Supply Chain Supply Chain ManagementManagement

and and Supplier Quality Supplier Quality

ControlControl

Ankush Kaul

Supply Chain Supply Chain ManagementManagement

and and Supplier Quality Supplier Quality

ControlControl

Ankush Kaul

March 21, 2007March 21, 2007

AGENDAAGENDA Supply Chain Management (SCM)

Introduction History Logistics Management Supply Chain Vs. Logistics Management Supply Chain Requirements and Uncertainties Bullwhip Effect Strategic Partnership Examples of Strategic Partnership

Supplier Quality Control (SQC) Introduction Why SQC? SQC Techniques SCM and SQC at Praxair

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Agenda (Cont’d..)Agenda (Cont’d..)

SCM and SQC @ Praxair Introduction to Praxair Supply Chain Management @ Praxair Supplier Quality Control @ Praxair

References

Introduction to SCMIntroduction to SCM

SCM is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders

- Global Supply Chain Forum (GSCF)

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SupplierSupplier ManufacturerManufacturer DistributorDistributor RetailerRetailer CustomerCustomer

UpstreamDownstream

Introduction (Cont’d..)Introduction (Cont’d..)

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Customer wants

detergent Customer wants

detergent Albertson’s

SupermarketAlbertson’s

SupermarketThird

party distributorThird

party distributorP&G or othermanufacturerP&G or othermanufacturer

PlasticProducerPlastic

Producer

Chemicalmanufacturer

(e.g. Oil Company)

Chemicalmanufacturer

(e.g. Oil Company)

TennecoPackagingTenneco

Packaging

Paper Manufacturer

Paper Manufacturer

TimberIndustryTimberIndustry

Elements of SCMElements of SCM

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Deciding how to best move and store materialsLogistics

Determining location of facilitiesLocation

Suppliers

Evaluating suppliers and supporting operationsPurchasing

Meeting demand while managing inventory costsInventory

Controlling quality, scheduling workProcessing

Incorporating customer wants, time etc.Design

Predicting quantity and timing of demandForecasting

Determining what customers wantCustomers

Typical IssuesElement

Monitoring supplier quality, delivery and relations

HistoryHistory 1750 - 1800

Industrial Revolution Era of Mechanical Inventions Product and process complexity increase

1800’s Increased factory complexity Birth of Industrial Engineering movement

1900’s Assembly line, Mass production Henry Gantt: Gantt charts, Scheduling Human factors Statistical Quality Control

1989 - 1993 Business Process Reengineering

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History (Cont’d…)History (Cont’d…)

Traditional

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DEPT. 1 DEPT. 2 DEPT. 3

Process: Cross-Functional Team

Re-engineered

Onset of Supply Chain ManagementOnset of Supply Chain Management

The term “SCM” was introduced by consultants in early 1980s Era of inter-network competition: SC vs. SC: Brand vs. brand, or

store vs. store => <suppliers-brand-store> vs. <suppliers-brand-store> type of competition.

Common goals for the entire supply chain

A supply chain consists of facilities, functions, activities for producing & delivering product or service all the way from early suppliers to eventual customers

The new focus is the entire supply chain

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Logistics ManagementLogistics Management

Logistics Management is that part of Supply Chain Management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements.

- Council of Supply Chain Management

http://www.cscmp.org

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Movement Within a FacilityMovement Within a Facility

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RE

CE

IVIN

G

Storage

Workcenter

Work centerWork center

Storage

Workcenter

Storage

Shipping

SCM VS. Logistics Management SCM VS. Logistics Management Focus of logistics was on making each firm in the

distribution channel more efficient, productive and profitable

Each firm operated on its own, maximizing profits with little attention to others in the chain

Within each firm, each function preoccupied with optimizing its own performance

Intra-functional (silo) orientation: cost tradeoffs and managing customer service levels

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Supply Chain Requirements and UncertaintiesSupply Chain Requirements and Uncertainties

Requirements for a Successful Supply Chain Trust among trading partners Effective communications Supply chain visibility Event management capability Performance metrics

Sources of Uncertainty in Supply Chains Wrong forecasts Late deliveries Poor quality Machine breakdowns Canceled orders Erroneous information Price uncertainties

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Bullwhip EffectBullwhip Effect

Distortion of demand information of a product while it passes from one firm to the next across SC

The information transferred in the form of “orders” tend to be distorted and can misguide upstream members in their inventory and production decisions.

In particular, “variance of orders” > “variance of sales”

Information sharing in SCs is important

Sales Information available in the form of orders received from the downstream member should be used with great caution.

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Bullwhip Effect (Cont’d..)Bullwhip Effect (Cont’d..) Who is affected?

