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To understand the supply chain, we first discuss the economic concept of the value chain. Michael Porter, 2 the noted economist and author, identified a systematic means for examining all the activities a firm performs and how those activities interact. Thevalue chain is a tool that disaggregates a firm into its core activities to help reduce costs and identify sources of competitiveness. It is part of the value system that consists of a network of value chains. The value chain and core activities that are performed by any company include inbound logistics, operations, outbound logistics, marketing and sales, and service.

2Porter, M., Competitive Advantage (New York: Free Press, 1995).

Figure 9-1 shows Porter’s value chain. Notice that this is a chain for a single firm; however, the firm’s suppliers have value chains also. The core activities shown in the figure are termed value-chain activities because they are the tasks that add value for the customer. If a firm performs these core functions well, the result is high customer satisfaction. Non-value-chain activities typically have costs but no effect on the customer and are referred to as the hidden factory. The hidden factory contains all the bureaucratic processes that are not part of the core activities in Figure 9-1.

SOURCE: M. Porter, Competitive Advantage (New York: Free Press, 1995). Reprinted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group. All rights reserved.

From a quality perspective, an interesting variation of the value chain is the concept of the chain of customers. 3 Looking at the activities along the value chain sequentially, we see that the links in the value chain are really people performing different functions. The chain of customers is revealed when you view the step in the chain after you as your own customer. This means that if you work at workstation 4 in a process at the core of the value chain, you will make sure that the work you do is absolutely impeccable before you release it to your “customer” in workstation 5. This chain extends from raw materials through supplier firms to the producing firm, with the final link in the chain being the ultimate consumer of the product. The notion is that if each of us along a chain works to satisfy our own customer, the final customer will be very satisfied, and our products and services will be free of defects and mistakes.

3Schonberger, R., Building a Chain of Customers (New York: Free Press, 1990).

The concept of supply-chain management extends the economic concept of the value chain. Figure 9-2 shows a rendering of a supply chain. Notice that it includes several suppliers, plants, distribution centers, and customer groups. This is a useful extension of the value chain because it provides a more realistic picture of the value chain. Notice that the value chain focuses on activities such as inbound and outbound logistics. These are supply-chain activities. One of the most significant aspects of the value chain is the linkage between a series of suppliers and consumers. This linkage is especially tenuous because it involves the complex interaction of logistics, systems, and human behavior. These linkages and relationships between suppliers and customers have undergone radical changes in the past decade. Much of this chapter focuses on this linkage.

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A Closer Look at Quality 9-1: Supply Chains and Terrorism a

aAdapted from Gonsalves, A., and Konicki, S., “In Search of the Big Picture: Supply Chains,” Information Week (October 8, 2001): 34–40.

Since the terrorist attacks on New York and Washington, many companies are shifting their supply-chain priorities from squeezing costs through inventory reduction to limiting the consequences of transportation disruptions on production. The concept of lean-inventory management systems feeding directly into production lines—in other words, lean manufacturing—has been the goal of companies looking to save money through more efficient supply chains. However, the September 11, 2001, tragedy introduced a new reality for supply-chain managers faced with grounded flights, closed borders, and lengthy inspections of truck cargoes. “People are coming to see they need contingency plans so that in case something happens, there’s a stockpile of critical parts somewhere,” says Bruce Bond, a supply-chain analyst at Gartner Group, a tech-consulting leader.

To minimize the effect of such transportation disruptions, companies are reconsidering their lean inventory strategies in favor of storing larger quantities of critical parts closer to manufacturing facilities. Arrow Electronics, Inc., a $13 billion electronic components distributor in Melville, New York, that has 13 distribution centers around the United States, is working with customers to determine whether it can help them maintain miniwarehouses near production lines through the use of Arrow’s proprietary inventory management software. Arrow might open and manage such a warehouse, or a customer might open it, and Arrow might provide the management services.

Bill Forster, Arrow’s vice president of worldwide logistics, says that the company is increasing the inventory of parts it holds for customers and sees the same trend among some of its largest customers. For Arrow, decisions about whether to increase inventory depend on a number of factors, including the importance of a given part to one or more customers and whether an inability to deliver the part could halt production.

