,….controlling, directing,….

Therefore, TQM is the art of managing the Therefore, TQM is the art of managing the whole to achieve excellencewhole to achieve excellence..


What does TQM mean?What does TQM mean?

Total Quality Management means that the Total Quality Management means that the organization's culture is defined by and organization's culture is defined by and supports the constant attainment of supports the constant attainment of customer satisfaction through an integrated customer satisfaction through an integrated system of tools, techniques, and training. system of tools, techniques, and training. This involves the continuous improvement This involves the continuous improvement of organizational processes, resulting in of organizational processes, resulting in high quality products and services.high quality products and services.


What’s the goal of TQM?What’s the goal of TQM?What’s the goal of TQM?What’s the goal of TQM?

““Do the right things Do the right things right right the first time, every time.”the first time, every time.”


Another way to put itAnother way to put itAnother way to put itAnother way to put it

At it’s simplest, TQM is all managers At it’s simplest, TQM is all managers leading and facilitating all contributors in leading and facilitating all contributors in everyone’s two main objectives:everyone’s two main objectives:

(1) (1) total client satisfactiontotal client satisfaction through through quality products and services; andquality products and services; and

(2) (2) continuous improvementscontinuous improvements to to processes, systems, people, suppliers, processes, systems, people, suppliers, partners, products, and services.partners, products, and services.


Productivity and TQMProductivity and TQM

Traditional view:Traditional view: Quality cannot be improved without Quality cannot be improved without

significant losses in productivity.significant losses in productivity.

TQM view:TQM view: Improved quality leads to improved Improved quality leads to improved

productivity.productivity.


Basic Tenets of TQMBasic Tenets of TQM

1. The customer makes the ultimate determination of 1. The customer makes the ultimate determination of quality.quality.

2. Top management must provide leadership and 2. Top management must provide leadership and support for all quality initiatives.support for all quality initiatives.

3. Preventing variability is the key to producing high 3. Preventing variability is the key to producing high quality.quality.

4. Quality goals are a moving target, thereby requiring 4. Quality goals are a moving target, thereby requiring a commitment toward continuous improvement.a commitment toward continuous improvement.

5. Improving quality requires the establishment of 5. Improving quality requires the establishment of effective metrics. We must speak with data and facts effective metrics. We must speak with data and facts not just opinions.not just opinions.


The three aspects of TQMThe three aspects of TQM

Counting

Customers

Culture

Counting

Customers

Culture

Tools, techniques, and training in their use for analyzing, understanding, and

solving quality problems

Quality for the customer as a driving force and central concern.

Shared values and beliefs, expressed by leaders, that define and support

quality.


Total Quality ManagementTotal Quality Managementand Continuous Improvementand Continuous Improvement

TQM is the management process used to make TQM is the management process used to make continuous improvements to all functions.continuous improvements to all functions.

TQM represents an ongoing, continuous TQM represents an ongoing, continuous commitment to improvement.commitment to improvement.

The foundation of total quality is a management The foundation of total quality is a management philosophy that supports meeting customer philosophy that supports meeting customer requirements through continuous improvement.requirements through continuous improvement.


Continuous Improvement versus Continuous Improvement versus Traditional ApproachTraditional Approach

Market-share focusMarket-share focus IndividualsIndividuals Focus on ‘who” and “why”Focus on ‘who” and “why” Short-term focusShort-term focus Status quo focusStatus quo focus Product focusProduct focus InnovationInnovation Fire fightingFire fighting

Customer focusCustomer focus Cross-functional teamsCross-functional teams Focus on “what” and “how”Focus on “what” and “how” Long-term focusLong-term focus Continuous improvementContinuous improvement Process improvement Process improvement

focusfocus Incremental improvementsIncremental improvements Problem solvingProblem solving

Traditional Approach Continuous ImprovementContinuous ImprovementContinuous ImprovementContinuous Improvement


Quality ThroughoutQuality Throughout

““A Customer’s impression of quality begins with the A Customer’s impression of quality begins with the initial contact with the company and continues initial contact with the company and continues through the life of the product.”through the life of the product.” Customers look to the total package - sales, service during Customers look to the total package - sales, service during

the sale, packaging, deliver, and service after the sale.the sale, packaging, deliver, and service after the sale. Quality extends to how the receptionist answers the Quality extends to how the receptionist answers the

phone, how managers treat subordinates, how courteous phone, how managers treat subordinates, how courteous sales and repair people are, and how the product is sales and repair people are, and how the product is serviced after the sale.serviced after the sale.

