Quality Through the Tiers

Just as the Industrial Revolution is credited with giving birth to independent job shops, the Quality Revolution may be held responsible for their death. For decades these small and medium-size shops have stood at the end of the supply chain, working from one to several links away from the original equipment manufacturer (OEM) making the end product. Traditionally, job shops have been independent operations. They may have had regular customers, but unless a job shop and a customer actually shared the same owner, the relationship between them began when the part plans came in the shop door and ended when the number of parts ordered was delivered, inspected, and approved.

But OEMs are building new kinds of relationships with their suppliers, treating them more like subsidiaries than sovereign companies. Sub-tier shops that rarely work with OEMs may not be feeling these changes yet. But they will. “Our goal is to work with our first-tier people to make sure they understand our requirements in terms of quality,” says Cynthia Hess, Chrysler’s director of supplier development, procurement and supply. “Then, in turn, we expect them to sit down with their first-tier and second-tier suppliers and follow through with a similar set of requirements.”

To play in this new arena, independent job shops will have to transform themselves into team members operating under the guidelines set down by the OEMs. The quickest and surest way to learn the rules is to see how the game is played at the first-tier level.

Regaining Control
The closely bound partnerships being formed between OEMs and their first-tier suppliers are the inevitable result of the OEMs’ growing preference for outsourcing. Increasingly, OEMs are finding it more cost effective to let subcontractors build their parts. But OEMs lose control over the processes used and the quality of the parts they receive when these parts are outsourced to traditional independent job shops. In-house, the OEMs follow such quality regimens as statistical process control, total quality management, and continuous improvement, which dictate the careful monitoring of the processes used to make each part. Using statistics derived from measurements taken during and after each operation, the manufacturer gages the ability of the operation to continue making good parts. If the statistics reveal a bad trend, the manufacturer can make corrections before rejects are produced. When it buys parts from an outside supplier, however, the OEM can do nothing about badly made parts until they land on its loading dock. And at that point, the OEM can’t send the parts back for replacement or rework, or start over with a better supplier, without derailing its own shipment schedule.

Thus was born the idea of suppliers as partners. Chrysler has been a pioneer in this realm of OEM/supplier relations, according to Hess. Under its Extended Enterprise program, Chrysler and its suppliers enter into long-term relationships that begin before the part prints are produced and continue after the parts are delivered and accepted. As a partner to its suppliers, Chrysler gains the authority to dictate how suppliers will make the automaker’s parts and what means suppliers will use to control quality.

The suppliers also gain some control over steps in the design/build process that they didn’t have before. “Suppliers are very integral in the design of the component or system that they will be supplying,” says Hess. “The supplier is bringing in its expertise, and we’re working together on the design development of the product, along with the product’s advanced quality plan.” By being involved at these early stages, the suppliers can ensure that the part will be manufacturable, reducing any obstacles to meeting Chrysler’s standards for quality and turnaround that might be lurking in the part design.

To emphasize its belief in two-way communication, Chrysler has instituted a program it calls SCORE (Supplier Cost-Reduction Effort). The program encourages suppliers to submit ideas that will increase productivity and profitability. These might be changes to the part they are supplying to make the part more manufacturable. They might also be words of advice to Chrysler suggesting better ways to handle or install the part or simply general recommendations on running a more productive operation. The SCORE program has yielded $1 billion in savings to date. According to Hess, Chrysler shares this savings with its suppliers. In addition, she says, “The suppliers are given credit for their ideas, and every year, as we rate suppliers, one of the things we look at is what they’ve submitted to the SCORE effort.”

Other OEMs in and out of the auto industry are adopting similarly close relationships with their suppliers. John Deere Tractor Works, Waterloo, IA, outsources about 60% of the content of its products. Gary Swartz, Deere’s supply manager, says that the company’s reliance on purchased supplies makes the capabilities and quality levels of its suppliers a critical issue. Suppliers are invited to sit on a council that also includes in-house purchasing people. The company’s managers use the council to convey their goals to the suppliers in the hope that this knowledge will lead to products that match the company’s needs.