Boosting stores of easily accessible inventory may become necessary as tighter security results in more frequent—and longer—cargo inspections by U.S. Customs at airports, on highways, and at shipping ports. “Every day we hear different requirements for the inspection of materials,” Forster says. Among those requirements are hand searches and x-ray examinations of cargo, as well as additional testing, such as passing shipments through compression chambers to make sure that no device being shipped is set to explode at reduced atmospheric pressure. One airline that before September 11 required no waiting time for cargo inspection now requires at least 24 hours, Forster says.

Ford Motor Company is one company that’s adjusting its lean-inventory model. The automaker has stockpiled engines from Canada and other critical parts manufactured outside the United States. Ford is also reevaluating its global-sourcing strategy for critical parts. Rival General Motors Corp. is developing a contingency plan that likely will include some stockpiling and a reevaluation of its global-sourcing strategy. Both automakers are reconsidering whether a sole source for a part should be a supplier whose manufacturing facility is in another country.

AMR Research automotive industry analyst Kevin Prouty says that DaimlerChrysler, Ford, and General Motors are all asking suppliers to increase the inventory of non-U.S.-made parts in the United States as one way to mitigate risk in the face of less reliable international shipping and potential recurring problems such as border slowdowns or closings and air shipment delays or stoppages. He notes that a supplier-managed inventory strategy forces suppliers to hold inventory and to bear the consequences of doing so.

Experts say that the ability to adapt quickly to sudden changes in supply-chain activity and customer demand will be imperative. Hon Industries, a $2.04 billion office furniture manufacturer in Muscatine, Iowa, is an example of this adaptability. The day of the attacks, the company received a 20-truckload rush order for office furniture from a customer in the Northeast. The customer that placed the order was setting up offices for companies affected by the World Trade Center attack, and it needed the furniture within five days. Jim McKeone, Hon’s investor relations manager, says filling the order was a daunting task, considering that the company is a lean manufacturer, generally requiring two weeks to build orders and not holding inventory of its products.

Many CFOs, says Gartner’s Bond, are starting to think that it is more economical to minimize supply-chain disruptions by building up inventory selectively, deploying supply-chain software that allows flexibility in production scheduling, and working closely with suppliers to meet unexpected needs rather than to be forced to halt production at a factory with a lean manufacturing model. Agility once meant the ability to respond to whatever a customer wanted. Now, Bond says, people are saying it “has to include the idea of planning for disruptions in the supply chain that could keep you from serving your customer at all.”

Managing inbound logistics in the supply chain involves working with suppliers who provide parts, raw materials, components, and services. As we have already discussed, there has been a trend toward developing closer working relationships with fewer suppliers. Given this new approach to suppliers, a big part of quality improvement requires developing and assisting suppliers so that they can provide needed products with low levels of defects, in a reliable manner, while conforming to requirements. Several approaches to improving suppliers result in what is called supplier partnering. Inspired by lean purchasing approaches learned from Japanese industry, supplier–partner relationships have emerged that treat suppliers as de facto subsidiaries of the customer organization. We say de facto subsidiaries because as information is shared and communications are improved, the relationship begins to resemble a parent/subsidiary instead of separate firms.

As is shown in Table 9-1, a number of systems are used to help develop suppliers. Single sourcing refers to narrowing down the list of approved suppliers for a single component to just one supplier. Companies that are uncomfortable with using a single supplier may use dual sourcing, where the number of approved suppliers is reduced to just a few. Dual sourcing reduces the exposures of having a single supplier.

Supplier evaluation is a tool used by many firms to differentiate and discriminate between suppliers. Supplier evaluations are often recorded on report cards in which potential suppliers are rated based on criteria such as quality, technical capability, or ability to meet schedule demands.

Sole-source filters that are used in many companies rely on external validation of quality programs. The external validation comes from outside examiners and registrars that are used in these processes. This gives customers the comfort that outside authorities have given your company a sort of seal of approval. Two of the most commonly used filters are the Baldrige criteria and ISO 9000:2000 (Chapter 3). In these cases, companies must show either that they are using the Baldrige criteria to improve or that they have become ISO 9000:2000 registered. The ISO 9000:2000 filter is used commonly in the international community.