Nearly all industries are affected ! Firms that experience large variations in demand are at risk Firms that depend on suppliers upstream or distributors and

retailers downstream may be at risk Causes of Bullwhip Effect

Finite supply shared by many retailers

Rationing game: retailer orders more than demand

Fixed order cost

Wholesale price varies over time

Inflationary / deflationary environment

Prices with no trend but variability

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Bullwhip Effect (Cont’d…)Bullwhip Effect (Cont’d…)

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Bullwhip Effect (Cont’d…)Bullwhip Effect (Cont’d…)

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Retailer

Distributor

Manufacturer

Supplier

Order Order Order Order

Stock Stock Stock Stock

Increased Variability

Bullwhip Effect - Disrupted Supply ChainBullwhip Effect - Disrupted Supply Chain

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Customer Demand forecast = 20 units

SuppliersProducers

Distributors

Retailers

Products & Services

Products & Services

Products & Services

Information Flow

Cash Flow

Key: = Inventory Levels

160 Units 80 Units 40 Units

80 Units 40 Units 20 Units

As demand increases, the distributor decides to accommodate the forecasted

demand and increase inventory to buffer against unforeseen problems in demand.

Each step along the supply chain increases their inventory (double in this example)

to accommodate demand fluctuations.

The top of the supply chain receives the harshest impact of the whip effect.

Bullwhip Effect (Cont’d..)Bullwhip Effect (Cont’d..)

Results of Bullwhip effect Excess inventories Problems with quality Increased raw material costs Overtime expenses Increased shipping costs Lost customer service Lengthened lead time

Solutions Improve communication along the supply chain Improve sources of forecast data Work with firms upstream and downstream in the supply chain

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Strategic Partnership in Supply ChainStrategic Partnership in Supply Chain

Business partnering occurs through a pooling of resources in a

trusting atmosphere focused on continuous, mutual improvement

Source: Robson, Rawnsley (2001)

Benefits of strategic partnerships Improved supplier product quality

On-time shipments

Lower costs, less inventory

Improved logistics

Customer satisfaction

 Increased business because of customer satisfaction

Vendor management inventory

Lean extended enterprise

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Strategic Partnership Examples Strategic Partnership Examples

Blockbuster Demand for newly released movies at blockbuster typically starts high and decreases

rapidly. Peak demand last about 10 weeks

Blockbuster purchases a copy from a studio for $65 and rent for $3. Hence, retailer must rent the tape at least 22 times before earning profit

Retailers cannot justify purchasing enough to cover the peak demand

In 1998, 20% of surveyed customers reported that they could not rent the movie they wanted

Starting in 1998 Blockbuster entered a revenue sharing agreement with the major studios. Studio charges $8 per copy, Blockbuster pays 30 - 45% of its rental income

Even if Blockbuster keeps only half of the rental income, the breakeven point is 6 rental per copy

The impact of revenue sharing on Blockbuster was dramatic, Rentals increased by 75% in test market and market share increased from 25% to 31%

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Strategic Partnership Examples (Cont’d..)Strategic Partnership Examples (Cont’d..)

Seven Eleven Stores Retailer determines order sizes and timing but in addition

passes POS (point of sales) data to the supplier. POS improves supplier’s forecasts.

Wal-Mart, K-Mart (Vendor Managed Inventory) Supplier maintain the inventory levels at the customer site and

continuously replenish as and when required. This has resulted in 30% inventory turnover improvement.

Milliken and Company The lead time from order receipt at Milliken’s textile plants to

final clothing receipt at the department stores was reduced from 18 weeks to 3 weeks. The POS data was used by the supplier to improve forecasting and scheduling.

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Supplier Quality ControlSupplier Quality Control

A methodology to: Select/Qualify the correct supplier Develop/Launch the item being sourced Monitor ongoing performance

II. Develop/Launch

I. Select/Qualify

III. Monitor Performance

Why is SQC Required??Why is SQC Required??

Improved Product Quality Reduced Lead Times Decreased Overall Life Cycle Costs Increased Customer Satisfaction

Faster and Cheaper can still be Better!

Why is SQC required? (Cont’d...)Why is SQC required? (Cont’d...)

Process maintained under control Quality Built-In; Not Added On!

