Quality and Purchasing: Common Challenges and Opportunities?

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1 Quality and Purchasing: Common Challenges and Opportunities? A Supplemental Paper Presented to the 2005 Rocky Mountain Quality Conference 1 by Richard Pennington Michael Chapman Introduction Purchasing (or supply management) and quality professionals share at least one thing in particular. Both professions periodicals have a common occasional theme: demonstrating for senior management their value to their organization s objectives of providing products and services that meet customer expectations and contribute to improvements in the bottom-line. In the public and nonprofit environment, the objectives are similar even though the role of profit is not. The organizational objective is to provide a service reliably, efficiently, and at an acceptable quality. The article by Nicolas Carr, IT Doesn t Matter, in Harvard Business Review s May 2003 edition has spurred a debate among IT professionals that quality and purchasing professionals might want to monitor. Carr s premise, that IT is a given and no longer of strategic importance, has led to predictions that CIO positions may change as IT literacy and capability become a foundational requirement for every organization s success, no longer important as a strategic resource. The analogous issue for quality and purchasing professionals is whether the strategic importance of quality and supply management will ever be questioned. Yet, even if the foundations of the IT debate never reach the purchasing and quality professions, there is room for discussing the value that both professions bring to organizations and exploration of ways perhaps nontraditional ones -- of contributing to improved organizational performance in the context of constantly changing organizational strategies. This paper will explore current themes of common interest to purchasing and quality professions, their common challenges, and some opportunities for collaboration. In his 1982 book, Out of the Crisis, W. Edwards Deming highlighted reduction of the number of suppliers as one key to improving organization performance and quality. The 1 This article was published in conjunction with the authors co-presentation, Supply Management and the Bottom Line: How You Can Contribute, at the 2005 Rocky Mountain Quality Conference in Denver, Colorado, on April 19, Richard Pennington is the director, Division of Finance and Procurement, Colorado Department of Personnel & Administration (richard.pennington@state.co.us). Michael Chapman (CQA, CQE) is the principal of The Chapman Group (mjchapman@comcast.net Richard Pennington. All Rights Reserved.

2 average U.S. manufacturing firm spends between 40-60% of its sales revenue on expenditures to suppliers, and effective supply management is a component of quality management systems whether assessed by the Malcolm Baldrige National Quality Awards program or ISO 9001:2000. So, supply management serves as a good launch point for evaluating the collaborative opportunities that exist between the two professions. Purchasing and Supply Management Trends The name change of the National Association of Purchasing Management to the Institute of Supply Management (ISM) illustrated the new emphasis on the competition between supply chains -- not just between individual companies -- as well as recognition of the changing role of purchasing professionals. Supply management's strategic focus importance of "value" beyond traditional price analysis, growing emphasis on supply chain processes, evolution of more complex relationships and integration between purchasers and suppliers, and cross-functional approaches to improvement -- poses challenges for public, nonprofit, and commercial purchasing professionals and opportunities for contributions by quality professionals. Purchasing professionals bring to the table knowledge of supplier markets and products, understanding of the processes involved in purchasing, supplier negotiation experience, the knowledge necessary to assess risk of outsourcing/privatization initiatives, and the background to assist in cost-benefit and other financial analysis necessary to set priorities and select solutions. For their part, quality professionals offer research and statistical process (and other data) analysis capabilities, experience with teams, tools that integrate customer requirements into design and process improvement, process assessment and problem solving skills, project management abilities, and approaches to managing change during organizational improvement efforts. The focus among purchasing professionals has continued to migrate away from transactions to strategies that acknowledge the time compression of supply management and its impact on competitiveness. While traditional concepts of cost and value continue to be a cornerstone of the purchasing profession, the current focus includes process efficiencies, value analysis, cost reduction/avoidance, and the total cost of ownership -- costs that embrace not only the acquisition costs but other costs associated with utilization of services, supplies, and software. For example, energy and other operations, maintenance and disposal costs are more likely to be considered in a sourcing decision today than 25 years ago. Where before these value judgments might have been made by the user specifying the supply (and often the source), today these analyses as well as other complex financial analysis like lease or buy -- are considered to be part of the more comprehensive value-added role of purchasing organizations. The systems approach to supply management has embraced other process considerations as well -- receiving, stores, just-in-time manufacturing, supplier replenishment arrangements, and other means of streamlining, reducing inventory, and improving quality and responsiveness. This has led to the use of more sophisticated transactions (like partnering and performance contracts) that attend these relationships. Purchasing education includes supply chain management concepts, although even today 2005 Richard Pennington. All Rights Reserved. 2

