Supply Chain
Management
and
Supplier Quality
Control
March 21, 2007
Ankush Kaul
AGENDA
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Supply Chain Management (SCM)
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Introduction
History
Logistics Management
Supply Chain Vs. Logistics Management
Supply Chain Requirements and Uncertainties
Bullwhip Effect
Strategic Partnership
Examples of Strategic Partnership
Supplier Quality Control (SQC)
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Introduction
Why SQC?
SQC Techniques
SCM and SQC at Praxair
Slide 2
Agenda (Cont’d..)
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SCM and SQC @ Praxair
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Introduction to Praxair
Supply Chain Management @ Praxair
Supplier Quality Control @ Praxair
References
Introduction to SCM
SCM is the integration of key business processes from end user
through original suppliers that provides products, services, and
information that add value for customers and other stakeholders
- Global Supply Chain Forum (GSCF)
Supplier
Manufacturer
Distributor
Retailer
Customer
Upstream
Downstream
Slide 4
Introduction (Cont’d..)
P&G or other
manufacturer
Third
party distributor
Plastic
Producer
Tenneco
Packaging
Chemical
manufacturer
(e.g. Oil Company)
Paper
Manufacturer
Albertson’s
Supermarket
Customer wants
detergent
Timber
Industry
Slide 5
Elements of SCM
Element
Typical Issues
Customers
Determining what customers want
Forecasting
Predicting quantity and timing of demand
Design
Incorporating customer wants, time etc.
Processing
Controlling quality, scheduling work
Inventory
Meeting demand while managing inventory costs
Purchasing
Evaluating suppliers and supporting operations
Suppliers
Monitoring supplier quality, delivery and relations
Location
Determining location of facilities
Logistics
Deciding how to best move and store materials
Slide 6
History
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1750 - 1800
 Industrial Revolution
 Era of Mechanical Inventions
 Product and process complexity increase
1800’s
 Increased factory complexity
 Birth of Industrial Engineering movement
1900’s
 Assembly line, Mass production
 Henry Gantt: Gantt charts, Scheduling
 Human factors
 Statistical Quality Control
1989 - 1993
 Business Process Reengineering
Slide 7
History (Cont’d…)
Traditional
DEPT. 1
DEPT. 2
DEPT. 3
Re-engineered
Process: CrossFunctional Team
Slide 8
Onset of Supply Chain Management
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The term “SCM” was introduced by consultants in early 1980s
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Era of inter-network competition: SC vs. SC: Brand vs. brand, or
store vs. store => <suppliers-brand-store> vs. <suppliers-brandstore> type of competition.
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Common goals for the entire supply chain
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A supply chain consists of facilities, functions, activities for producing
& delivering product or service all the way from early suppliers to
eventual customers
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The new focus is the entire supply chain
Slide 9
Logistics Management
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Logistics Management is that part of Supply Chain
Management that plans, implements, and controls the
efficient, effective forward and reverse flow and storage
of goods, services and related information between the
point of origin and the point of consumption in order to
meet customers' requirements.
- Council of Supply Chain Management
http://www.cscmp.org
Slide 10
Movement Within a Facility
Work center
Work center
Work
center
Storage
Work
center
Storage
RECEIVING
Storage
Shipping
Slide 11
SCM VS. Logistics Management
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Focus of logistics was on making each firm in the
distribution channel more efficient, productive and
profitable
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Each firm operated on its own, maximizing profits with
little attention to others in the chain
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Within each firm, each function preoccupied with
optimizing its own performance
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Intra-functional (silo) orientation: cost tradeoffs and
managing customer service levels
Slide 12
Supply Chain Requirements and Uncertainties
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Requirements for a Successful Supply Chain
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Trust among trading partners
Effective communications
Supply chain visibility
Event management capability
Performance metrics
Sources of Uncertainty in Supply Chains
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Wrong forecasts
Late deliveries
Poor quality
Machine breakdowns
Canceled orders
Erroneous information
Price uncertainties
Slide 13
Bullwhip Effect
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Distortion of demand information of a product while it passes from
one firm to the next across SC
The information transferred in the form of “orders” tend to be
distorted and can misguide upstream members in their inventory and
production decisions.
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In particular, “variance of orders” > “variance of sales”
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Information sharing in SCs is important
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Sales Information available in the form of orders received from the
downstream member should be used with great caution.
Slide 14
Bullwhip Effect (Cont’d..)
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Who is affected?
 Nearly all industries are affected !