At the same time John Deere is building closer ties with its suppliers, it is giving some of its own divisions more independence. For instance, the company’s Harvester Works, Cylinder Division, Moline, IL, competes with outside firms to supply John Deere’s other divisions with hydraulic cylinders. The division builds cylinders for outside firms as well, including John Deere’s competitors.

Closer relationships between OEMs and their suppliers give the OEMs the opportunity to keep track of their suppliers’ progress and step in to help when problems arise. Chrysler uses advanced quality planning and failure mode and effects analysis to monitor its suppliers’ performance on an ongoing basis, says Cynthia Hess. “There are a lot of indicators that we built into the system to let us know why a shop won’t be on time or why it’s having a problem. The whole reason for advanced quality planning and watching the milestones is to help the suppliers.”

John Deere also keeps tabs on its suppliers, tracking their performance to see how well they are meeting the terms of its quality program. When it discovers problems, it quickly sets up meetings with the supplier to resolve them.

David Nelson, vice president of purchasing for Honda of America, says his company tries to anticipate and correct potential problems before a job begins. Honda sends a team to examine every one of a supplier’s processes every time a supplier has a new part or process ready to go on line. This diligence helps Honda get 100% good parts 100% of the time, Nelson says.

According to the OEMs, now that they have established these long-term partnerships, they no longer price shop. Hess says that Chrysler’s suppliers know the carmaker has made a commitment to working with them. They don’t have to win the company’s favor with a low bid every time Chrysler wants a new part made. Nelson says Honda’s loyalty to its suppliers gives the suppliers more incentive to cooperate with the company, because they know Honda won’t give a job away to someone else who promises to do it a penny cheaper.

The OEMs also say that the long-term relationships give suppliers more freedom to acknowledge problems they may be having or to pass up jobs they fear may be beyond their capacity.

But even valued suppliers aren’t entirely free from price pressure. Mark Fagan, a vice president at Mercer Management Consulting, advises OEMs to bargain aggressively with their suppliers once they’ve established a business relationship with them. The goal, he says, is to coax suppliers to drop their margins as low as possible. As vice president of quality for ITT Automotive, one of Chrysler’s largest suppliers, Dick Jones is familiar with this strategy. “The OEMs don’t want to pay us more for our parts,” he says. “In fact, they want to pay us less every time. And they’ll use every argument they can to do so.” Dan Resmer, COO of automotive supplier Machining Enterprises Inc., Warren, MI, says that it’s especially difficult for suppliers to make a profit with the OEMs expecting low prices on one hand and higher quality on the other. “We’re at a very difficult time right now in the domestic automotive marketplace,” he says. “We’re nowhere near the margins on parts that we had five or 10 years ago, and the requirements are all tighter.”

The OEMs say lower prices are simply the logical outgrowth of their relationships with their suppliers. The two-way communication between these partners should ensure that the parts are being designed and made in the most productive manner. Jones agrees that suppliers should be able to lower their prices and still make a profit if OEMs are willing to demonstrate to their suppliers how to increase productivity and help them achieve a more productive operation. “The wrong way,” he says, “is to take the lowest bidder and tell him he’s got to reduce his bid by another 10% or 20% if he wants to keep the business. That’s just plain using a blunt instrument.”

A Defect-Free Goal
The OEMs say that with their help, suppliers should be able to meet the OEMs’ requirements for quality as well as price. These requirements, in terms of how many defective parts the OEM will consider acceptable, can appear to a small or medium-size shop to be impossible to achieve. “Years ago we used to talk in percentages, and a 1% reject rate was probably considered pretty good, because so often you got worse than that,” Jones says. “Nowadays anything that isn’t less than 100 ppm [rejected parts per million] is really considered unacceptable. And a number of customers are setting targets of 25 ppm.”

The OEMs frequently talk of “six-sigma” quality. The term was originally coined by engineers at Motorola, the Chicago-based electronics manufacturer, to refer to a goal of 3.4 defects for every million opportunities in the manufacturing process for defects or errors to occur. The term implies more than just a rough count of rejected parts, though. It’s actually a statistical evaluation of a manufacturer’s processes. To achieve six-sigma quality, key measurements of the process and features produced by the process must remain centered on their nominal values, and the spread of measurements around these values must be extremely narrow.

