The Role of Engineering in Supply Chain Management William K. Hoehn, Ph.D. Raytheon Systems Company Tucson, Arizona

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1 The Role of Engineering in Supply Chain Management William K. Hoehn, Ph.D. Raytheon Systems Company Tucson, Arizona Abstract Supply Chain Management addresses the need for companies to coordinate their processes, functions and product development activities to improve the long-term performance of all businesses in the supply chain. Development of complex product necessitates interaction between buyer and supplier engineering organizations. Engineering interaction follows a life-cycle process beginning with product conceptualization and continuing through production. This interaction is required to ensure optimal product design and manufacturing processes. 2 Background 2.1 Supply Chain Management Mentzer, et. al. (2001) define a supply chain as a set of three or more companies directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer. At the minimum, a supply chain is composed of a supplier, a producer and a consumer. Supply chain management is the systematic, strategic coordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole (Mentzer, et. al., 2001). Supply chain management causes the organization to view the flow of materials, information and capital from a systems perspective. Supply chain management is a relatively new term, and has evolved both in usage and meaning over the last 10 years. Industry has embraced supply chain management, mostly because some response was needed to manage a growing number of suppliers and products, and an increasingly global supply and sales base. Mentzer, et. al. (2001) noted that there are three drivers for supply chain management. First, corporations are more globally focused and now source from global rather than regional suppliers. Second, time and quality has taken on greater significance, and has become a discriminator in organizational performance. Third, market place uncertainty that is caused by the rapid pace of technology and commerce causes companies within the supply chain to establish flexible relationships that enable them to react quickly to changes in technology and commerce. Deming ( ) and Garvin (1987) suggested that companies could reduce variation in quality by reducing the supply base. Taken together, three key results of supply base reduction are: 1) a potential increase in quality, 2) a reduction in cost through larger buys, and 3) closer relationships with each supplier which will positively affect new product introduction schedules. A secondary outcome is that increases in production quantities enable suppliers to invest in improved manufacturing processes. 1

2 2.2 Product Development Complex product development entails substantial supplier interaction with design and production engineering. Nevins and Whitney (1989) have shown that early supplier involvement is a significant variable on product introduction quality and schedule. For this reason, supplier interaction should begin early in the product life cycle. This has been well documented in literature describing concurrent engineering and manufacturing. As product performance and quality is highly dependent on supplier capability, it is natural that the procuring organization must establish a strong technical relationship with suppliers developing subsystems and key components. Thus, companies should develop and follow some process for technical interaction throughout the product life cycle. We typically think of technology in terms of product breakthroughs. In truth, technology development may also entail manufacturing process improvement or development. Because of this, both product and process development issues must be considered when selecting a supplier. A prerequisite to success is the assurance that the supplier has the capabilities and capacity to perform the supply functions deemed necessary. Stanley and Wisner (2001) have shown that the quality passed onto the consumer is directly related to the incoming supplier quality. That is, outgoing quality is highly dependent upon the quality levels achieved by each supplier. 3 Life-Cycle Process The supplier selection and management process depicted in Figure 1 includes the technical activities that must be completed in each product life-cycle phase. Supplier interaction begins with the development of an initial set of product design and specifications, and leads to the assessment and selection of a supplier. Product design activities include reassessment of supplier capabilities and leads to an initial production run. This run includes component as well as manufacturing process qualification. The design phase should include significant technical interaction between the supplier and procuring company, as it easiest to modify a design prior to production. The final phase includes a transition to high-rate production and continuing observation of supplier capabilities. Design improvements may be dictated during this phase to reduce product cost, improve quality, or to improve the rate of production. It may be found that supplier capability does not meet expectations leading to a decision to either improve the supplier s capability, or locate and select new suppliers. 3.6 Making Initial Allocations Product design typically begins with concept development and the identification of key subsystems and components. This phase usually involves a review of available products that could be used in the system. In some cases, the technology available is deemed insufficient to achieve performance or cost goals. In these cases, the product concept will include subsystems or components that are not readily available, and will require investments in product and/or process technology. 2

