I] Background: The ‘Buy’ Characteristics: Product Complexity: High. Savings Potential: High. Rupee Value of Purchase: Very High. Supply Base: 01 Vendor. Source of Supply: Abroad. In light of the characteristics of this buy, this item becomes a core product that the Buyer should concentrate as a potential for strategic sourcing. By selecting such a product for strategic sourcing, the buyer can reduce the cost of purchase and thereby contributing handsomely for the improvement of the profit of the organization. For an idea of the volume of buy, we present a specific example: Cost per piece (current): Rs. 42000/_ Quantity: 1000 Nos. Value of purchase: Rs. 4.20 Cr. The values provided are for one particular variant of the item. The total purchases have multifarious variants of varying quantities. However for purpose of illustration, data about a specific variant has been adopted in this presentation. Company: The Buyer is a large engineering organization whose product portfolio includes a sophisticated engineering product which is manufactured under license from one of the world leaders, who provides the technology for design, manufacture, supply, erection, commissioning and troubleshooting of the licensed product. The component under study: Due to lack of local suppliers, some of the key items are imported by the company from the licensor, which includes raw materials also. One of the components is an aluminum alloy casting. The company has the option to buy the casting in finished machined condition or buy it as a raw casting and machine it in-house. The casting is of complex nature with an aerofoil cross-section. The casting can be made using Sand Casting, or gravity die-casting, or pressure die-casting method. The raw casting has then to be heat treated. Each casting has to pass through a rigorous testing including profile checking, 100% RT and LPI. The profile checking is to be done for every piece with a 3D fixture and also through a CMM on a sample basis. (1 in100) Strict dimensional tolerances have to be achieved for each item. While aluminum casting is prevalent in the country, development of this product indigenously is beset with many problems. The very complex nature of the product is the biggest inhibitor. Though the item can easily be developed through the pressure die-casting route, the quantity requirement does not make it a cost-effective process. (The pressure die casting is remunerative only when the quantities are very large – as in the case of automobile parts). However for the company this represents a strategic buy. In the earlier years, attempts had been made by the Purchasing department and the Engineering department to develop indigenous sources for similar products, but the efforts had been in vain. Half a dozen suppliers evinced interest and made samples. Only one supplier could make the mark, while the others were not able to meet the product specifications. But the supply rate of the developed supplier was so slow, there was no positive impact for the company by this development and they had to continue to be dependent heavily for supplies from their collaborator at prohibitive costs. This sets a stage where it becomes imperative for the company to quickly develop a strategic supplier. But in spite of this urgency, due to all-round bureaucratic approach the supplier development was stunted in spite of every stake-holder being acutely aware of the need for developing a low-cost indigenous supplier. This study is presented as lesson on “how-not-to” approach a strategic purchase. II] The Study: -Phase I: Placing the Purchase Order The entire study is presented on calendar time lines. i) Stage Zero Supplier M/s XXX enterprises, located in the western part of the country approached the Purchase Department as a potential for supplier of the Aluminum casting. XXX is engaged in the manufacture and supply of cast aluminum automobile components. ii) + 6 Months Though XXX had established contact with the Purchase Department, it takes 6 months for the company to organize a site visit. A two member committee from the company visited XXX 6 months from the zero date and recommends placing a trial order. iii) + 12 Months Now an internal squabble arises as to who would initiate the purchase requisition. While the Materials Controller says that the requisition should be made by the Engineering Department, the Engineering points the finger towards the Materials Control Department. 6 months elapse and finally the Materials control department raises the purchase requisition. With the purchase requisition is hand, the Purchase department goes forward for order placement. iv) +13 Months After taking up with XXX, Purchase Department gets an offer for supply of MOQ 1000 Nos. v) +15 Months After internal approvals supply order was placed on XXX. From the time of approach by the Supplier to the time of ordering by the Buyer 15 Months pass. Once the order was placed, in order to speed up the development of the pattern the supplier requested Purchase Department for a 3D Model. The purchase department then placed an order elsewhere to develop a 3D model. The Engineering approached a leading education institute for developing the model. But the time frame given by the Institution was very high. So the Engineering department made the 3D model drawing for the supplier. - Phase II Component Development by Supplier Day 00:: Date of supply Order issue. Day 24:: Sample of 5 Nos. are made by XXX and CMM report was made for the machining area for two pieces of components. No inspection was made on this first lot sample of 5 