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The Mindful Business: Balancing Supply Costs and Quality

Michael Wilson | Jun 18, 2014

What is Quality?  “According to Joseph Juran, quality means ‘fitness for use;’ according to Philip Crosby, it means ‘conformance to requirements.’ (American Society for Quality, ...

supply chain sustainability

What is Quality?  “According to Joseph Juran, quality means ‘fitness for use;’ according to Philip Crosby, it means ‘conformance to requirements.’ (American Society for Quality, n.d.).  The business truth is that quality is defined by the customer; it is the customer that decides how much value they assign to quality and, therefore, how much they are willing to pay for that assigned value. The supplier’s interests are to satisfy their customer and achieve profitability. It is the task of both customer and supplier to find the value point that strikes a balance between cost and quality.

From the customer’s perspective, the procurement objectives are to get what you need, when you need it, where you need it, in the condition needed, and at the highest value possible for the price you are prepared or willing to pay. The supplier’s perspective focuses on providing what the customer needs at a cost that permits profitability to the supplier. Traditional thinking follows a silo approach where the customer focuses on requirements and price and the supplier searches for cost-cutting measures to satisfy their customer and achieve profitability. Both run the risk of missing the mark entirely!

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Communicating Supply Chain Sustainability

Achievement of both customer and supplier objectives is a win-win proposition that supports supply chain sustainability. A key element to sustainability is a collaborative approach that requires clear and frank communication between the organizations to determine an understanding of the critical requirements as well as any permissible flexibility within the product/service standard.

Synchronized thinking between the customer and supplier on the product/service keeps them on track toward common objectives. Innovative thinking between customer and supplier seeks synergies and stimulates creativity in alternative solutions to reduce/eliminate redundancies, waste, or inefficiencies affecting high-cost elements, sometimes from the design onset.

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So how do both customer and supplier identify the balance between cost and quality, the value point that serves their mutual interests? Here are three approaches:

1. Understanding which procurement items merit the effort

ABC classification is a useful tool to identify those critical or high value items that merit a closer relationship between customer/supplier to ensure a sustainable supply chain. Take, for example, a furniture fabrication company that had the foresight to collaborate with their fastener supplier to standardize fastener specifications and therefore minimize the cost/effort of managing multiple types and sizes of bolts and nuts.

Quality of the components is significant because of the criticality of the fasteners to total production output, but the low cost characteristic of the item is such that over-application of unit quality monitoring increases cost and creates a value imbalance.

2. Creative mindfulness

Creative thinking between the customer and supplier on alternative quality practices can sway the value point closer to center. To the customer, relaxed monitoring of quality conformance at the receiving station could represent a shift from bottleneck to a supply buffer point made possible through collaborative efforts with the supplier.

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3. Utilizing alternate quality monitoring techniques

Agreement by the supplier to use alternate quality monitoring techniques such as Statistical Process Control (SPC) and agreement to unquestioningly accept return items could be negotiated with the customer for a price increment that could be absorbed due to the consequential increase in production output by debottle-necking the customer’s receiving point. Issues upstream in the production process as they develop rather than through cumbersome quality monitoring of finished items in post-production.

4. Supplier differentiation

In the global environment in which business is conducted today, supplier differentiation, rather than product price point, has become the focal point of procurement strategies. Supplier differentiation places value on critical aspects of the product/service as it relates to the overall value chain between supplier’s suppliers/supplier/customer/customer’s customers. Implementation of lean practices up and down the supply chain keeps all supply chain members aware and watchful of redundancies, waste, and inefficiencies.

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Minimum Cost, Maximum Value

The benefits of lean practices become evident as customers and suppliers recognize shared best practices and relate to each other with increased trust and collaboration. Incorporating lean practices becomes a habitual way of conducting business and soon reflects as a way to increase value at minimal cost.

Finding the value point between cost and quality is not a formula-based exercise. It is a paradigm shift that begins by understanding that the customer-supplier relationship is not one of opponents, but rather of partners.

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