How to Reduce Supply Chain Cost and Avoid the Cost of Poor Quality

What factors contribute to supply chain costs?

In a seminal 2012 paper, Prof. Henry Quesada and colleagues outlined numerous key factors affecting supply chain management. 

• Environmental uncertainty, such as unexpected changes in customers, competitors, suppliers and technologies.
• Government support, which is especially integral when it comes to such aspects of the supply chain as the use of domestic materials and the importation of raw materials or products from overseas. These aspects can be further complicated by transportation, tariffs, administrative practices and exchange rates. There is also a significant level of uncertainty involved when it comes to the political landscape overseas, which can increase risk for suppliers, provoke decisions of no investment and alter business strategies and decisions.
• Information technology, which, when implemented effectively, reduces lead time and unnecessary activities such as paperwork.
• Social uncertainties overseas, including environment, language barriers, cultural issues, religion and limitations on communications. These must be accounted for when implementing an international supply chain strategy.
• Communication tools used to facilitate data transfer and communication between trading parties.
• Planning tools, including material requirement planning, enterprise resource planning and manufacturing resources planning. A strong planning protocol is the backbone of any solid logistics system.
• Flexibility, the ability of an organization to react and adapt rapidly to changes in the market that occur because of increases or decreases in customers’ requirements and the acceleration or deceleration of manufacturing processes.

What makes some industries particularly vulnerable to supply chain issues? 

Today’s economy relies on the smooth operation of sophisticated and complex supply chains. The ability to move components, materials and products in an efficient and timely manner brings numerous benefits:

• Reduced cost of manufactured products
• New markets and business opportunities for producers
• Improved access to advanced technologies

Modern supply chains are more intricate and global than ever before — but this leaves them open to a wider variety of disruptions and risks. 

• Transportation delays
• Theft
• Natural disasters
• Cyberattacks
•  Inclement weather
• Tougher environmental regulations in a move to tackle climate change and reduce pollution through controlling the use of toxic materials and chemicals
• Cargo flow issues
• Economic uncertainty due to shifts in local, national and international trade and regulatory policies, which in turn can lead to the imposition of unexpected import tariffs
• Raw material shortages
• Recalls and safety scares

Some industries are particularly susceptible to supply chain cost issues. Take the apparel and textile industries. Both are still primarily driven by manual labor and factory processes, meaning products are extremely vulnerable to physical or mechanical quality issues. 

That being said, these problems can be addressed relatively well with a good quality assurance plan, but the same cannot be said for quality control issues involving chemistry. This is because chemical tests are especially costly and must be carried out regularly by law. Due to a large number of different styles or items, chemical testing can be very expensive, thus, can hurt margins.

What is quality control?

There are 3 major aspects of quality control management, in which companies and organizations review the quality of every factor involved in production. 

• Hard elements, including performance and integrity criteria, defined and well-managed processes, identification of records, job management and controls.

• Soft elements, including personnel, confidence, integrity, motivation, morale, relationships and organizational culture.

• Competence, including knowledge, experience, qualifications, credentials and skills.

During quality control, products are examined visually for such unacceptable defects as blemishes or cracks. After this initial stage, a streamlining plan can begin to take shape.

What are the costs of poor quality management?

The costs associated with quality control issues vary depending on how early the problem is discovered. If detected at the beginning of production, corrective action can be taken swiftly, negating most costs of poor quality. However, a further dilemma then arises: if a company has demonstrably effective early corrective action processes, why bother implementing a quality assurance system at all?

The solution is complex and involves balancing the investment in preventative measures and the manpower behind them with the possible pending rework — or even destruction — of articles. After all, mistakes will always happen. As outlined in an excellent article on quality improvement by Boston Consulting Group, a good quality-assurance system can drastically decrease how many mistakes occur, but random checks must always be made in order to keep an eye on how effective the existing quality checks are and how they can be improved. 

