Digitex Corporation
CASE
Beginning in 1988, Digitex Corporation began a policy of doing business “using
time as a prime competitive weapon.” Specifically, this involved collapsing time
from product time-to-market as well as faster response to customer demands.
The goal was to greatly improve competitiveness and improve across all key
business measures. A set of tools defined by Jim Wish of semiconductor
manufacturing focused on waste elimination, simplicity, flexibility, quality,
employee effectiveness, self-controlling mechanisms, creating awareness that
whole processes take precedence over individual operations, and continuous
improvement.
The new initiative, described as just-in-time/total quality control (JITQC),
combined the initiatives of just-in-time with the concepts of total quality
management. The total quality principles emphasized at Digitex involved
1. An emphasis on quality first, not short-term profit
2. Orientation toward the consumer and customer, not the producer
3. A view of the next process as the customer and a corresponding reduction of
organizational barriers
4. Use of statistical methods and decision making based on facts, data, and
problem- solving techniques
5. Full employee involvement in problem solving
6. Broader, more flexible management perspective
Digitex sought to drive improvement by first ensuring adherence to the JITQC
system, which should lead to an increased analysis of processes and process
improvement. Eventually, the standardization of new business processes should
result. The new corporate philosophy centers around the AT (read A – delta –
T) System, which involves the identification of actual conditions (A), the
determination of the theoretical ideal (T) and the elimination of intervening waste
or delta (). The challenge behind this system is to design a function or process
in which the actual time to perform a process (A) equals the theoretical (T) level
of the time to perform. AT provides a way to assess actual conditions and
model the ideal process. As a result, waste can be identified, discussed,
analyzed, and removed from the process.
Once the objective of “achieving theoretical time” is clear, the challenge of
achieving theoretical values becomes obvious and the necessary tools and
approaches can be aggressively applied. Achieving the theoretical time becomes
a motivating challenge that should translate into individual action. Digitex applies
AT to any process or system that involves time or cost, such as production,
administration, sourcing, communication, new product introduction, and so on.
Purchasing’s Role in JITQC
To support the JITQC initiative, Digitex renamed purchasing “Supplier
Manufacturing” and integrated a number of new policies and procedures into the
new sourcing management department. Contracts are now constructed around
families of parts for the projected life of a product, component, or technology.
Because product life cycles in the computer industry are so short (sometimes as
little as six to eight months) and demand patterns often erratic, the contracts
include a flexible range of quantity requirements. Suppliers do not receive
guarantees of
specific volumes but are assured participation. Quality
expectations are also detailed in the contract, including Cpk/parts per million
(ppm) or other definitions that define the required level of quality. Other contract
elements include forecast and release process and timing, longer-term pricing
formulas
(both
cost
reductions and
increases), nondisclosure
clauses,
technology ownership and license provisions, and liability limitations based on a
supplier’s theoretical cycle time.
Information systems are a major part of Digitex’s sourcing strategy. Digitex
provides to external suppliers an MRP-driven twelve-month forecast via
electronic data interchange (EDI) each time it updates its MRP system. Distant
suppliers use the forecast and agreed-upon shipment authorization windows to
schedule their shipments to Digitex. For example, the first week of the forecast
may become the delivery schedule. Local supplier shipments are triggered by
consumption using release mechanisms such as a kanban process, and flow
directly to the production point of use. The consistent use of long-term blanket
purchase orders is normal, while piecemeal internal purchase requisitions,
orders, or release approvals are not normally used. These approaches take time
and hence contribute to waste in the process.
Digitex works to integrate suppliers directly into its JIT, total quality control,
and employee involvement strategies. The company then measures each
supplier’s progress toward these strategies and shares the results during supplier
performance reviews. When needed, the company also uses site, group, or
corporate assistance teams to help suppliers adopt JITQC principles, including
process capability analysis, cycle-time reduction, pull-system implementation,
and AT assistance. Early supplier involvement (ESI) programs help promote
strong supplier input to new product design.
Digitex aggressively establishes local sources of supply using long-term
contracts (from life of product to two to four years) where appropriate. In solesource environments where only one supplier is available to supply a given
commodity or item, Digitex develops long-term pricing processes and contracts
based on experience curves derived from previous sourcing experience. Joint
supplier-Digitex cost-appraisal benchmarking programs based on theoretical
cycle time and cost are also in place.
