How to find and prevent serious defects from entering your supply chain early enough to reduce on going quality risks and damage to reputation.
With a drive to reduce costs in a more globally diverse supply chain, some manufacturers are finding ways to significantly reduce quality risks by implementing global web based systems that provide unprecedented visibility.
Executive Summary
The globalization of manufacturing supply chains together with the imminent retirement of experienced engineering and quality employees, require an aggressive review of existing quality practices to avoid potential disasters.
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The failure of a single feature of a part, a flawed manufacturing process, or a tainted ingredient can erode years of stock and brand value in an instant. |
A small part in a auto assembly made by an unknown sub tier supplier may save pennies, but could end up damaging a reputation of quality and brand reputation that the auto maker built up over many years and could end up costing cost millions of dollars to mitigate.
A dramatic jet engine failure caused by a small component manufactured by a sub contactor could lead to catastrophic impact for the reputation of the engine maker, the aircraft manufacturer, and the airline.
A medical joint replacement manufacturer using an unapproved process, could create a cascade of claims and litigation that ultimately destroy the reputation of that brand.
Unapproved ingredients mixed into a drug by a drug manufacturer could create a similar type of impact to a brand that Tylenol faced several years ago.
From automobiles and jet engines to medical devices and pharmaceuticals, quality escapements have caused such a global media frenzy that a brand’s value and reputation can be wiped out in seconds. Given the nature and speed of the internet this all happens in seconds and cannot be isolated and quarantined as it was in the past.
Why don’t the current quality management programs catch these problems? What conditions created these catastrophic quality tsunamis and are they getting worse? What can we learn from these failures and what new tools can be implemented to change the paradigm from defect detection to true root cause analysis and defect elimination. Can these risks be eliminated?
The drive for lower costs and unintended consequences
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Globally sourced parts and materials continue to increase dramatically yet the resources and tools to ensure their quality has not kept pace. |
For most major manufacturing companies their supply chain chains have become more complex and more geographically dispersed. The visibility is almost nonexistent as you drop down to the sub tier levels. The drive from increased competition to lower costs has accelerated this process at the same time products have become more complex. The days of local and regional specialty suppliers are being supplanted by lower cost globally remote suppliers that can be competitive because of lower cost of labor and more efficient transportation. As Original Equipment manufacturers (OEM’s) press for lower supplier costs, the expansion of additional global sub-tier suppliers is reshaping the supply chain. The demand for cheaper parts, subcomponents, assemblies, and materials has now intensified. With lower labor costs and more competitive and efficient transportation, global suppliers are now unseating more expensive domestic suppliers.
The result is more suppliers and sub tier suppliers using a wider array of brand-new suppliers, often based on price. As these sub-tier suppliers multiply, ingredients for pharmaceuticals and parts assembled into larger components are increasingly likely to come from all over the world, and from unknown sub tier suppliers. More troubling, the capability to review and inspect these suppliers may be falling behind. Reliance on traditional paper -based quality programs and go or no-go approvals make trust more than verify the name of the game. Over the years and enormous amount of trust was placed on suppliers that you had worked with for years. Local companies worked in your best interest and used traditional quality methods to stop defects from entering the supply chain. This system although not perfect did provide at least some protection for the OEM because their reputations were aligned. With the lowest cost being a requirement and product made on the other side of the globe, this alignment is no longer there.
According to the Aerospace Industries Association (AIA), overall imports for aerospace and aircraft manufacturing jumped 10% in 2010, with spacecraft, missiles, rockets, and parts increasing nearly 50% and imports for aircraft and engine parts up 14.3%. From engines to aircraft, aviation/aerospace OEMs are increasingly reliant on parts and materials from around the world.
The outlook for pharmaceuticals indicates a similar globalization trend. In the US Food and Drug Administration’s 9/29/2010 draft whitepaper Strategic Priorities 2011-2015, responding to the Public Health Challenges of the 21st Century, the FDA recognizes the priority of strengthening the safety and integrity of the global supply chain. In Section 2, “Cross-Cutting Strategic Priorities”, the FDA Commissioner identifies the global supply chain as one of the four strategic priorities that cut across all areas, based in part on their forecast of over 20 million lines of imported food, devices, drugs and cosmetics in FY2010, more than 3 times the number of imports 10 years ago. The FDA report goes on to describe the increasing complexity and volume of imports as a “serious challenge”.