In the 1960s, IBM endeavored to study its own quality costs. The concept of the costs of poor quality was later popularized by IBM quality expert H. James Harrington in his 1987 book Poor-Quality Cost. Harrington specifically adopted the term poor-quality costs as opposed to quality costs because he believed that investing in the detection and prevention of product failures is more than offset by the savings in the reductions in product failures. After all, it’s not uncommon for companies with little experience in quality management to jump to the conclusion that higher-quality products must necessarily cost more to produce.

Harrington identified that the costs of poor quality management can be broken down into 2 categories: direct and indirect elements.

Direct cost of poor quality control management

• Controllable costs of poor quality ensure that only acceptable products reach the customer.
• Resultant costs of poor quality are incurred when unacceptable products are delivered to the customer, resulting from earlier decisions regarding how much budget should be invested in controllable costs of poor quality.
• Equipment costs of poor quality occur when a company invests in equipment for measuring, controlling and accepting a product. This element is treated independently of the controlled costs of poor quality in order to accommodate the effects of depreciation.

Indirect costs of poor quality control management 

Indirect costs are more difficult to measure than the direct costs because they are a delayed result of time, effort and the financial costs incurred by the customer. They include 

• Customer-incurred costs
• Customer dissatisfaction
• Loss of reputation

How can supply chain issues be solved?

Addressing your business’s or organization’s supply chain problems can help you increase profitability while decreasing costs. Whether you operate a warehouse facility in a small market or oversee a global distribution facility, the opportunities for growth are (when scaled relatively) the same.

So to which specific aspects of your supply chain can you implement solutions?

Personnel

Savvy management of your labor force is one of the best opportunities available to you to decrease your supply chain costs — and no, it doesn’t involve reducing staff numbers. Labor force management includes 

• Communication initiatives
• Process forecasting
• Market demand analysis

Information technology

Whether you’re using inventory tracking technology or software for warehouses with multi-level decision-makers, your IT expenditures can influence your ability to build a profitable business. By staying up to date on the latest technological advances in shipment tracking interfaces, logistics analytics tools, or quality and compliance assurance systems like TOPO, you can achieve better supply chain cost savings. 

Inventory management 

Without a clear plan in place for every aspect of inventory handling, you might not spot inefficiencies or identify potential cost savings.

Transportation

Developing a transportation strategy allows you to consider multiple factors that could lead to reduced costs, including

• Warehouse robots
• Crowd-sourced P2P transportation services
• In-house product movement via drones
• On-demand shipping container services

The more you pay attention to every aspect of your transportation strategy, the better positioned you are to discover cost-saving opportunities.

Third-party services

You don’t need to maintain every aspect of your organization in-house. It’s worth considering whether your expenditures could be decreased by utilizing the services of an offshore warehouse or startup transportation service located where the largest proportion of your customer base is.

Operations and supply chain strategy

Analyze the service needs of your customers and implement a demand-planning strategy. Develop product movement protocols based on customer segmentation, the more streamlined your operations, the more efficient your organization.

Digital and mobile data solutions for your supply chain

Decreasing the costs associated with your supply chain and quality assurance program is not impossible. You should investigate every aspect of your organization’s operations — the uncovered cost-saving opportunities might just amaze you.

Topo is a market leader in quality assurance and compliance processes. We value total transparency, providing our users with full access to data collected in real-time, allowing faster decision making and report generation. Our digital and mobile data solutions allow you to enhance your supply chain management and save costs. Monitor, inspect and analyze your sourcing, quality, production and compliance processes — without jeopardizing product quality and brand image.

Topo’s platform is highly flexible and allows users to customize their interfaces on their own. For example, you might want to add in a video or image field in your inspection reporting interface, allowing the inspector to upload photographs of defects. It is by no means a one-size-fits-all software.

Replacing manual processes with a digital and data-empowered solution can help you reduce up to 30% inspection cost and up to 70% auditing cost. By utilizing our platform, you stay connected with every stakeholder in your supply chain and save time on tedious and unnecessary activities, such as paperwork, and reduce lead time, allowing you to spend time on what really matters: ensuring your product or service is the best it can possibly be. 

Topo processes over 20,000 reports a day and has users in over 40 countries. Get in touch today and see how we can save you costs by enhancing your supply chain management and quality assurance program.