Supplier selection relies on the total cost of sourcing an item or service and
takes full recognition of distribution costs, supplier process capability, ppm quality
history, supplier JIT manufacturing processes, supplier employee involvement
programs, and historical cost improvement contributions. The number of active
suppliers is continually reduced in accordance with resources available to
manage JITQC business practices. Supplier selection for new items involves the
use of cross-functional teams with members from design, distribution, and
quality. Joint approval about a supplier from both the new product and
manufacturing organizations also occurs. Purchasing managers are responsible
for driving quality at the source after supplier selection is complete.
Performance measurement supports the supplier selection and evaluation
process at Digitex. Three performance areas in particular are an integral part of
the evaluation, selection, and continuous performance review process. The
following measurement areas link the sourcing process directly to Digitex’s stated
JITQC initiatives:
1. Cost of quality/price of nonconformance (PONC) and responsiveness
measurements, which must demonstrate continuous improvement during the
initial baseline review and the achievement of 30% or better improvement
toward theoretical best-possible levels during all subsequent reviews.
2. Customer satisfaction and small group improvement activities must exhibit
continuous improvement during both baseline and subsequent reviews.
3. Employee contribution criteria, which Digitex establishes during the baseline
review and which the supplier must continuously improve.
Cost of Quality/Price of Nonconformance (PONC)
The cost of quality consists of prevention, appraisal, and failure costs. Prevention
costs include areas such as design reviews, supplier quality evaluations, quality
training programs, quality audits, and preventive maintenance. Appraisal costs
include supplier source inspection, incoming inspection and/or testing, in-process
inspection, and status measurement. Failure costs include redesign cost,
engineering change cost, rework, and scrap and warranty cost. To be relevant,
the company compares the cost of quality to some base activity such as gross
inventory spending or transfer cost.
The Price of Nonconformance (PONC) includes all nonconformance costs
related to production (scrap, rework and repair, inspection, and test and
diagnosis) along with inventory-related costs. This category is related to gross
inventory spending, which includes all spending for material, material acquisition,
production, administration, and variances. The equation for PONC% is:
PONC% = PONC Expense
Inventory Spending
The theoretical target for PONC is zero. DEC expects suppliers to achieve at
least a 30% improvement from review to review, using the equation
Target PONC Improvement = Previous PONC% – .3 X (Previous PONC).
Supplier Responsiveness
The ability of a supplier to respond quickly with a minimum of inventory cost
exposure has a direct effect on raw and work-in-process (WIP) inventory and
WIP cycle time. Inventory measurement includes days of supply (current
inventory dollars/volume of sales per working day). However, a more relevant
measure is the cycle-time performance ratio (CTPR), which stresses the
elimination of all unnecessary factory floor cycle time. CTPR is calculated as:
CTPR = Actual Cycle Time in Hours
Theoretical Cycle Time in Hours
Actual cycle time starts at the point of entry of key components to the production
line and concludes with delivery of finished assemblies to the customer or stock.
Actual cycle time is measured using the formula
Actual WIP Cycle Time in Hours = Average Work-in-Process Inventory $
Average Daily Output $ X (manufacturing
hours per day)
Theoretical cycle time is the cycle time with all unnecessary activities eliminated.
Examples of unnecessary activities include setup, move, rework, wait, queue,
burn-in, inspection, kitting, counting, and transaction. Examples of necessary
activities include machine operation time, operator value-added or hands-on
assembly, and functional tests.
Cycle time initially measured production time improvement. However, Digitex
soon expanded the approach of cycle-time ratio analysis in the AT program to
include a great deal more. The measurement system can track an entire product
cumulative cycle time, a total plant cycle time, or a particular machine operation.
AT also applies to inventory levels, cost models, or any administration process
using the generalized ratio of actual cycle time to theoretical cycle time. As
before, Digitex targets 30% improvement in inventory and cycle-time ratios from
review to review.
Customer Satisfaction and Small Group Improvement Activity
Suppliers must demonstrate the use and understanding of customer satisfaction
feedback. (Digitex is the primary customer but feedback can also originate with
end users of Digitex product.) The format and content of the feedback is sitespecific and defined by Digitex. Suppliers must demonstrate that a feedback
review process is in place, the data is an accurate reflection of customer
satisfaction, and an action plan is in place to improve customer satisfaction.