““All departments of the company must strive to All departments of the company must strive to improve the quality of their operations.”improve the quality of their operations.”


Value-based ApproachValue-based Approach

Manufacturing Manufacturing DimensionsDimensions PerformancePerformance FeaturesFeatures ReliabilityReliability ConformanceConformance DurabilityDurability ServiceabilityServiceability AestheticsAesthetics Perceived qualityPerceived quality

Service DimensionsService Dimensions ReliabilityReliability ResponsivenessResponsiveness AssuranceAssurance EmpathyEmpathy TangiblesTangibles


The TQM SystemThe TQM System

CustomerFocus

ProcessImprovement

TotalInvolvement

LeadershipEducation and Training Supportive structureCommunications Reward and recognitionMeasurement

ContinuousImprovement

Objective

Principles

Elements


Total Quality ManagementTotal Quality Management

Commitment to quality throughout organizationCommitment to quality throughout organization

Principles of TQMPrinciples of TQM Customer-orientedCustomer-oriented LeadershipLeadership Strategic planningStrategic planning Employee responsibilityEmployee responsibility Continuous improvementContinuous improvement CooperationCooperation Statistical methodsStatistical methods Training and educationTraining and education


Deming Wheel: PDCA Deming Wheel: PDCA CycleCycle

1. PlanIdentify problem and develop plan for improvement.

2. DoImplement plan on a test basis.

3. Study/CheckAssess plan; is it working?

4. ActInstitutionalize improvement; continue cycle.


TQM and…TQM and…

… … PartneringPartnering a relationship between a company and a relationship between a company and

its supplier based on mutual quality its supplier based on mutual quality standardsstandards

… … CustomersCustomers system must measure customer system must measure customer

satisfactionsatisfaction … … Information TechnologyInformation Technology

infrastructure of hardware, networks, infrastructure of hardware, networks, and software necessary to support a and software necessary to support a quality programquality program


Quality Improvement Quality Improvement and Role of Employeesand Role of Employees

Participative Participative problem solvingproblem solving employees involved in employees involved in

quality management quality management every employee has every employee has

undergone extensive undergone extensive training to provide quality training to provide quality service to Disney’s guestsservice to Disney’s guests


PresentationImplementation

Monitoring

SolutionProblem results

Problem Analysis

Cause and effectData collection and analysis

Problem IdentificationList alternatives

ConsensusBrainstorming

TrainingGroup processes

Data collectionProblem analysis

Organization8-10 members

Same areaSupervisor/moderator

Quality CircleQuality Circle


Strategic Implications of Strategic Implications of TQMTQM

Strong leadershipStrong leadership GoalsGoals, , visionvision, or , or missionmission Operational plans and policiesOperational plans and policies Mechanism for feedbackMechanism for feedback


Six SigmaSix Sigma

A process for developing and delivering A process for developing and delivering near perfect products and servicesnear perfect products and services

Measure of how much a process Measure of how much a process deviates from perfectiondeviates from perfection

3.4 defects per million opportunities3.4 defects per million opportunities ChampionChampion

an executive responsible for project successan executive responsible for project success


3.4 DPMO3.4 DPMO

67,000 DPMOcost = 25% of

sales

67,000 DPMOcost = 25% of

sales

DEFINEDEFINE CONTROLCONTROLIMPROVEIMPROVEANALYZEANALYZEMEASUREMEASURE

Six Sigma: DMAICSix Sigma: DMAIC


Cost of QualityCost of Quality

Cost of Achieving Good QualityCost of Achieving Good Quality Prevention costsPrevention costs

costs incurred during product designcosts incurred during product design Appraisal costsAppraisal costs

costs of measuring, testing, and analyzingcosts of measuring, testing, and analyzing Cost of Poor QualityCost of Poor Quality