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The FDA describes the complexity and volume of imports as a “serious challenge” that requires a “paradigm shift”; stopping threats before they are a reality. |
While manufacturing companies may have relied upon their traditional quality management programs, many are recognizing that financially and practically this cannot work in the new paradigm. Quality departments have always been very conservative by nature and now are being forced to relook at every aspect of how their quality mission is accomplished. Systems that were adequate before are now looking woefully out of date and have no practical application in the new supply chain universe.
The FDA recognized that with over 300,000 facilities in more than 150 different countries, the growing challenges of globalization of the supply chain has “far outstripped the nation’s resources for inspection and quality monitoring”. As a result, the FDA is focused on a “paradigm shift”; stopping threats before they are a reality using proactive tools, more inspections and updated IT systems (IBID, Section 2.2, page 6).
The growing media attention to fake parts and the increasing focus of Federal regulatory agencies such as the FAA and FDA on the risks associated with the global supply chain is evidence of the growing concern about this threat. Recent very public quality disasters have reinforced the fact that it is the OEM’s brand that ultimately pays the price; the culprit can shut up shop and reappear as another inexpensive no name, no reputation supplier down the street. The OEM’s brand is left in ruins.
The global fragmentation of the supply chain
A “Stress Test” that may be revealing vulnerabilities of current quality management programs.
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The lack of a consistent, uniform and cost-effective way to ensure all manufacturing documentation and associated data is complete and accurate is a red flag |
- Are Quality documents and procedures accurate and visible?: While most manufacturing processes require detailed documentation containing the specifications ,details of the first manufacturing run called “the first article”, material certification etc. It is virtually impossible to check without vast quantities of paper changing hands. These additional paper requirements because of increased tiers eliminates a lot of the cost savings that had been hoped for. While many companies apply an empirical focus on production quality, the process of establishing and documenting the specifications that will ultimately be used for inspection plans, and downstream quality audits often lacks similar detail, accuracy, and validation. For example, the AS/EN 9100 (aerospace quality standard) requires that “first articles” for every part be complete, accurate and be inspected by the manufacturer. From part specifications and tolerances, to processes and coatings, the quality standard requires complete and comprehensive documentation. But how often does this happen; and where is the documentation for the sub-tier suppliers? Who inspected the documentation and checked it? What is the audit trail and chain of custody of these critical documents? Were the measurements accurate and did they use appropriate metrology for specification requirements. If the wrong measuring device was used, the results have no value.
The answer is often not clear due to the lack of a consistent, uniform and cost-effective way to collect, inspect and manage this documentation. Typically, in the past manufacturers relied on in-house experts who were intimately familiar with the products and long-time suppliers whose performance had always been trusted. Now they must rely on a patchwork system of paper that is impossible to verify except by occasional audit. These audits normally only occur after a serious incident has occurred. Closing the door after the horse has bolted.
Even more troubling is when a detailed review of the process is completed. Were measurements made on a first-run part? Were they recorded as an amount not just a pass fails? what type of instrument was used? were the tools calibrated? who calibrated the measuring too?
The fact is that without this information being readily available and verifiable, many of the data elements required for approval may be suspect. A global supply chain only makes this problem even more difficult to manage.