Video Clip: Supplier Development at Nylamode

Many companies perform lengthy inspections of their suppliers that involve long-term visits and evaluations. These programs are often called supplier certification of qualification programs if the focus is entirely on evaluation. If the focus is on helping the supplier to improve by training the supplier over long periods of time, they are termed supplier development programs. Supplier development programs are sort of like mowing Mrs. Gunther’s yard. The first time I mowed Mrs. Gunther’s yard as a youth, she was not especially satisfied. After I had finished, she brought me a glass of lemonade and explained to me gently how she really wanted her yard to look. A week later, I returned and did a better job. Over lemonade, Mrs. Gunther explained where I had done better and where I needed to improve further. With each successive week, I did a better job. As my work improved, she paid me more. By the end of the summer, I realized how much better I had become at caring for her yard. She patiently developed me as a service provider. Over time she became more satisfied, as did I.

Another tool that is used often is the supplier audit. This is similar to supplier certification except that a team of auditors visits the supplier and then provides results of the audit to the customer. The audits are performed to ensure that product quality and procedural objectives are being met. Supplier audits tend not to have the developmental component that is found in supplier development programs.

We should mention that there are drawbacks to single sourcing. When there are few suppliers, there is more exposure to interruption of supply. For example, General Motors experienced a major shutdown as a result of single sourcing from a single supplier named Delphi. If labor relations are not solid, single sourcing can have the effect of shifting negotiating power to unions in supplier plants. Other problems include possible interruptions because of transportation problems, quality problems, disagreements concerning pricing, or global security problems (see A Closer Look at Quality 9-1).

In the 1980s, a defective rate of 5% for a supplier was acceptable. In this new century, parts-per-million levels of quality are expected from suppliers. In addition, many companies such as Mercedes-Benz are moving to single-source suppliers (see Quality Highlight 9-1). Other changes have occurred as well. Purchasing groups were viewed in the past as in-house experts who expedited orders and solved materials supply problems. The dollars spent on supply were not critical as long as parts were available for manufacture. Strategies are different now. The way to develop a supplier is to have adequate communications, linear production schedules, and time to make necessary changes. Supplier contacts are one way to ensure adequate communication. Assigning one person or a team to each supplier can reduce the potential for miscommunication. Another way to communicate is through supplier programs where the product or service producer ensures supplier access to information. This provides open communication on mutually critical issues between the customer and the supplier. Another issue of communication between suppliers and customers is that production schedules must match. Suppliers constantly must be updated as to when the customers need products with lead times becoming shorter.

Quality Highlight 9-1: Supplier Partnerships at Mercedes-Benz

Mercedes-Benz was recently able to manufacture and sell a sports utility vehicle (SUV) in a price range only slightly higher than a Grand Cherokee or Ford Explorer. The M-Class, classified by Mercedes-Benz as an “all-activity vehicle” rather than an SUV, was manufactured using the basics of JIT production. When a vehicle is put through the paint shop, a computer system sends an order to a supplier, such as Johnson Controls, Inc., in Milwaukee, which delivers a dashboard to the Vance, Alabama, assembly line in a few hours. Therefore, Mercedes-Benz does not have to store that part before it is needed. As the vehicle nears readiness for dashboard installation, that part arrives. The key to success here is the communication link between the two firms. If the electronic data interchange is interrupted for some reason, a supplier will not be aware of an order, and the manufacturer’s effectiveness is hampered. Even with the chance of a flaw, the payoffs are significant. Robert Sigler, an automotive analyst, says, “With 70% of its components being developed by other suppliers, Mercedes-Benz could slash millions of dollars in inventory management costs.” b

bHoffman, T., “Mercedes-Benz Introduces M-Class All-Activity,” Computerworld (November 17, 1997):42–53.

One of the key elements in improving quality is the supplier. As illustrated by Mercedes-Benz, if the electronic data interchange is not functioning, its delivery system is not operating on schedule, or the production of the M-Class components is behind, the overall reputation of the company will be affected. As a result, supplier selection is a key issue for many companies. Is it best to take the time to inspect incoming components before putting them into the final product? To develop a solid partnership between customers’ suppliers, a mutually beneficial program must be developed where both sides contribute to the stability and capability of the production process.

Electronic data interchange (EDI) is a system that aids customer and supplier communication by linking together supplier and customer information systems. Customers now are helping suppliers to isolate bottlenecks in the operation, balance production systems, and reduce setup times in an effort to reduce lead times. For example, suppliers of seats to Chrysler Motor Corporation must be able to meet the schedule changes within 36 hours. Schedules are communicated through an electronic data interchange link on a real-time basis.