Internal failure costsInternal failure costs include scrap, rework, process failure, downtime, include scrap, rework, process failure, downtime,

and price reductionsand price reductions External failure costsExternal failure costs

include complaints, returns, warranty claims, include complaints, returns, warranty claims, liability, and lost salesliability, and lost sales


Prevention CostsPrevention Costs

Quality planning costsQuality planning costs costs of developing and costs of developing and

implementing quality implementing quality management programmanagement program

Product-design costsProduct-design costs costs of designing costs of designing

products with quality products with quality characteristicscharacteristics

Process costsProcess costs costs expended to make costs expended to make

sure productive process sure productive process conforms to quality conforms to quality specificationsspecifications

Training costsTraining costs costs of developing and costs of developing and

putting on quality training putting on quality training programs for employees programs for employees and managementand management

Information costsInformation costs costs of acquiring and costs of acquiring and

maintaining data related maintaining data related to quality, and to quality, and development of reports on development of reports on quality performancequality performance


Appraisal CostsAppraisal Costs

Inspection and testingInspection and testing costs of testing and inspecting materials, parts, and costs of testing and inspecting materials, parts, and

product at various stages and at the end of a product at various stages and at the end of a processprocess

Test equipment costsTest equipment costs costs of maintaining equipment used in testing costs of maintaining equipment used in testing

quality characteristics of productsquality characteristics of products Operator costsOperator costs

costs of time spent by operators to gar data for costs of time spent by operators to gar data for testing product quality, to make equipment testing product quality, to make equipment adjustments to maintain quality, and to stop work to adjustments to maintain quality, and to stop work to assess qualityassess quality


Internal Failure CostsInternal Failure Costs

Scrap costsScrap costs costs of poor-quality costs of poor-quality

products that must be products that must be discarded, including labor, discarded, including labor, material, and indirect costsmaterial, and indirect costs

Rework costsRework costs costs of fixing defective costs of fixing defective

products to conform to products to conform to quality specificationsquality specifications

Process failure costsProcess failure costs costs of determining why costs of determining why

production process is production process is producing poor-quality producing poor-quality productsproducts

Process downtime costsProcess downtime costs costs of shutting down costs of shutting down

productive process to fix productive process to fix problemproblem

Price-downgrading costsPrice-downgrading costs costs of discounting poor-costs of discounting poor-

quality products—that is, quality products—that is, selling products as selling products as “seconds”“seconds”


External Failure CostsExternal Failure Costs

Customer complaint costsCustomer complaint costs costs of investigating and costs of investigating and

satisfactorily responding to a satisfactorily responding to a customer complaint resulting customer complaint resulting from a poor-quality productfrom a poor-quality product

Product return costsProduct return costs costs of handling and replacing costs of handling and replacing

poor-quality products returned poor-quality products returned by customerby customer

Warranty claims costsWarranty claims costs costs of complying with costs of complying with

product warrantiesproduct warranties

Product liability costsProduct liability costs litigation costs litigation costs

resulting from product resulting from product liability and customer liability and customer injuryinjury

Lost sales costsLost sales costs costs incurred costs incurred

because customers because customers are dissatisfied with are dissatisfied with poor quality products poor quality products and do not make and do not make additional purchasesadditional purchases


Quality–Cost RelationshipQuality–Cost Relationship

Cost of qualityCost of quality Difference between price of Difference between price of

nonconformance and conformancenonconformance and conformance Cost of doing things wrongCost of doing things wrong

20 to 35% of revenues20 to 35% of revenues Cost of doing things rightCost of doing things right

3 to 4% of revenues3 to 4% of revenues Profitability Profitability

In the long run, quality is freeIn the long run, quality is free

How important is procurement?How important is procurement?

We estimate that for every dollar a company We estimate that for every dollar a company earns in revenue, 50 cents to 55 cents is spent earns in revenue, 50 cents to 55 cents is spent on indirect goods and services—things like office on indirect goods and services—things like office supplies and computer equipment. supplies and computer equipment.