Nos. However the Supplier was asked to proceed with and cast 100 components. Day 40:: Sample size 100 nos. are made ready by the Supplier. Day 50:: A team (of 3 members) from Purchase, Quality Assurance and the PPC visits XXX. Mechanical Tests, Chemistry and Hardness are seen for two samples and based on the result the sample is CLEARED. The CMM report for two components is found to be in order. The components were offered in partly machined conditions where the fixing the holes were not yet drilled and the height of the component were not trimmed. LPI and X-ray are completed on all 100 components and 62 pass the NDT. The PPC representative gives suggestion on Profile checking and says that it can be limited to three locations. The 62 pieces could have been accepted at this stage as un-machined pieces and Buyer could have done the final machining (trimming and hole drilling) at their shop floor. But they did not adopt this route. Day 63:: The checking methodology required a fixture for checking the component profile. This is essentially required when bulk manufacture of the components is taken up and not at the Development Stage, when the component profile could be checked in a CMM. Development of the fixture was not a part of the order. However in the interest of mutual development XXX agreed to make a fixture in the Development order itself at their cost. Though not a part of the order sheet the requirement that the profile would be checked only with an approved fixture was insisted upon by the QA representative. To break the stalemate XXX agreed to make the fixture without extra cost. Day 70:: At this stage Engineering entered the picture and reversed the suggestion of the PPC. Engineering wanted the profile checking at more locations – 5 to be precise. This was insisted by Engineering orally though in the original specification sheet made by them they had notified for the checking at 4 locations only. Day 89:: After incorporating all the inputs given by the various departments of the Buyer, the Supplier came to the works of the Buyer with 5 Nos. of finished components (with the holes drilled and height trimmed) and the fixture. XXX brought the fixture along with the sample so that the fixture can be checked for its accuracy and certified by the Quality and the Tooling Department of the Buyer. At this Stage, it was discovered that the drawing made by the Engineering had an error. There was an ambiguity in locating the component fixing holes and because of this the holes in the sample brought by XXX were shifted by about 2.6 degrees away from the required location. Engineering then corrected the drawing. After strong persuasion by the Head of Purchase, as a special case it was agreed that this deviation would be accepted for the first lot of 62 components. The Supplier was also asked to modify the fixture so that further supplies would come out as per the revised drawing. Here is what (near verbatim) the supplier said about his (harrowing) experience in the component development stage:
Day 94::
Engineering revises the drawing yet one more time, now revising the height (reducing it) and incorporating dimensional tolerances. Meanwhile the Supplier has cast 500 pieces. Day 105:: QC now visits Supplier but accepts only 12 components out of the 62. The supplier has modified the fixture in line with the revised drawing but QC is unable to certify the correctness or otherwise of the modified fixture. QC says that they have to consult the Tooling Department before making the commitment. Day 108:: The Head of Purchase calls for an internal review. He explains that the QC representative at Supplier Site is unable to carry out the inspection of the fixture and wants expert support. Engineering says that the component can be cleared by checking it out on a CMM. They also say that if the component is found all right as per the modified fixture, then it can be accepted. Day 111:: The first set of components (23 Nos only) is dispatched after clearance after clearance by QC. Day 115:: The first-off supply of the components is received and they are accepted. Day 185: 22 Mar 2012 The supplier gets the payment for the first lot. III] Outcome and Learning: So from the time of first approach to order release is 15 months and the time of order release to the time that the supplier gets paid for the first lot is 6 months and all together the company has taken 21 months to address a strategic issue. In hind-sight look at this episode it is clear that the entire development process could have been approached in a professional manner.
IV] Conclusion Supplier development demands coordinated working of the various elements in the organization. Engineering, Quality Control, Operations – all have a role to play along with the purchasing department. Supplier development cannot be left alone in the hands of the purchasing department. Successful development leads to large savings for the buyer. In this case, the price that the new supplier gave was 1/10th of the prevailing purchase rates. Such is the power of developing new suppliers. This study is presented so as to be a lesson on “how-not-to” be in approaching supplier development but to see it as a strategy for competitive buying and thereby create value to the end customer. Legend R.T: Radiography Test/s. LPI: Liquid Penetrant Test/s CMM: Coordinate Measuring Machine MM: Materials Management QA: Quality Assurance PPC: Production Planning & Control Q: A Stock and Carry Item MOQ: Minimum Order Quantity PO: Purchase Order NDT: Non-Destructive Testing
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