Having measurements centered on the nominal value is as important as having them within an acceptable range. For instance, a supplier who turned a groove on a shaft to a depth that was within tolerance, but that was consistently 0.0001" too deep, would not be achieving “six-sigma” quality.

The levels of quality are achievable, according to the OEMs, because they and their suppliers concentrate on the quality of the processes used to make the parts rather than on the quality of the parts coming off the line. If the supplier can keep the processes that produce good parts from drifting out of range, then they should be able to produce good parts indefinitely. As Jones explains it, the supplier must have processes that are not only capable of producing good parts presently, but capable of continuing to produce good parts. Many suppliers have been able to eliminate defects by vigilantly monitoring their processes. David Nelson says that Honda’s purchasing people work closely with its parts quality department to compile summaries of suppliers’ quality and delivery performance. Each month the suppliers receive report cards to help them identify problems. As a result of this feedback, 200 of Honda’s 322 suppliers ship defect-free each month.

Many OEMs are ready and willing to step in when a supplier’s processes aren’t capable of meeting the OEM’s quality requirements. Nelson says Honda takes quick action when a problem is detected. The company may call in the supplier’s CEO, or Honda representatives may pay a visit to the supplier. Larger OEMs like Honda typically have more resources and manpower to devote to quality issues, and they may know of processes and procedures that have helped improve quality in their own operations. When a supplier begins missing shipping dates or its SPC data or reject rates reveal quality problems, the OEM can offer the expertise it may have gained through its own experience. This is not to say that the advice can’t travel in the other direction, however. ITT Automotive, for example, was invited to give some of Chrysler’s own divisions help in meeting the quality requirements the automaker itself had issued.

Standard Requirements
A supplier with a number of customers all wanting to be its partner could end up trying to satisfy a bewildering number of requirements and expectations. Some of these dictates may be spelled out in the OEM’s quality program, while others may be handed down through less formal channels. In recent years, some organizations have attempted to simplify the situation with standardized sets of requirements.

The most widely used standards are the ISO 9000 series, released in 1987 by International Organization for Standardization (ISO). The standards require companies to have documented quality-assurance programs in place and to provide proof that they work. To satisfy the first requirement suppliers have to have a quality manual laying out what the employees are doing to ensure the quality of the parts produced, an operations/procedures manual with work instructions for each task or operation needed to produce the part, and documentation to show that the procedures are being followed.

To satisfy the second requirement, many customers may demand a third-party audit by an accredited registrar, who will carefully examine a shop’s documentation and its operations to certify that what’s written down is being carried out.

It should be noted that the ISO 9000 standards do not specify what the programs and procedures being documented should be. The open-ended nature of the standards has led countless suppliers to spend thousands of dollars apiece on consultants, seminars, and registrars to guide them through the development of a quality program and its documentation. Estimates of the total cost for certification run from $35,000 to $150,000, plus annual fees for the yearly audit for recertification. And it must be remembered that the customer requiring ISO 9000 certification does not promise to use the supplier once it becomes certified. As Jack Tyson, manager of business improvement for United Technologies Automotive, Dearborn, MI, characterizes it, “You’re starting to approach $100,000 to $150,000 in costs for a possibility that you might have additional business.”

In 1995, the Big Three automakers—Chrysler, General Motors, and Ford—along with several truck manufacturers issued their own quality standards called QS-9000. These standards incorporated all of the ISO 9000 standards, but the automakers added more specific requirements as well. The QS-9000 standards superseded the Big Three’s separate quality programs, but room was left in the joint requirements for the automakers to insert requirements just for their own suppliers. Following in the footsteps of the ISO 9000 writers, the automakers included provisions for third-party certification. Presently none of the Big Three requires a third-party audit, but they all have issued a date when they say they certification will be mandatory.