That half dollar represents an opportunity: By That half dollar represents an opportunity: By driving costs out of the purchasing process, driving costs out of the purchasing process, companies can increase profits without having to companies can increase profits without having to sell more goodssell more goods. Hildebrand (2002). Hildebrand (2002)

Procurement PerspectivesProcurement Perspectives

Continuous SupplyContinuous Supply Minimize Inventory InvestmentsMinimize Inventory Investments Quality ImprovementQuality Improvement Supplier DevelopmentSupplier Development Lowest Total Cost of OwnershipLowest Total Cost of Ownership


TCOTCO

The four elements of cost are: The four elements of cost are: QQuality, uality, SService, ervice, DDelivery, elivery, and and PPrice (rice (QSDPQSDP))

TCOTCO =the sum of the cost elements in QSDP, or =the sum of the cost elements in QSDP, or TCOTCO = = QQuality + uality + SService ervice + + DDelivery + elivery + PPricerice

Several facts about TCO must be recognized and appreciated to Several facts about TCO must be recognized and appreciated to conduct an effective negotiation:conduct an effective negotiation:

Each element of QSDP has an impact on the TCO Each element of QSDP has an impact on the TCO The importance of each element varies with the product or service being The importance of each element varies with the product or service being

purchased purchased The relative weight of each element depends upon our assessment of the The relative weight of each element depends upon our assessment of the

TCO impact on our business.TCO impact on our business. The identity and weight of each element is an ongoing part of the continuous The identity and weight of each element is an ongoing part of the continuous

negotiation process. negotiation process.


Procurement StrategiesProcurement Strategies

Volume consolidationVolume consolidation Reducing total number of suppliers while minimizing risk Reducing total number of suppliers while minimizing risk

Supplier operational integrationSupplier operational integration Building partnershipsBuilding partnerships Sharing information and knowledgeSharing information and knowledge Identifying linked processes and shared opportunities for Identifying linked processes and shared opportunities for

improvementimprovement

Value management extends beyond buyer-seller Value management extends beyond buyer-seller operations operations

Involving the supplier early in product designInvolving the supplier early in product design Reducing complexityReducing complexity Value engineering Value engineering

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E-procurementE-procurement

The 5 rights of e-procurementThe 5 rights of e-procurement

at the right priceat the right price delivered at the right timedelivered at the right time are of the right qualityare of the right quality of the right quantityof the right quantity from the right source.from the right source.

Baily Baily et al.et al., 1994, 1994

Figure 7.1 Key procurement activities within an organization

Figure 7.2 Electronic procurement systemSource: Tranmit plc

Figure 7.4 Use of different information systems for different aspects of thefulfilment cycle

Figure 7.5 E-mail notification of requisition approvalSource: Tranmit plc

Figure 7.6 Document management software for reconciling supplier invoice with purchase order data

Source: Tranmit plc

Figure 7.7 The three main e-procurement model alternatives for buyers

Figure 7.8 Integration between e-procurement systems and catalogue data

Important!Important!

Purchasing has undergone a Purchasing has undergone a transformation from merely being a transformation from merely being a necessarynecessary function to one that has function to one that has become more strategic with a focus on become more strategic with a focus on generating a competitivegenerating a competitive business business advantageadvantage

Elektronsko poslovanje 62

PurposePurpose

The challenge that remains is how to The challenge that remains is how to measure the increase in efficiency (both measure the increase in efficiency (both value and risks)value and risks) of e-procurement of e-procurement implementations and simultaneous implementations and simultaneous changes in the organization and strategy.changes in the organization and strategy.

Elektronsko poslovanje 63

Expected benefitsExpected benefits

The main benefits of e-procurement are an The main benefits of e-procurement are an increase inincrease in firms’ competitiveness through cost firms’ competitiveness through cost reduction and/or boosted efficiency with inboundreduction and/or boosted efficiency with inbound logisticslogistics..

Those benefits can materialize in a reduction of Those benefits can materialize in a reduction of purchasing transactions costs,purchasing transactions costs, order fulfillment and order fulfillment and cycle time, a reduction of the number of suppliers cycle time, a reduction of the number of suppliers or even a reduction inor even a reduction in the price paid and the the price paid and the number of staff to support purchase transactionsnumber of staff to support purchase transactions

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Importance of P2P processImportance of P2P process

E-procurement is the use of electronic means E-procurement is the use of electronic means (the internet, web, e-mail) to enable the (the internet, web, e-mail) to enable the purchase of products and services over the purchase of products and services over the internet internet

OOne of the major processes (global sourcing)ne of the major processes (global sourcing) BBoth savings & risks are importantoth savings & risks are important Important to study the whole process!Important to study the whole process!

