We add supply chain management and the impact of suppliers is included in  our graphic model.

Few products or services exist that so not require some  supply chain management. The more suppliers that are involved the more complex the supply chain management becomes.  Even if the entire supply chain from basic raw materials that come from the earth or out of the minds and actions of people, is not considered there is still a supply chain that must be attended. Cycle time of each step and process in the supply chain sets the limit on how fast the entire supply chain can function.

There have been a number or philosophies about how to deal with the supply chain management.  Backward integration, develop as many suppliers as possible to make the supply item a commodity, competitive bidding, single source, supplier partnerships to name a few.

In general the closer a product or service is to a commodity item by definition the more potential suppliers are available. This can make the supply chain management extremely complex.  Maintaining traceability becomes much more burdensome.  For example in the US purchasing wheat is generally considered a commodity and there are thousands of wheat farmers seeking to fill the need. On the other hand Kashmir wool is not quite as readily available in the US and there are fewer providers. (Maybe in India it would be a commodity item.) Tracing a specific load of wheat to a particular field or farmers can be an almost impossible task.

Take a relatively new field that has quickly become a commodity service...web site development. The number of people doing that kind of work has grown extremely fast. Yet I am told that search engines index less than 13% of all web sites. A less commodity service in this area are those who not only can get your web site indexed by search engines but who can do so with phrases that people actually enter and actually drive legitimate traffic to a web site. (If you are interested in this area we have a strong recommendation based on performance and affiliation.)

Commodity suppliers are always at the bottom of the economic food chain. The price they get for their goods or services is generally out of their control and they are forced to take what a fairly price elastic economy offers. This is not to say that there are not commodity suppliers who have very successful and profitable businesses. They are always seeking to be the lowest cost producer and have little if any price influence. They have to be extremely cost sensitive to all of the factors involved in their system. Usually you will find the successful commodity suppliers seeking to differentiate themselves from everyone else in some fashion. Faster delivery, friendlier people, easier credit terms, better service, consistency (lack of variation) of product, location, branding and brand allegiance, customizing, various packaging, lot sizes, etc. are all ways that commodity products and services seek to move away from that pure commodity image to a more specialized and higher price but better value product or service.

Your suppliers have a strong and important impact on your products, services, work processes and distribution. The old cliché is "You can't make a silk purse from a sows ear." It seems obvious that the quality of the raw material will have an impact on the quality of the end product. There are many that attempt to reduce their cost structure at the point of contact with the supplier and pay little attention to the internal processes and systems that use that raw material. There is a multitude of ways that the supplier relationship can impact beyond just the physical "quality " of the raw material.

With Six Sigma Plus the goal is to meet the customer expectations better than any one else and at a minimum be able to deliver at a defect rate of less than 3.4 ppm. There are two basic approaches to do that.

One is to have you process centered as well as possible at the target value. This is the on target component. Classic Six Sigma allows for a 1.5 standard deviation shift to compensate for the fact that few if any processes remain stable centered exactly on the target value. The second way to approach Six Sigma is to reduce the variation in the process to the level that even with a 1.5 standard deviation shift the chances of a defect are less than 3.44 ppm. The objective is really "On target with minimum variation."

Suppliers have the opportunity to greatly influence both of the objectives. They are at the beginning of the chain of process steps for your product or service. 

Assume that you have five process steps in your organization all of which are performing at better than a Six Sigma level, lets say 3ppm defect level. This is 0.999997 good at each process step. For argument sake there is no inspection and sorting of the good from the bad, you are using what the supplier furnishes and shipping to your customer. If your supplier is at the same 0.999997 performance level the defect rate for these six steps ( 5 of yours plus the supplier )is 0.999997*0.999997*0.999997*0.999997*0.999997*0.999997=0.999982 or 18 ppm defect rate. Realizing this has failed to meet you objective of less than 3.4ppm defect rate you and all in your organization put in a lot of creative and hard work and reduce each of your process steps to 1ppm defect rate. Your supplier impressed with a 3ppm defect rate neglected controlling the process and the defect rate from the supplier climbs to 13ppm. The overall performance after all of your work and effort is now 0.999982*0.999999*0.999999*0.999999*0.999999*0.999987=0.999982. Exactly the same place you started with 18ppm defect rate. I'll leave the math to you to prove that with five process steps at 0.999999 even if the supplier were perfect the best you can do is 5ppm defect rate. 

These calculations demonstrate a number of important concepts. One is that suppliers can have a tremendous impact on your products and services. Another is that it does not matter where in the sequence the defect rate is high it will impact the overall performance. Each step is a supplier for the next process step. Suppliers do not have to be external to your organization. Think of all processes as a combination of a number of simple three component process steps. (supplier  to process to output ) . This part of the reason for Deming's drive to reduce the number of suppliers. Performance level for one supplier is difficult to maintain, as the number of suppliers are increased the variation increases. There are two sources of variation, that within each supplier and the variation between suppliers. Having effective supply chain management can be an important part of any six sigma defect reduction effort.

Those of you with some math inclination will quickly realize that the overall process will always perform at a level less than the worst single process step. A simple strategy for improving performance is to eliminate process (reduction in complexity) also done in cycle time reduction. Back in the original example if we only had four steps plus the supplier all performing at 0.999997 the end result is 0.999985 a 3ppm defect improvement rate by eliminating one process step.

Some organizations that have started to reduce the number of suppliers in order to reduce some of the variation, understand that it is not the number of companies that they have as suppliers that is important but rather the number of processes that provide the product or service. These organizations will qualify a supplier on a process by process basis and insist upon knowing if there is any change to the supply. This could be a change in machinery, a processing step, personnel, storage conditions or anything else. It is not that they want to run your business but rather and understanding of just how little it takes early in a process to have major impact at the end. Much like the ripple from a rock thrown in a pond, the diameter of the ripple just keeps getting bigger and bigger.

Understanding this will drive you to focus your improvements including as far up the supply chain as you can get. This is contrary to the intuitive approach of having a defect in a product and looking that the last process step before the defect was discovered and attempting to make the improvements at that process step first. We contend the best approach is to document the various process steps involved and obtain data about the performance of each process step. It will become apparent where the biggest opportunities exist. If this is done with cycle time reduction and/or complexity reduction sometimes the highest defect producing process step can be totally eliminated.

Adams Associates
10A Bayou Rd
Lake Jackson, TX 77566 
1- 979-297-5198

cadams@adamssixsigma.com

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