3 Evaluation Product Design Production Initial product specification and component allocations Product sourcing strategy Review product specifications and reallocate to achieve best design for manufacturing and product performance Define manufacturing process specifications and capabilities Modify mfg. process and/or product design Initiate supplier high-rate production Monitor supplier and administer corrective action Supplier assessment and selection Initial manufacturing for evaluation and qualification Review and resolve supplier problems Evaluate new suppliers Figure 1. Supplier selection and management process. The initial allocations are complete when functional and performance requirements have been fulfilled by hardware and/or software items. That is, each function the system must perform is traced to one or more hardware and software elements. In addition, it can be shown that these elements meet the performance requirements. 3.2 Sourcing Strategy Following initial allocations, the company may have some idea of where components will be procured as the performance and functional allocations were based to some degree on existing products or knowledge of supplier s capabilities. A strategy for critical components and subsystems should be developed at this point. Decisions to be made are: (1) whether the product will be outsourced or built in-house, (2) the type of supplier relationship required to design and fabricate the product, (3) whether the technology can be developed in the time frame, (4) in the case of high-risk components, whether a dual-source development strategy should be adopted, (5) identification of suppliers that can develop the product, (6) the level of investment the company is willing to make in product and process technology, and (7) the degree and investment to be made in supplier development. 3.3 Supplier Selection An initial assessment to ensure supplier capabilities should be performed. There are several reasons why the assessment must be performed by the procuring organization or an independent entity. In technically challenging products, the supplier may not have sufficient knowledge of the product and processes to perform a capability assessment. The knowledge 3

4 gap may become more pronounced as the product or manufacturing processes becomes more technically involved. In addition, extreme product complexity or physical distance between supplier and customer may necessitate a partnership. Following supplier assessment, one or more suppliers are selected to participate in product development activities. 3.4 Specification Re-balancing Engineers from the supplier and sourcing organization should work together to balance product requirements. As the supplier has in-depth knowledge of product and manufacturing capability, the sourcing organization should attempt to incorporate these capabilities in the product design. Product and manufacturing capability will play a role in product performance, cost and quality. Thus, the sourcing organization should gain an indepth understanding of factors that affect these three parameters. Specifications can be more easily modified at this point to achieve a better balance across system elements. Waiting until manufacturing has commenced to learn about supplier capability is bad practice. It is extremely difficult to change other supplier s requirements to provide the one supplier relief after production has begun. System performance cannot be optimized if these capabilities are not factored into the system specifications and requirements. 3.5 Developing Manufacturing Processes Specification balancing should end with a set of subsystem and component specifications that are agreed to by supplier and the procuring company. The supplier will use these specifications to develop manufacturing process and capabilities specifications. The manufacturing process chosen may have a significant effect of product cost, schedule, quality and reliability. For this reason, the engineers from the sourcing company must work with the supplier to understand the effect that selection of manufacturing processes will have on these variables. The engineers do not have to gain an in-depth understanding of the process, but must have sufficient depth to ensure that the cost, quality, delivery and reliability goals will be met. The supplier should take steps to analyze these parameters, and demonstrate that the processes planned for employment will fulfill the goals. 3.6 Initial Manufacturing At this point, the supplier will enter an initial manufacturing phase. The supplier may fabricate different product configurations during this step in order to demonstrate product and process maturity. Units developed during this phase typically include engineering evaluation units, qualification units, and first batch production. First batch production certifies that product quality and delivery can be achieved, and that the manufacturing processes are achieving rate and in-process quality levels. The procuring organization must ensure that these two goals are met, as it s possible for a supplier to produce products that meet specifications yet have a high-level of in-process failures. High levels of in-process failures may ultimately lead to poor delivery, low quality, higher production costs, more inprocess failures at the procuring organization s plant, and ultimately, poor fielded reliability. 3.7 Transition to High-Rate Production 4

