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Read the case study that explains how
optimizing a purchasing process saved $1 million
. Explain how you, as a quality manager, would apply at least three of the 7M tools for the purchasing process identified at MWM International.
200 words min
Making the Case for Quality
Optimizing
P
urchasing Processes
Saves $1 Million
• Using the DMAIC
method, a Six Sigma
improvement team at
MWM INTERNATIONAL
Motores in Brazil improved
the company’s supplier
selection process.
• Known as the Moving
Forward team, this group
applied a wide variety
of quality tools to reduce
the price/weight ratio for
bolts, a key component
for the company’s diesel
engine products.
• By streamlining processes,
reducing variability, and
increasing efficiency,
the yearlong project
helped reduce engine
bolt costs by $1 million.
• The team shared its
success story with a
worldwide audience when
it participated in the final
round of competition in the
2009 International Team
Excellence Award Process.
At a Glance . . .
Often the simple things create the biggest impact. But could a change in purchasing processes for the
most basic manufacturing components, like bolts, actually lead to $1 million in savings, increased effi-
ciency, and reduced process variation? When a multidisciplinary Six Sigma improvement team tackles
the issue, the answer is a resounding yes!
About MWM INTERNATIONAL
MWM INTERNATIONAL Motores is a wholly-owned subsidiary of Navistar, a major worldwide
diesel engine manufacturer and current leader in diesel engine technology and development in Latin
America. Operations include a technology and business center in São Paulo, Brazil, as well as three
South American manufacturing sites—São Paulo; Canoas, Brazil; and Jesus Maria, Argentina.
The company’s engine products range from 2.5 to 9.3 liters and from 50 to 375 cv and serve a
wide range of markets in the vehicular, agricultural, industrial, and marine sectors. Among MWM
INTERNATIONAL’s customers are Ford, GM, Volvo, Volkswagen, New Holland, Troller, and Valtra.
Focusing on Purchasing Activities to Reduce Waste
As an engine maker, MWM INTERNATIONAL uses more than 400 different bolts in its manufactur-
ing operations, which led to inefficient purchasing strategies for this commodity. Because bolts are
a standardized product, both the material and production processes are similar for the entire range of
existing bolts. Therefore, MWM INTERNATIONAL officials believed it was reasonable to expect a
linear relationship between the price of bolts and steel—the raw material from which they are made.
The relationship is expressed in a formula called linear price performance or LPP. This comparative
method evaluates price and measurement correlation in kilograms, linear meters, square meters, or
liters. LPP is calculated by dividing price per a measurement unit, as shown in the examples below.
price price
weight
= LPP or
length
= LP
P
Company leaders surmised that finding a way to optimize the organization’s purchasing processes for
engine bolts would reduce the LPP, thus lowering costs and reducing waste.
This Six Sigma improvement project was identified as a result of the company’s culture of continu-
ous improvement, whereby MWM INTERNATIONAL officials consistently pursue opportunities to
develop new projects that follow the define, measure, analyze, improve, and control (DMAIC) method-
ology. The organization uses the following tools to help pinpoint new process improvement projects:
by Janet Jacobsen
July 2009
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• Voice of the customer, to identify customer requirements.
• Voice of the process, to learn about process capability.
• Process or value stream maps, to understand the
organization’s processes.
• Failure mode and effects analysis (FMEA), to discover
possible failures.
• Critical-to-quality (CTQ) trend analysis, to identify good and
bad trends.
From the onset,
the team involved
stakeholders—
both internal
and external—
in the effort.
Stakeholders,
listed in Table 1,
played key roles
in mapping a
project charter
and with
brainstorming
and process-
mapping exercises
that helped define
both positive and
negative impacts
on various
activities.
Searching for a Cause and Formulating Solutions
The improvement project kicked off in August 2007 with an
11-member group called the Moving Forward team. See the
sidebar, Meet the Project Team, for a complete list of team
members. These individuals were carefully selected from a
“talent bank” of employees who completed training in lean, Six
Sigma, or other process improvement strategies.
Identifying Root Causes
After gathering data on LPP, including completing the pains-
taking task of checking the weight of every bolt, the team
identified CTQ factors. Arranging the CTQs on a process map
enabled the team to better estimate the incidence of each, as
well as understand distinctive features of the factors in every
stage. Identifying all factors was necessary, but proved difficult
because some were not readily apparent. “We had to walk
through every process step to identify the factors and relate them
with the LPP,” explains Fernando Lima Lopes, Six Sigma Black
Belt coach on this project.
Next, the team selected the most critical factors and conducted
a more thorough analysis with a prioritization matrix, where
scores were assigned according to the influence of each factor
in the response variable. The four factors listed below were cor-
related in an attempt to observe a cause-effect relationship and
thus determine the root cause of the problem:
• The supplier—some vendors offer competitive advantages
that affect the final price of bolts.
• Annual purchase volume that showed a negative correlation
with LPP.
• The technical specifications of each bolt that may affect the price.
• The commodity strategy for conducting the quotation process
to select bolt suppliers.
