A major goal in supply chain management strategy is to minimize the bullwhip effect. The bullwhip effect occurs when inaccurate or distorted information is passed on through the links in the supply chain. As the bad information gets passed from one party to the next, the distortions worsen and cause poor ordering decisions by upstream parties in the supply chain that have little apparent link to the final end-item product demand. As information gets farther from the end customer, the worse the quality of information gets as the supply chain members base their guesses on the bad guesses of their partners. The results are wasteful inventory investments, poor customer service, inefficient distribution, misused manufacturing capacity, and lost revenues for all parties in the supply chain.

For example, Open Range Jeans (a fictitious company) are sold in a popular retail store chain. The retail chain decides to promote Open Range Jeans and reduce the price to boost customer traffic in its stores, but the chain does not tell the Open Range manufacturer of this promotion plan. The manufacturer sees an increase in retail orders, forecasts a long-term growth in demand for its jeans, and places orders with its suppliers for more fabric, zippers, and dye.

Suppliers of fabric, zippers and dye see the increase in orders from the jeans manufacturer and boost their orders for raw cotton, chemicals, etc. Meanwhile, the retail chain has ended its Open Range promotion, and sales of the jeans plummet below normal levels because customers have stocked up to take advantage of the promotion prices. Just as end-customer demand falls, new jeans are being manufactured, and raw materials are being sent to the jeans factory. When the falling end-customer demand is finally realized, manufacturers rush to slash production, cancel orders, and discount inventories.

Not wanting to get burned twice, manufacturers wait until finished goods jean inventories are drawn down to minimal levels. When seasonal demand increases jeans purchases, the retail stores order more Open Range jeans, but the manufacturers cannot respond quickly enough. A stockout occurs at the retail store level just as customers are purchasing jeans during the back-to-school sales season. Retail customers respond to the stockout by purchasing the jeans of a major competitor, causing long-term damage to Open Range’s market share.

In addition to managing the bullwhip effect, supply chain managers must also contend with a variety of factors that pose on-going challenges:

Choosing suppliers is one of the most important decisions made by a company. The efficiency and value a supplier provides to an organization is reflected in the end product the organization produces. The supplier must not only provide goods and services that are consistent with the company’s mission, it must also provide good value. The three most important factors in choosing a supplier are price, quality, and on-time delivery.

A company must not only choose who it wants as a supplier, it must also decide how many suppliers to use for a given good or service. There are advantages to using multiple suppliers and there are advantages to using one supplier. Whether to single-source or multiple-source often depends on the supply chain structure of the company and the character of the goods or services it produces.

If a company uses a single supplier, it can form a partnership with that supplier. A partnership is a long-term relationship between a supplier and a company that involves trust, information sharing, and financial benefits for both parties. When both parties benefit from a partnership, it is called a “win-win situation”. It is easy to see how choosing suppliers is one of the most important decisions a company makes.

There are advantages and disadvantages to using one supplier. One advantage is that the supplier might own patents or processes and be the only source for the product. With one supplier, pricing discounts may be granted because purchases over the long-term are large and unit production costs for the supplier are lower. The supplier may be more responsive if you are the only purchaser of an item, resulting in better supplier relations. Just-in-time ordering is easier to implement, and deliveries may be scheduled more easily. Finally, using a single supplier is necessary to form a partnership. One disadvantage is that if that one supplier experiences a disaster at its warehouse like a fire or a tornado, or its workers go on strike, there is no other ready source for the product. Another possible disadvantage is that a single supplier may not be able to supply a very large quantity if it is suddenly needed. Also, sometimes the government requires the use of multiple suppliers for government projects.

There are also advantages and disadvantages to using multiple suppliers. Suppliers might provide better products and services over time if they know they are competing with other suppliers. Also, if a disaster happens at one supplier’s warehouse, other suppliers can make up the loss. If a company uses multiple suppliers, there is more flexibility of volume to match demand fluctuations. One disadvantage with multiple suppliers is that it is more difficult to forge long-term partnerships. Information sharing becomes riskier, lower volumes for each supplier provide fewer opportunities for cost savings, and suppliers tend to be less responsive to emergency situations.

Partnerships are long-term relationships between a supplier and a company that involve trust and sharing and result in benefits for both parties. A good example of a partnership is the partnering between a Deere & Co. farm equipment factory and its suppliers. Deere decided to outsource its sheet metal, bar stock, and castings part families.

When Deere sent requests for bids to 120 companies, 24 companies responded to say they were interested. Deere then sent a team of engineers, quality specialists, and supply chain managers to evaluate each company. One supplier was chosen for each of the three part families. All three of the suppliers that were chosen were located less than two hours of driving time from the Deere plant.

For many years, all three suppliers have continued to provide outstanding quality, delivery, and cost performance to Deere. The suppliers benefited by gaining a long-term customer with a large amount of profitable business. Deere realized a 50 per cent drop in production costs on the three part families and was able to better focus on its mission of manufacturing farm equipment.

Supply chain management concerns the development of communication and information systems to link suppliers together in cooperative partnerships that promote advantage for all participants. Benefits include faster response times, reduced inventory costs, increased accuracy, and improved quality.

An important basis for justifying TQM practice is understanding its impact on total quality costs. TQM is rooted in the belief that preventing defects is cheaper than dealing with the costs of quality failures. In other words, total quality costs are minimized when managers strive to reach zero defects in the organization. The four major types of quality costs are prevention, appraisal, internal failure, and external failure.