3 the purchasing function is often seen as ending somewhere before goods are in production and distribution to the end user. Yet, the purchasing organization is commonly part of improvement efforts aimed at these other aspects of the supply chain, including product design that accounts for most cost and quality issues. The purchasing function finds itself on cross-functional teams that solve problems arising across the entire supply chain a chain that is managed and affected by a range of disciplines in the organization: quality, engineering, manufacturing, finance, legal, logistics, marketing and sales. Purchasing s future as highlighted by ISM includes: More deployment of technology to streamline the tactical functions of purchasing, better integration with suppliers, and improved decision tools for strategic decision-making More global outsourcing of elements of the supply chain, even strategic ones like manufacturing in some cases Further supplier network rationalization (and reduction), as well as greater integration with suppliers More customer sophistication and, with it, more competitive pressure Increased emphasis on cycle time and time compression in general, requiring continuous improvements in processes and greater flexibility Early supplier involvement during product design The Expanding Scope of Customer Focus: The Supply Chain With the migration away from traditional price and cost analysis in purchasing, the scope of the definition of customer has grown. While traditionally the customer requirements were defined in terms of acquisition cost, delivery quality, and timeliness, suppliers now are asked to provide more. Figure 1 shows the multidimensional view of the supply chain today, with suppliers at various levels integrated into the information exchange with various functions in the organization, and ISO 9001 and its derivatives (e.g. quality standards in automotive, aerospace, and information technology) serving as standardization platforms to promote better product assurance in a global environment Richard Pennington. All Rights Reserved. 3

4 Figure 1 Internal customers of supply management organizations and their suppliers now collaborate in functions such as: Engineering and design Inventory management or other materials handling functions (or alternative strategies such as Just-in-Time) Production scheduling and manufacturing, especially in the outsourcing of manufacturing operations Transportation and distribution Other strategic requirements have arisen also. With outsourced business functions, some suppliers are satisfying key business support requirements (like financial and human resources) that are critical to the organization. Suppliers now are becoming central players in an organization s management of its intellectual capital (knowledge management). Suppliers also provide market intelligence: the knowledge about commodities and competitors that often is critical to improved competitiveness. The term outsourcing is commonly used as the nature of the relationships become more strategic and characterized as partnerships or alliances. The need for more and faster information exchange whether forecasts or marketing and production plans has made the relationships more difficult to manage. Add the exploding number of intellectual property management and other legal issues accompanying complex supplier-buyer relations, and the scope expands even more. And this is before one even considers the ultimate customer, the end-user of the organization s 2005 Richard Pennington. All Rights Reserved. 4

5 product or service. Even public procurement organizations can no longer ignore the revenue side of the equation, historically not a concern. Facing budget pressures, more government systems like e-commerce and e-procurement systems are supported by user fees imposed on vendors who use the systems. Some commercial organizations likewise are using technology as a revenue generator, charging suppliers for use of these systems. This adds a whole new dimension in the concept of value and customer satisfaction. To internal service organizations like purchasing, the concept of the customer used to be simpler. Now, the number of potential customers in more complex, integrated supplier relationships requires better discipline in the assessment of customer requirements and in monitoring service performance for customer satisfaction. Customers have become more sophisticated and are challenged by the same time constraints as the rest of us, raising their expectations in terms of cycle time. Quality professionals are trained in customer requirements analysis. Quality Function Deployment, for example, is a model used by quality professionals to assess different customer requirements against organization product/process capabilities designed to meet them, consider feasibility, and evaluate the organization s ability to meet customer expectations compared to competitors or other alternative solutions. The house of quality depicted in Figure 2 while conceived for use in design may have utility in applications outside of the traditional design environment. Quality Function Deployment Service/Product Attributes Customer Needs Weights Relationships between needs and attributes Customer Perceptions /Rank in the marketplace Feasibility Figure 2 Purchasing and other organizational staff functions have included customer focus as part of their lexicon. But quality professionals have developed and used tools for continuously measuring and assessing customer satisfaction. On the other hand, purchasing professionals bring their experience and knowledge about the less quantifiable considerations that customer surveying or interviewing could address during the process of continuous improvement Richard Pennington. All Rights Reserved. 5