P2P processP2P process

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Just-In-Time Just-In-Time SystemsSystems

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JIT/Lean ProductionJIT/Lean Production

Just-in-timeJust-in-time: : Repetitive production system in Repetitive production system in which processing and movement of materials which processing and movement of materials and goods occur just as they are needed, and goods occur just as they are needed, usually in small batchesusually in small batches

JIT is characteristic of lean production JIT is characteristic of lean production systemssystems

JIT operates with very little “fat”JIT operates with very little “fat”

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JIT GoalsJIT Goals

Eliminate disruptionsEliminate disruptions

Make system flexible by reduce Make system flexible by reduce setup and lead timessetup and lead times

Eliminate waste, especially excess Eliminate waste, especially excess inventoryinventory

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Sources of WasteSources of Waste

OverproductionOverproduction

Waiting timeWaiting time

Unnecessary transportationUnnecessary transportation

Processing wasteProcessing waste

Inefficient work methodsInefficient work methods

Product defectsProduct defects

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Big JIT – broad focusBig JIT – broad focus Vendor relationsVendor relations Human relationsHuman relations Technology managementTechnology management Materials and inventory managementMaterials and inventory management

Little JIT – narrow focusLittle JIT – narrow focus Scheduling materialsScheduling materials Scheduling services of productionScheduling services of production

Big vs. Little JITBig vs. Little JIT

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JIT Building BlocksJIT Building Blocks

1. Product design1. Product design

2. Process design2. Process design

3. Personnel/organizational3. Personnel/organizationalelementselements

4. Manufacturing 4. Manufacturing planning and controlplanning and control

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1. Product Design1. Product Design

Standard partsStandard parts

Modular designModular design

Highly capable production systemsHighly capable production systems

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2. Process Design2. Process Design

Small lot sizesSmall lot sizes

Setup time reductionSetup time reduction

Manufacturing cellsManufacturing cells

Limited work in processLimited work in process

Quality improvementQuality improvement

Production flexibilityProduction flexibility

Little inventory storageLittle inventory storage

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Benefits of Small Lot SizesBenefits of Small Lot Sizes

Reduces inventory

Less storage space

Less rework

Problems are more apparent

Increases product flexibility

Easier to balance operations

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Production FlexibilityProduction Flexibility

Reduce downtime by reducing Reduce downtime by reducing changeover timechangeover time

Use preventive maintenance to Use preventive maintenance to reduce breakdownsreduce breakdowns

Cross-train workers to help clear Cross-train workers to help clear bottlenecksbottlenecks

Reserve capacity for important Reserve capacity for important customerscustomers

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3. Personnel/Organizational 3. Personnel/Organizational ElementsElements

Workers as assetsWorkers as assets

Cross-trained workersCross-trained workers

Continuous Continuous improvementimprovement

Cost accountingCost accounting

Leadership/project Leadership/project managementmanagement

78

4. Manufacturing Planning and 4. Manufacturing Planning and ControlControl

Level loadingLevel loading

Pull systemsPull systems

Visual systemsVisual systems

Close vendor relationshipsClose vendor relationships

Reduced transaction processingReduced transaction processing

Preventive maintenancePreventive maintenance

79

Pull/Push SystemsPull/Push Systems

Pull systemPull system: System for moving work : System for moving work where a workstation pulls output from where a workstation pulls output from the preceding station as needed. (e.g. the preceding station as needed. (e.g. Kanban)Kanban)

Push systemPush system: System for moving work : System for moving work where output is pushed to the next where output is pushed to the next station as it is completedstation as it is completed

80

Kanban Production Control SystemKanban Production Control System

KanbanKanban:: Card or other device that communicates demand Card or other device that communicates demand for work or materials from the preceding stationfor work or materials from the preceding station

Kanban is the Japanese word meaning “signal” or “visible Kanban is the Japanese word meaning “signal” or “visible record”record”

Paperless production control systemPaperless production control system

Authority to pull, or produce comes Authority to pull, or produce comes from a downstream process.from a downstream process.

