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Manufacturing
Overview of procurement and
manufacturing
• The quality imperative
• Procurement
• Manufacturing
• Lean and six sigma
• Logistical interfaces
4-2
The 8 Dimensions of Product
Quality
• Features
Performance
– How
Whatwell
different
the product
functions
performs
or tasksincan
comparison
the product
to how
perform
it was designed to
• perform
Aesthetics
• Reliability
– Is the styling, color, workmanship pleasing to the customer
– Likelihood that the product will perform throughout its expected life
• Serviceability
• Durability
– What is the ease of fixing or repairing the product if it fails
– The actual life expectancy of the product
• Perceived Quality
• Conformance
– Based on customer’s experience before, during and after they purchase a
– product
Does the product meet its specifications as designed
4-3
Total Quality Management
• Total quality management (TQM) is a
philosophy focused on meeting customer
expectations with respect to all needs,
across all company functions, and
recognizing all customers, both internal and
external
• TQM’s basic conceptual elements are:
– Top Management commitment and support
– Maintaining a customer focus in product, service
and process performance
– Integrated operations within and between
organizations
– A commitment to continuous improvement
4-4
Management standards have been established by
the ISO in both quality and environment
• The International Organization for
Standards (ISO) was formed after World
War II
• ISO 9000—International Quality Standard
– First one established in 1994
– Currently transitioning to ISO 9000:2008
• ISO 14000—International Environmental
Standard
– First one established in 1998
– Current one is ISO 14001:2004
4-5
ISO certified suppliers are frequently preferred by
procurement departments
• They have to conform to an externally defined
set of standards for quality and delivery of
service
• They are usually more open to sharing supply
chain information
• They welcome building relationships with their
customers
• They have formal processes in place for continual improvement of their
products, services, and processes
• They are easier for procurement folks to initially qualify and periodically
audit
– Certification is done by an external register agency
– Firms have to be re-certified every three years
4-6
Procurement is now a strategic activity of the
firm
• Several factors have elevated the
importance of procurement to the
firm
– Purchased goods and services are
among the largest cost elements for
most firms
– The growing emphasis of
outsourcing has expanded the
supply base of organizations
• This added complexity requires more
management attention on the
organizational interfaces with suppliers
4-7
Purchasing perspective
4-8
Procurement perspective
4-9
Procurement focuses on several issues
related to the firms’ supply base
• Ensuring continuous supply
• Minimizing inventory investment
• Quality improvement of supply
• Supplier development
– Supplier selection
– Building supplier relationships
– Supplier continuous improvement
• Lowest total cost of ownership
4-10
Figure 4.1 Major Categories for the Components of
Total Cost of Ownership
4-11
Procurement strategies
• Volume consolidation
– Reducing total number of suppliers while
minimizing risk
• Supplier operational integration
– Building partnerships
– Sharing information and knowledge
– Identifying linked processes and shared
opportunities for improvement
• Value management extends beyond
buyer-seller operations
– Involving the supplier early in product design
– Reducing complexity
– Value engineering
4-12
Savings potential from volume
consolidation
• Purchases average 55% of every sales dollar
• Cost savings estimated between 5% to 15% of
purchases
• Potential savings is $5.5 million annually for a
company with revenues of $100 million
4-13
Supplier operational integration
• Primary objective of operational integration is to cut waste,
reduce cost, and develop a relationship that allows both
buyer and seller to achieve mutual improvements
• Integration can take many forms
– Buyer providing detailed sales information to supplier
– Buyers and suppliers working together to redesign linked
processes
– Eliminating duplicated activities performed by both the buyer and
supplier
• Can provide incremental savings of 5% to 25% over the
benefits of volume consolidation
4-14
Value management through early supplier
involvement in product design
4-16
E-Commerce and procurement
• Electronic Data Interchange (EDI) is the
electronic transmission of data between a firm
and its suppliers
– Shares information and knowledge such as order
entry, planning/scheduling, tracking, delivery, billing
and payment
• Internet-based communications offer several
opportunities for making product information
available while overcoming compatibility issues
between computer systems
– Electronic catalogs allow rapid access to product
info, specifications, pricing and ordering
– Buying exchanges allow sellers or buyers of specific
goods or services to find each other on a common
web site
4-17
Manufacturing perspectives
• Brand power is the measure of customer
preference based on reputation, product quality
and supply chain capabilities
4-18
Manufacturing perspectives
continued
• Constraints interact with volume and variety to create
realistic manufacturing plans
– Capacity is how much can you produce in a given unit of time
– Equipment considers how flexible it is
• Is one particular piece a bottleneck?
