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optimizing-purchasing-processes-saves-1-million.pdf

Making the Case for Quality

Optimizing Purchasing Processes

Saves $1 Million

• Using the DMAIC method, a Six Sigma improvement team at MWM INTERNATIONAL Motores in Brazil improved the company’s supplier selection process.

• Known as the Moving Forward team, this group applied a wide variety of quality tools to reduce the price/weight ratio for bolts, a key component for the company’s diesel engine products.

• By streamlining processes, reducing variability, and increasing efficiency, the yearlong project helped reduce engine bolt costs by $1 million.

• The team shared its success story with a worldwide audience when it participated in the final round of competition in the 2009 International Team Excellence Award Process.

At a Glance . . . Often the simple things create the biggest impact. But could a change in purchasing processes for the most basic manufacturing components, like bolts, actually lead to $1 million in savings, increased effi- ciency, and reduced process variation? When a multidisciplinary Six Sigma improvement team tackles the issue, the answer is a resounding yes!

About MWM INTERNATIONAL

MWM INTERNATIONAL Motores is a wholly-owned subsidiary of Navistar, a major worldwide diesel engine manufacturer and current leader in diesel engine technology and development in Latin America. Operations include a technology and business center in São Paulo, Brazil, as well as three South American manufacturing sites—São Paulo; Canoas, Brazil; and Jesus Maria, Argentina.

The company’s engine products range from 2.5 to 9.3 liters and from 50 to 375 cv and serve a wide range of markets in the vehicular, agricultural, industrial, and marine sectors. Among MWM INTERNATIONAL’s customers are Ford, GM, Volvo, Volkswagen, New Holland, Troller, and Valtra.

Focusing on Purchasing Activities to Reduce Waste

As an engine maker, MWM INTERNATIONAL uses more than 400 different bolts in its manufactur- ing operations, which led to inefficient purchasing strategies for this commodity. Because bolts are a standardized product, both the material and production processes are similar for the entire range of existing bolts. Therefore, MWM INTERNATIONAL officials believed it was reasonable to expect a linear relationship between the price of bolts and steel—the raw material from which they are made. The relationship is expressed in a formula called linear price performance or LPP. This comparative method evaluates price and measurement correlation in kilograms, linear meters, square meters, or liters. LPP is calculated by dividing price per a measurement unit, as shown in the examples below.

price price weight

= LPP or length

= LPP

Company leaders surmised that finding a way to optimize the organization’s purchasing processes for engine bolts would reduce the LPP, thus lowering costs and reducing waste.

This Six Sigma improvement project was identified as a result of the company’s culture of continu- ous improvement, whereby MWM INTERNATIONAL officials consistently pursue opportunities to develop new projects that follow the define, measure, analyze, improve, and control (DMAIC) method- ology. The organization uses the following tools to help pinpoint new process improvement projects:

by Janet Jacobsen

July 2009

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• Voice of the customer, to identify customer requirements. • Voice of the process, to learn about process capability. • Process or value stream maps, to understand the

organization’s processes. • Failure mode and effects analysis (FMEA), to discover

possible failures. • Critical-to-quality (CTQ) trend analysis, to identify good and

bad trends.

From the onset, the team involved stakeholders— both internal and external— in the effort. Stakeholders, listed in Table 1, played key roles in mapping a project charter and with brainstorming and process- mapping exercises that helped define both positive and negative impacts on various activities.

Searching for a Cause and Formulating Solutions

The improvement project kicked off in August 2007 with an 11-member group called the Moving Forward team. See the sidebar, Meet the Project Team, for a complete list of team members. These individuals were carefully selected from a

“talent bank” of employees who completed training in lean, Six Sigma, or other process improvement strategies.

Identifying Root Causes

After gathering data on LPP, including completing the pains- taking task of checking the weight of every bolt, the team identified CTQ factors. Arranging the CTQs on a process map enabled the team to better estimate the incidence of each, as well as understand distinctive features of the factors in every stage. Identifying all factors was necessary, but proved difficult

because some were not readily apparent. “We had to walk through every process step to identify the factors and relate them with the LPP,” explains Fernando Lima Lopes, Six Sigma Black Belt coach on this project.

Next, the team selected the most critical factors and conducted a more thorough analysis with a prioritization matrix, where scores were assigned according to the influence of each factor in the response variable. The four factors listed below were cor- related in an attempt to observe a cause-effect relationship and thus determine the root cause of the problem:

• The supplier—some vendors offer competitive advantages that affect the final price of bolts.

• Annual purchase volume that showed a negative correlation with LPP.

• The technical specifications of each bolt that may affect the price. • The commodity strategy for conducting the quotation process

to select bolt suppliers.