Team members then used design of experiments to help deter-
mine the relationship between the response variable, LPP, and the
scored factors. The four selected factors were carefully analyzed
and verified during each process phase. Eventually, a quotation
was simulated for a bolt in each category. The simulation included
purchasing volumes in three levels and with four separate suppli-
ers. Quotes were requested from suppliers and the team drafted a
model, including LPPs from the suppliers’ returned quotes.
As a result of the simulations, the team observed that higher LPPs
resulted from low volume purchases from a particular supplier,
referred to here as Supplier A. Data confirmed that Supplier A
offered a competitive advantage only for very high volumes of bolts
and that 91 percent of the bolts purchased came from this supplier.
In addition, team members discovered that the company’s commod-
ity strategy did not include recommendations on annual purchasing
volumes, but did advocate giving Supplier A the opportunity to bid
on any new business. Thus, the team identified incorrect supplier
selection as the root cause. “We could see that good planning led us
to identify the true root cause of the problem and to choose correc-
tive actions to neutralize this cause,” recalls Lopes.
Developing a Solution
To formulate a solution that would effectively address the root
cause, the team used several tools, including brainstorming,
benchmarking, stakeholder interviews, and process waste assess-
ment. With the information gathered through these tools, the
team divided potential solutions in two ways:
1. Preventive actions, designed to avoid selecting new bolts that
do not meet targets for LPP mean and variability.
2. Corrective actions, related to revising purchasing processes
for current parts to meet LPP mean and variability targets.
Next, by comparing preventive and corrective actions with the
primary wastes observed in the process, the team estimated the
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Stakeholder Degree of Impact From Project
Purchasing department High
Financial department High
Quality department Medium
Engineering department Low
Sales department Low
Bolts suppliers High
Customers Medium
Other partners Low
Table 1— Degree of stakeholder impact
Members of MWM INTERNATIONAL’s Moving
Forward team included the following employees from
the São Paulo and Canoas, Brazil, facilities:
Juliano Afonso Tessaro Team leader
Fernando Begara Project champion
Fernando Lima Lopes Black Belt coach
Diego Pellini Master Black Belt
Andreia Pereira Current products buyer
Andrea Regina Siewerdt New programs buyer
Eduardo Vilaboa Costs engineer
Humberto Belloto Applications engineer
Rodrigo de Carvalho New programs buyer
Lucilene Gomes da Silva Purchasing assistant
Adriel Castro Purchasing finance
Meet the Project Team
http://www.asq.org
impact of the proposed actions to formulate a list of possible
solutions. Again, the list was divided into two categories:
• Supplier change, where the main goal is developing new
business only with those suppliers that provide the best
commercial proposal for meeting LPP targets.
• Negotiation with actual supplier, where the idea is negotiating
with the current supplier to adjust current prices to a market price.
Based on the possible solutions, the team pursued the actions
with the greatest support from the main stakeholders and those
solutions that showed the greatest potential impact on organiza-
tional performance metrics. Three methods proved effective for
defining solutions, including:
• The application of game theory and economic behavior to
simulate likely behavior for those involved in purchasing
negotiations.
• Stakeholder analysis on the impact for each potential solution.
• Estimated impacts on organizational performance metrics as
a result of eliminating or reducing process wastes.
Together, these tools helped the team define a strategy and the
best solutions. Figure 1 provides a detailed depiction of the
team’s process to analyze data to select a final solution.
Analyzing Data
Making use of short-range period analysis and a payoffs matrix, the
Moving Forward team analyzed the effects of various solutions and
realized that any strategy selected would create a financial loss for
Supplier A. However, the team predicted that Supplier A would
choose to negotiate price rather than risk losing a significant share
of business to a competitor. Based on this analysis, the team con-
cluded the best corrective action was to negotiate with Supplier A.
Looking at long-term preventive actions, the team developed a
different approach to manage the supplier relationship to obtain
the most favorable LPP conditions. The team concluded that in
the future new engine parts should be developed directly with
the most competitive supplier, thus eliminating the need to rene-
gotiate prices with current suppliers.
Selecting and Validating Final Solutions
Ultimately, the team arrived at a two-fold solution, as follows:
• Design a new commodity strategy: Establish guidelines
for quotation and development that take into account the
differing annual volumes needed for each type of bolt.
• Negotiate with the current supplier: Revise all current
contracts to reduce the gap between market prices and the
current price paid to the supplier.
To verify if these solutions would accomplish the project’s goals,
the team applied a simulation model to predict LPP. In doing
so, team members confirmed that selected actions would indeed
provide even greater results than initial project goals—creating a
significant reduction in LPP mean and variability.
Addressing Resistance and Creating Buy-In
Throughout the course of this improvement project the team
was diligent about involving stakeholders to increase buy-in and
reduce resistance. With two types of actions planned, different
forms of resistance emerged for each solution. For the correc-
tive action solution, the only resistance came from the supplier
that faced lower profits on its bolt products sold to MWM
INTERNATIONAL. On the other hand, with preventive actions
focused on changing suppliers, the team found opposition from
stakeholders other than the affected supplier, including MWM
INTERNATIONAL’s quality and engineering departments.
Members of these units expressed concerns about the impact a
supplier change could have on product quality and about poten-
tial restrictions on parts development.
