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Best Practicesin Supplier Quality Management

Two years after Target suffered a massive data breach due to vulnerabilities in a third-party vendor’s systems, the retail giant discovered another major issue in its supply chain. In August 2016, the company announced that Welspun, one of the world’s largest textile manufacturers, had been substituting Egyptian cotton in sheets sold in Target stores with another, lower grade cotton.

While Target was quick to contain the damage -- terminating all ties with Welspun, and promising a refund to customers who had purchased the products in question – the incident raised serious concerns about quality management in an increasingly vast and complex supply chain: How do you keep quality issues in check when dealing with hundreds of suppliers? How do you determine if these suppliers are meeting quality standards? How do you lower quality costs?

With these questions in mind, here are six best practices to strengthen your supplier quality management program:

1. Measure and Track the Cost of Poor Supplier Quality

If a product quality issue arises, it is often the parent company who bears the Cost of Poor Quality (COPQ),

even though the fault may lie with a supplier. These costs can consume a significant portion of revenue, yet many companies fail to measure and track them in a consistent manner. As a result, they end up wasting millions of dollars on poor quality every year, without knowing where or how to recover these costs.

Although the COPQ in the supply chain cannot be eliminated completely – since no supplier is perfect – calculating these metrics can help you identify opportunities for cost savings, as well as problem areas to address. For instance, by understanding how the COPQ is affected by delays in supply delivery, you can proactively work with suppliers to expedite future deliveries. The COPQ metrics can also help you calculate supplier charge-backs accurately, and thereby recover costs faster.

While measuring the COPQ for suppliers, it is important to consider a range of internal and external cost factors (see Fig. 1 below). It is also useful to measure the costs of good quality i.e. (a) the costs of preventing supplier quality issues with a quality management system, and (b) the costs of appraising and monitoring supplier quality. Companies that invest more resources on good quality have fewer supplier quality issues, and, therefore, a lower cost of poor quality.

Fig. 1: Measuring the Cost of Quality – Factors to Consider

Quality Cost

Internal Costs Prevention CostsExternal Costs Appraisal Costs

Cost of Poor Quality Cost of Good Quality

• Waste & rework

• Re-testing

• Expedited shipping

• Failure analysis

• Backorders

• Downgraded price

• Quality control plans

• Quality policies and procedures

• Quality training and awareness programs

• Quality audits

• Inspection of incoming products

• Supplier performance rating

• Customer complaints

• Recalls

• Warranties

• Penalties

• Lost opportunities

• Reputational damage

2. Align Supplier Risk Management with Quality Audits

With companies being held to increasingly high quality standards, supplier quality audits play a pivotal role in ensuring that the products delivered by suppliers meet pre-defined quality specifications. However, instead of trying to audit all suppliers at once, it is much more efficient to classify suppliers by risk, and then prioritize audit activities accordingly.Generally, suppliers that are high risk are those that are critical to your product’s availability and quality, and therefore, require more frequent on-site audits to ensure that they have adequate quality controls and measures. Lower risk suppliers are those that have no direct product impact, and therefore require fewer audits.

Once all suppliers have been assessed and classified based on risk, plan and schedule audits to identify quality gaps, issues, and opportunities for optimization. Also, instead of using audits as a chance to police and punish suppliers, create a positive experience -- help suppliers understand the importance of the audit, give them the time to respond to queries, and work with them to address identified issues.

Fig. 2: Conducting a Supplier Quality Audit

• Identify audit objectives & scope

• Prioritize audits based on supplier risk

• Incorporate results of previous audits

Audit Planning

1

• Ensure that the supplier conducts a root cause analysis of the issue • Work with suppliers to implement corrective action

Corrective Action

5

• Verify that the corrective action is implemented • Conduct follow-up audits to ensure that the issue is resolved

Audit Verification and Follow-up

6

• Schedule audits focusing on high risk suppliers first

• Identify lead auditor

• Notify the supplier of audit requirements

Audit Scheduling

2

• Conduct an initial meeting to brief suppliers

• Observe & listen for non-conformities

• Take photos or videos as evidence, if appropriate

Audit Execution

3

• Report audit observations and non-conformities

• Discuss findings with suppliers

• Generate final audit report

Audit Reporting

4

Types of Supplier Quality Audits

Product AuditsEvaluate the supplier’s products, ingredients, and services

System AuditsAssess the effectiveness of the supplier’s quality management systems, processes, and policies

Process AuditsAnalyze product manufacturing processes, equipment, and working conditions

3. Rationalize Suppliers for Better Quality Control

The larger the supply chain, the more challenging and costly it can be to maintain and monitor supplier quality. One way of dealing with this challenge is to step back at periodic intervals, and look at how to optimize the supply chain, so as to bring greater order, control, and efficiency to supplier quality management. This process of supplier rationalization enables you to determine if you have an optimal number of suppliers, and if those suppliers have the right capabilities to meet quality requirements.