Team members then used design of experiments to help deter- mine the relationship between the response variable, LPP, and the scored factors. The four selected factors were carefully analyzed and verified during each process phase. Eventually, a quotation was simulated for a bolt in each category. The simulation included purchasing volumes in three levels and with four separate suppli- ers. Quotes were requested from suppliers and the team drafted a model, including LPPs from the suppliers’ returned quotes.

As a result of the simulations, the team observed that higher LPPs resulted from low volume purchases from a particular supplier, referred to here as Supplier A. Data confirmed that Supplier A offered a competitive advantage only for very high volumes of bolts and that 91 percent of the bolts purchased came from this supplier. In addition, team members discovered that the company’s commod- ity strategy did not include recommendations on annual purchasing volumes, but did advocate giving Supplier A the opportunity to bid on any new business. Thus, the team identified incorrect supplier selection as the root cause. “We could see that good planning led us to identify the true root cause of the problem and to choose correc- tive actions to neutralize this cause,” recalls Lopes.

Developing a Solution

To formulate a solution that would effectively address the root cause, the team used several tools, including brainstorming, benchmarking, stakeholder interviews, and process waste assess- ment. With the information gathered through these tools, the team divided potential solutions in two ways:

1. Preventive actions, designed to avoid selecting new bolts that do not meet targets for LPP mean and variability.

2. Corrective actions, related to revising purchasing processes for current parts to meet LPP mean and variability targets.

Next, by comparing preventive and corrective actions with the primary wastes observed in the process, the team estimated the

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Stakeholder Degree of Impact From Project Purchasing department High Financial department High Quality department Medium

Engineering department Low Sales department Low Bolts suppliers High Customers Medium

Other partners Low

Table 1— Degree of stakeholder impact

Members of MWM INTERNATIONAL’s Moving Forward team included the following employees from the São Paulo and Canoas, Brazil, facilities:

Juliano Afonso Tessaro Team leader

Fernando Begara Project champion

Fernando Lima Lopes Black Belt coach

Diego Pellini Master Black Belt

Andreia Pereira Current products buyer

Andrea Regina Siewerdt New programs buyer

Eduardo Vilaboa Costs engineer

Humberto Belloto Applications engineer

Rodrigo de Carvalho New programs buyer

Lucilene Gomes da Silva Purchasing assistant

Adriel Castro Purchasing finance

Meet the Project Team

impact of the proposed actions to formulate a list of possible solutions. Again, the list was divided into two categories:

• Supplier change, where the main goal is developing new business only with those suppliers that provide the best commercial proposal for meeting LPP targets.

• Negotiation with actual supplier, where the idea is negotiating with the current supplier to adjust current prices to a market price.

Based on the possible solutions, the team pursued the actions with the greatest support from the main stakeholders and those solutions that showed the greatest potential impact on organiza- tional performance metrics. Three methods proved effective for defining solutions, including:

• The application of game theory and economic behavior to simulate likely behavior for those involved in purchasing negotiations.

• Stakeholder analysis on the impact for each potential solution. • Estimated impacts on organizational performance metrics as

a result of eliminating or reducing process wastes.

Together, these tools helped the team define a strategy and the best solutions. Figure 1 provides a detailed depiction of the team’s process to analyze data to select a final solution.

Analyzing Data

Making use of short-range period analysis and a payoffs matrix, the Moving Forward team analyzed the effects of various solutions and realized that any strategy selected would create a financial loss for Supplier A. However, the team predicted that Supplier A would choose to negotiate price rather than risk losing a significant share of business to a competitor. Based on this analysis, the team con- cluded the best corrective action was to negotiate with Supplier A.

Looking at long-term preventive actions, the team developed a different approach to manage the supplier relationship to obtain the most favorable LPP conditions. The team concluded that in the future new engine parts should be developed directly with the most competitive supplier, thus eliminating the need to rene- gotiate prices with current suppliers.

Selecting and Validating Final Solutions

Ultimately, the team arrived at a two-fold solution, as follows:

• Design a new commodity strategy: Establish guidelines for quotation and development that take into account the differing annual volumes needed for each type of bolt.

• Negotiate with the current supplier: Revise all current contracts to reduce the gap between market prices and the current price paid to the supplier.

To verify if these solutions would accomplish the project’s goals, the team applied a simulation model to predict LPP. In doing so, team members confirmed that selected actions would indeed provide even greater results than initial project goals—creating a significant reduction in LPP mean and variability.

Addressing Resistance and Creating Buy-In

Throughout the course of this improvement project the team was diligent about involving stakeholders to increase buy-in and reduce resistance. With two types of actions planned, different forms of resistance emerged for each solution. For the correc- tive action solution, the only resistance came from the supplier that faced lower profits on its bolt products sold to MWM INTERNATIONAL. On the other hand, with preventive actions focused on changing suppliers, the team found opposition from stakeholders other than the affected supplier, including MWM INTERNATIONAL’s quality and engineering departments. Members of these units expressed concerns about the impact a supplier change could have on product quality and about poten- tial restrictions on parts development.