The improvement team conducted two meetings with concerned
stakeholders prior to implementation so that all parties could
discuss potential impacts of each planned action. As a result,
the team decided to begin with a small-scale implementation to
alleviate concerns raised during the stakeholder meetings. After
selecting an average sample of bolts that were already in produc-
tion and by using a few new designs to develop items that would
require modifications, the team was ready for the small-scale
implementation of its solution.
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Figure 1— Analyzing data to select a final solution
Are there risks involved in these solutions?
Key solutions
found
Two basic subgroups to possible solutions
Economic theory Game theory andeconomic behavior
Estimated impacts
over organizational
performance metrics
What do stakeholders
think about it?
Which are
expected results?
Strategy definition
What is company
strategy?
Final solution definition Stakeholders’ analysis aboutthe impacts of each action
List of possible
solutions
Negotiation with
actual supplier
Bolts supplier change
C
C
P
P
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Saving Money While Reducing Variability
Results of the trial implementation showed great promise with a
consistent correlation between price and weight of the bolts. By
comparing results before and after implementation of the small-scale
rollout, the team corroborated a very significant reduction in LPP
mean and standard deviations to easily meet the primary project
goal. Shortly thereafter, the team obtained consensus: It was time to
move forward and implement the solution to all bolt products.
The team’s improvement strategy resulted in a cost reduction of
13.6 percent of the annual purchase price for bolts, which repre-
sented a savings of nearly $1 million. In addition, quality metrics
improved through an almost 90-percent reduction in process
variability. For a complete view of the benefits and the impact
this project had on performance metrics, see Figure 2.
The only goal not fully accomplished was reducing the lead
time for the bolt development process. Although this goal was
not achieved in 20 days, the team did implement significant
process improvements.
Sharing the Team’s Story
The Moving Forward team shared its success story internally to
help improve other purchasing processes, and also with a worldwide
audience in the final round competition of the 2009 International
Team Excellence Award Process, held in May in Minneapolis, MN.
Here, Lopes and his team members delivered a presentation during
the ASQ World Conference on Quality and Improvement.
Monitoring and Sustaining the Improvements
As a means of measuring and monitoring the project’s results, the
team created a performance metric panel that shows the correla-
tion graph between weight and price, process capacity ratio, and
a comparison between previous and current conditions. In addi-
tion, the team implemented a quotation assessment form to use as
a monitoring chart for every LPP. When quotes fall in the green
area of the form, the purchasing manager approves the quote
because it’s consistent with market LPP. Those quotes that land
in the yellow area indicate the need to remake a quote, while any
quotes in the red area of the monitoring chart are rejected.
To ensure the inclusion of every bolt, new or in production,
in the methodology, the team developed a process where
the performance analysis form and the approval of each
LPP work together to help prevent errors. As a continuous
improvement mechanism, the team created a system
that periodically reassesses quotes to help maintain bolt
purchasing costs as close as possible to market value.
Lopes explains that the team’s year-long process improve-
ment effort will continue to pay dividends into the future as the
company applies the process to other commodities: “With this
project we found a way to optimize the results of the purchasing
process, and it can be used for every kind of material purchased
by MWM INTERNATIONAL. We are planning to replicate
these analyses for other commodities to achieve a new level of
quality in every purchasing process.”
For More Information:
• To learn more about MWM INTERNATIONAL, visit the
company online at www.mwm-international.com.br.
• For additional details on this project, contact Fernando Lima
Lopes at fernando.lopes@navistar.com.br.
• For more information on the ASQ International Team
Excellence Awards, visit http://wcqi.asq.org/team-
competition/.
About the Author
Janet Jacobsen is a freelance writer specializing in quality and
compliance topics. A graduate of Drake University, she resides
in Cedar Rapids, IA.
Figure 2— Linkage of results with organizational goals, performance measures, and strategies
Cost reduction
Sales volume
market share
External
audit results
Process quality
indicators
Non-value-added
steps
Avoid wastes
Real impact on each
performance metric
Initial estimated
degree of impact
Estimated
vs. realized
�
Realized was 10.6%
higher than estimated
More than 13.6% cost
reduction in purchased bolts
Almost 90% reduction
in process variability
�
Realized according
to expectations
�
Realized was almost 70%
higher than estimated
�
Realized was 50%
less than estimated
Intangible benefit: Cost reductions will be considered
in the next price negotiation with customers
�
Benefits for our customers
will be high in the future
New process work flow reduced waste costs,
reduced overall process lead time 10 days,
and eliminated some non-value-added steps
High
3%+ cost reduction over
annual bolts spent
Low
Material cost reduction will impact sales
prices for a mid- to long-term strategy
High
Expected improvements in purchasing
process in alignment with SOX
Medium
Do it right the first time—20% less supplier
change process for cost reduction
High
Reduce overall process lead time
20 days for bolts development
Intangible benefit: Great quality
improvement can eliminate audit gaps
Organizational
performance metrics
mailto:fernando.lopes@navistar.com.br
http://wcqi.asq.org/team-competition/
http://wcqi.asq.org/team-competition/
http://www.mwm-international.com.br
http://www.asq.org
