How to Strike the Perfect Balance; Process Control and Cost of Quality in Procurement Supplier Management. The procurement department plays a critical role in an organization’s success by managing suppliers, controlling costs, and ensuring quality in the products and services delivered. Striking the perfect balance between process control and cost of quality is essential for maximizing operational efficiency and delivering value to the organization. This blog post will explore the relationship between these two aspects and provide insights on how procurement departments can effectively manage the process control and cost of quality to optimize supplier management.
Table of Contents
Understanding Process Control and Cost of Quality in Procurement
Process control refers to the systematic approach of monitoring and controlling the processes involved in the supply chain to ensure that the products and services delivered meet the organization’s quality standards. This includes identifying potential risks, implementing corrective actions, and maintaining ongoing communication with suppliers.
Cost of quality, on the other hand, encompasses all the costs associated with ensuring product quality. This includes prevention costs, appraisal costs, and the costs of internal and external failures. The goal of any procurement department is to minimize the cost of quality while maintaining the desired level of process control.
Here are some illustrating examples of costs connected to process control and costs connected to the cost of quality in the context of procurement:
Costs Connected to Process Control:
- Monitoring and Inspection Equipment:
- Example: Investing in automated inspection systems for incoming materials to ensure they meet quality specifications. This includes the purchase, installation, and maintenance of equipment such as optical scanners, X-ray machines, or other quality control tools.
- Supplier Audits and Evaluations:
- Example: Conducting regular audits of supplier facilities to ensure they comply with the organization’s quality standards. This includes travel expenses, auditor salaries, and any costs associated with generating audit reports.
- Training and Development:
- Example: Providing ongoing training for procurement staff and suppliers on quality standards and process improvement techniques. Costs include training materials, instructor fees, and employee time spent in training sessions.
- Data Analysis and Reporting:
- Example: Implementing and maintaining software systems that collect and analyze quality data from various stages of the supply chain. This includes the cost of software licenses, IT infrastructure, and data analyst salaries.
- Process Improvement Initiatives:
- Example: Running Six Sigma or Lean projects to streamline procurement processes and reduce variability. Costs include project team salaries, consultancy fees, and expenses related to implementing process changes.
Costs Connected to Cost of Quality:
Prevention Costs:
- Quality Planning:
- Example: Developing comprehensive quality plans that outline standards, procedures, and responsibilities. This involves costs associated with creating documentation and planning activities.
- Supplier Qualification:
- Example: Conducting extensive qualification processes for new suppliers to ensure they meet quality requirements before being added to the approved supplier list. Costs include evaluation time and resources.
Appraisal Costs:
- Inspection and Testing:
- Example: Routine inspection and testing of incoming materials and finished products to detect defects. This includes costs of inspection staff, testing equipment, and consumables used in testing.
- Quality Audits:
- Example: Periodic audits of procurement processes and supplier performance to ensure adherence to quality standards. Costs include auditor salaries, audit materials, and reporting.
Internal Failure Costs:
- Rework:
- Example: Correcting defects in products identified before shipment. This includes labor, materials, and overhead costs associated with reworking the defective items.
- Scrap:
- Example: Disposing of materials or products that cannot be reworked and must be discarded. Costs include the value of the wasted materials and disposal fees.
External Failure Costs:
- Warranty Claims:
- Example: Handling customer complaints and returning defective products under warranty. Costs include replacement products, shipping, and administrative handling of claims.
- Product Recalls:
- Example: Conducting a product recall due to a widespread quality issue. Costs include communication, logistics, replacement products, and potential legal fees.
By managing these costs effectively, a procurement department can balance the need for stringent process control with the objective of minimizing the overall cost of quality, thereby ensuring high-quality outcomes while maintaining cost efficiency.
Balancing Process Control and Cost of Quality in Procurement
Establish clear quality standards: The first step in striking a balance between process control and cost of quality is to define and communicate clear quality standards to suppliers. This helps ensure that suppliers understand the organization’s expectations and enables them to align their processes accordingly.
Invest in supplier relationships: Building strong relationships with suppliers is key to achieving a balance between process control and cost of quality. By investing in these relationships, procurement departments can better understand supplier capabilities, identify potential risks, and develop strategies to mitigate them, thus reducing the overall cost of quality.
Perform regular supplier evaluations: Regularly evaluating supplier performance is crucial for maintaining a high level of process control. Procurement departments should develop evaluation criteria that measure both qualitative and quantitative aspects of supplier performance. This allows them to identify any deviations from the established quality standards and take corrective actions as needed.
Implement risk management strategies: A proactive approach to risk management can significantly reduce the cost of quality. Procurement departments should identify potential risks associated with their suppliers and develop contingency plans to mitigate them. This helps to minimize the impact of any disruptions in the supply chain and ensures that the organization’s quality standards are maintained.
Continuously improve processes: Continuous improvement is an essential component of balancing process control and cost of quality. Procurement departments should collaborate with suppliers to identify opportunities for process improvement and implement changes that can reduce the cost of quality while maintaining the desired level of process control.
Process Control and Cost of Quality in Procurement – Conclusion
Balancing process control and cost of quality is a challenging yet crucial aspect of procurement supplier management. By defining clear quality standards, investing in supplier relationships, regularly evaluating supplier performance, implementing risk management strategies, and continuously improving processes, procurement departments can effectively manage suppliers while optimizing operational efficiency and delivering value to their organizations.
As a procurement manager (CPO) this is one of the questions on the table when defining PM&T strategi and KPIs. Learn more about the responsibility of the Procurement Manager in Learn How to Source’s introduction course and learn more in EFFSO’s course about Sourcing KPIs.
Note: Illustration to the blogpost “Process Control and Cost of Quality in Procurement” was created with CHAT-GPT on June 11, 2024.