MGMT 524Class three

Agenda

Introduction to Metrics & Problem SolvingChina Sourcing group discussionCurrent eventsHammer, Field, & Narayanan discussions

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?)

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

Hammer: 7 deadly sins

What are the two sins you have observed in a company or organization?

Which of these were present in the China Sourcing case?

How do you measure the “right way?”How do you create a measurement friendly

world?

Lean

Sorting (Seiri)Straightening or Setting in Order (Seiton) –

SimplifyingSweeping or Shining or Cleanliness /

Systematic Cleaning (Seiso)Standardizing (Seiketsu)Sustaining the discipline (Shitsuke)Safety

Lean Drives Surplus ValueSimple formula / Complex question: How do

you lower wages while growing income for employees and profit?

C+V+S=W

C= CapitalV=Value (wages)S=Surplus Value (profit)W=Price

Definitions for LeanMuda: Reducing waste: When a process upstream

breaks down or is inefficientValue: “Meets” the customer’s needs; drive out

complexitiesWhat happened in Autos?Who is the worst at this: examples?Core competency: What is Blount’s?How is Apple unique: Cognitive interface

What is your org’s Value Statement? Is this where you want to go?

Value Stream: NPI – CLSC or “soup to nuts and back again”

Definitions for Lean

Value /stream is intra and inter firm, must go beyond the one process to include customers

Flow: Question the process activities, are they run in batches?

Pull vs. push processes, putting your problem on someone else is not productive

Perfection = transparency

18

Fishbone Chart - Problems with Airline Customer Service

19

Pareto Analysis of Wine Glass Defects (Total Defects = 77)

54

125 4 2

72%

88%93% 97% 100%

0

10

20

30

40

50

60

70

Scratches Porosity Nicks Contamination Misc.

Causes, by percent total defects

Freq

uenc

y (N

umbe

r)

0%

20%

40%

60%

80%

100%

Cum

ulat

ive

Perc

ent

20

Histograms

A chart that shows the frequency distribution of observed values of a variable like service time at a bank drive-up window

Displays whether the distribution is symmetrical (normal) or skewed

The Force Field Analysis is a method to: Investigate the Balance of Power involved in

issue

Identify the most important player (Stake

holder) & target group for the campaign on

the issue

Identify opponents and Allies

Identify how to influence each target group

Metrics vs. incentivesFirst: What are the strategic objectives?

Reduce product development cycle time by 500 days in the next three years.

Second: How does this affect the customer?Increase Patient Satisfaction by 20%

Third: What are the key drivers?Market share, cost reduction, etc

Four: Define MetricsOn time Shipments to target goal

Five: Change and evaluate metrics7 deadly sins of performance

Six: Develop incentives to support metricsLimit Key metrics to between 5-7

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

Narayanan & Raman and Field: IncentivesHow do incentives work against each other?When do incentives get out of line?How can incentives be transparent?How do metrics and incentives relate in your

opinion?What is the author’s step by step approach to

incentives, are these adequate?How often should incentives be changed /

audited?

China Sourcing – On Time Delivery - What is the issue in this case?- What areas can be identified for

improvement? - NPI- Compliance- Quality- Logistics- Innovation

- Who is responsible for the above areas?- What should the metrics be for OTD?