How do we solve this issue?
We examine the root that bears the fruit. From where do these quality issues come? Once we identify the root cause of the problem, we can take steps to avoid the issue altogether. The result is putting the money you spend on damaged and out-of-specification parts back into your company’s bottom line.
What Is the Out of Specification and Damaged Parts Closet?
Here’s the scenario. Your company is a manufacturing company in the aerospace and defense industry. You sent an expensive purchase order to your supplier for electronic control system assemblies, a mission-critical piece of your final product. When the batch arrives, everything looks great except for one glaring issue. The wiring harness specified in the purchase order is not the wiring harness that came attached to the electronic control system assembly. Now you have a batch of electronic control system assemblies that don’t fit in any airplane your company manufactures.
At this point, you would issue a Reject Notice to notify your supplier that they sent an invalid part and begin formulating a plan to remedy the mistake. The problem is that your supplier is not a compliant electronic trading partner. Your supplier is a manual supplier, and you have no way to ensure that they receive the Reject Notice other than checking their email. Like clockwork, the supplier “misses” the email containing the Reject Notice claiming to have never seen it. You have other things to do, so this issue, while highly important, falls to the back burner. Your supplier proceeds full sail ahead to issue the invoice accepted and paid for by accounts payable before you have a chance to resolve the Reject Notice.
You are now the owner of a batch of unusable parts. Sometimes you might be able to negotiate an issue resolution with your suppliers. Other times, the solution is to issue another purchase order and keep a closer eye on it this time. What do you do with that batch of bad parts when the supplier does not take them back, and you cannot use them?
The answer to this question is to put those parts in the infamous out-of-specification parts closet.
Most manufacturing companies have this closet, which eventually grows into a corner of the warehouse. Occasionally, the value of what lives in this closet can be millions of dollars collected over time. Regarding your company, these parts only have value as a paperweight and nothing else.
So, what can be done about these unusable parts apart from recycling? Can we prevent the collection of unwanted and useless parts?
Sources of the Closet
To answer that question, we have to ask another question. Why do you keep collecting things in the out-of-specification parts closet? This issue boils down to leveraging supplier communications tools to increase supplier transparency. You need to know that the supplier received your Reject Notice, and you need to take away their opportunity to ‘gloss over’ those mission-critical business documents that they just don’t want to deal with.
In a perfect world, 100% of your supply chain would enjoy the benefits of compliant electronic trading. They would have an electronic connection between your back-office systems, such as EDI, and you would send business documents via that connection, which provides automation and traceability. Unfortunately, we don’t live in a perfect world.
These suppliers are manual trading partners. Manual trading partners rely on PDFs and email because an investment in an EDI connection is too expensive to install and too complex to maintain in their situation. Therefore, they use email.
This reliance on unsecured email has several drawbacks, many of which are listed in this article here. When a trading partner has to do business manually, there is limited traceability and no automation in the purchasing process. As a result, the opportunity for error, whether intentional or not, is extremely high, and you can expect numerous quality issues.
Without adding automation and supplier transparency, you won’t be able to eliminate the need for storage space to house unusable supplier parts that you also can’t return for credit.
Impact of the Problem
The most significant issue is the last line of the previous paragraph. That growing inventory of parts is not only unusable but also you can’t return them for credit because, in the eyes of your supplier, you are the owner of those parts now. Those paperweights are nothing more than sunk costs sitting there just out of sight but growing in number year after year.
How significant are these costs? Each organization is different, but it’s thousands of dollars at a minimum, and it is not uncommon that there are millions of dollars tied up in that unusable parts closet. Those millions of dollars are coming out of your company’s bottom line.
That means that if you can eliminate the out-of-specification parts closet, you can put those millions of dollars back into your company’s bottom line in the future.
It does not matter how big your company is; wasting millions of dollars on paperweights is not a wise use of organizational resources. This cost is a substantial amount of money that your company can save.
Eliminate the Out-of-Specification Parts Closet
So, how much do out-of-specification and non-returnable parts affect your business? For many organizations, the impact over just a couple of years is millions of dollars they don’t have to spend.
What is your business process for resolving these kinds of issues when a supplier sends you parts that are damaged or out of specification and refuse to own the mistake that they made? What infrastructure do you have to trace the error to its point of origin? How do you leverage your systems to make your supplier own the quality issues when they are clearly at fault? If your answer is none, you know where to begin the conversation to remedy this costly problem.
Most companies are in a position where they have to surrender a lot of bargaining power back to their suppliers. They surrender this bargaining power because they do not have the technology infrastructure to trace the origin point of those quality issues within their exchange of B2B information and ensure that their supplier takes ownership of the mistakes.
Want to avoid building out the unusable and non-returnable parts closet altogether? The solution is to convert your manual supply chain from PDF trading to fully compliant electronic trading.
What other ways can you benefit from electronically enabling your supply chain? Check out Supply Chain Management and B2B Collaboration to find out.
Curious about what else we do? Visit our company site ttpsolutions.com.