6 Cross Functional Teams: The Linchpin for Effectively Integrating Suppliers As the scope of supplier management has grown, the number of disciplines required to effectively manage a project of this type has grown also. This requires process and problem assessment by persons outside of the traditional boundaries of purchasing offices. This involvement of other disciplines, who often serve as an initial voice of the customer in the early stages of any improvement project, is also a means of setting priorities among various improvement projects. Setting priorities is especially important in the early stages of an organization s effort where its self assessment has identified numerous quality management deficiencies that should be addressed over time. One of the big challenges faced in any organization is the difficulty of having the resources to address all of them. The customer assessment will require the application of experience and knowledge to set priorities about what needs to be done first. Cross-functional teams are needed, not only to help construct an effective way of seeking the voice of the customer, but in mapping the project strategy. Persons with supply management experience may be in the best position to wade through the multitude of improvement suggestions and make judgments about what to do first. This soft application of the Pareto principle, well understood by quality professionals during problem solving, may be judgment-driven as project priorities are established during early stages of the project. And of course, the purchasing, quality, manufacturing, design, logistics, financial, and supplier representatives on the team are critical to having the knowledge and wisdom necessary to: understand the products and services; know the markets; define quality requirements; perform quantitative analysis and make qualitative judgments about possible solutions; evaluate cost implications; assess feasibility; fashion and present recommendations; and suggest implementation strategies. Legal and contracting expertise become particularly important as the partnerships move into areas of codevelopment, sharing of financial risk, and exchange of confidential information. The quality profession has well developed approaches to team problem solving. Six Sigma has a well-known knowledge and training structure for developing the team competencies necessary for effective collaboration. This is likely to be an area where a quality professional can contribute, beginning with normative group techniques designed to facilitate free exchange of ideas. Quality professionals can champion and coach on high performance practices. They bring statistics, measurement, and auditing expertise. The quality professional further serves the team as the advocate for the systems approach. Project Management: Meeting the Challenge of Complexity in Supply Chain Management As supply chain management has become more complex, so has management of a project of this magnitude Richard Pennington. All Rights Reserved. 6