First-tier suppliers may be cheered that the OEMs are finally paying attention to their suggestions and their problems. And they may find their future much more certain as a partner in a long-term business relationship. But there is a dark side to all this. OEMs are discovering that if they can maximize their best suppliers’ performance, they need a lot fewer suppliers to get the work done. Ford, for instance, says that by the end of the decade it will have cut its supplier base from 2400 to 1000. Cynthia Hess says the engineers at Chrysler have been looking at their outsourcing strategy for a number of years, asking themselves “Given a certain component or a certain system, how many suppliers do we need?” Hess says that once they’ve determined the answer, they establish long-term relationships with that number of suppliers and drop the rest.

When it comes to determining who stays on the OEM’s short list, the OEMs frequently use compliance with their quality programs as well as with ISO 9000 or QS-9000 as their criteria. According to Machining Enterprises’ Dan Resmer, the OEM’s attitude is, “If you don’t want to sign up to this, you will not be making parts in the future.” He says this attitude should be viewed like any of the OEM’s other terms of business. “It’s not whether you like it or not,” he explains. “It’s just the way it is.”

Moving Down the Tiers
In some OEMs’ eyes, the quality war has been won at the first-tier level, and they’re ready to take their fight to their suppliers’ suppliers. Thomas Stallkamp, vice president of procurement and supply for Chrysler Corp., says most of Chrysler’s quality problems are coming from second- and third-tier suppliers. The sub-tiers don’t have the same quality ethic Chrysler’s tier-one suppliers have, in Stallkamp’s opinion. That’s why Chrysler will be concentrating on quality throughout its supply chain.

“It’s the next logical step for quality in the automotive industry,” says Raymond Mitzel, executive director of the Automotive Industry Action Group (AIAG), on loan from Chrysler. “In order for tier-one suppliers to provide the Big Three with world-class products and services, they must work with quality suppliers all the way down the supply chain.”

Because the OEMs are concerned about sub-tier quality, they are urging their first-tier suppliers to make changes in their relationships with suppliers that mirror the changes going on at the first-tier level. Chrysler’s Cynthia Hess says that if a sub-tier supplier has good ideas, she definitely wants them on the team early in the part-development process.

Evidence that the first-tier suppliers are taking the OEMs’ lessons to heart can be seen in the long-term relationships some first-tier suppliers are forging with their suppliers. Dick Jones says the help and support ITT Automotive gave to its suppliers improved the suppliers’ quality enough to earn ITT Automotive Chrysler’s first extended enterprise award. Jones says the company offers help to suppliers through its supplier development group, which brings suppliers together with the company’s engineers. As long as a supplier is making a good-faith effort to meet ITT Automotive’s requirements, the company will give the supplier all the help it can, according to Jones.

However, not every customer has the resources of a company like ITT Automotive to help its suppliers. Jack Tyson of United Technologies Automotive, says most companies will be willing to let their suppliers tap the skills and expertise of their in-house staff, but they may be stingier when it comes to spending money to bring their suppliers up to speed. In some cases, the OEM may be able to help. Cynthia Hess says Chrysler would be willing to give a sub-tier assistance, advice, or training if the smaller company had a quality problem that the first-tier couldn’t fix.

Sub-tiers should also expect the same price pressures the first tiers are experiencing. Jones says ITT Automotive tries as hard as its OEM customers to pass costs to its suppliers by bargaining with them for lower prices and higher quality. At the same time, some OEMs are urging their suppliers to share with the sub-tiers any cost-reducing methods they may have learned as a result of their relationship with the OEM. Chrysler’s Thomas Stallkamp says his company is trying to figure out how to encourage suppliers to pass on those requirements or procedures that may have yielded higher quality or cost savings to the next level, even though the first tiers may not have seen the need to do so in the past.

Sub-Tier Requirements
In exchange for making a sub-tier supplier a member of their team, the first-tier supplier and its customer, the OEM, will expect the sub-tier to follow the same quality requirements as the first-tier. Like the OEM, the first-tier will be expecting nearly defect-free shipments. Gary Swartz of John Deere says that, to keep quality consistent regardless of who supplies the part, second- and third-tier suppliers must adhere to the same quality standards that the OEM imposes on its first-tier suppliers.

