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Dr. Deming's Point #4 was "End the practice of awarding business on price tag alone."
In her thought-provoking editorial titled "One Single Point of Failure" (Purchasing b2b Magazine, May 2010), Deborah Aarts discusses the April 2010 eruption of volcano Eyjafjallajokull in Iceland, and the impact suffered by supply chains worldwide caused by the subsequent ash and dust clouds. This natural disaster "caused chaos in supply chains the world over. As air traffic to and from northern Europe ceased, many companies sourcing from the region scrambled to make alternate arrangements." She cites the example of Nissan, who sources pneumatic tire pressure sensors out of Ireland that are sent to plants around the world by air in a JIT environment: "When the airspace closed, planes could no longer service the Irish plant, and Nissan's quick supply of the sensors was cut off. The company was reportedly forced to temporarily suspend production at its plants in Fukuoka and Kanagawa, Japan." BMW operations in South Carolina were similarly disrupted as it could no longer obtain seat covers from South Africa.
Ms. Aarts (along with risk advisor Marsh Inc. in a follow-up contribution within that same magazine) search for solutions. The key, it is argued, is to analyze the supply chain of each item and look for single points of failure: those critical items and points of contact that, if disrupted, would cause serious problems downstream. But what specific evasive action could be forward-planned? Searching for alternative suppliers is a possibility, but having an alternate local supplier sit idle in anticipation of a similar disaster could be impractical and cost-prohibitive. Carrying some protective safety stock might be a prudent plan: I discussed this option with a colleague of mine in the health care industry at a recent APICS Professional Development Meeting - in an industry that makes life-or-death decisions on a daily basis, they have concluded that a 4-week safety stock is affordable and comfortable. While I have never personally embraced an arbitrary "weeks coverage" objective (as it flies in the face of the spirit of continuous improvement) I had difficulty arguing with my colleague. Lives are at stake. I decided to take a "Total Cost" view which worked to support his conclusion. Whatever the optimal solution, it is important to identify those single points of contact that present the greatest risk.
How is all this relevant to Dr. Deming's Point #4? Well, Deming argues that the practice of awarding business based on price tag alone, which was, and continues to be ubiquitous in American business and public service procurement policies, leads to a proliferation of suppliers. Moreover, if the purchasing agent plays one supplier against another, he or she may succeed in driving the rice to a point where the suppliers having difficulty staying alive!
It is critically important for companies' procurement policies to put quality first. Sourcing from a multitude of suppliers will make evaluation of quality of inbound materials virtually impossible. Too much variation lot-to-lot and within lots will necessarily occur, and variation impairs quality. Jumping from vendor to vendor will further produce reliance upon specifications, the practice of which impairs pursuit of the quality initiative and continuous improvement.
Deming strongly advocates building long term relationships built on trust with single suppliers. There are enormous advantages. Long term quality initiatives can be cemented. The supplier is more likely to assume the risk of innovation and the cost of modification of production processes that benefit the customer. Administrative processes and transactions between the two partners are likely to be streamlined. Engineering, supply chain, and marketing departments, among others, in both companies should work together to build quality and reduce costs. He argues that robust quality arrangements cannot be adequately arranged across a multitude of suppliers.
Dr. Deming further questions the worth of contracts, especially short term (annual) ones. A supplier who enters in to a series of short term contracts cannot, typically, afford to tailor the product to the needs of the buyer.
Does Dr. Deming's advocacy of single source long-term relationships conflict with the "Single Point of Failure" analysis as discussed by Ms. Aarts? I do not think so. Dr. Deming was enough of a realist to understand that catastrophes such as fires, strikes, and yes, even volcanoes happen, sometimes with devastating consequences. The outcomes are magnified in a JIT environment. Alternatives need to be planned, with intelligence.
The point is that the myopic view of awarding business based on price tag alone is a quality catastrophe waiting to happen. Take the Quality and Total Cost view. "Defects beget defects. Good quality begets good quality."
John Skelton is the Principal Consultant and founder of Strategic Inventory Management.