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Case Study and Commentary: Supply Chain Redesign

Case studies offer an insider’s view of change that can stimulate our thinking and even serve as role models for change in our own organizations. The case study presented here describes the process used by a successful firm in a heavily regulated industry to leverage customer-supplier teams. Additionally, the two lead advisors on the project (Patrick Lucansky and Robert Burke) shared their views on information sharing with News for a Change.

Advanced Sterilization Products (ASP), a Johnson & Johnson Company, Case Study

“Knowing what you want, never losing sight of your objectives, and never losing control of your plan doesn’t necessarily project success, but that’s the way to bet.” Paraphrased from Damon Runyon

Advanced Sterilization Products (ASP), a Johnson & Johnson Company, manufactures medical sterilization equipment and sterilant supplies. The organization grew 13-17% annually during the past five years and was actively involved in process improvement efforts designed to address future challenges. In particular, management was concerned about strained resources, a common problem for organizations growing at this rapid rate.

Supply chain issues were identified as a key opportunity area. A preliminary study revealed that the functionally structured operations environment was not achieving optimum results. Partnering skills with suppliers lagged behind expectations. Given that ASP made only 10 of its 220 SKUs (store keeping units) and relied heavily on its suppliers for its success, the need for a robust supply chain was a critical component in future marketplace success.

Activity-based costing (ABC) was used to analyze the existing process. Excessive material handling expenses, manufacturing lead times, and inventory levels were discovered, as well as many non-value-added activities. The incoming materials inspection process was suboptimal, creating more than 10% internal rejects along with unacceptable scrap and rework rates.

Project Team Approach

A core team was designed; its charter required a fact-based, process-driven approach that would enhance value throughout the organization, focusing on strategic, long-term success with incremental and meaningful tactical results.

The team’s objectives were:

• Addressing the immediate need to reduce inventory and rejects.
• Establishing long-term relationships with partners.
• Receiving cost-effective, quality products in a just-in-time manner.
• Developing world-class suppliers.

A five-step process was adopted for the project:

1. Pre-analysis phase: Collect data and identify customer requirements.
2. Analyze data: Conduct cross-functional training and value map the physical and information flow in the supply chain.
3. Redesign: Develop “To Be” process maps, suggest supply chain redesign, develop an implementation plan, and agree on performance measures, benefits, and results.
4. Make business case: Propose lean supply chain techniques and strategy and then scope the effort and timetable.
5. Implement: Implement specific activities and monitor benefits as they relate to bottom-line requirements.

During the pre-analysis phase, 20% of the components were identified as representing 80% of ASP’s material costs and inventory value, as well as more than 90% of the internal rejects. These components became the focus of improvement efforts.

Similarly, 15 suppliers (out of 110) were selected as strategic partners. They not only produced the majority of key components/ subassemblies for the primary products associated with the project, but they also had expressed interest in working with ASP on improving quality, delivery, cost, etc.

The envisioned supply-chain strategy was presented to the selected suppliers, and they became actively involved in the project. The sidebar, “Suppliers Share Their View of the Project,” describes their perspectives.

Additional project support was obtained from KTG Consulting. The consultants provided the team with training and facilitation services, including development of value maps on all major supply chain processes, benchmarking, and design of the redesigned processes and required outputs using lean concepts and techniques.

Supplier Selection/Qualification

One area that required improvement was the supplier selection/qualification process. New policies, objectives, procedures, tools, techniques, and forms were developed to strengthen ASP’s relationship with their key suppliers. A comprehensive system was developed that involved independent parts- and supplier-certification processes.

The revised parts-certification process incorporated reviews of product specifications, test requirements, packaging and handling specifications, and operational processes under strict statistical process control. Historical assessments of rejection rates, corrective action trends, costs, etc., also were included.

The supplier-certification process was expanded to consider business, financial, engineering, technology, capacity, process control, and management capabilities of suppliers. Supplier programs for zero defects, concurrent engineering, just-in-time practices, continuous improvement strategies, and ISO 9000 certification were encouraged and recognized in the prequalification assessment process. Based on this assessment, suppliers could be rated as partners, preferred, or approved.

Ongoing Supplier Management

In addition to the new supplier selection process, changes were made to the way the ongoing relationships would be managed. For instance, steps were implemented to reduce incoming parts inspection based on extended good performance. Quarterly reviews with suppliers were put into practice.

Additionally, a commitment was made to enhance learning for both ASP and its suppliers. For example, a foundation for ongoing, periodic training in lean thinking and continuous quality improvement was created.

