Strategic sourcing defeats an old enemy

Variation in parts quality used to be an irritant at Woodward. No more. Now, the sourcing operation helps suppliers leverage their own capabilities—and consistent high quality is the result.

By Susan Avery -- Purchasing, 2/16/2006

Purchasing professionals everywhere probably agree: Analyzing spend is one thing. Using the data to drive supplier performance is another. With spend data in hand, the sourcing operation at Woodward, an $828 million global manufacturer of energy control systems for aircraft and industrial engines in Rockford, Ill., is consolidating the supplier base and better leveraging suppliers' core competencies to solve an age-old problem: inconsistent parts quality.

Sourcing's objective is to improve supplier pricing, quality and delivery, initially for machined parts. In three years, a team of sourcing, supplier quality and manufacturing engineering professionals has put 3,000 parts through the new process, reducing costs by 25%, nearly eliminating quality defects and attaining 100% on-time delivery. As a result, the sourcing operation has adopted the process as a best practice, and applied it to such other categories as sand castings and supplier-designed components.

The so-called "transition" process consists of a hard-edged review of suppliers' manufacturing, quality and financial capabilities as well as an analysis of what they do best.

Colin Walker, manager of global sourcing systems and supplier development, and a member of the team, considers these results "a phenomenal success" because they are ongoing. He points to just two quality "escapes" in three years. One was an error that Woodward caught early on but did not communicate to the supplier. Another was a supplier mistake. Neither got past Woodward's receiving dock.

The sourcing operation embarked on the transition process in 2002. As a link in the aerospace supply chain, Woodward keenly felt effects of the downturn in the market following Sept. 11.

Afterward, management made decisions that would help make it more competitive once business picked up, including concentrating more on core competencies of designing and manufacturing energy control systems and less on machining parts that go into the products. Although the company still machines some parts itself, the category now comprises 50% of its $500 million annual buy.

Tapping its expertise (for more than 130 years, Woodward ran an academy that provided training for young apprentices), the sourcing operation selected machined parts as the first category to put through the process. Because the company designed and built the parts itself for years, sourcing understood the cost structure and could help transfer machining knowledge to suppliers.

Starting with Woodward's spend data, the sourcing operation looked at the way it was sending its business to suppliers who were providing machined parts. There didn't appear to be any rhyme or reason as to why it was purchasing some parts from some suppliers and other parts from other suppliers. So, sourcing pulled together parts with similar material types and technology into families that they believed they could leverage with suppliers. Walker points out that according to Six Sigma methodology this leverage helps reduce quality variation, which is an old enemy in quality circles. "Combining parts into families allows suppliers to optimize their manufacturing set-up for a continuous flow of material, helping to improve efficiency and reduce costs," he says.

As they put part families together, sourcing was able to gather data on quality issues that arose from time to time. In a sense, Walker says that they had over time, turned some "good" suppliers into "bad" suppliers by giving them work they were not capable of performing. "If you are a supplier of square parts and doing a great job, my tendency is to reward you with more business," he says. "I would give you round parts and odd-shaped parts and soon your performance falls because the parts don't fit your core profile."

Soon, Walker says, quality, delivery and productivity suffer. Then, the supplier wants a price increase because he has more scrap than he anticipated. "I start to see (them) as a supplier that used to be good," he adds. "After a long look in the mirror, we realized we were at least 50% of the problem when it came to quality issues."

The team developed and executed a standardized process using common tools such as Six Sigma that it adapted and used in creative ways. The process begins with the data and a thorough evaluation of the supplier base. The team conducts extensive business assessments of suppliers (both incumbents and others with similar capabilities), putting together comprehensive reviews from a manufacturing, quality and financial perspective. They ask suppliers to demonstrate and validate their core competence.

After the evaluations, the team makes a first cut. To these suppliers, they send a sample of parts requesting a price quote. Responses to the RFQs help the team to see whether the supplier is leveraging its technology, Walker says. "If the supplier really knows his craft, his quote will have a very tight range (prices for each part will not differ by much). If the supplier doesn't recognize that these parts fit into a nice profile, his costs will vary widely." Based on the data gathered through the quoting process and an understanding of supplier capability, the team finally awards the business.

At this point, the team meets with the supplier at its facility to review lessons learned about making the parts—and the supplier shares its manufacturing plan. The two meet again to review the plan, ensuring it encompasses all specifications communicated and that the supplier is capable of resolving quality issues that may arise.

Once they agree that everything is in place, the supplier begins to make the part. The team observes manufacturing of one or two parts with more complex features. They qualify samples, ensuring that everything is on plan and will yield results they anticipate.

Woodward provides suppliers production schedules forecasted 18 to 24 months out and other information, such as historical usage and performance measures through a supplier portal. Most suppliers that serve its U.S. facilities are based in the U.S. although there are some located in Europe and Asia. European and Asian facilities likewise are served by local suppliers in their areas. Already, facilities in Europe are using the process to improve supplier performance there.

The team is about 25% through the parts they plan to transition. Woodward has 680,000 active part numbers. As they proceed, they expect to continue to refine the process: Now, they use software from Apexon to automate some tasks that they used to perform manually. With still more spend categories to go, Walker says, "There are lots of opportunities ahead of us."