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by Amy Zuckerman

Many organizations have started outsourcing parts of their production processes to outside companies. Maintaining quality and conformity in these outsourced processes, however, isn’t always easy.

That’s a problem companies of all sizes face as they rely on outsiders to handle many aspects of their operations. These third parties can be across town, in another region, or as far away as Sri Lanka and El Salvador. Distance only adds to the challenge.

Tips From the Field

An internationally known quality expert, H. James Harrington of the Harrington Institute, offers the following tips to those venturing into an outsourcing arrangement:

The quality base. Before insisting that suppliers or subcontractors meet quality levels, the company doing the hiring must have its own quality act together, including a good quality measurement system to pass on to suppliers. Harrington doesn’t care what quality program the core company has selected “as long as it shows continuous improvement.” He considers ISO 9001 a base but recommends adding Six Sigma or a TQM system “to promote excellence.”

The contract. Harrington recommends including a stipulation in the contract with the subcontractor or supplier that they show “10 percent or more quality improvement per year. Insist on documented commitment to a minimum amount of continuous improvement.” He adds, “The contract should include a clause that penalizes them some minimum amount if they don’t comply with their improvement goals.”

The follow through. “The first thing to do is set up a system to measure the outsourcing partners’ performance improvement,” he says. “Are they getting better, really providing a higher level of total performance? This requires understanding their processes, ensuring they’re documented and don’t degrade the core company’s quality processes.”

It will be essential to “stay in close contact and validate that they are following the processes and upgrading them,” Harrington adds. “Ask them: ‘What are you doing to be better? How are you doing it? What are your plans to continuously improve as we move forward?’ If you see a continuous improvement, you don’t need to waste time and money flying to India.”

The annual audit. Be prepared to conduct at least one annual, in-person audit.

 

Outsourcing myths
Nigel Croft, who coordinates the TC 176 task force that wrote an ISO 9001 guidance document on outsourced proc-esses, says organizations must first realize that outsourcing doesn’t necessarily entail going overseas—what’s called “offshoring.” Then they must comprehend the difference between purchasing and outsourcing. Croft has struggled with the issue of how companies can ensure quality while outsourcing some of their processes to third parties, whether foreign-based or regional.

“There seems to be a misconception that outsourcing means going overseas, generally for cheap labor, but that’s only one possibility,” he says, pointing out that some companies outsource manufacturing or financial services even though the work takes place on their own premises. As for distinguishing between purchasing and outsourcing, he explains that purchasing relates to buying component parts made to specification. In such cases, the supplier is evaluated based on its quality management system and the performance of the products it provides. Outsourcing, on the other hand, involves a third party actually taking over all or portions of a company’s manufacturing process.

“This is a process the OEM used to do for itself but no longer does,” Croft says of outsourced activities. “There are complex interfaces in communication and logistics between the manufacturer and the provider of the outsourced process. It’s likely that the degree of control exercised by the manufacturer is much greater.” The manufacturer will focus on the process, not just the finished product, and form a strategic partnership with the subcontracting company that includes monitoring quality processes.

“The trend is to outsource anything that’s not a core competency because the third party can do it better, cheaper and faster than you,” concurs H. James Harrington, a Quality Digest columnist and CEO of the Harrington Institute, a quality management consulting firm with offices in California, Florida, the United Arab Emirates and China. “More and more, we’re finding organizations around the world outsourcing even things they consider personal and confidential, such as personnel records and payroll.”

How companies promote or monitor quality efforts in an outsourcing arrangement can vary, depending on their specific needs. “It’s really based on an analysis of the risks to the business, the nature of the contractual relationship, the relative maturity of the two organizations and the level of confidence that exists between them,” says Croft, adding that a great deal can depend on “the relative financial clout of each party.”

“If I’m a major multinational outsourcing a process to a small local contractor who might be 100-percent dependent on my business, then of course the contractor will jump through all the hoops to keep me happy,” Croft observes. “The exact opposite situation could also apply, though. Suppose I’m a small-business owner, and I decide to outsource all my logistics to DHL or FedEx, or all my document controls and distribution to Xerox? I’m not suggesting that they won’t be customer-focused, but they’ll have a pretty standardized process, and probably wouldn’t be too thrilled to have their small-business customer try to impose additional requirements or specific quality initiatives on them.”