– Setup/Changeover considers how quickly can you change from
one variety of product to another
4-19
The four common manufacturing
processes
• Job shop creates a custom product for each customer
• Batch process manufactures a small quantity of an item in a
single production run
• Line flow process has standard products with a limited
number of variations moving on an assembly line through
stages of production
• Continuous process is used to manufacture such items as
gasoline, laundry detergent and chemicals
• Modifications of the above can create new options
– Mass customization produces a unique product quickly and at a
low cost using a high volume production process
4-20
Manufacturing strategies should match
your market requirements
• Make to Stock (MTS) features economies of scale, large
volumes, long production runs, low variety, and distribution
channels
• Assemble to Order (ATO) is when base components are
made, stocked to forecast, but products are not assembled
until customer order is received
– Manufacturing postponement practiced here
• Make to Order (MTO) relies on relatively small quantities,
but more complexity
– Requires much interaction with customer to work out design and
specification
– Usually shipped direct to customer
4-21
The choice of strategy determines which
performance cycles the customer experiences
4-23
TCM per unit ranging across
strategic alternatives
/MTS
• Lean is a philosophy of
manufacturing that
emphasizes the
minimization of the amount
of all resources (including
time) used in the operation
of a company
• Defining principle is the
elimination of “waste”
4-25
Primary objectives of lean systems
are to
Produce only the products that
customers want
Produce products only as quickly as
customers want them
Produce products with perfect quality
Produce in the minimum possible
lead times
Produce products with features that
customers want and no others
Produce with no waste of labor,
materials or equipment
Produce with methods that reinforce
the occupational development of
workers
4-26
Six sigma quality concepts
• Six sigma approach is to
identify sources of variability
and then systematically reduce
them
• The six sigma goal is to
achieve a process standard
deviation that is six times
smaller than the range of
outputs allowed by the
product’s design specification
4-27
Example of a six sigma quality level
4-28
Logistical interfaces
4-29
Just-in-time (JIT) interfaces
• Just-in-time only produces to a customer
order (ATO, MTO)
• Purchased materials and components arrive
at the manufacturing or assembly point just
at the time they are required for the
transformation process
• Raw material and work in process
inventories are minimized
• Demand for materials depends on the
finalized production schedule
• Lot sizes are as low as one unit
• Close cooperation with suppliers is
essential!
4-30
Materials requirements planning (MRP)
interfaces
• For more complex manufacturing
(MTO, ETO) where large numbers of
components or assemblies are used to
produce a final product
• Procurement has a key role in insuring
all the components are obtained on
time to make an end item
– Key information requirement is the bill of
materials (BOM)
• Planning sometimes spans multiple
manufacturing locations (e.g. Boeing
Dreamliner)
4-31
Design for logistics interfaces
• Design for logistics includes the
requirements and framework for logistical
support in the early phases of product
development
• Considers
– What we are going to make
– How we are going to make it
– What logistics capabilities do we need
– How we are going to integrate our
suppliers into the process
– Any subassembly manufacture by
suppliers
– The need for outsourcing of some parts
or assemblies
4-32
Performance based logistics
interface
• Initiated by US Department of
Defense to purchase performance
outcomes instead of individual
transactions defined by product
specifications
• Government specifies desired
outcomes and lets suppliers
determine the best way to meet
those requirements
• Currently limited to government
purchasing but business
organizations are expected to
adopt the practice
4-33
Table 4.2 Strategic Integration Framework
4-34