Prevention costs are the costs created from the effort to reduce poor quality. Examples are designing the products so that they will be durable, training employees so they do a good job, certifying suppliers to ensure that suppliers provide quality in products and services, conducting preventive maintenance on equipment, and documenting quality procedures and improvements. In a traditional organization that does not practice TQM, prevention costs typically comprise the smallest percentage of total quality costs.

A good example of good product design occurs in all Honda products. Honda produces a wide variety of items including automobiles, ATVs, engines, generators, motorcycles, outboard motors, snow blowers, lawn and garden equipment, and even more items. To say the least, Honda engines last a long time. For example, Honda Accords typically run for well over 200,000 miles.

Employee training is also a very important prevention cost. For instance, employees in a vegetable/fruit packaging warehouse need to know what a bad vegetable/fruit looks like, since customers will not want to find spoiled produce in the store. Lifeguards at a swimming pool must know proper procedures for keeping swimmers safe. In many circumstances in both manufacturing and service businesses, the training of employees can make an enormous difference in preventing defects.

Supplier selection and certification are critical prevention activities. A product or service is only as good as the suppliers who partner with an organization to provide the raw materials, parts and components, and supporting services that make up the final products and services that the end customers receive. For example, a home furnishings store might use an outside subcontractor to install carpeting, but if the subcontractor fails to show up on time, tracks mud into the customer’s home, or behaves in a rude manner, the store’s reputation will suffer. Similarly, a car manufacturer who purchases defective tires from a supplier risks incurring high costs of recalls and lawsuits when the defects are discovered.

Preventive maintenance is necessary for preventing equipment breakdowns. Many manufacturing companies use sophisticated software to track machine usage, and determine optimal schedules for regular machine maintenance, overhauls, and replacement.

Documenting quality is a necessary prevention cost because it helps the organization track quality performance, identify quality problems, collect data, and specify procedures that contribute to the pursuit of zero defects. Documentation is important to communicating good quality practice to all employees and suppliers.

Appraisal costs are a second major type of quality cost. Appraisal costs include the inspection and testing of raw materials, work-in-process, and finished goods. In addition, quality audits, sampling, and statistical process control also fall under the umbrella of appraisal costs.

Inspection and testing of raw materials is very important, since substandard raw materials lead to substandard products. Raw materials used for a bridge determine the strength of the bridge. For example, soft steel will erode away faster than hardened steel. Moreover, the concrete bridge decking needs to be solid, as concrete with air pockets will erode and crumble faster creating an unsafe bridge.

Finished goods and work-in-process inventory also need inspecting and testing. For example, worker error is quite common in the home construction industry, and this is why inspections occur frequently on newly constructed homes during and after the construction process is complete. Building inspectors ensure that the house has the proper framing, electrical, plumbing, heating, and so forth.

Quality audits and sampling are also important appraisal costs. Quality audits are checks of quality procedures to ensure that employees and suppliers are following proper quality practices. With sampling, a company can ensure with confidence that a batch of products is fit for use. For example, a wooden baseball bat manufacturer may test 10 out of every 100 bats to check that they meet strength standards. One weak bat can signal that quality problems are present.

Statistical process control (SPC) is the final type of appraisal cost. SPC tracks on-going processes in manufacturing or service environments to make sure that they are producing the desired performance. For example, a restaurant might statistically track customer survey results to make sure that customer satisfaction is maintained over time. In manufacturing windshields for automobiles, SPC might be used to track the number of microscopic air bubbles in the glass to make sure the process is performing to standard.

Internal failure costs are a third category of quality costs. This cost occurs when quality defects are discovered before they reach the customer. Examples of internal failure costs include scrapping a product, reworking the product, and lost productivity due to machine breakdowns or labor errors. Internal failure costs are typically more expensive than both prevention and appraisal costs because a great deal of material and labor often has been invested prior to the discovery of the defect. If a book publisher prints 10,000 books, then discovers that one of the chapters is missing from every copy, the cost of reworking or scrapping the books represents a major loss to the company. It would have been much cheaper to have procedures in place to prevent such a mistake from happening in the first place.

In the case of internal failure cost due to machine failures, FedEx, and other courier services cannot keep up with demand when a conveyor belt breaks down in the package distribution center. Major delays and costs occur when such incidents occur. Other examples include a road construction company having a road grader break down, a tool and die shop having a CNC machine break down, and a farmer having a combine break down during harvest time.

External failure costs are the fourth major cost of quality. External failure costs when the defect is discovered after it has reached the customer. This is the most expensive category of quality costs. Examples include product returns, repairs, warranty claims, lost reputation, and lost business. One spectacular example of external failure cost was when the Hubbell telescope was launched into space with mirrors that were ground improperly. When the telescope was turned on, instead of a magnificent view of stars, planets, and galaxies, the scientists could see only blurred images. The price of correcting the problem was over USD 1 billion.

External failure costs also occur when the wrong meal is delivered to a restaurant customer, when a computer breaks down shortly after it was purchased, when the wrong kidney is removed from a patient, and when a poorly designed automobile causes the death of drivers and passengers. Because of the enormous costs of internal and external failures, all companies should strive for zero defects. Successful TQM practice dictates that pursuing zero defects will result in the minimization of total quality costs by spending more on prevention and appraisal activities in order to reduce the much higher costs of internal and external failure.

Successful practice of Total Quality Management involves both technical and people aspects that cover the entire organization and extend to relationships with suppliers and customers. Seven basic elements capture the essence of the TQM philosophy: customer focus, continuous improvement, employee empowerment, quality tools, product design, process management, and supplier quality.