7 The challenges posed by limited resources have already been highlighted: the customer remains the touchstone for setting priorities. Beyond that, the quality professional literature describes tools like SWOT analysis (strengths, weakness, opportunities, threats), strategic planning, and other techniques designed to link longterm vision with the reality of results. For those in supply management who have labored getting beyond brainstorming sessions to action plans that will achieve results in a defined timeline, quality professionals may be able to help. Their body of knowledge places a special emphasis on project-based management and offers an opportunity for experienced quality professionals to help move these projects forward. Meeting discipline, defining projects, establishing accountability for tasks, and setting priorities are skills that simply are not common. Both professions emphasize project capabilities in their bodies of knowledge, but quality professionals who have managed projects of similar scope have a special opportunity to contribute. Process and Problem Solving Analysis: A Clear Vision of the Chain Basic problem solving skills like plan, do, check, and act (PDCA) are invaluable, yet uncommon. Those with Six Sigma experience have been trained in a more disciplined, rigorous method of problem solving that builds on that basic methodology (Define, Measure, Analyze, Improve, Control). The training in those programs extends from customer focus, through process analysis and root cause analysis, into advanced statistical methods. Lean manufacturing is a model that is heavy in process analysis and assessment of waste in terms of movement and time. Quality professionals who are schooled in or have experience with these techniques will be an invaluable adjunct to any problem solving effort. Organizations that are lucky enough to have deployed improvement models like these will have resources trained and available to supplement the improvement efforts of any supply management function. Often the performance of subsystems or sub processes cannot be effectively measured; no data and quantifiable means of assessing performance exist. The purchasing professional (along with other members of the team like legal, accounting, manufacturing) provide the insight during process mapping about why things are done the way they are, and whether they need to be done. The quality professional is in a good position to provide the structure and other technical skills necessary to support the analysis. For example, one especially useful quality tool is the Five Why s in problem solving. The discipline of the quality professional maps the improvement project in a way that provides visibility to the questions that need to be asked. Typically, the purchasing (and other professionals) are going to have the answers to the why inquiry. The expanding view of supply chains has placed technology at the center of the debate. Material Requirements Planning systems, Distribution Requirements Planning systems, public implementations of e-procurement systems, and supplier-managed inventory systems are receiving even greater attention as organizations identify core competencies, adjust the division of services between purchasers and suppliers, and enter into more long term relationships. Now technology is moving well beyond information management to radical changes in traditional inventory operations as micro radio 2005 Richard Pennington. All Rights Reserved. 7

8 transmitters are integrated into inventory management with RFID technologies. As anyone knows who has helped implement process improvements with technology, gaining insight into the process to be automated is a critical first step. An automated bad process is more destructive than one that is manual, so a way to validate the value added by each step in an automated process ideally is a key part of any implementation. The tools that quality professionals use are invaluable in a cross functional environment to painting a clear picture of inputs, transformation, outputs, and value. Measurement: Assessing Supplier Capabilities and Monitoring Performance Both professions contribute to the bottom-line. However, bottom-line financial performance is not adequate to provide the granular measurement of process performance necessary to monitor, control and evaluate operational improvements. In a supply management context, measurements may include other sub process measurements, such as on-time delivery times, rejection or other quality performance rates, unit price or cost trends, and customer satisfaction. Supplier Past Performance Dunn and Bradstreet, Open Ratings Figure 3 There are two particular challenges faced by purchasing professionals. First, only some of these measures are susceptible to traditional measurement. As Figure 3 demonstrates, other factors are essentially qualitative judgments that are reported in quantified forms, often based on surveys. These measures pose the same difficulties as customer satisfaction measures: assuring validity and reliability in the collection, analysis, and reporting of the information. Quality professionals can help here. Another issue is sub optimization. From the oft-repeated maxim, what gets measured gets done, one can find instances when optimized performance at the process level is counterproductive at a system level. Price and quality is an example. Reducing variances between standard costs and actual costs in the supply chain the cousin of the 2005 Richard Pennington. All Rights Reserved. 8

9 low bid problem in public procurement -- can lead to quality problems. Quality professionals understand the sub optimization problem, one more reason to have them part of the team. Complex supplier partnerships or alliances always involve contracts. Some contracts apply these supplier performance metrics to financial incentives (or penalties), making the validity of the measurement systems especially important. In performancebased contracts, in particular, a specific performance level can lead to contractually defined reductions in pay or incentive payments that are tied to measurable schedule and/or quality performance. A best practice that is taught to supply management professionals is supplier development, a strategy for enhancing the relationship between organizations. The supplier essentially engages with the purchasing organization in a collaborative relationship aimed at continuously improving quality and process efficiencies, using expertise and resources in the buying organization. Many of the skills that would be of interest to suppliers would be those that tend to be impenetrable to those without quality backgrounds: measurement and analysis, statistical process control, and an understanding of quality management systems in general. Benchmarking is a well-recognized means of developing a should be state for organizations, selecting achievable best-in-class metrics for assessing performance, or for adopting processes used by world-class competitors. Yet, some commentators criticize benchmarking as a low pay-off venture whose benefits often do not warrant the associated costs. In supply chain improvement, competitor approaches to supply base reduction may provide some visibility into useful approaches, but an improvement team can use the experience of a professional who has been through benchmarking studies and knows the questions to ask to assess relevance. Quality professionals can help here as well. Probably more than any other topic, development and deployment of meaningful measurement systems present the greatest challenges to purchasing professionals. These complex systems require seasoned selection of metrics that are accepted as valid and whose collection the organization and its suppliers can sustain. Quality professionals typically have more experience in quantitative analysis and know its limitations. And both professions together have a better chance of developing a meaningful set of relevant criteria for measuring performance. Supplier Rationalization and Decisions: Integrating Benefits, Cost, Risk, and Policy Decisions regarding supplier selection or reduction of the supply base typically involve a combination of quantitative and qualitative considerations. Quality professionals have a leg up on statistical and other quantitative analysis. Purchasing professionals, on the other hand, may have a clearer picture of qualitative considerations like risk. For example, in major outsourcing decisions, some way must be found of assessing qualitative aspects of performance such as flexibility, clarity and 2005 Richard Pennington. All Rights Reserved. 9