This may mean that when the OEM imposes the ISO 9000 or QS-9000 standards on its first-tier suppliers, the sub-tiers all down the supply chain will have to become ISO 9000 or QS-9000 certified as well. Traditionally, customers have taken little, if any, responsibility for their suppliers’ compliance with the ISO 9000 standards. The supplier is expected to bear all costs and get whatever help it needs on its own, says Amy Zuckerman, president of A-Z International Associates, Amherst, MA. Jack Tyson fears that this can be a prohibitive investment for many sub-tiers. “If you roll in the training costs, the internal costs of development, some of the consulting costs, the registration fees, and the registrar costs, you’re going to bankrupt some of these small to mid-size companies,” he says.

Because QS-9000 is an offshoot of ISO 9000, sub-tiers working with QS-9000 certified customers may face the same pressure to comply with the standards. And they may find compliance just as expensive. Machining Enterprises’ Dan Resmer says his company plans to spend at least $50,000 cash to earn QS-9000 registration. “Plus we have a lot of internal resources that are going to be dedicated to the cause,” he says.

One group of first-tier suppliers in the automotive industry is trying to take an approach they hope will be more cooperative and less costly. Under the aegis of AIAG, they have formed the Sub-Tier QS-9000 Deployment Work Group. Tyson is the chair of the group. “The whole effort is to reduce the cost for the sub-tier supplier,” Tyson says. “We’re trying hard to make compliance with QS-9000 as convenient as possible.”

The group is striving to find ways to supply sub-tiers with cost-effective educational programs and training, supplier compliance database development, and management and auditor qualification criteria at a reasonable cost. “Sub-tier suppliers shouldn’t have to pay consultants to show them how to do a quality-control manual, for instance,” says Tyson. The group is also recommending that first-tiers pass the QS-9000 requirement down to their suppliers but refrain from requiring QS-9000 certification at this time because of the prohibitive registrars’ fees.

The one sure thing is that nearly all customers will be imposing some type of quality requirements on their suppliers at some point in the near future. And as these first-tier companies pare down their own supplier bases, compliance with their quality requirements will become an important criterion for deciding who remains on their list. “We will be encouraging and monitoring our supply base for plans to be compliant with QS-9000,” says Resmer. “And we probably won’t work with suppliers that aren’t compliant after a certain period of time.” Jones says ITT Automotive has already reduced its supplier base considerably, and they have further to go. The company doesn’t automatically drop a supplier that doesn’t comply with QS-9000, but a shop’s “ability and willingness to adopt the QS-9000 requirements will certainly be a factor in our decisions,” he says.

If a sub-tier supplier does find that its customers are insisting on ISO 9000 or QS-9000 certification, it might consider joining a consortium to reduce its costs. In a consortium, several members share the services of a consultant who gives them expert guidance in preparing for certification, according to consultant Victor Logan of the Chicago Manufacturing Center. Members also can share their experiences and expertise with each other. Logan says he attended one meeting where participants discussed forming a consortium, and they were quoted a cost of $7000 to $8000 per member for the consultant’s services.

Sub-tier suppliers facing stringent quality requirements may also benefit from a closer, long-term relationship with their customers. If the shop’s people believe they are already complying or can comply with the spirit of the requirements in a less costly way, they may be able to negotiate an alternative requirement. “If you’re dealing with the Big Three, things are very specific,” says Zuckerman. “But if you go outside that realm, then everything can be very variable.”

Zuckerman’s advises sub-tiers not to regard a customer’s quality requirements simply as a test they must pass to get its business. Most requirements mandate an intense evaluation and documentation of a company’s procedures and quality-assurance measures. If a supplier gathers this information in a form that it can use to pinpoint problems and make improvements, the exercise can propel the company into a stronger and more competitive position. “Documentation for documentation’s sake is useless,” says Zuckerman. “But when it’s coupled with a game plan for a company’s survival and growth in the next decade, it can be a potent force.” Ideally, suppliers should use their customers’ quality requirements as blueprints to transform themselves into high-performance companies capable of achieving high quality without sacrificing profits. And that is what the OEMs had in mind all along.