Digitex.doc

Digitex Corporation

Beginning in the late 1990s, Digitex Corporation began a policy of doing business “using time as a prime competitive weapon.” Specifically, this involved collapsing time from product time-to-market as well as faster response to customer demands. The goal was to greatly improve competitiveness and improve across all key business measures. A set of tools developed by the company focused on waste elimination, simplicity, flexibility, quality, employee effectiveness, self-controlling mechanisms, creating awareness that whole processes take precedence over individual operations, and continuous improvement.

The new initiative, described as just-in-time/total quality control (JITQC), combined the initiatives of just-in-time with the concepts of total quality management. The total quality principles emphasized at Digitex involved:

1.
An emphasis on quality first, not short-term profit

2.
Orientation toward the consumer and customer, not the producer

3.
A view of the next process as the customer and a corresponding reduction of organizational barriers

4.
Use of statistical methods and decision making based on facts, data, and problem- solving techniques

5.
Full employee involvement in problem solving

6.
Broader, more flexible management perspective

Digitex sought to drive improvement by first ensuring adherence to the JITQC system, which should lead to an increased analysis of processes and process improvement. Eventually, the standardization of new business processes should result. The new corporate philosophy centers around the A(T (read as “A – delta – T”) System, which involves the identification of actual conditions (A), the determination of the theoretical ideal (T) and the elimination of intervening waste or delta ((). The challenge behind this system is to design a function or process in which the actual time to perform a process (A) equals the theoretical (T) level of the time to perform. A(T provides a way to assess actual conditions and model the ideal process. As a result, waste can be identified, discussed, analyzed, and removed from the process.

Once the objective of “achieving theoretical time” is clear, the challenge of achieving theoretical values becomes clearer and the necessary tools and approaches can be aggressively applied. Achieving the theoretical time becomes a motivating challenge that should translate into individual action. Digitex applies A(T to any process or system that involves time or cost, such as production, administration, sourcing, communication, new product introduction, and so on.

Purchasing’s Role in JITQC

To support the JITQC initiative, Digitex renamed purchasing “Supplier Manufacturing” and integrated a number of new policies and procedures into the new sourcing management department. Contracts are now constructed around families of parts for the projected life of a product, component, or technology. Because product life cycles in the computer industry are so short (sometimes as little as six to eight months) and demand patterns often erratic, the contracts include a flexible range of quantity requirements. Suppliers do not receive guarantees of specific volumes but are assured participation. Quality expectations are also detailed in the contract, including Cpk/parts per million (ppm) or other definitions that define the required level of quality. Other contract elements include forecast and release process and timing, longer-term pricing formulas (both cost reductions and increases), nondisclosure clauses, technology ownership and license provisions, and liability limitations based on a supplier’s theoretical cycle time.

Information systems are a major part of Digitex’s sourcing strategy. Digitex provides to external suppliers an MRP-driven twelve-month forecast via electronic data interchange (EDI) each time it updates its MRP system. Distant suppliers use the forecast and agreed-upon shipment authorization windows to schedule their shipments to Digitex. For example, the first week of the forecast may become the delivery schedule. Local supplier shipments are triggered by consumption using release mechanisms such as a kanban process, and flow directly to the production point of use. The consistent use of long-term blanket purchase orders is normal, while piecemeal internal purchase requisitions, orders, or release approvals are not normally used. These approaches take time and hence contribute to waste in the process.

Digitex works to integrate suppliers directly into its JIT, total quality control, and employee involvement strategies. The company then measures each supplier’s progress toward these strategies and shares the results during supplier performance reviews. When needed, the company also uses site, group, or corporate assistance teams to help suppliers adopt JITQC principles, including process capability analysis, cycle-time reduction, pull-system implementation, and A(T assistance. Early supplier involvement (ESI) programs help promote strong supplier input to new product design.

Digitex aggressively establishes local sources of supply using long-term contracts (from life of product to two to four years) where appropriate. In sole-source environments where only one supplier is available to supply a given commodity or item, Digitex develops long-term pricing processes and contracts based on experience curves derived from previous sourcing experience. Joint supplier-Digitex cost-appraisal benchmarking programs based on theoretical cycle time and cost are also in place.

Supplier selection relies on the total cost of sourcing an item or service and takes full recognition of distribution costs, supplier process capability, ppm quality history, supplier JIT manufacturing processes, supplier employee involvement programs, and historical cost improvement contributions. The number of active suppliers is continually reduced in accordance with resources available to manage JITQC business practices. Supplier selection for new items involves the use of cross-functional teams with members from design, distribution, and quality. Joint approval about a supplier from both the new product and manufacturing organizations also occurs. Purchasing managers are responsible for driving quality at the source after supplier selection is complete.