- Traditional quality programs and go/no-go inspections are ineffective at reducing and eliminating defects: There is substantial evidence to show that traditional quality programs over the years have failed to establish significant and sustainable quality improvements. Every escapement not only indicates a process failure but also may be the tip of the iceberg. It also shows defects found not defects made. The key word being “sustainable”, most activity-based programs that rely on training and documentation fail to change practices and behavior because they lack a quantifiable feedback loop. Human-based activity changes for a time period but like a rubber band, snaps back to the familiar and comfortable practices of the past. Such quality programs delegated to suppliers are even more difficult to sustain and are often viewed as imposed mandates requiring additional work and cost rather than something that is truly beneficial to their operation. At the same time these programs substitute activities and processes for verifiable results and the goal of defect elimination. Reporting on discovered defects or flawed ingredients after they are produced and shipped is evidence of a process breakdown, not a solution. Compounding the risks of defect detection quality programs, quality managers often overly rely on statistical data to prove that their quality programs are work. Historical lack of defects found has always been used by companies to reassure themselves that they will not have problems in the future. However, the world has changed and even if that confidence was marginally justified in the past, today that confidence is no longer valid. Severe problems that will occur in the future will likely be a single characteristic of a single part buried deep in the sub tier assembly. Because it is also likely to be a detail characteristic, the defect will not reveal itself in the up-line inspection process because the part will be fully assembled defect and all. This will then produce the worst type of defect “the latent defect “. This defect will only reveal itself in a massive in-service failure but also require an expensive recall and reinspection of all other in-service products that use that item. This will draw much unwanted attention to the brand and the OEM, the culprit manufacturer will disappear into thin air.
It is obvious now that the traditional systems cannot solve these problems. Real time observation of all manufacturing processes including a detailed analysis of all defects made not just escapements is now mandatory to mitigate these risks with suppliers under ever-increasing pressure to lower costs, and the supply chain fragmenting worldwide, who is inspecting these key features of each part, and how are they doing it? Do large OEMs really know whose parts or ingredients are in their product and whether each key feature and essential characteristic was inspected? Remember, it can be a single hidden feature of a single part that leads to the worst quality failures.
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Past performance fails to address the impact and cost of seemingly minor defects in a single feature of the smallest parts, minor ingredients and materials. |
- Manufacturing quality processes have normally been based on in-house experienced personnel and not bullet proof processes, these are very same people that are headed for large scale retirement in the next few years: To add to the OEMs challenges their last line of quality defense is now crumbling. Many production teams have relied on experts who “know how it is done” and are comfortable, with long term relationships between suppliers and their personnel. Instead of completely documented and measurable manufacturing specifications and processes, many companies rely on experience and not process.
Tribal knowledge is kept tucked away and not documented to increase employment value and job security. With the imminent retirement of a major demographic bubble of these experts’ processes and tribal knowledge need to be documented immediately in addition to a more robust quality system that does not rely on in house expertise to make judgment calls. One that is based on process and metrics and less on judgment and tribal knowledge. As the saying goes, “your intellectual property walks out the door every day”. As the baby boom generation retires this exodus of knowledge will be of biblical proportions and could be end up in the complete destruction of companies and products. Will your brand survive when this exodus occurs and what steps must be taken to document and institutionalize this knowledge?
- Conflicts between cost reduction initiatives, risk mitigation and quality programs:
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Are the risks associated with a fragmented, global supply chain fully understood and accounted for? |
As the constant pressure for market share and stock appreciation increases, cost reduction is usually the prime focus. Not willing to spare anything from scrutiny, quality programs with their personnel and systems are often viewed as cost centers that must justify their value. Since most companies manage to a fiscal year, if not by the quarter, quality organizations frequently spend valuable time and resources trying to show the current systems are not only needed but are working. Using “silent evidence” (the lack of past major quality escapements), companies may be tempted to conclude the current programs are “good enough”. Meanwhile, the quality managers using traditional “defect detection” approaches recognize the expanding global supply chain requires more personnel, more travel for inspections and more tools resulting in funding gaps if they are to continue the traditional quality approach.
Corporate compliance and legal departments are also recognizing the growing regulatory and civil liability risks arising out of the fragmentation of the global supply chain. If supplier documentation (for every supplier at every tier) is spotty, validation of data lacking and inspections limited, tough questions must be asked. Is the company doing everything it can to identify and mitigate these risks? Is the corporation properly disclosing the extent of risk associated with potential quality problems from global suppliers, and are sufficient funds being allocated? Is it more costly to react to problems later than prevent them now? Is there a need for higher warranty or recall reserves?