10 appropriateness of communications, problem solving commitment and ability, and other indicators of service performance that are difficult to quantify. An outsourcing decision may be driven by the perceptions about the core competencies of the organization and whether a supplier-managed function (like outsourced manufacturing, for example) is in the strategic interests of the organization. Boeing Corporation, as an example, has a set of guiding principles that identifies complex system integration as its core competency. Even in a public procurement environment, outsourcing considerations will involve evaluations of what inherently governmental functions are not appropriate for outsourcing. The purchasing professional must be part of these decisions that are largely policy in nature. One mystery among purchasing professionals is the importance of ISO 9001 certification to supplier evaluation. The purchasing professional s body of knowledge teaches that ISO 9001 certification is an important consideration in evaluating suppliers for preferred supplier status or integration as a partner. Yet, there has been some confusion over the past 15 years as buyers moved away from contractually specified quality programs and systems about the significance that can be ascribed to certification under the ISO 9000 series of standards. The quality professional is an important resource in helping a purchasing professional understand the meaning of certification and the types of questions that should be asked during any supplier assessment, ISO certification or not. In supply chain rationalization, one of the central issues is the depth of reduction of the supply base. On the one hand, a reduction can lead to less variation in delivered supplies or other performance. On the other hand, depending on the market conditions and industry capacity, there may be business continuity risk in reducing the number of suppliers and not being able to respond to unanticipated shortages or other reductions in availability. Often, organizations pursue social policy objectives of developing small businesses and providing opportunities to historically underutilized businesses. The federal and other governments may have policies or rules that require these kinds of programs. A decision to reduce the supplier base may easily run counter to those objectives. Overlying all of the considerations are costs, the effect of supplier base reductions on competitive pricing over time, the magnitude of other process efficiencies that are difficult to quantify, and the ease at which a new source can be established (or performance brought in-house) if the chain is disrupted. While quality professionals are well equipped to bring structure to the problem solving and decision-making, the purchasing professionals provide much of the remaining qualitative wisdom. But quality professionals trained in decision matrix analysis can guide an improvement team in integrating multidimensional, qualitative considerations in decision-making. Finally, any team effort at making supply management improvements must keep implementation in mind. Contracts usually exist (or will be written) that will define the financial and operational relationship between the organization and its supplier. The issues some directly relevant to quality professionals -- that commonly have to be 2005 Richard Pennington. All Rights Reserved. 10