Industries such as apparel and automotive—leaders in both the outsourcing and offshoring trends—have wide experience in outsourcing over long distances. Companies and experts from these industries, as well as a small electronics firm on the receiving end of quality demands from customers, provide insight for organizations considering one or both of those options.

Apparel industry pioneers
Who isn’t familiar with Carter’s infant sleep and playwear, or children’s underwear and sleepwear? Like so many apparel companies, during the late 1990s Carter’s moved from domestic production in its own factories to hiring out much of its manufacturing to separate companies, according to Steve Loftin, vice president of quality assurance at Carter’s Atlanta headquarters.

It’s a switch from “internal manufacturing” to “full-package sourcing,” says Loftin. “That means we buy the completed product to be shipped from their factory direct to our distribution centers. All is done to our specifications.” The fact that the third-party manufacturers are based in locales ranging from South America to Thailand and Indonesia “brings on a whole set of challenges and difficulties,” he says. “It’s not easy, but it’s definitely worth it. We get good, quality product, and, with proper planning, we get the product in on time.”

Quality issues Carter’s faces range from color quality and dyes to fabrics. As much as possible, colors can’t be allowed to run, and fabrics can’t be allowed to shrink. All of these processes—and more—require extensive premanufacturing testing and reporting from locations thousands of miles from Carter’s home base. Of course, the final product must reflect the company’s exacting stand-ards that have made it a well-known and respected brand name.

Like many in the apparel industry Carter’s focuses on conformity assessment or product testing, and has evolved its own quality processes based on total quality management principles that are codified in its quality manual. Moreover, its factories must pass social compliance audits to ensure that employees are treated fairly.

Besides relying on the interface between its home-based quality team and agents located in foreign countries, Carter’s hires third-party laboratories around the world to perform tests throughout the manufacturing process. Quoting the late President Ronald Reagan, Loftin says Carter’s quality catchphrase is, “Trust, but verify.”

“We put trust in our agents and trust in our factories, but we verify that our expectations are being met by on-site visits to the factories, by inspection of the product as it arrives at our distribution centers and then through random testing,” he explains. “There’s a constant interface between Carter’s and our [overseas] agents. We have several minor and at least two major meetings annually, and agents undergo quality assurance training in the United States.”

Jerry Duncan, a textile industry consultant, has managed overseas quality efforts for Russell Athletic in Atlanta, his former employer. He is a member of the executive committee of the Enterprise Competitive Council within the American Apparel and Footwear Association, and believes that quality must be “built-in from the product development stage. That means sending people in to do in-process audits and final quality audits to make sure the product meets the company’s quality standards before it’s shipped.”

He considers Carter’s a good example of how the industry operates as a whole, with more emphasis on product testing and less involvement in quality management system standards such as ISO 9001. “ISO 9001 isn’t as big an issue for the textile and apparel business as it is for other industries,” he says. “That’s not to say it’s not important or that it’s not a good thing. It’s the products being made that count.” He adds that companies expend much of their effort on picking the right testing lab and figuring out how to conduct quality audits and assessments, particularly with subcontractors that are located a great distance from their core businesses.

Like Loftin, Duncan recommends conducting what he calls “a factory evaluation”: an on-site assessment of the subcontractor’s facility—including equipment, manufacturing and quality processes—before signing a contract. “For example, do they do incoming fabric inspections?” he challenges. “You want to know that they have a quality system in place, and they’ve proved that they can make the quality level you’re seeking. You can tell some of that by who their customers are.”

Automotive outsourcing
It’s a different story in the auto industry. With more than a decade’s commitment to QS-9000, it’s now embracing the ISO/TS 16949 standard. Besides testing for product defects, OEMs in the auto world must ensure that the manufacturing process fosters continuous improvement.

In 2003, a U.S. subsidiary of a Japanese firm that produces steering columns for auto-industry giants started outsourcing the manufacture of many metal-fabricated components to China. The company, which requested anonymity for this article, selected a Chinese supplier with some automotive experience in component parts fabrication, according to Rob Condon, president of Longley Associates Inc. in Belchertown, Massachusetts, and director of operations for the auto parts manufacturer at the time the outsourcing took place. A benefit was that the supplier maintained a Chicago warehouse to hold inventory so quality inspections could take place in the United States.