The fact is that without addressing the tough questions and completing a reexamination of traditional quality systems, these companies are exposing themselves to not only unnecessary risk but also one that is increasing exponentially
Summary: “The Stress Test”
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Are unknown parts and materials in complex assemblies like the toxic mortgages that were rolled up in triple “AAA” rated bonds? |
Unreliable documentation, limitations of current quality programs, the mass retirement of the manufacturing quality experts and the lack of integration of corporate initiatives that impact quality, all compound the risks associated with the fragmentation and globalization of the supply chain. Further concerns arise from the lack of verification and documentation, the weakness in traditional statistical measurement methodologies and the underestimation of the potential catastrophic financial impact of a defect in a single feature of a single part or ingredient.
For many years financial institutions and their government regulators utilized highly sophisticated financial modeling systems and risk profile management to detect problems. This was considered more than adequate until recently when all their assumptions were destroyed in a few weeks because they failed to look at the details and assumed that because problems had not occurred in the past that they would not occur in the future. Will current AAA rated manufacturers similarly implode because none knew what was in the detail parts. Companies must know the details of their products to not only catch defects, but expose them in real time so they can be prevented? Just like most asset-backed security investors who did not know the extent of the toxic mortgages inside their triple “AAA” rated bonds; do manufacturers really know who made the parts that are rolled up in their subcomponents and assemblies that now comprise their finished products that bear their brand name? The odds are, with a rapidly expanding global supply chain and an increasing trend toward integrated assemblies provided by suppliers (i.e. pushed down the supply chain), the parts or materials that are in a final product are increasingly difficult to verify. It is simply not possible with current internal systems and traditional quality management methodologies. Defects that are undetected at any level in the manufacturing process can now become latent defects and appear as in service failures with all the negative publicity and brand damage that that entails.
All it takes is a single, key characteristic to fail to cause a part or ingredient to fail, This will result in a brand failure The results of the “Stress Test” suggest current quality programs and systems are not sufficient.
The Solution
Real-time supply chain visibility across the production lifecycle and across the globe.
“2011 will be the year that businesses embrace the app revolution for purchasing, logistics, supply chain, management and sales providing real time information” according to Daniel Burrus, author of the Flash Foresight (Wall Street Journal, “A Look Ahead 2011, Trends That Will Shape Next Year”, page B6, December 15, 2010)
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Documentation can now be rapidly and accurately compiled, reviewed and verified not just for primary suppliers, but for every supplier and sub tier supplier. |
An increasing number of manufacturers and suppliers are discovering a new level of visibility that can be obtained through new web-based software that connects all suppliers to a single server complex. From aviation/aerospace and medical device companies to electrical component manufacturers. OEM’s (Original Equipment manufacturers) are leveraging web applications to augment and extend their in-house systems and processes. Real time visibility is the name of the game. Companies need to have instant and accurate real time information to stop defects at source and monitor real time deviation of process.
With anytime/anywhere access and uniform and consistent electronic documentation that can be checked and verified in real-time, web-based applications now offer tools to combat the challenge of global fragmentation. First articles, bill of materials and all other specification documentation about parts and materials can now be rapidly and accurately complied, reviewed, and verified not just for the primary suppliers, but for every supplier in the sub tiers. With the power of hyperlinking documentation (parts and components can be linked with larger assemblies enabling an OEM to “see” every detail of every part going into their finished product), web- based visibility tools solve the challenges that traditional quality programs and systems could not. Details of a product can be extracted from a solid model and placed in an electronic document creating complete configuration control. Leveraging this data, web-based applications can provide the capability to collect and aggregate real time status of supplier activities such as all the quality data and the manufacturing status of the parts. These visibility tools offer new supply chain and quality management capabilities that focus on preventing defects before they enter the supply chain. At the same time such web-based applications offer these advantages, they also provide robust security and access control to ensure compliance with international trade and security regulations (ITAR -EAR) that may pertain to control of data to US citizens.
They also have the ability to determine the capability of a supplier before they are entrusted with manufacturing key components. This allows the OEM to determine capability before issuing a PO not after
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Visibility down the entire supply chain and across the globe can be enabled by web applications that offer real time status of all key supplier quality requirements and metrics. |
Manufacturers and suppliers are both benefitting from these innovative web applications. Manufacturers can now focus resources on preventing defects instead of trying to discover them on the assembly line or worse, as an in-service failure.
