Executive Memo: The Quality Risk

A discussion about preemptively addressing the business risks associated with product quality

The main feature in this issue of Supply & Demand Chain Executive ("Rethinking Risk") highlights several companies that are implementing strategies to mitigate risk in one area of their supply chain or another. To a large extent, risk management is about laying the groundwork for bridging the "reality gap" between a company's plans and how events actually unfold. The automotive industry has been at the forefront of driving this approach down into the supply chain and extending risk management into the design phase with their advanced product quality planning (APQP) process. Now manufacturers, and even non-manufacturing companies, outside the auto sector are looking to apply a similar approach to their own supply chain as a way of preemptively addressing the business risks associated with product quality.

"The key to quality planning," says Peter Schroer, president of Aras, a provider of product development solutions, "is failure mode and effects analysis (FMEA). This means that before your supply chain has even started doing design work, or started tooling the factory, you look at the product you're about to develop and compare it to other parts within the same part family or product family. You're looking for critical characteristics of the part and what the previous failure modes have been — things that could result in a catastrophic failure, for example. Then before you've even started designing, you've already documented the possible failure modes and the effects of that failure, and then you put controls in place so that the first time you produce the design drawings you've already got the risk mitigated. You've already covered the potential process-related flaws as you tool-up the factory and set up the distribution."

Schroer sees this as a very proactive way of thinking about quality that he believes has been uncharacteristic of the process at work at the many U.S. companies where quality was left primarily in the hands of manufacturing rather than addressed during design and development. That might have been fine when manufacturing and design actually resided within the same enterprise. But with the increasing reliance on outsourced manufacturing, companies are realizing that quality has to be a prime concern during product development at the point of supplier selection, and that they need to have quality assurance plans in place from the start of the product launch process, with clear guidance on the types of inspections and tests that will be performed and the quality levels that are acceptable for receipt. "Because the last thing you want is a container-full of products showing up at the dock that is nonconforming to the specifications that you've set," Schroer notes.

Of course, in the automotive industry, the emphasis on quality — and the documentation around quality — is one way for the original equipment manufacturers (OEMs) to spread warranty risk throughout the supply chain. If a part goes bad, the OEM wants to ensure that it can recover the cost of the replacement part (and, increasingly, the cost of replacing that part, that is, the associated service costs) from the appropriate supplier. Interestingly, Schroer says that he is seeing a growing movement on the part of suppliers to document, in greater levels of detail, the measurable characteristics of the parts they are providing and incorporating those details into their agreements with the OEMs. This "chain of evidence" would extend throughout all the documentation for a particular part and allow the supplier to demonstrate, potentially, both that it had met the OEM's quality requirements and clear responsibility for a warranty problem.

Will that actually fly? Maybe not. The automotive OEMs, despite the ups and downs of the industry, retain much of their 800-pound gorilla status, and, as Schroer notes, it works to the OEMs' benefit to leave things fuzzy, since they're managing so many suppliers, contending with market shifts and having their designers continuously tweak their designs. "But if you're going to push the warranty liability and the cost liability down into the supply chain," Schroer concludes, "this is how the supply chain has got to respond, to formalize their relationships."

How is your company managing its quality risks? As always, please feel free to send you're your thoughts to me at [email protected]. I'll look forward to hearing from you.