Summary

ASP started this project by shaping its vision of supply chain redesign, consistent with its overall business strategy to provide value. The primary objective was to implement a long-term, meaningful process for mutually beneficial supplier management.

In addition to completing this broad-based, cross-functional project to redesign the supply chain, ancillary improvements were achieved in design and development producibility, quality, reporting and data collection, and materials/logistics. A five-to-one payback was realized on the investment in supplier training. And the involved suppliers agree that the results were well worth the effort!

Comments on Information Sharing

NFC: What processes do you see companies using to communicate and ensure understanding of their specifications/requirements, as well as other key information?

Lucansky and Burke: Typically, we see companies using processes that require the joint participation of appropriate customer and supplier staff members. End users also may be involved. They deploy strategic processes, such as concurrent engineering, design reviews, site visits, and audits. Tools, including Design for Manufacturing and Assembly and Design of Experiments, are used to capture and transfer specific data—both technical and nontechnical in nature, such as parts specifications, contact lists, purchase order procedures, and delivery instructions.

NFC: What documents are routinely exchanged between customers and suppliers?

Lucansky and Burke: The documents that we find exchanged routinely are quite varied, but some of the more common ones include drawings, technical specifications, bills of materials, test data, certificates of acceptance, design reviews, contracts, requests for quotes, purchase orders, and material return authorizations.

NFC: Is there a difference in the information exchanged with partners versus that exchanged with other suppliers?

Lucansky and Burke: Certainly the level of information exchanged depends on the risk and involvement of each organization. Partners typically have access to the most sensitive data, whereas other suppliers generally are allowed to view only data necessary to meet their contractual obligations as a supplier.

NFC: How important is a free flow of information to the supply-chain process?

Lucansky and Burke: It’s extremely important because all parties in the supply chain are really part of a single process that requires them to share the data necessary to meet the end users’ expectations. This is one of the most difficult areas for partnering organizations to define because traditional business thinking is rooted in an adversarial, nontrusting context.

NFC: Do most companies require their suppliers to sign confidentiality agreements? Is this done for all levels of supplier certification?

Lucansky and Burke: Most customers require some form of legal agreement with their suppliers. These agreements often get more complex and broader in scope as suppliers move up the qualification ladder from approved to partner status. Even though the goal is to establish a partnership built on trust, it is always important to capture the terms and agreed upon requirements in a legal format that provides proper protection for both parties.

NFC: Do you find that most customers sign confidentiality agreements with their suppliers for all levels of supplier certification?

Lucansky and Burke: Yes, most companies do sign confidentiality and noncompete agreements with their suppliers; however, this depends somewhat on the level of ownership of design, patent rights, etc. For instance, if commodity items comprise the principle goods/services, customers and suppliers may choose not to require that level of formality.

NFC: Do the business and/or management portions of typical site reviews include assessment of the suppliers’ ability to maintain confidentiality? If yes, does this assessment include a review of historical performance?

Lucansky and Burke: Although not an everyday process, some customers do assess a supplier’s ability to maintain confidentiality. There are three primary reasons that this area may be evaluated:

1. If there is a suspicion that the supplier committed some breach of security in the past.
2. If information related to national security is involved, such as occurs for DOD contracts.
3. If the customer’s industry is highly competitive and/or extremely sensitive to leaks, such as pharmaceutical research and software development.

In these situations, suppliers usually are required to demonstrate their ability to maintain secure areas (often using video), ID screening, and document logging and control rooms.

NFC: How do most customers ensure that their suppliers do not share trade secrets or other proprietary information with competitors?

Lucansky and Burke: Companies can protect sensitive data like trade secrets through specific contractual agreements and auditing procedures focused on reviewing such matters. Additionally, they can establish strategic alliances that require each party to expose certain key sensitive internal data important to the partnership. These strategic alliances form tight bonds between the parties as each has a vested interest in the health and prosperity of the other.

PATRICK LUCANSKY is the president of KTG Consulting, an operations improvement consulting firm specializing in lean manufacturing, supply chain management, Six Sigma, and pharmacovigilance. He has held a variety of positions, including production manager, director of operations, and small business owner. Lucansky can be reached via e-mail at plucansky@vipggroup.us or by telephone at 847-395-7076.

ROBERT BURKE is president of Vision Management Associates (formerly KTG) an operations improvement consulting firm specializing in lean manufacturing, supply chain management, ISO 9000, and pharmacovigilance. He has more than 25 years’ experience in many manufacturing environments. Burke can be reached via e-mail at rburke@vma-us.com or by telephone at 617-803-1325.

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