11 addressed by purchasing professionals in any type of contract embracing strategic supplier relationships include: The length of the relationship, sometimes measured by the life of a product The payment terms and definition of how financial incentives/risks will be shared The amount of capital or other investment expected Any minimum quantity guarantees, or whether all requirements will be satisfied through the contract Whether and when the supplier is expected to achieve and maintain quality certification or outcomes The information exchange requirements, and attendant information technology and integration requirements Intellectual property and confidentiality agreements Organizational and Personal Leadership: Fostering the Conditions Necessary for Change and Improvement Professionals in positions of leadership in both professions whether leading organizations or influencing colleagues through personal leadership -- share common challenges in implementing changes arising from these kinds of improvement initiatives. Purchasing professionals will have the historical knowledge and familiarity with processes necessary to identify the resistance points to change, and even possible strategies to integrating change into the organization. On the other hand, quality professionals who have worked with models like TQM, Lean or Six Sigma may have a broader base of experience with improvement initiatives in general. They may have more general experience with overcoming resistance and have likely seen alternative approaches, some that worked and some that did not. Both professions can help organizations leaders establish a favorable environment for improvement initiatives of the magnitude involved in supply chain management. Constructive approaches include: A strategy for adopting an improvement model that is not seen as an installation of the next flavor of the month improvement model Selection of limited numbers of meaningful metrics that best measure supply chain performance The need to support the cross functional teams through adequate resources, reprioritization of existing work, and other needed management support Some tolerance for setbacks from attempts that may fail but are well meaning Guidance in the practical application of cost-benefit analysis or ROI to improvement efforts, so teams receive appropriate coaching on setting 2005 Richard Pennington. All Rights Reserved. 11

12 realistic priorities that are consistent with the organizational objectives and vision Leaders staying visibly, constructively engaged with the project, devoting the time necessary to promote its importance and learn Organizational Learning: Gaining and Applying the Necessary Knowledge and Skills A common challenge faced by both professions is getting the knowledge transferred to behavioral changes across the organization. While quality and purchasing professionals individually may have the necessary knowledge, skills, and abilities/attitudes, achieving sustained systemic changes necessary to improve requires the involvement of a variety of people and disciplines. In a sense, both professions will be seen as internal consultants in these improvement initiatives: bringing professional competence to the problem solving and at the same time encouraging the engagement necessary to achieve sustained change and results. Organizations often do not have the capabilities to train or otherwise promote knowledge transfer to align everyone with the shared vision, build a common glossary of quality and supply chain concepts, and otherwise achieve results. This challenge presents a shared opportunity. Internal and external consultants always have difficulty getting an organization s individuals engaged so change can be sustained. In a complex project like improving management of the supply chain, the key to sustaining improvements requires the participation of many others outside the quality and purchasing functions. As solutions to the knowledge management challenge in your organizations evolve and are discussed, get involved in them. Talk to your human resources or training department. They are traditionally solid in communications, conflict resolution, and change management training. Yet, many of the problem solving skills learned by quality professionals, financial and contracting transactional skills applied by purchasing professionals, and collaborative team and decision techniques applied by both may be in short supply in organizational training programs. The analysis, problem solving, and project management capabilities of each profession will represent opportunities for both. Learning completes the final dimension of the analysis of supply management challenges. Figure 4 depicts the dimensions of improvement to any organizational activity or process in this case supply management. The key to moving towards a fully integrated supply management system, away from routine, stagnant processes that may have outlived their utility, is in managed transformation and change, leadership, and knowledge and learning Richard Pennington. All Rights Reserved. 12

13 Figure4 Conclusion With increased globalization and emergence of outsourcing of large functions of organizations, the definition of contribution by both professions is a moving target. Traditional visions of purchasing have given way to a broader view of suppliers and the efficiencies to be gained by a systems approach to supply management. Opportunities for those in traditional quality and reliability engineering positions will be affected by offshore migration of manufacturing jobs. What remains organizationally will present challenges for both professions. They both must develop capabilities to contribute to joint problem solving in complex, changing operational environments that test the quality management capabilities of their organizations. Organizations will need people that can work in teams, integrate customer satisfaction concepts in a complex, dynamic operations environment, develop meaningful ways to measure performance in increasingly complicated processes, stay sensitive to the steps necessary to achieve employee adoption of improvement initiatives so they can be sustained, and who can manage projects and solve problems of this complexity. Both professions can contribute perhaps in nontraditional ways and through collaboration they stand a better chance of promoting improvements to the bottom line Richard Pennington. All Rights Reserved. 13