5 During the transition to high-rate production, the procuring organization should verify that the product quality and delivery meets expectations. During this step, unexpected issues may arise that must be addressed quickly in order to maintain consistent production. For example, transportation, packaging, and material handling issues may crop up. To avoid schedule problems, the procuring company and the supplier must be ready to rapidly address any of these issues. Because of this, technical interaction must be continued through production. In addition to shipping and handling issues that lead to a reactive posture, both organizations should be vigilant to identify and implement product cost savings and quality improvements. Improvements should be evaluated and handled following the same process steps noted above, as design changes may affect the manufacturing processes and product performance. 3.8 Visibility into Supplier Performance The procuring company should routinely collect metrics on supplier delivery and quality. Metrics should include incoming supplier quality as well as supplier in-process quality. Downstream metrics should also be collected to ensure that the subsystem or component performs in the factory as well as in the field. The procuring company should evaluate metrics at production and supplier meetings to either deal with current delivery or quality problems, or to adopt strategies to deal with anticipated problems. Key suppliers should participate in production meetings. 3.9 Problem Resolution When problems arise, each should be addressed in a timely manner. Solutions should be identified and jointly agreed to by the procuring company and the supplier. There may be times when the supplier cannot resolve the problem in a reasonable time frame. For example, consumer demand may have increased at a rate that cannot be supported by the supplier. Another example is when a supplier has suffered from quality or delivery problems that cannot be resolved. An inability to resolve these problems may lead to loss of sales, revenues and customer satisfaction for the procuring company. In these cases, the procuring company should begin evaluating new suppliers or contemplating steps that could be taken to improve the supplier s performance. New suppliers should be evaluated and selected following the steps outlined above. Strategies to deal with supplier issues include maintaining the first supplier as well as adding one or more additional suppliers. This type of strategy can be implemented when the first supplier s quality is good, but the supplier is unable to meet delivery commitments. A second strategy is abandoning the first supplier and selecting a new supplier. This strategy will most likely be implemented when the first supplier has poor quality, high costs and/or poor delivery performance. However, before abandoning a supplier, the procuring company should be somewhat introspective. That is, the technical community should determine what effect their requirements play on poor quality, delivery and cost. It may be found that rebalancing specifications will alleviate issues with the supplier. For this reason, this option should be investigated prior to making the decision to switch suppliers. Decisions to contract with new suppliers should be carefully weighed against the costs. If the supplier that is replaced is producing a product that does not require substantial 5

6 technical interaction the transition to a new supplier it s likely that a transition will progress without incident. However, if the supplier is producing a product that requires substantial technical interaction, the decision should be carefully evaluated. In these situations, it s likely that the supplier and the procuring company s technical communities have established a long-term relationship. The relationship gave each company a better understanding of capabilities, processes and approach. Changing suppliers means that these same relationships must be established with the new supplier. Establishment of relationships is quite complex, and could take several years to fully develop. Because of this, the procuring company should carefully weigh the options before making a change. 4 Conclusions Product development necessitates close technical interaction with suppliers. To foster this technical interaction, companies should develop and implement a process that addresses each life-cycle phase. Close technical interaction helps ensure that product requirements are met and that suppliers are able to achieve and maintain delivery volume and quality levels. Supplier abandonment and dual sourcing should be carefully weighed against the costs involved. 5 References Boddy, D., Macbeth, D, and Wagner, B., Implementing collaboration between organizations: an empirical study of supply chain partnering, Journal of Management studies 37:7, November 2000, Deming, W.E., Improvement of quality and productivity through action by management. National Productivity Review 1 (1), Forrester, J.W., Industrial Dynamics: A major breakthrough for decision makers, Harvard Business Review, 7/8, Garvin, D. A., Competing on eight dimensions of quality, Harvard Business Review 11/12, Gunasekaran, A., Patel, C. and Tirtiroglu, E., Performance measures and metrics in a supply chain environment, International Journal of Operations & Production Management, Vol. 21, No. ½, (2001) Nevins, J.L. and Whitney, D.E., Concurrent Design of Products and Processes, McGraw Hill, New York. Chapter One, Supply Chain Management, Sage Publications, Inc, edited by John T. Mentzer, Stanley, L.L. and J.D. Wisner, Service quality along the supply chain: implications for purchasing, Journal of Operations Management 19 (2001) Van Hoek, R., Harrison, A., and Christopher, M., Measuring agile capabilities in the supply chain, International Journal of Operations & Production Management, Vol. 21, No. ½, (2001)