Achieve earlier corrective action on deficiencies

Less waste; Minimizes rework

Material protected from deterioration Especially Applicable to Bulk Metals

Quality Control established at point of supply

SQC TechniquesSQC Techniques

Some of the techniques used are: Supplier Scorecard: Supplier Evaluation

Regular supplier site visits: Supplier site inspection during the equipment build

Supplier quality systems evaluation: Vendor quality system evaluation

Non Conformance reporting process: Documentation of issues and source of “Lessons Learnt” before and after the equipment build

Supplier training: Training the supplier by the customer (especially if the supplier is fabricating the equipment for the first time)

Praxair - IntroductionPraxair - Introduction

A Fortune 500 company with sales of $ 8.3 billion (2006)

Leader in industrial gases supply systems and equipment, and in applications technologies; almost 3,000 active patents

One of the three largest industrial gases companies worldwide and the largest in North and South America

Operations in 40 countries with over 27,000 employees

Services include on-site gas handling and monitoring systems, pipeline and plant services, turnkey design and construction

Praxair Introduction- Sales by Served MarketsPraxair Introduction- Sales by Served Markets

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Chemicals 10%Other 12%

Food and Beverage 7%

Electronics 7%

Energy 12%

Healthcare 11%

Aerospace 4%

Manufacturing 21%

Metals 16%

SCM @ PraxairSCM @ Praxair

Customer needs Liquid Nitrogen

Customer needs Liquid Nitrogen

Praxair PlantPraxair PlantField ContractorsField ContractorsPlant SitePlant Site

Cold Box FabricatorCold Box Fabricator

Cold Box fabricator Sub

Supplier

Cold Box fabricator Sub

Supplier

Valves SupplierValves Supplier

Valve Sub Supplier

Valve Sub Supplier Metal ShopMetal Shop

SCM @ Praxair (Cont’d..)SCM @ Praxair (Cont’d..)

Partnership with suppliers and customers for mutual benefit 6 Sigma projects with suppliers and customers

Strategic agreements with competitors

Core competency used to help suppliers as well as customers

Process improvements by streamlining internal supply chain

NAIG GPMM GSS PSTNAIG GPMM GSS PSTSUB- SUPPLIER

SUB- SUPPLIER

SUPPLIERSUPPLIER

PRAXAIRPRAXAIR

CUSTOMERCUSTOMER

SQC @ PraxairSQC @ Praxair Historical Qualification

To ensure products and services consistently meet the organization’s acceptance criteria

To implement a reduced testing regime for incoming goods

To maintain precise and up-to-date supplier records, “well-known” partners, and improved quality of products and services

Low Cost Country Sourcing (LCCS) To establish a competitive capital cost advantage

To include a low cost country sourcing for equipment, fabrication and engineering design

To identify, qualify and select new equipment suppliers worldwide and evaluate based on technical and low-cost evaluation criteria

SQC @ Praxair (Cont’d..)SQC @ Praxair (Cont’d..)

Standard Method Historically qualified Suppliers Database of specifications, requirements and guidelines

Due to cost cutting initiatives in 1990’s and post 9/11, supplier quality control was given less importance- this led to reliability and other issues in field

LCCS program was another driver for the development of a structured supplier quality control program

New Initiative for SQC @ PraxairNew Initiative for SQC @ Praxair

Tier 1 Tier 2 Tier 3

Critical path Non critical path CommoditySingle Source Less critical partSole sourceCritical part

Compressors Water pumps FittingsInduction motors Tanks Piping

Synchronous motors Cryo tanks HardwareCold Boxes Manual valves

BAHX SilencersPacking S&T heat exchangers

Adsorbents VaporizersChillers

Auto valvesSkids

Shop visit Shop visit As NeededQuality System rating Quality System ratingInspection test plan Inspection test plan

NCR tracking NCR trackingSurveillance SurveillanceControl Plan Control Plan

Su

pp

ly A

ttri

bu

tes

Eq

uip

men

t D

escri

pti

on

Qu

ality

Acti

vit

ies

Commodities were divided into Tier-1,Tier-2 and Tier-3 depending on their criticality in terms of their time impact on project, cost and sourcing

status

Tier 1 – Build relationships Critical supplier

Safety Critical Routine surveillance

Tier 2 – Periodic surveillance

Tier 3 – Infrequent contact

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SQC @ Praxair - Inspection PlanSQC @ Praxair - Inspection Plan

Developed a method to ensure that the suppliers adhere to specifications mentioned as a part of the purchase order-

Comprehensive and easy to use commodity specific quality control checklist containing key specifications questions

Discussions with a cross functional group of equipment engineers, process engineers, procurement and quality engineers followed to finalize the format of the checklist

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Designated Inspection PointsDesignated Inspection Points

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Non- Conformance TrackingNon- Conformance Tracking

One of the most important tools to keep track of suppliers performance

Helps to see supplier trends as well as defect trends over time

Also useful as a repository for “lessons learned”

Quality Engineering Team @ PraxairQuality Engineering Team @ Praxair

The projects at Praxair have helped me see the implementation of academic knowledge as well as the importance of “people skills” in an organization. Overall, it continues to been a great learning experience

Slide 37

Asia4 Quality Engineers in Asia

region

South America

2 Quality Engineers in South America

North America5 Quality Engineers in North American region

Europe

2 Quality Engineers in Europe

ReferencesReferences

Lecture notes from “Supply Chain and Global Operations”

Praxair database www.google.com (The best invention of 20th

Century!!!) Experience

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