Are You Developing Supplier Relationships with Quality In Mind?

Having worked with many suppliers in the dairy industry and lead cost reduction negotiations with service providers, I have found that when times get tough and you are put in a position to have to negotiate lower pricing, it is better to be in a good relationship to get there together. After all, you have to keep in mind you can only go to the pot a limited number of times to ask for help and then the relationship becomes strained and one-sided. The relationship with a supplier should be mutually beneficial to work. It’s like that old saying, “You scratch my back and I will scratch yours”, right?

The supplier relationship related to quality works the same way. If the relationship is strained, it is a lot harder to ask for more, right? Not only that, suppliers may be left with a poor taste in their mouth. Proposals must really consider a WIN-WIN scenario and don’t be afraid to ask for this if you are on the receiving end. With the GFSI food safety and quality standards getting more and more prescriptive, we need to stand our ground on quality versus quantity. Let’s think about the big picture of the relationship and what we accept soon becomes the norm. Quality and Supply Chain need to be on the same page speaking the same language. I challenge those in Quality to challenge the supply chain model “buy cheap and sell high”, as this undoubtedly leads organizations down the path to getting what you paid for, and having to settle for less than quality raw materials. This model does not set up the company for long term success when it comes to quality objectives and meeting quality objectives of First Pass Quality. I have seen this model in place and still struggle with it as it really stresses the operations team to have additional processes such as ultra filtration, kill steps, and other processing techniques to manage the less than quality raw materials coming in from market spot buys for example. The real challenge is to put your money where the mouth is and measure the cost of poor quality. Get the # of pounds produced that do not pass standard quality inspection and get that data in front of decision makers. Work towards a continuous improvement solution on First Pass Quality with your organization and with your suppliers.

If you want to improve the quality of your output, it’s important to “speak with data and manage with facts.” The key to improvement is setting benchmarks and obtaining actionable data that point you to the issues you need to focus on. This is where quality metrics come in into play…

There are 5 Key Quality Metrics to consider:

1. First Pass Quality

First pass yield (FPQ), also known as throughput yield (TPY), is an indicator of production and quality performance tracked per day for example. FPQ is calculated by dividing the total pounds for example less rework, or scrap defects from the process by the pounds produced over a set time period.

First Pass Yield (FPQ) = Quality Pounds/Total Pounds

Manufacturers should strive for a high FPQ, which to work towards continual improvement strategies. The higher the yield, indicates processes and equipment alignment, low scrap and rework costs are relatively low.

2. Scrap rate

Scrap rate can be calculated by using the percentage of materials produced compared to that is excluded from finished products.

For example, scrap rate can be calculated as follows:

Scrap rate = Total Pounds of

Scrap/Total Pounds

Don’t forget to include packaging in the types of scrap as this required for food safety recalls.

3. Supplier Defect Rate

Supplier defect rate is the percentage of materials from suppliers that don’t meet quality specifications. The quality of materials from suppliers can have a huge impact on the cost of quality. This means having the capability with flow meters in the example of bulk liquids going into silos. Start with incoming pounds at receipt and calculate the percentage of materials received versus what goes on quality hold. It’s important to think about liquid versus dry state when planning this calculation. There may be additional costs not factored in on the initial purchase order for substandard raw materials received. A common mistake is trying to recuperate costs associated with raw materials that had to be rejected and hauled off for disposal and disposal costs. This is why it is critical to spell this language out in the supplier contracts. If you let supply chain control all of this process, you will likely be missing some key supplier expectations. Be quite clear when reviewing existing contracts looking for these types of issues.

Supplier Defect Rate = % Defects in Pounds (e.g.)

Incoming Supplier Quality = % Acceptable Raw Material in Pounds

Supplier Costs = Total Cost

This quality metric is important for understanding quality throughout the entire value stream. Supplier costs may include hauling fees, fines, disposal and any miscellaneous associated costs with respect to the agreed on specifications.

4. Cost of Quality

The Cost of Quality metric is essentially the total cost of quality and its related efforts. This quality metric classifies quality-related process costs and allows for extra handling resources for performing finished product evaluation, additional testing, sampling, etc. investments in quality based on different cost areas. Cost areas include:

Measuring cost of quality helps an organization determine the potential savings from implementing process improvements. Don’t forget transportation and signing-off on purchasing agreements that allow for ownership upon receipt; thus, deal with the problems when they get to the manufacturing site. The cost may seem like a bargain up front, but to the untrained eye and inexperienced supply chain, can be a huge cost of rework, repackaging, etc. Additionally, there may be some hidden operational costs such as double handling and storage costs to track true operational costs to quality. Alignment and communication of stock and scheduling is key to reduce this type of waste. Lean manufacturing is also the best way to identify all the costs to be calculated.

5. Return Material Authorization (RMAs) and Returns

Lastly, be aware of the return material authorization process and what customers are allowed to return. Especially when there are sales or cost structured bundling involved in the sales process. Having the infrastructure in place to track this cost is critical in best practices to track cost reduction strategies. This policy should be part of the customer contract as well, to offer the organization protection against return of substandard quality or mis-treated, stored or other raw materials being returned with high risk.

At minimum it is recommended a tracking process tied to the corrective action and complaint processes to understand the reasons customers are returning goods and make improvements. You might consider evaluating this data with Pareto graphing analysis of the top 20% of factors that drive 80% of returns can help identify the root causes of the quality issues.