Making the Case for Quality

July 2009

Optimizing Purchasing Processes

Saves $1 Million
by Janet Jacobsen
At a Glance . . .
Using the DMAIC
method, a Six Sigma
improvement team at
MWM INTERNATIONAL
Motores in Brazil improved
the companys 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 companys 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.

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 efficiency, 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 So Paulo, Brazil, as well as three
South American manufacturing sitesSo Paulo; Canoas, Brazil; and Jesus Maria, Argentina.
The companys 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
INTERNATIONALs 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 manufacturing 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 steelthe 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
= LPP or
= LPP
weight
length

Company leaders surmised that finding a way to optimize the organizations 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 companys culture of continuous improvement, whereby MWM INTERNATIONAL officials consistently pursue opportunities to
develop new projects that follow the define, measure, analyze, improve, and control (DMAIC) methodology. The organization uses the following tools to help pinpoint new process improvement projects:

ASQ

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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
organizations 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 processmapping exercises
that helped define
both positive and
negative impacts
on various
activities.

Meet the Project Team

Members of MWM INTERNATIONALs Moving
Forward team included the following employees from
the So 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

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 painstaking 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

Table 1Degree of stakeholder impact

ASQ

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

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 correlated in an attempt to observe a cause-effect relationship and
thus determine the root cause of the problem:

The suppliersome 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 determine 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 suppliers. 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 companys commodity 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 corrective 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 assessment. 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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impact of the proposed actions to formulate a list of possible

solutions. Again, the list was divided into two categories:

Selecting and Validating Final Solutions

Ultimately, the team arrived at a two-fold solution, as follows:

Supplier change, where the main goal is developing new
business only with those suppliers that provide the best
Design a new commodity strategy: Establish guidelines
commercial proposal for meeting LPP targets.
for quotation and development that take into account the
Negotiation with actual supplier, where the idea is negotiating
differing annual volumes needed for each type of bolt.
with the current supplier to adjust current prices to a market price. Negotiate with the current supplier: Revise all current
contracts to reduce the gap between market prices and the
Based on the possible solutions, the team pursued the actions
current price paid to the supplier.
with the greatest support from the main stakeholders and those
To verify if these solutions would accomplish the projects goals,
solutions that showed the greatest potential impact on organizathe team applied a simulation model to predict LPP. In doing
tional performance metrics. Three methods proved effective for
so, team members confirmed that selected actions would indeed
defining solutions, including:
provide even greater results than initial project goalscreating a
The application of game theory and economic behavior to
significant reduction in LPP mean and variability.
simulate likely behavior for those involved in purchasing
Addressing Resistance and Creating Buy-In
negotiations.
Stakeholder analysis on the impact for each potential solution.
Throughout the course of this improvement project the team
Estimated impacts on organizational performance metrics as
was diligent about involving stakeholders to increase buy-in and
a result of eliminating or reducing process wastes.
reduce resistance. With two types of actions planned, different
forms of resistance emerged for each solution. For the correcTogether, these tools helped the team define a strategy and the
tive action solution, the only resistance came from the supplier
best solutions. Figure 1 provides a detailed depiction of the
that faced lower profits on its bolt products sold to MWM
teams process to analyze data to select a final solution.
INTERNATIONAL. On the other hand, with preventive actions
Analyzing Data
focused on changing suppliers, the team found opposition from
stakeholders other than the affected supplier, including MWM
Making use of short-range period analysis and a payoffs matrix, the
INTERNATIONALs quality and engineering departments.
Moving Forward team analyzed the effects of various solutions and
Members of these units expressed concerns about the impact a
realized that any strategy selected would create a financial loss for
supplier change could have on product quality and about potenSupplier A. However, the team predicted that Supplier A would
tial restrictions on parts development.
choose to negotiate price rather than risk losing a significant share
The improvement team conducted two meetings with concerned
of business to a competitor. Based on this analysis, the team constakeholders prior to implementation so that all parties could
cluded the best corrective action was to negotiate with Supplier A.
discuss potential impacts of each planned action. As a result,
Looking at long-term preventive actions, the team developed a
the team decided to begin with a small-scale implementation to
different approach to manage the supplier relationship to obtain
alleviate concerns raised during the stakeholder meetings. After
the most favorable LPP conditions. The team concluded that in
selecting an average sample of bolts that were already in producthe future new engine parts should be developed directly with
tion and by using a few new designs to develop items that would
the most competitive supplier, thus eliminating the need to renerequire modifications, the team was ready for the small-scale
implementation of its solution.
gotiate prices with current suppliers.

Figure 1Analyzing data to select a final solution

Two basic subgroups to possible solutions
Bolts supplier change
List of possible
solutions

C
Economic theory

Negotiation with
actual supplier

ASQ

Are there risks involved in these solutions?

Game theory and

economic behavior

Key solutions
found

Which are
expected results?

What do stakeholders
think about it?

What is company
strategy?

Final solution definition

Estimated impacts
over organizational
performance metrics

Stakeholders analysis about

the impacts of each action

Strategy definition

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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 teams improvement strategy resulted in a cost reduction of
13.6 percent of the annual purchase price for bolts, which represented 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.

a monitoring chart for every LPP. When quotes fall in the green
area of the form, the purchasing manager approves the quote
because its 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 teams year-long process improvement 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.

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 Teams Story

For More Information:

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 projects results, the
team created a performance metric panel that shows the correlation graph between weight and price, process capacity ratio, and
a comparison between previous and current conditions. In addition, the team implemented a quotation assessment form to use as

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/teamcompetition/.

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 2Linkage of results with organizational goals, performance measures, and strategies
Organizational
performance metrics

Initial estimated
degree of impact

Estimated
vs. realized

More than 13.6% cost

reduction in purchased bolts

High
3%+ cost reduction over
annual bolts spent

Realized was 10.6%

higher than estimated

Sales volume
market share

Intangible benefit: Cost reductions will be considered

in the next price negotiation with customers

Low
Material cost reduction will impact sales
prices for a mid- to long-term strategy

Benefits for our customers

will be high in the future

External
audit results

Intangible benefit: Great quality

improvement can eliminate audit gaps

High
Expected improvements in purchasing
process in alignment with SOX

Realized according
to expectations

Process quality
indicators

Almost 90% reduction

in process variability

Medium
Do it right the first time20% less supplier
change process for cost reduction

Realized was almost 70%

higher than estimated

New process work flow reduced waste costs,

reduced overall process lead time 10 days,
and eliminated some non-value-added steps

High
Reduce overall process lead time
20 days for bolts development

Realized was 50%

less than estimated

Cost reduction

Non-value-added
steps
Avoid wastes

ASQ

Real impact on each

performance metric

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