Rating Quality and Selecting Suppliers Using Taguchi Loss Functions

Abstract

ABSTRACTThis article describes a method to objectively and numerically rate a supplier's quality. The method then uses both purchase cost and quality as award criteria to select the preferred supplier. The method equates higher quality with lower variation, of a product's characteristics, about a target. Taguchi loss functions are used to quantitatively rate quality. A quality loss of zero is perfect quality. Loss functions for four types of specifications are described, two sided, two sided with one side preferable, one sided maximum, and one sided minimum.An example is given of determining the production quantity split between two sources of microwave tubes using the quality rating and the proposed cost. The supplier with the lowest quality loss earns the maximum point amount in the quality category. The other supplier earns quality points which are proportionally reduced by how the supplier's rating compares to the lowest quality loss rating. The same point award method is used for the cost category. The supplier with the highest point total is the preferred supplier. The quality rating can, also, be used to incentivize a sole source supplier.At first glance the method may be criticized for only focusing on the suppliers' output, however, this method will incentivize suppliers to focus on their processes and achieve a lower variation in output. This is a specific tool to help implement the continuous improvement aspect of the Navy's total quality management effort.