Like most auto industry tier one suppliers, the parts manufacturer was required to earn certification to QS-9000 and “flow down QS-9000 requirements to our suppliers,” says Condon. “We were also required to audit them to QS-9000 requirements, typically on an annual basis.” As a Ford supplier, the parts manufacturer was required to be certified to Ford’s Q1 supplier status. “Although Six Sigma and other programs were often used by suppliers to continuously improve their processes to achieve zero PPM defect rates, they weren’t made mandatory, although QS-9000 was.”

Working with a supplier from such a distance and trying to avoid quality defects during the ramp-up phase—even as an existing supplier ramped down—proved a major concern. Startup with the Chinese company was problematic enough to warrant sending a U.S. team to China. Once there, the team found a number of problems, including scheduling issues, misinterpretation of blueprints and no understanding of process control to reduce the defects being produced.

For example, the auto parts manufacturer originally imposed quality requirements of process validation and control by recording in-line inspection results, to which the supplier readily agreed. “But during our on-site audit, we found they didn’t understand process control well enough to reduce the defects being produced,” Cordon recalls. “Instead, they relied upon multiple inspections to weed out the defects—a totally intolerable situation.”

He stationed a team of quality and engineering experts at the Chinese factory and then rotated in another team until all the issues were cleared up. “After several months of intense process development, specification and quality reviews, we were ready for full process validation and production,” he says. “We taught the supplier quality systems based upon QS-9000. We taught the supplier the methodology of proving out capable manufacturing proc-esses before production begins. Several months and tens of thousands of dollars later, we started receiving high-quality parts from our new Chinese supplier.

“Like any outsourcing story, over time the suppliers become more capable,” he says. “But the development of an offshore supplier is time-consuming and expensive. The costs of supplier development, maintaining high quality and ensuring proper logistics are significant. A small to mid-size business might not be able to afford offshore supplier development costs.”

View from the other side
Court Square Data Group sits on the other side of the outsourcing trend, as a company that’s hired to do the work. A 70-employee IT consulting firm based in Springfield, Massachusetts, Court Square Data Group manages computer servers and platforms for more than 50 clients. These range from health care to financial institutions, pharmaceuticals and general manufacturing companies.

Given its range of customers, Court Square Data Group must sometimes meet industry-specific requirements. For example, one pharmaceutical customer operates under the FDA’s 21 CFR Part 11 standard for research in drug manufacture, which means that, as part of its contractual arrangement, Court Square must “follow certain processes and procedures and document the best practices we follow,” says Keith Parent, the company’s CEO and president.

The company also follows the Information Technology Infrastructure Library standards for running an IT infrastructure. The standard includes 10 focus areas, ranging from documentation of procedures to training IT employees.

Court Square’s approach to meeting so many different quality requirements is to “try to exceed the demands before they come in,” Parent says.

“We developed a disciplined methodology before we were even aware of ITIL requirements,” he explains. “Later, when we implemented them, we found they matched perfectly.” Court Square also implemented the Project Management Institute’s methodology for managing projects “to produce consistency of delivery,” Parent says. “I found, as we grew larger, that we had new employees with different backgrounds and ways of handling projects. We wanted a consistent methodology.”

Parent is determined to work on quality management “whether customers ask for it or not.” Having the ITIL base has made it easier to function and meet customer’s quality requirements. “It creates documented working procedures so we can absorb the requests of our customer base and exceed their requests from the get-go,” he adds.

To ensure that Court Square follows a customer’s quality requests and meets whatever requirements are imposed, the company conducts at least monthly, if not weekly, quality meetings with its customer base “to determine how we’re doing against our contract,” Parent says. “We’ll look at the root cause analysis so there won’t be problems in the next month, keep benchmarking against ourselves and re-evaluate fixed milestones along the way.”

As outsourcing and offshoring become standard operating procedure for manufacturers in an increasing range of industries, issues concerning process control, logistics and communication will remain a concern for both parent companies and their outsourced process providers. The quality solutions that served all-inclusive companies in the past will prove invaluable as those same companies transition into their global models.

About the author
Amy Zuckerman is an award-winning author, columnist and consultant specializing in the mechanics of international trade, including electronic commerce, supply chain and quality management, international standards and global communication. She is the first-ever recipient of the American National Standards Institute President’s Award for Journalism (2001).