Performance measurement supports the supplier selection and evaluation process at Digitex. Three performance areas in particular are an integral part of the evaluation, selection, and continuous performance review process. The following measurement areas link the sourcing process directly to Digitex’s stated JITQC initiatives:

1.
Cost of quality/price of nonconformance (PONC) and responsiveness measurements, which must demonstrate continuous improvement during the initial baseline review and the achievement of 30% or better improvement toward theoretical best-possible levels during all subsequent reviews.

2.
Customer satisfaction and small group improvement activities must exhibit continuous improvement during both baseline and subsequent reviews.

3.
Employee contribution criteria, which Digitex establishes during the baseline review and which the supplier must continuously improve.

Cost of Quality/Price of Nonconformance (PONC)

The cost of quality consists of prevention, appraisal, and failure costs. Prevention costs include areas such as design reviews, supplier quality evaluations, quality training programs, quality audits, and preventive maintenance. Appraisal costs include supplier source inspection, incoming inspection and/or testing, in-process inspection, and status measurement. Failure costs include redesign cost, engineering change cost, rework, and scrap and warranty cost. To be relevant, the company compares the cost of quality to some base activity such as gross inventory spending or transfer cost.

The Price of Nonconformance (PONC) includes all nonconformance costs related to production (scrap, rework and repair, inspection, and test and diagnosis) along with inventory-related costs. This category is related to gross inventory spending, which includes all spending for material, material acquisition, production, administration, and variances. The equation for PONC% is:

PONC% =
PONC Expense

Inventory Spending

The theoretical target for PONC is zero. Digitex expects suppliers to achieve at least a 30% improvement from review to review, using the equation

Target PONC Improvement = Previous PONC% – .3 X (Previous PONC).

Supplier Responsiveness

The ability of a supplier to respond quickly with a minimum of inventory cost exposure has a direct effect on raw and work-in-process (WIP) inventory and WIP cycle time. Inventory measurement includes days of supply (current inventory dollars/volume of sales per working day). However, a more relevant measure is the cycle-time performance ratio (CTPR), which stresses the elimination of all unnecessary factory floor cycle time. CTPR is calculated as:

CTPR =
Actual Cycle Time in Hours

Theoretical Cycle Time in Hours

Actual cycle time starts at the point of entry of key components to the production line and concludes with delivery of finished assemblies to the customer or stock. Actual cycle time is measured using the formula

Actual WIP Cycle Time in Hours =
Average Work-in-Process Inventory $

Average Daily Output $ X (manufacturing hours per day)

Theoretical cycle time is the cycle time with all unnecessary activities eliminated. Examples of unnecessary activities include setup, move, rework, wait, queue, burn-in, inspection, kitting, counting, and transaction. Examples of necessary activities include machine operation time, operator value-added or hands-on assembly, and functional tests.

Cycle time initially measured production time improvement. However, Digitex soon expanded the approach of cycle-time ratio analysis in the A(T program to include a great deal more. The measurement system can track an entire product cumulative cycle time, a total plant cycle time, or a particular machine operation. A(T also applies to inventory levels, cost models, or any administration process using the generalized ratio of actual cycle time to theoretical cycle time. As before, Digitex targets 30% improvement in inventory and cycle-time ratios from review to review.

Customer Satisfaction and Small Group Improvement Activity

Suppliers must demonstrate the use and understanding of customer satisfaction feedback. (Digitex is the primary customer but feedback can also originate with end users of Digitex product.) The format and content of the feedback is site-specific and defined by Digitex. Suppliers must demonstrate that a feedback review process is in place, the data is an accurate reflection of customer satisfaction, and an action plan is in place to improve customer satisfaction.

Continuous improvement in customer satisfaction results include the total elimination of customer inspection, zero customer line interruptions due to supplier performance, mean time between failures, mean time to repair, problem-free installation, and customer survey responses.

Small-group improvement activities are a primary source of improvement ideas. Therefore, Digitex expects the number of employees at the supplier’s facility involved in such activities to increase over time.

Employee Contribution

The number of employee ideas generated and carried out at the supplier is an indication of the level of employee empowerment, contribution, and effectiveness of the overall employee involvement program. Small-group involvement activity participation is a necessary but insufficient indicator of employee involvement. It is possible for small groups to formally exist at the supplier but not really be empowered to make suggestions or effect change. By tracking the status of ideas actually contributed and implemented by supplier teams, Digitex can evaluate the level of employee empowerment. The measurement system tracks the number of ideas submitted and implemented and, when necessary, Digitex encourages action to improve the level and quality of employee activity.

Conclusion

Sourcing is a key part of the JITQC initiative at Digitex. Supporting this effort requires a different type of purchasing organization: one that focuses externally, has the resources to support a supplier’s technical needs, links directly to corporate JITQC goals and objectives, and has the right measures and information systems to evaluate performance. Firms that demonstrate this level of commitment to their sourcing process are placing themselves in ideal positions to achieve significant competitive advantage.