81

Traditional Supplier Network

BuyerBuyer

SupplierSupplierSupplierSupplierSupplierSupplier SuppilerSuppiler

SupplierSupplier

SupplierSupplier

SupplierSupplier

82

Tiered Supplier Network

SupplierSupplier

SupplierSupplier

SupplierSupplier

SupplierSupplierSupplierSupplier SupplierSupplier

BuyerBuyer

SupplierSupplierFirst Tier Supplier

Second Tier Supplier

Third Tier Supplier

83

Summary JIT Goals and Building Summary JIT Goals and Building BlocksBlocks

Product Design

ProcessDesign

PersonnelElements

Manufactur-ing Planning

Eliminate disruptionsMake the system flexible

Reduce setupand lead times

Eliminate wasteMinimize inventories

Abalancedrapid flow

UltimateGoal

SupportingGoals

BuildingBlocks

84

Converting to a JIT SystemConverting to a JIT System

Get top management commitmentGet top management commitment

Decide which parts need most effortDecide which parts need most effort

Obtain support of workersObtain support of workers

Start by trying to reduce setup timesStart by trying to reduce setup times

Gradually convert operationsGradually convert operations

Convert suppliers to JITConvert suppliers to JIT

Prepare for obstaclesPrepare for obstacles

85

Obstacles to ConversionObstacles to Conversion

Management may not be committedManagement may not be committed

Workers/management may not be Workers/management may not be cooperativecooperative

Suppliers may Suppliers may resistresist

86

JIT in ServiceJIT in Service

The basic goal of the demand flow technology in the service organization is The basic goal of the demand flow technology in the service organization is to provide optimum response to the customer with the highest quality to provide optimum response to the customer with the highest quality service and lowest possible cost.service and lowest possible cost. Eliminate disruptionsEliminate disruptions Make system flexibleMake system flexible Reduce setup and lead timesReduce setup and lead times Eliminate wasteEliminate waste Minimize WIPMinimize WIP Simplify the processSimplify the process

87

New challengesNew challenges Meeting manufacturing requirementsMeeting manufacturing requirements Changing from traditional thinking and practices – Changing from traditional thinking and practices –

frequent on-time delivery of small quantitiesfrequent on-time delivery of small quantities Long term relationships with suppliers as Long term relationships with suppliers as

partnerspartners

How about Exchange purchasing: Auctions?How about Exchange purchasing: Auctions?

JIT PurchasingJIT Purchasing

88

JIT II: the practice of allowing vendors JIT II: the practice of allowing vendors to manage some aspects of buying their to manage some aspects of buying their products or services for the buyerproducts or services for the buyer

JIT IIJIT II

89

Benefits of JIT SystemsBenefits of JIT Systems

Reduced inventory levelsReduced inventory levels

High qualityHigh quality

Flexibility Flexibility

Reduced lead timesReduced lead times

Increased productivityIncreased productivity

90

Benefits of JIT Systems (cont’d)Benefits of JIT Systems (cont’d)

Increased equipment utilizationIncreased equipment utilization

Reduced scrap and reworkReduced scrap and rework

Reduced space requirementsReduced space requirements

Pressure for good vendor relationshipsPressure for good vendor relationships

Reduced need for indirect laborReduced need for indirect labor

91

Smooth flow of work (the ultimate goal)Smooth flow of work (the ultimate goal) Elimination of wasteElimination of waste Continuous improvementContinuous improvement Eliminating anything that does not add Eliminating anything that does not add

valuevalue Simple systems that are easy to manageSimple systems that are easy to manage Use of product layouts to minimize Use of product layouts to minimize

moving materials and partsmoving materials and parts Quality at the sourceQuality at the source

Elements of JITElements of JIT

92

Poka-yoke – fail safe tools and methodsPoka-yoke – fail safe tools and methods Preventative maintenancePreventative maintenance Good housekeepingGood housekeeping Set-up time reductionSet-up time reduction

Cross-trained employeesCross-trained employees

A pull systemA pull system

Elements of JIT (cont’d)Elements of JIT (cont’d)

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Procurement and Manufacturing Final

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