THIRD PARTY INSPECTION SERVICES SINGLE SOURCE OR MULTI SOURCE.DOCX
- 1. May 10, 2010 Copyright © 2010 by Q2 Management Inc. New market, Ontario, Canada. All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording or otherw ise, w ithout the w ritten consent of the publisher. 1/3 Consulting Group: T.S.D. Scott, MBA, CMA; Jason Chan, MBA, CMA Management Inc THIRD PARTY INSPECTION SERVICES: SINGLE SOURCE OR MULTI SOURCE? The purpose of this article is to provide the reader with an overview of approaches to utilizing third party quality inspection service providers at vehicle assembly facilities. A comparison matrix summarizing the advantages and disadvantages of each approach from the Assembler’s perspective is provided at the end of this article. There are two broad approaches to quality inspection service support currently implemented at vehicle assembly facilities in North America. 1. The Single Service Provider approach One service provider sourced to deliver these services at the Assembler’s facility 2. The Portfolio approach Component Suppliers select from a portfolio of inspection service providers to contain quality challenges at the assembler’s facilities The Single Service provider approach at time of writing is utilized by many assemblers throughout North America including: Mercedes Benz U.S. International; Tuscaloosa, Alabama BMW Spartanburg, South Carolina Honda of America Mfg assembly plants in Ohio Toyota Motor Manufacturing assembly plants in Kentucky and Texas KIA, Motors in Georgia Nissan Motor Manufacturing Corporation USA, 3 X facilities in Tennessee/Misissippi The Portfolio approach is known to be utilized by the following assemblers: Hyundai Motor Manufacturing. Alabama Honda Manufacturing of Alabama Ford Motor Company Oakville, Canada CAMI, Ingersoll Canada The Portfolio approach essentially provides the advantage of mitigating the risk of an Assembler dealing with the challenges associated with a sole service provider ceasing business operations. If a Single Service provider were to fail then the Assembler would experience management distraction and productivity challenges associated with replacing this Service Provider. There are transactional costs in time and resources related to resourcing. There also exist costs associated with productivity impairment related to internal Assembler staff distracted with conducting inspection activities until a service provider is sourced. It’s important to note that Service Providers of this nature do not impact the Assembler’s business operations as drastically as component suppliers. An unforeseen stoppage of components from a manufacturing supplier could shut down an Assembler’s supply chain within 24 – 48 hours and for an extended period of time until a replacement manufacturer was sourced, tooled and ramped up production. Whereas impact on output from the cessation of services from Quality Services provider is significantly less impactful.
- 2. Copyright © 2010 by Q2 Management Inc. New market, Ontario, Canada. All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording or otherw ise, w ithout the w ritten consent of the publisher. 2/3 In early 2009 the Service Provider of inspection services to the Honda of America Mfg assembly plants in Ohio ceased business operations. The initial response by the Honda Assembly facilities was to immediately switch to an open “Portfolio” approach. Essentially, component suppliers were permitted to select any Service Provider to contain their quality challenges at the Honda assembly facilities. Within 60-90 days Honda of America reverted back to the single provider approach. The inference is that a sole supplier becomes an extension of the Assembler’s organizational culture as a whole - not just the quality or production departments – and therefore shares the same pride in achievements which contributes to overall product quality. The overarching challenge with respect to the Portfolio Approach, from the Assembler’s perspective, surrounds the interaction between competing service providers. As service providers actively promote their services through internal Assembler staff and directly through component suppliers each will pursue differentiators to attract opportunity. The tendency is for unsophisticated Service Providers to attract business through low cost models. An easy measureable for component suppliers is the inspector/operator hourly rate. Since the component supplier is not directly supervising the inspection activity at the assembler’s location, the supplier is unable to directly observe the responsiveness, effectiveness and efficiency of the inspection activity. In the absence of observable differentiators the component supplier tends to choose the “cheap” option. There is a perception that the competitive nature inherent in the Portfolio approach will create higher service standards at a lower price. From the Assembler’s perspective, there is a moral hazard in allowing suppliers freedom of choice. Under the Portfolio Approach, and in response to low pricing pressures, competing Service Providers are compelled to cut input costs including employee wages, infrastructure costs, training expenses, supervision capacities, communications, technologies, uniforms and equipment, and back office functions. Typically, the “last competitor standing” in this microeconomic environment is the least sophisticated competitor. Those Service Providers with more sophisticated inputs (providing more value-added services) will be forced to pursue other opportunities and reduce focus at the Assembler. The Single Provider approach ensures focused commitment both strategically from the Service Provider’s management team and operationally as day to day activities are fulfilled by the Service Provider’s staff motivated by their respect for the opportunity to contribute to the creation of quality products. Core learning and growth is mutually shared by the Assembler and the Service Provider affording a robust continuous improvement curve. There may be a perception that the Single Provider approach poses the risk that an assembler will be “stuck” with a poor performing Service Provider. This risk is easily mitigated with contractual performance metrics such as responsiveness in delivery, effectiveness and quality of service standards. As discussed above the Service Provider that fails to respond to the assemblers needs is far less cumbersome to replace than a component supplier. All these factors should serve to motivate the Service Provider to delight the assembler throughout the duration of the contract.
- 3. Copyright © 2010 by Q2 Management Inc. New market, Ontario, Canada. All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording or otherw ise, w ithout the w ritten consent of the publisher. 3/3 APPROACH ADVANTAGES DISADVANTAGES Single Service Provider Training and integration with respect to OEM’s policies, procedures and organizational requirements is concentrated on one supplier. Perceived lack of competitive motivation with single service providers Strong commitment from service provider: Greater opportunity for Service provider. Service provider compelled to invest in infrastructure and capacities to ensure unfettered support under demand volatility characteristic in quality services. Service provider committed to success to earn future business Eliminates confusion characteristic in managing multiple suppliers. Determining responsibility and correcting errors and omissions related to: o Component suppliers’ complaints regarding performance/response of service provider o Confusing communications / accountability Prevents challenges associated with competing service provider staff working at cross purposes / infighting derived from fear of reduced demand / job loss Standardized access to technology for OEM staff and supplier staff Documentation of inspection activity Real time outcome reports / non-conformances Single database location for historical activity Portfolio of Service Providers Competition motivates service providers to perform Organizational confusion with multiple contractors. Rework and other inefficiencies associated with training and developing multiple organizations. Provides risk management in the event of a service provider business failure Shared demand for service providers = diminished demand for each service provider Less investment in infrastructure / capacities Higher likelihood of service provider failure due to diminished demand Provides component suppliers choices Moral hazard as suppliers will select lowest cost / least sophisticated provider & negatively impact OEM COMPARISON MATRIX: SINGLE SERVICE PROVIDER / PORTFOLIO APPROACH