Web applications give them real time data about parts, materials, and processes down to the smallest sub-tier suppliers across the globe. Real time monitoring of production process variations now enables quality management resources to address root causes immediately when automatic alerts are received. Such critical quality management activities like root cause analysis and producing pareto charts are now created automatically as the problems occur and are not a post facto management reporting function. Not only do manufacturers gain unprecedented levels of visibility and control over their global supply chain, but they also gain complete, accurate documentation evidencing new levels of complete and rigorous quality control and risk mitigation. Finally, with these new capabilities, manufacturers can reduce costs without risking quality; reduce global travel for inspections and lower supplier costs for replacements, scrap, and rework. Redeployment of quality resources from documenting and managing the after-effects of defects to real value-added root cause analysis and defect prevention
Suppliers benefit because they gain a uniform, consistent and labor-saving way to prepare and manage their quality related documentation. Suppliers at all tiers also have the ability to become more visible and credible based on the quality of their online documentation and quality record. As suppliers reap the advantages of lower costs and improved quality from using identical web-based services, they can also increasingly compete on quality and lower prices based on efficiencies, not cut-rate labor.
Conclusion
Manufacturing organizations have long been active in implementing and managing “quality” programs. From Six Sigma, Lean and other quality methodologies/programs to specialized legacy ERP systems and software to track defects and quality information. Many manufacturing organizations have invested millions of dollars in the fashionable six sigma programs that had a cult like following until they failed to produce the expected ROI. Even when improvements were obtained rarely were these improvements sustainable and they frequently morphed back to their original
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All it takes is the failure of a single part to erase millions of dollars of brand value. |
comfortable state. This happened because the expensive analysis to monitor the processes was stopped and when no longer monitored in real time the processes drifted back to their original state.
The simple fact is that “defect detection” or inspecting parts after the fact using documentation and measurements that often contain a wide range of variability and accuracy, is not sufficient to address the problem of a more complex, global supply chain. Add to fact that the same inspection plan was rarely used between supply steps, it hardly surprising that deviations frequently occurred that were nothing more than different interpretations of the same data. Against the reality of the OEM’s drive for cost reduction, suppliers are driving this cost reduction to their suppliers and/or new suppliers looking for opportunities to further lower their own costs. This trend opens the door for cost-driven suppliers to seek even lower cost components, materials, and labor. When all it takes is the failure of a single characteristic of a single part to erase millions of dollars in brand value, the fragmentation of the global supply chain and retirement of workers familiar with legacy programs can no longer be ignored.
With complete, detailed, real-time visibility in the entire supply chain across the globe provided by web-based applications, manufacturers now have the capability to respond to the growing challenge of global supply chain fragmentation. At the same time, expertise and tribal knowledge can be documented electronically risk mitigation and regulatory compliance can be integrated and harmonized. As defect detection and on-site facility inspections are replaced by real time, automated manufacturing process control, all parts can be hyperlinked for complete visibility. Government regulatory compliance can now be augmented by automated and fully documented processes, demonstrating a new level of control, record keeping and visibility that meets and exceeds current levels of compliance expectations.
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OEMs and suppliers now have the automated tools to lower costs and compete on quality, not cut-rate labor. |
Suppliers gain new confidence by making their production quality and quality documentation readily visible and accessible to all customers at all tiers. In addition to lowering quality management costs and improving production efficiencies (less scrap and rework, lower warranty costs, in service failures etc) suppliers can sustain healthy margins with lower prices, unseating competitors that sought advantage with cut-rate labor. Using technology to compete on quality and value with cost advantages arising from higher quality and efficiencies is an emerging example of innovation at work.
Now is the time to examine more closely how the global supply chain may be increasing the risks to your brand, and whether current quality programs and in-house systems are enough to prevent a significant risk to the reputation of a brand that has taken many decades to create. Is your brand one event away from being seriously damaged. What steps can you take to mitigate this risk? Can you make sure everything that goes into your product is known and visible? Do you know the reputation and quality of all the sub tier suppliers in your supply chain?