 Firms that experience large variations in demand are at risk
 Firms that depend on suppliers upstream or distributors and
retailers downstream may be at risk
Causes of Bullwhip Effect
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Finite supply shared by many retailers
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Rationing game: retailer orders more than demand
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Fixed order cost
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Wholesale price varies over time
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Inflationary / deflationary environment

Prices with no trend but variability
Slide 15
Bullwhip Effect (Cont’d…)
Slide 16
Bullwhip Effect (Cont’d…)
Retailer
Distributor
Manufacturer
Order
Order
Order
Stock
Stock
Stock
Supplier
Order
Stock
Increased Variability
Slide 17
Bullwhip Effect - Disrupted Supply Chain
Customer Demand forecast = 20 units
Information Flow
Suppliers
Producers
Products &
Services
Products & Distributors Products &
Services
Services
80 Units
160 Units
40 Units
80 Units
Retailers
20 Units
40 Units
Cash Flow
 As demand increases, the distributor decides to accommodate the forecasted
demand and increase inventory to buffer against unforeseen problems in demand.
 Each step along the supply chain increases their inventory (double in this example)
to accommodate demand fluctuations.
 The top of the supply chain receives the harshest impact of the whip effect.
Key:
= Inventory Levels
Slide 18
Bullwhip Effect (Cont’d..)
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Results of Bullwhip effect
 Excess inventories
 Problems with quality
 Increased raw material costs
 Overtime expenses
 Increased shipping costs
 Lost customer service
 Lengthened lead time
Solutions
 Improve communication along the supply chain
 Improve sources of forecast data
 Work with firms upstream and downstream in the supply chain
Slide 19
Strategic Partnership in Supply Chain
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Business partnering occurs through a pooling of resources in a
trusting atmosphere focused on continuous, mutual improvement
Source: Robson, Rawnsley (2001)
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Benefits of strategic partnerships
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Improved supplier product quality
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On-time shipments
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Lower costs, less inventory
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Improved logistics
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Customer satisfaction
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Increased business because of customer satisfaction
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Vendor management inventory
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Lean extended enterprise
Slide 20
Strategic Partnership Examples
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Blockbuster
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Demand for newly released movies at blockbuster typically starts high and decreases
rapidly. Peak demand last about 10 weeks
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Blockbuster purchases a copy from a studio for $65 and rent for $3. Hence, retailer must
rent the tape at least 22 times before earning profit
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Retailers cannot justify purchasing enough to cover the peak demand
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In 1998, 20% of surveyed customers reported that they could not rent the movie they wanted
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Starting in 1998 Blockbuster entered a revenue sharing agreement with the major studios.
Studio charges $8 per copy, Blockbuster pays 30 - 45% of its rental income
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Even if Blockbuster keeps only half of the rental income, the breakeven point is 6 rental per
copy
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The impact of revenue sharing on Blockbuster was dramatic, Rentals increased by 75% in
test market and market share increased from 25% to 31%
Slide 21
Strategic Partnership Examples (Cont’d..)
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Seven Eleven Stores
 Retailer determines order sizes and timing but in addition
passes POS (point of sales) data to the supplier. POS
improves supplier’s forecasts.
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Wal-Mart, K-Mart (Vendor Managed Inventory)
 Supplier maintain the inventory levels at the customer site and
continuously replenish as and when required. This has
resulted in 30% inventory turnover improvement.
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Milliken and Company
 The lead time from order receipt at Milliken’s textile plants to
final clothing receipt at the department stores was reduced
from 18 weeks to 3 weeks. The POS data was used by the
supplier to improve forecasting and scheduling.
Slide 22
Supplier Quality Control
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A methodology to:
Select/Qualify the correct supplier
Develop/Launch the item being sourced
Monitor ongoing performance
I. Select/Qualify
II. Develop/Launch
III. Monitor Performance
Why is SQC Required??
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Improved Product Quality
Reduced Lead Times
Decreased Overall Life Cycle Costs
Increased Customer Satisfaction
Faster and Cheaper can still be Better!
Why is SQC required? (Cont’d...)
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Process maintained under control
Quality Built-In; Not Added On!