Single sourcing has changed the landscape of purchasing. Prior to single sourcing, Xerox used 5,000 suppliers. Since implementing single sourcing, Xerox uses only 300 suppliers. Suppliers were chosen for their current quality practices and their willingness to work with Xerox to implement a quality improvement program. In Britain, dual or multisourcing has been chosen by many major customers predominantly to avoid unfair pricing and the possibility of the customer’s production being disrupted by suppliers’ labor disputes. Having a limited set of suppliers also reduces shopping around for the best price.

The Dell Computer Company’s goal was to work with suppliers to figure out how to minimize the supply chain and hold the least amount of inventory. Personal computer production is characterized by a tremendous inventory control problem. Suppliers who win in this industry are suppliers who are able to help the personal computer producers to overcome this inventory control problem. Dell is responding by bringing in suppliers who understand the personal computer production business. If suppliers don’t understand your business, you end up creating buffers that translate into inventory.

Lockheed-Martin was a defense contractor that worked closely with its suppliers. At its Aeronautics Materials Management Center, a special program for suppliers was developed. This program was called the Star Supplier Program. Lockheed-Martin developed criteria that each supplier had to meet. Quality was a top requirement. Each Star Supplier was required to use statistical process control, have a 0% rejection rate at the point of inspection for six months, and achieve zero nonconformance—documented at the Aeronautics Materials Management Center. The next requirement was to meet scheduled delivery dates. A supplier had to maintain a 98% concurrency to contract delivery schedules. Finally, the cost criteria were used, which showed favorably improving price trends and favorable purchase order administration.

Perhaps the most extreme example of supplier partnering comes from the Bose Corporation. Bose has implemented what it terms JIT II. In this effort, Bose eliminated a large part of its purchasing department and empowered suppliers to write their own purchase orders. This in effect made the suppliers responsible for managing inventories and keeping inventory costs low. It will be interesting to see if JIT II catches on. This is now called vendor-managed inventory (VMI).

Supplier Development has to do with the activities a buyer undertakes to improve the performance of its suppliers. Some of these activities may include supplier evaluation, supplier training, consultation, sharing data, and sharing processes. Companies such as Toyota and Honeywell have become very good at developing suppliers. However, recent data suggests that over 50% of U.S. companies do not have adequate supplier development programs. There is much work left to be done in this area.

There are seven steps for supplier development. First, you identify critical products and services. This involves identifying strategic products and components (those that are difficult to obtain, high costs, or high volume). Second, identify critical suppliers. These may be suppliers who provide strategic components but do not meet quality or reliability objectives or suppliers who do not meet schedules. Third, form cross-functional teams. The buyer forms a cross-functional team to work with the supplier. Fourth,meet with supplier top management. This is to discuss details of strategic alignment, performance expectations and measurement, and processes for improving. Fifth, identify key projects. These occur when there is agreement about how the supplier needs to improve and where. Projects are selected in the same way six-sigma projects are selected, utilizing criteria such as impact, ROI, feasibility, and required investments. Sixth, define details of agreement. This involves cost (and benefit sharing), commitments of resources, metrics for improvement, project charters, accountability, and deliverables. Finally, monitor status and modify strategies. To ensure success, management must actively monitor progress and revise strategies as needed.

It should be noted that many companies confuse supplier evaluation with supplier development. These are not synonyms. Implicit to supplier development is the expenditure of resources designed to improve the performance of the supplier. This may occur over a long period of time—sometimes months or years. Many companies couple this with expectations for shared cost reductions. For example, Toyota sets goals for cost reductions with its suppliers. If the target is 10%, Toyota may ask for a cost reduction of 5% and provide the other 5% benefit to the supplier. Suppliers who successfully complete development activities are often designated as preferred suppliers due to their alignment with customer needs.

Many times, companies will provide awards to outstanding suppliers. This provides an opportunity to celebrate supplier performance that is best of the best. Some of these awards are based on the Baldrige criteria or are decided by a committee within the buyer’s company. An example of a supplier award is the Ford World Excellence Award. In 2004, Ford provided this designation to over 50 companies around the world. Their program includes Gold, Silver, and Recognition level awards.