The improvement team conducted two meetings with concerned stakeholders prior to implementation so that all parties could discuss potential impacts of each planned action. As a result, the team decided to begin with a small-scale implementation to alleviate concerns raised during the stakeholder meetings. After selecting an average sample of bolts that were already in produc- tion and by using a few new designs to develop items that would require modifications, the team was ready for the small-scale implementation of its solution.

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Figure 1— Analyzing data to select a final solution

Are there risks involved in these solutions?

Key solutions found

Two basic subgroups to possible solutions

Economic theory Game theory andeconomic behavior

Estimated impacts over organizational performance metrics

What do stakeholders think about it?

Which are expected results?

Strategy definition

What is company strategy?

Final solution definition Stakeholders’ analysis aboutthe impacts of each action

List of possible solutions

Negotiation with actual supplier

Bolts supplier change C

C

P

P

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Saving Money While Reducing Variability

Results of the trial implementation showed great promise with a consistent correlation between price and weight of the bolts. By comparing results before and after implementation of the small-scale rollout, the team corroborated a very significant reduction in LPP mean and standard deviations to easily meet the primary project goal. Shortly thereafter, the team obtained consensus: It was time to move forward and implement the solution to all bolt products.

The team’s improvement strategy resulted in a cost reduction of 13.6 percent of the annual purchase price for bolts, which repre- sented a savings of nearly $1 million. In addition, quality metrics improved through an almost 90-percent reduction in process variability. For a complete view of the benefits and the impact this project had on performance metrics, see Figure 2.

The only goal not fully accomplished was reducing the lead time for the bolt development process. Although this goal was not achieved in 20 days, the team did implement significant process improvements.

Sharing the Team’s Story

The Moving Forward team shared its success story internally to help improve other purchasing processes, and also with a worldwide audience in the final round competition of the 2009 International Team Excellence Award Process, held in May in Minneapolis, MN. Here, Lopes and his team members delivered a presentation during the ASQ World Conference on Quality and Improvement.

Monitoring and Sustaining the Improvements

As a means of measuring and monitoring the project’s results, the team created a performance metric panel that shows the correla- tion graph between weight and price, process capacity ratio, and a comparison between previous and current conditions. In addi- tion, the team implemented a quotation assessment form to use as

a monitoring chart for every LPP. When quotes fall in the green area of the form, the purchasing manager approves the quote because it’s consistent with market LPP. Those quotes that land in the yellow area indicate the need to remake a quote, while any quotes in the red area of the monitoring chart are rejected.

To ensure the inclusion of every bolt, new or in production, in the methodology, the team developed a process where the performance analysis form and the approval of each LPP work together to help prevent errors. As a continuous improvement mechanism, the team created a system that periodically reassesses quotes to help maintain bolt purchasing costs as close as possible to market value.

Lopes explains that the team’s year-long process improve- ment effort will continue to pay dividends into the future as the company applies the process to other commodities: “With this project we found a way to optimize the results of the purchasing process, and it can be used for every kind of material purchased by MWM INTERNATIONAL. We are planning to replicate these analyses for other commodities to achieve a new level of quality in every purchasing process.”

For More Information:

• To learn more about MWM INTERNATIONAL, visit the company online at www.mwm-international.com.br.

• For additional details on this project, contact Fernando Lima Lopes at [email protected]

• For more information on the ASQ International Team Excellence Awards, visit http://wcqi.asq.org/team- competition/.

About the Author

Janet Jacobsen is a freelance writer specializing in quality and compliance topics. A graduate of Drake University, she resides in Cedar Rapids, IA.

Figure 2— Linkage of results with organizational goals, performance measures, and strategies

Cost reduction

Sales volume market share

External audit results

Process quality indicators

Non-value-added steps

Avoid wastes

Real impact on each performance metric

Initial estimated degree of impact

Estimated vs. realized

� Realized was 10.6% higher than estimated

More than 13.6% cost reduction in purchased bolts

Almost 90% reduction in process variability

� Realized according

to expectations

� Realized was almost 70%

higher than estimated

� Realized was 50% less than estimated

Intangible benefit: Cost reductions will be considered in the next price negotiation with customers

� Benefits for our customers will be high in the future

New process work flow reduced waste costs, reduced overall process lead time 10 days, and eliminated some non-value-added steps

High 3%+ cost reduction over

annual bolts spent

Low Material cost reduction will impact sales prices for a mid- to long-term strategy

High Expected improvements in purchasing

process in alignment with SOX

Medium Do it right the first time—20% less supplier

change process for cost reduction

High Reduce overall process lead time 20 days for bolts development

Intangible benefit: Great quality improvement can eliminate audit gaps

Organizational performance metrics