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Achieve earlier corrective action on deficiencies
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Less waste; Minimizes rework
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Material protected from deterioration
 Especially Applicable to Bulk Metals
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Quality Control established at point of supply
SQC Techniques
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Some of the techniques used are:
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Supplier Scorecard: Supplier Evaluation
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Regular supplier site visits: Supplier site inspection during the
equipment build
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Supplier quality systems evaluation: Vendor quality system
evaluation
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Non Conformance reporting process: Documentation of issues and
source of “Lessons Learnt” before and after the equipment build
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Supplier training: Training the supplier by the customer (especially if
the supplier is fabricating the equipment for the first time)
Praxair - Introduction
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A Fortune 500 company with sales of $ 8.3 billion (2006)
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Leader in industrial gases supply systems and equipment, and in
applications technologies; almost 3,000 active patents
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One of the three largest industrial gases companies worldwide and
the largest in North and South America
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Operations in 40 countries with over 27,000 employees
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Services include on-site gas handling and monitoring systems,
pipeline and plant services, turnkey design and construction
Praxair Introduction- Sales by Served Markets
Aerospace 4%
Healthcare 11%
Manufacturing 21%
Energy 12%
Electronics 7%
Metals 16%
Food and
Beverage 7%
Other 12%
Chemicals 10%
Slide 28
SCM @ Praxair
Plant Site
Field Contractors
Cold Box
Fabricator
Valves Supplier
Cold Box
fabricator Sub
Supplier
Valve Sub
Supplier
Praxair Plant
Metal Shop
Customer needs
Liquid Nitrogen
SCM @ Praxair (Cont’d..)
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Partnership with suppliers and customers for mutual benefit
 6 Sigma projects with suppliers and customers
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Strategic agreements with competitors
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Core competency used to help suppliers as well as customers
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Process improvements by streamlining internal supply chain
PRAXAIR
SUBSUPPLIER
SUPPLIER
NAIG
GPMM
GSS
PST
CUSTOMER
SQC @ Praxair
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Historical Qualification
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To ensure products and services consistently meet the
organization’s acceptance criteria
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To implement a reduced testing regime for incoming goods
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To maintain precise and up-to-date supplier records, “well-known”
partners, and improved quality of products and services
Low Cost Country Sourcing (LCCS)
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To establish a competitive capital cost advantage
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To include a low cost country sourcing for equipment, fabrication
and engineering design
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To identify, qualify and select new equipment suppliers worldwide
and evaluate based on technical and low-cost evaluation criteria
SQC @ Praxair (Cont’d..)
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Standard Method
 Historically qualified Suppliers
 Database of specifications, requirements and guidelines
Due to cost cutting initiatives in 1990’s and post 9/11, supplier
quality control was given less importance- this led to reliability
and other issues in field
LCCS program was another driver for the development of a
structured supplier quality control program
Tier 2
Tier 3
Critical path
Single Source
Sole source
Critical part
Non critical path
Less critical part
Commodity
Equipment Description
Compressors
Induction motors
Synchronous motors
Cold Boxes
BAHX
Packing
Adsorbents
Chillers
Auto valves
Skids
Water pumps
Tanks
Cryo tanks
Manual valves
Silencers
S&T heat exchangers
Vaporizers
Fittings
Piping
Hardware
Shop visit
Quality System rating
Inspection test plan
NCR tracking
Surveillance
Control Plan
Shop visit
Quality System rating
Inspection test plan
NCR tracking
Surveillance
Control Plan
As Needed
Supply Attributes
Tier 1
Quality Activities
New Initiative for SQC @ Praxair
Commodities were
divided into Tier-1,Tier-2
and Tier-3 depending on
their criticality in terms of
their time impact on
project, cost and sourcing
status
Tier 1 – Build relationships
Critical supplier
Safety Critical
Routine surveillance
Tier 2 – Periodic surveillance
Tier 3 – Infrequent contact
Slide 33
SQC @ Praxair - Inspection Plan
Developed a method to ensure
that the suppliers adhere to
specifications mentioned as a
part of the purchase order
Comprehensive and easy to
use commodity specific quality
control checklist containing key
specifications questions
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Discussions with a cross
functional group of equipment
engineers, process engineers,
procurement and quality
engineers followed to finalize
the format of the checklist
Slide 34
Designated Inspection Points
Slide 35
Non- Conformance Tracking
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One of the most important tools
to keep track of suppliers
performance
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Helps to see supplier trends as
well as defect trends over time
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Also useful as a repository for
“lessons learned”
Quality Engineering Team @ Praxair
The projects at Praxair have helped me see the
implementation of academic knowledge as well as the
importance of “people skills” in an organization. Overall,
it continues to been a great learning experience
North America
Asia
South America
Europe
5 Quality Engineers in
North American region
4 Quality Engineers in Asia
region
2 Quality Engineers
in South America
2 Quality Engineers
in Europe
Slide 37
References
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Lecture notes from “Supply Chain and Global
Operations”
Praxair database
www.google.com (The best invention of 20th
Century!!!)
Experience
Slide 38