Some companies rationalize their supply chain based on the suppliers that are critical to their business, eliminating the ones that are not. Others do it based on supplier competence, the range of products provided, or the uniqueness of the supplier’s offering. Quality itself is a parameter in rationalization – suppliers that fail to meet pre-defined quality or performance specifications can pose a significant risk and might need to be removed from the supply chain. Whatever the approach, the goal of rationalization is to build a supply chain that is the best fit for your organization and its quality requirements.

4. Standardize Supplier Quality and Performance Metrics

While each department may have their own methods for measuring supplier performance with respect to quality, a good practice is to develop a consistent set of supplier metrics and KPIs that are applicable to all departments. Standardized metrics give you a broad view of performance and quality trends in the supply chain, helping you determine areas of concern, as well as opportunities for improvement or further investment.

Many companies measure these metrics with supplier scorecards. Not only do these tools help rank a supplier’s performance relative to the rest of the supply chain, but they also help in tracking improvements or failures in the supplier’s quality over time. There are multiple performance metrics that can be tracked through supplier score cards, but some important focus areas are quality, delivery, and responsiveness. Suppliers can also be tracked based on their compliance with requirements such as CTPAT (Customs Trade Partnership Against Terrorism) and social accountability. Each of these categories can have an assigned weight which rolls up together with other metrics into an overall supplier score.

5. Enable a Collaborative Approach to Corrective Action

The sooner you identify and correct supplier quality issues and non-conformances, the better your performance. The key is to ensure that you have strong internal processes and clearly defined roles and responsibilities to alert suppliers to a non-conformance, initiate a Supplier Corrective Action Request (SCAR), ensure that a root cause analysis is performed, and follow up on corrective and preventive action.

Problems often arise when SCARs are thrown at suppliers without any guidance or support, leaving them confused and unsure about how to respond. A better approach would be to communicate and collaborate closely with suppliers at each stage, giving them as much information as possible about the issue or non-conformance, and suggesting corrective action priorities along with examples. Taking the time to train suppliers periodically on quality policies and compliance requirements also goes a long way towards preventing quality issues.

Managing and monitoring supplier corrective actions may seem costly in the short term. However, in the long run, it can help you build stronger relationships with suppliers, reduce the recurrence of non-conformances, and thereby lower costs.

DeliveryProduct Quality

• Success of new product introductions

• % of products non-compliant with quality standards

• # of returned products/ customer complaints

• % of defective products received

• # of corrective action requests

• % of on-time and complete deliverables

• % of late deliverables

• # of emergency orders shipped within agreed lead time

• # of emergency requests for change

• Overall communications with suppliers

Responsiveness

6. Gain Better Visibility into Supplier Quality with Technology

In a vast global supply chain, one of the biggest challenges companies face is a lack of sufficient and timely visibility into supplier quality. This is where technology can help by integrating supplier data in a centralized system, while also mapping each supplier to the associated products/ ingredients, risks, policies, controls, and issues. Thus, you get a comprehensive, cohesive view of supplier quality which, in turn, enhances traceability and accountability for any issues that arise.

Technology also makes quality management processes simpler and more efficient by streamlining and automating workflows such as supplier performance monitoring and quality risk assessments. Advanced tools such as offline and mobile auditing applications make it easy for auditors to enter their findings on the go at remote supplier locations (even without network connectivity).

Interactive reports, dashboards, and analytics can add further value by helping you harness supplier quality information from across the enterprise, slice and dice this data from various angles, and pull out timely and intelligent insights to support decision-making. Therefore, instead of sifting through multiple spreadsheets and word documents, you get

Metrics

Fig. 3: Supplier Quality Score

MetricStream is the market leader in enterprise-wide Governance, Risk, Compliance (GRC) and Quality Management Solutions. MetricStream solutions are used by leading global corporations in diverse industries such as Financial Services, Healthcare, Life Sciences, Energy and Utilities, Food, Retail, CPG, Government, Hi-tech and Manufacturing to manage their risk management programs, quality management processes, regulatory and industry-mandated compliance and other corporate governance initiatives.

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all the quality information you need in one common view, and can drill down to analyze the data in detail.

Better Performance through Better Supplier Relationships

Supplier quality management is not just about avoiding costly recalls, penalties, and lawsuits. When done well, it generates significant value for your business by strengthening overall product quality, enhancing your company’s reputation and credibility, lowering costs, and driving superior business performance.

The key to achieving these objectives is to remember that suppliers are an extension of your enterprise, and not a separate entity. Quality standards, audits, and other processes must be enforced with the same rigor and commitment in the supply chain as in the rest of your organization. When you position supplier quality as a core business activity that is integrated with broader supplier governance and relationship management efforts, you will be well-positioned to drive superior performance, quality, and credibility throughout the enterprise.

Quick Tip

Companies are often quick to pull up suppliers

for non-conformance issues, while failing to

recognize those that demonstrate consistent

quality. Consider motivating your suppliers

with rewards or recognition for compliance

with quality standards, or readiness to report

and respond to issues quickly. Incentivizing

suppliers can go a long way towards

strengthening overall quality.