Elsewhere in this text, we discuss customer relationship management systems (CRMS). For upstream activities, there are similar systems called SRMS. These systems include spend analytics, sourcing execution, procurement execution, payment, supplier scorecarding, and performance monitoring. In SAS ERP systems, the SRMS have the following capabilities:

· Create complete spend transparency.

· Develop a comprehensive, accurate profile of the supplier base.

· Identify opportunities for optimal sourcing of materials, equipment, and services.

· Consolidate and prioritize suppliers based on quality, performance, and on-time delivery.

· Ensure contract compliance and reduce maverick spending.

· Ensure the quality of purchased items.

· Ensure appropriate levels of supply.

Different firms take different approaches to supplier development. Remembering the contingency perspective discussed in Chapter 1, you should not be surprised. Apparently, one variable that affects what customers want from their suppliers is the customer’s position in the supply chain. A study of the auto industry supply chain found that the auto manufacturers, direct suppliers, and indirect suppliers had somewhat different expectations from their suppliers. Table 9-2 shows these priorities and their rankings. This table shows relative priorities between auto assemblers, their direct suppliers, and their indirect suppliers. Notice that suppliers are marginally more interested in relationships than customers. This makes sense because it is to their advantage to develop these relationships to gain sales. Perhaps customers should pay more attention to relationship building.

SOURCE: T.Y. Choi and J.L. Hartley, Journal of Operations Management 14 (1996):340.

Now that we have discussed supplier development conceptually, let’s look at a specific example of a supplier development program—ISO/TS 16949. The goal of developing your suppliers is based on the need to provide high quality to the customer. Because variability is anathema to quality, the supplier’s processes must be consistent with those of the customer. In the late 1980s, U.S. automakers developed certification programs for suppliers. The General Motors program was called “Targets for Excellence,” and Ford used a program called “Q1.” With the increase in popularity of ISO 9000, suppliers asked auto companies to adopt a single standard for certifying suppliers. The result, called QS 9000, provided a common standard for DaimlerChrysler, General Motors, and Ford. This standard has gone through an update and is being supplanted by ISO/TS 16949.

The ISO/TS 16949 standard applies only to automotive companies. ISO/TS 16949 is an International Standards Organization (ISO) Technical Specification that aligns existing automotive quality system requirements within the global automotive industry. ISO/TS 16949 specifies the quality system requirements for the design/development, production, and, where relevant, installation and servicing of automotive-related products.

ISO/TS 16949 was written by the International Automotive Task Force (IATF). The IATF consists of an international group of vehicle makers including Ford, General Motors, and DaimlerChrysler, as well as several automotive trade associations. Representatives and subcommittees of TC 176 also helped to prepare ISO/TS 16949. We will discuss ISO/TS 16949 in more depth below.

ISO/TS 16949 is founded on the model in Figure 9-3. This model shows that ISO/TS 16949 is closely aligned with ISO 9000:2000 in that it is founded upon a systems view of automotive production. This system for continual improvement involves management responsibility; resource management; product realization; and measurement, analysis, and improvement.

The sections of ISO/TS 16949 4 are shown in Table 9-3. We will discuss each of the major sections in more detail.

4The facts for this section are drawn from Technical Specification ISO/TS 16949, International Standards Organization, 2006.

For the quality management system, suppliers must recognize key processes and document these processes. They must establish sequences and linkages for these processes. The organization must determine how effective their operations are; make resources and information available in sufficient quality and quantity to run the business; monitor, measure, and analyze the business to ensure effective operations; and take actions to ensure the planned results are attained and continual improvements are being made.

For this section of ISO/TS 16949, the extent to which management is committed to the development and implementation of quality management and continuous improvement is documented. Management is responsible for developing policy, communicating with the organization relative to customer service, establishing quality objectives, conducting managerial reviews, and providing resources. For example, managers with responsibility and authority for corrective actions will need to be informed when products do not meet specifications and see that corrective action is taken to ameliorate the problems.

For management to fulfill its responsibility, it must provide resources. These resources are used to maintain the quality management system and to meet customer requirements. This includes training and development for human resources. Management is required to provide infrastructure such as bricks and mortar, equipment, and support systems. These must be planned and implemented properly. A safe, clean, and adequate work environment is established for worker satisfaction.

