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Quality Insider

Not Just in Time

Just in <i>case</i>

Published: Monday, May 19, 2008 - 22:00

I recently gave a speech on products made in China to ASQ’s customer service division in Raleigh, North Carolina. The critical takeaways were that global uncertainties and risks were fundamentally changing the rules of outsourcing and offshoring. What’s going on? Let’s look at few of the changes.

Over the past year, two companies reanalyzed their business models and supply chains. Boeing Co. adopted a business model that emphasizes outsourcing and supply management. It incorporates designing the core product, outsourcing the core assembly (up to 85 percent of manufacturing costs), assembling the complete product, testing the product to assure compliance, and then managing the Boeing brand. Although the Boeing 787 Dreamliner was built following this model, Boeing didn’t anticipate and manage supplier-fastener risks. The result was delays in its introduction and reputation loss.

Toyota’s lean management is the benchmark for best manufacturing practices. As Toyota has become the world leader in auto production, it has had difficulty scaling its lean practices. In 2007, it had its fifth vehicle recall and suffered a blow to its reputation when Consumer Reports gave its cars poor reviews—Toyota is now third, behind Honda and Subaru, in reliability, and two Toyota models recently fell “below average” in predicted reliability.

What do these companies have in common? Neither anticipated and managed their supplier risks. According to a recent Marsh Research study, 73 percent of the respondents said that supply-chain risk had increased since 2005. We could have predicted this response. But, 0 percent of the respondents said that they are “highly effective at supply-chain risk management.” Let’s look at several critical, counterintuitive changes going on in the supply chain.

Just-in-time management
When most of us think of just-in-time (JIT) management, we think of overnight delivery—just in time for assembly or test. Inventories are reduced to close to zero. Time between a customer order and product delivery is minimized.

Today there are challenges to the JIT model. Top federal officials want womb-to-tomb traceability of shipments based on source and product risks. Incoming shipments can be a terrorist vector or delivery mechanism for chemical, biological, high explosive, radiological, and nuclear terrorism. The federal government requires supply chain security through C-TPAT compliance audits, 100-percent container inspection, radio frequency (RF) tagging of containers, issuance of biometric IDs to port workers, GPS/RFID markers on critical shipments, supplier profiling, and fewer “less than truckload” shipments.

Just-in-case management
Each of these can disrupt the JIT supply-chain model. Each changes the JIT supply-management model into the just-in-case model. The customer and supplier need to think in terms of having contingency measures to plan for a disruption. This may mean having buffer inventories as a means to mitigate the disruption. Buffer inventories are a huge no-no in traditional JIT management, and this is but one example of the increasing importance of supply-chain risk management.

Supply-chain management changes
Supply management as recently as five years ago was a siloed organization called purchasing or contract administration. Supply management now is an enterprise, C-level function. Only five years ago, the top purchasing position was at a director level, and today’s chief purchasing officer is a senior vice president or executive vice president reporting to the chief operating officer or chief executive officer.

A change can also be seen in the scope and definition of supply management. The Institute of Supply Management (ISM) defines supply management as “the identification, acquisition, access, positioning, management of resources, and related capabilities the organization needs or potentially needs in the attainment of its strategic objectives.”

Made in the USA
Macroeconomic factors and geopolitical risks are also reshaping offshoring and outsourcing. The cost of oil may surpass $120 a barrel soon. The cost of leasing tankers has tripled over the last two years. The cost of shipping bulk containers and commodities has increased to the point where companies must reevaluate offshoring in favor of domestic sourcing. As well, U.S. Department of Homeland Security regulations can stall shipments at docks. Customers require suppliers to be sustainable and socially conscious, thus increasing offshoring risks and uncertainty.

This discussion eventually leads to China. China is the world’s manufacturing and, more often, design nexus. However, melamine-laced dog food and heparin blood thinner have tarnished the “Made in China” quality cachet. The chief purchasing officer is now balancing offshoring with domestic sourcing. On a day-to-day level, buyers are learning how to manage Chinese suppliers economically; receive high-quality, safe goods; and avoid disrupting the supply chain.

The outsourcing rationale has changed.
Companies are reevaluating the “make or buy” decision, which was based on cost/benefit and is now based on a risk/benefit analysis. For example, the downside risk of outsourcing is balanced against the benefits of domestic sourcing.

What can you do about it?
Traditional purchasing and logistics functions have matured over the last five years into supply-chain management. Professional organizations, such as the Institute of Supply Management (ISM) and the American Production Inventory Control Society have developed professional supply-management certifications. Many schools have rebranded their production and operations management departments into supply-chain management.

With a recession coming, it may be a good time to get that extra certification you were thinking about.

Discuss

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