Continuous improvement in customer satisfaction results include the total
elimination of customer inspection, zero customer line interruptions due to
supplier performance, mean time between failures, mean time to repair, problemfree installation, and customer survey responses.
Small-group improvement activities are a primary source of improvement
ideas. Therefore, Digitex expects the number of employees at the supplier’s
facility involved in such activities to increase over time.
Employee Contribution
The number of employee ideas generated and carried out at the supplier is an
indication of the level of employee empowerment, contribution, and effectiveness
of the overall employee involvement program. Small-group involvement activity
participation is a necessary but insufficient indicator of employee involvement. It
is possible for small groups to formally exist at the supplier but not really be
empowered to make suggestions or effect change. By tracking the status of
ideas actually contributed and implemented by supplier teams, Digitex can
evaluate the level of employee empowerment. The measurement system tracks
the number of ideas submitted and implemented and, when necessary, Digitex
encourages action to improve the level and quality of employee activity.
Conclusion
Sourcing is a key part of the JITQC initiative at Digitex. Supporting this effort
requires a different type of purchasing organization: one that focuses externally,
has the resources to support a supplier’s technical needs, links directly to
corporate JITQC goals and objectives, and has the right measures and
information systems to evaluate performance. Firms that demonstrate this level
of commitment to their sourcing process are placing themselves in ideal positions
to achieve significant competitive advantage.
Assignment
The following questions relate to ideas and concepts presented throughout this
book. Answer some or all of the questions depending on your progress in
covering the following chapters.
1. To support the JITQC initiative, Digitex renamed purchasing “Supplier
Manufacturing.” What is the significance of this change?
2. How does Digitex’s sourcing strategy link directly to the corporate goals and
objectives of JITQC?
3. Digitex argues that once the objective of “achieving theoretical time” is clear,
the challenge of achieving theoretical values becomes obvious and the
necessary tools and approaches can be aggressively applied. Discuss the
tools and approaches used in purchasing to help reach the corporate goal of
achieving the “theoretical time.”
4. Digitex details its quality expectations directly in supplier contracts, including
Cpk/parts per million (ppm) target levels or other definitions that define the
required level of quality. Why do you think Digitex spells out the expected
supplier quality performance levels in the contract?
5. What types of costs are included in the PONC? What does the PONC%
represent? What is the theoretical performance target of this figure?
6. The case presented six total quality principles emphasized at the corporate
level by Digitex. Discuss how suppliers, through their performance, can impact
each of these principles.
7. Digitex aggressively establishes local sources of supply using long-term
contracts (from life of product to two to four years) where appropriate. What
are the advantages of using local sources of supply? Why does the company
rely on longer-term contract agreements?
8. When needed, the company uses site, group, or corporate assistance teams
to help suppliers adopt JITQC principles. Discuss the advantages to Digitex of
using cross-functional specialists to help develop supplier capabilities.
9. Discuss the different types of supplier development support that a buying
company might be able to provide to a supplier.
10. Distant suppliers use the forecast and agreed-upon shipment authorization
windows to schedule their shipments to Digitex. Local supplier shipments are
triggered by Digitex consumption using release mechanisms such as a
kanban process, and flow directly to the production point of use. What is the
advantage to Digitex of having shipments triggered by consumption (i.e., a
JIT system) versus using forecasts to schedule shipments?
11.Information systems are a major part of Digitex’s sourcing strategy. Discuss
how Digitex uses information technology when executing its sourcing
strategy.
12.With JITQC, Digitex works to integrate suppliers directly into its JIT, total
quality control, and employee involvement strategies. The company then
measures each supplier’s progress and shares the results during supplier
performance reviews. What benefit does the measurement of supplier
performance
provide
to
Digitex?
What
benefit
does
performance
measurement provide to the supplier?
13.What is the value of regularly scheduled performance reviews between
suppliers and Digitex?
14.How does Digitex promote continuous supplier improvement through its
performance measurement system?
15.Explain the statement “Performance measurement supports the supplier
selection process at Digitex.”