Product and processes should be adequately planned, including quality objectives for the products. Customer-related processes should be designed in a way that customer needs are fully considered and regulatory requirements are met. This section considers all aspects of product and process design as well as purchasing, suppliers, control plans, setups, preventive maintenance, traceability, and many other aspects of designing and producing products.

For this requirement, the company needs to provide documentation that it can demonstrate product conformity, quality management system conformity, and continual improvement of the quality management system. This includes aspects such as statistical tools, measurement systems, customer satisfaction measurement, internal audits, and other considerations.

Although we have focused on developing standards so that the receiving firm has confidence in the quality of materials received from the supplier, there are times when the receiving firm must inspect incoming materials from its suppliers. Acceptance sampling is the technique used to verify that incoming goods from a supplier adhere to quality standards. Acceptance sampling inspection can range from 100% of the delivery to a relatively few items from which the receiving firm draws inferences about the whole shipment.

Quality Highlight 9-2: Integrating Forward Along the Supply Chain: 3M Dental Products Division c

cAdapted with permission from the Malcolm Baldrige National Quality Award Profiles of Winner, 2006.

A customer satisfaction rating of “good” is no longer good enough for 3M Dental Products Division (DPD), a Minnesota-based supplier of products used around the world. The 700-employee division of 3M has determined that only by striving to earn grades of “excellent” in all product and service areas can it set clear goals for performance improvement, continue to increase sales, and boost productivity at industry-leading rates.

Pursuit of excellence explains why 3M DPD’s customer surveys no longer combine “good” and “excellent” responses in a single category, why it has developed a comprehensive network of customer “listening posts,” and why it has built an information system that tracks the purchasing decisions of dentists. It also accounts for how 3M DPD sets its priorities—by concentrating people and resources on opportunities most likely to improve products and services beyond customer expectations.

The division’s careful reading of customer requirements drives a finely tuned innovation process that delivers a steady stream of new or improved products. Products introduced within the last five years now account for 45% of total annual sales, up from 12% in 1992.

3M DPD manufactures and markets more than 1,300 dental products, including restorative materials, crown and bridge materials, dental adhesives, and infection-control products. Most of its 700 employees are based at its St. Paul, Minnesota, headquarters and at its manufacturing and distribution facility in Irvine, California.

In the United States, where it has a leading share of the market, 3M DPD competes with more than 100 manufacturers of dental products. Sales and distribution to U.S. dentists are carried out through a network of independent distributors. In foreign markets, the division uses 3M subsidiaries for sales, marketing, and customer support. Sales of 3M DPD products outside the United States account for 65% of the division’s total sales.

3M DPD aims “to become THE supplier of choice” of dental professionals worldwide. Setting a clear course to achieve this aim is the objective of the division’s systematic strategic planning process, cited as an industry best practice by Fortune magazine. Led by a steering committee of top executives and senior managers, the process is designed to build consensus on what needs to be improved and how it will be accomplished. More than 20% of employees participate. The result is a 10-year vision, a detailed 5-year strategic plan, and a 1-year operating plan.

For each priority improvement, the steering committee negotiates with the appropriate department or functional unit to establish the anticipated business impact, determine resource allocations, and set metrics and target values for assessing progress.

The Employee Contribution and Development Plan is the division’s chief personnel appraisal tool. It sets individual goals in the areas of business results, team effectiveness, and employee development and is used to determine performance ratings and to guide promotion decisions.

3M DPD’s measurement system—the Business Performance Management Matrix—provides an easy-to-grasp framework for aggregating performance measures and for directly linking these measures to key business drivers and goals.

Most dentists in the United States and Europe—the division’s largest markets—already use 3M DPD products. Future growth will depend largely on expanding existing customers’ options—and spending—for 3M dental products. To do this, the division must have a thorough knowledge of customer requirements.

The division has graded the dentist market, resulting in five groups that reflect differences in satisfaction, purchasing behavior, referrals, repurchases, and number of 3M DPD products used. In-house and third-party surveys, focus groups, and hands-on evaluations are among the wide variety of methods that the division uses to listen to and learn from dentists in each segment. In addition, virtually all customer contacts—from visits by field representatives to calls to the technical hotline—provide additional information that also is entered into the division’s customer information system. This extensive database provides the information necessary to determine whether specific products and services are meeting key customer satisfaction goals and to spot opportunities for new products.

