In the electronics manufacturing services (EMS) industry, contract manufacturers are expected to build the highest quality product at the lowest cost.
That’s why it should be no surprise that EMS provider Celestica, based in Toronto, measures its suppliers on product quality as well as total cost of ownership (TCOO) criteria.
It's not enough for suppliers to build components, subassemblies and other products that meet the quality targets that Celestica has set. Suppliers must also build products that meet TCOO requirements.
With product quality, suppliers are measured against six criteria, says Paul Blom, chief procurement officer for Celestica. The criteria includes lot rejections, defects per million, line stoppages, supplier corrective actions and how effective the supplier was in resolving any quality issues. Suppliers are also measured on their products’ performance in the field.
With parts per million (ppm) defect levels, Celestica sets targets each year that suppliers are expected to meet. Defect level targets vary depending on the commodity. However, most electronic components have defect levels in the sub-100 ppm range, and some components have ppm levels as low as 3.4 ppm, according to Blom.
Stoppages are nasty
If a supplier builds a defective part that causes a line stoppage at Celestica, it will adversely affect the vendor’s score.
"Line stoppages are obviously serious," says Blom, adding that how serious depends on what the supplier is manufacturing for Celestica. “If we are building a high-volume, high-running product, a line stoppage is a nasty thing to happen.”
But it may not be as serious if Celestica is building a high-mix, lower-volume product and “we can switch over quickly to build something else so the financial impact to us is lower," he adds.
If a supplier has a quality problem with a product, Celestica issues a corrective action request. It's up to the supplier to analyze the quality problem and find a way to correct it.
Suppliers are also rated on the effectiveness of the corrective action and whether or not the quality problem was successfully resolved.
"If they come back to us and say ‘we fixed the problem’ but the problem repeats itself, then we have an issue" and the supplier’s score is negatively affected, Blom explains.
“If we are building a high-volume, high-running product, a line stoppage is a nasty thing to happen," says Paul Blom, chief procurement officer at EMS provider Celestica.Suppliers are also rated on the "outgoing performance” of their products. This is a measure of how the product performs in the field after Celestica has shipped the equipment. If a part causes the equipment to fail in the field, it's a serious problem and results in a lower score.
A supplier’s quality score is factored into its total cost of ownership score.
TCOO is comprehensive
For TCOO, in addition to quality, suppliers are rated on delivery, leadtime reduction, flexibility, vendor managed inventory programs, costs performance and reduction, and technology and innovation.
With delivery, suppliers are measured on how well they meet Celestica's delivery request date.
“Typically, we allow one day late and two days early,” says Blom, adding that Celestica makes allowances in certain circumstances. “There is the standard delivery to commit date and then there is measuring suppliers on how well they respond to upsides in demand.”
He notes that one of Celestica’s OEM customers may get a sudden increase in demand for their products and Celestica may need parts from a supplier very quickly. If suppliers can deliver the parts when Celestica needs them, it could result in a higher score.
Celestica also measures supplier performance on cost reduction of a part.
“This can be both in the form of cost reduction for the components that we are purchasing, but it also includes if suppliers come up with innovative ways to take cost out of Celestica’s supply chain,” he says.
Celestica collaborates with suppliers on cost reduction, especially with build-to-print items, which are non-commodity parts.
“We work with suppliers to figure out how to take cost out of their production process which, in turn, benefits us in a lower component price,” he says.
Celestica also measures suppliers against cost targets that the EMS provider sets. For commodities that have inventory turns in the range of 7 to 10, for example, Celestica tries to drive quarterly cost reductions. For other, lower cost products, the EMS provider sets annual price reduction goals.
In rating supplier performance, Celestica is increasingly emphasizing supplier technology and innovation.
“Innovation is not limited to products," says Blom. “It also includes innovation in their supply chain process, their engineering activity and measures that make supply chain more flexible.”
A supplier’s strategic partnering activity with Celestica is also part of the supplier’s TCOO score.
“This could be kaizen events that focus on quality or delivery” or activities designed to improve the planning process or inventory visibility in the supply chain, says Blom.
Blom also notes that supplier quality has improved over the years as more suppliers have adopted Six-Sigma or other quality methods.
“Suppliers have become more advanced in their use of quality management systems and quality techniques. Whether it's under Six-Sigma, a lean or a market-driven quality program, more and more of the suppliers have adopted continuous improvement programs that have yielded better product quality,” he says.