Insights into changing customer requirements—combined with knowledge of technological, societal, and environmental trends—are the starting point for product and process innovations. Dentists, distributors, and major suppliers are involved in the division’s systematic approach to translating key customer requirements into design requirements, prototypes, and—ultimately—reliable, quality products.

Continually raising the bar for performance improvement, 3M DPD is realizing benefits in nearly all facets of its business. Over the last 10 years the division has doubled global sales and market share.

Acceptance sampling is controversial. Some critics of the technique believe that the assumption in acceptance sampling that a percentage will be defective or less than perfect (called acceptable quality level, or AQL) is counter to Deming’s concepts of continual improvement. However, there is still need for acceptance sampling in many different circumstances. See a situation where acceptance sampling and testing may be needed in A Closer Look at Quality 9-2. Following are some examples of when acceptance sampling might be needed:

· When dealing with unproven suppliers

· During start-ups and when building new products

· When products can be damaged in shipment

· When dealing with extremely sensitive products that can be damaged easily

· When products can spoil during shipment

· When problems with a certain supplier have been noticed in the production

· process that bring the supplier’s performance into question

A Closer Look at Quality 9-2: For Rfid to Take Hold, Reliability Needs to Improve

Radio frequency identification (RFID) tags are an important technology for supply chain management. For example, consider the supply chain of a hospital where the patient flows through the process. An elderly woman dozes quietly in her hospital bed, tucked under layers of blankets. Her doctor stops by on his rounds and clicks on a wireless tablet PC, which is equipped with an RFID reader. This device transmits a signal to an RFID tag in the woman’s hospital bracelet, although it’s hidden by the bedding. The tag transmits information to the PC, which is integrated with the hospital’s information management system. On the display, the doctor sees the patient’s name, her previously administered medications, plus recently collected vital information, such as temperature, heart rate, and blood pressure. Without disturbing the patient or having to check back at the nursing station, the doctor has received the accurate, up-to-date information needed to monitor the patient’s progress. d

dAdapted from “RFID After Compliance: Integration and Payback,” Business Week, November 20, 2004, pp. 91–98.

The patient may not be real but the application is. The hospital, Jacobi Medical Center in the Bronx, benefits tremendously from an RFID system. According to CIO Daniel Morreale, “We get 100% accuracy in identifying patients and an overall savings of clinician time because doctors and nurses get the patient information they need at the bedside.” This is just one example of RFID usage in business. Businesses with logistics operations have been quick to embrace RFID. Large organizations such as Wal-Mart and the U.S. Department of Defense are mandating the use of RFID in their supply chain activities. However, there are concerns about RFID. They need to be nearly 100% reliable. The current standard is that pallet labels need to have a 100% read rate. That read rate is also nearly the expectation for individual items. Cost is also a consideration with one major retailer stating that they will adopt RFID as soon as the technology cost drops below 1 cent per tag.

It is expected that “RFID will go through a process similar to what happened 20 years ago with bar-codes,” says Dan Mullen, president of AIM Global. “Initially, people thought they couldn’t afford the technology. As it became more widespread, the payback grew. Now companies couldn’t do without it. The emergence of RFID in the retail supply chain will drive further adoption. As companies implement the technology deeper within their own operations, the return on investment will grow and applications will expand.” However, they need to be reliable.

We define acceptance sampling as a statistical quality control technique used in deciding to accept or reject a shipment of input or output. When compared with statistical quality control, acceptance sampling is defined by its occurrence after production has been completed. Acceptance sampling inspection can occur at the beginning of the process, such as when receiving components, parts, or raw materials from a supplier. Or it can occur at the end of production, as in the case of final inspection. Again, we focus here on inspection of incoming materials. One interesting application of acceptance sampling occurs with seed producers. Because of the biological nature of seed, a supplier can place the seed on a truck in perfect condition, and the seed can arrive in an unsuitable state. Therefore, large bulk purchasers of seed and other agricultural products are avid users of acceptance sampling techniques.

It should be noted that there are different methods for developing sampling plans. We discuss how to develop sampling plans using Dodge and Romig tables and OC curves.

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