Case Study: Quality Management with Third-Party Inspections vs Vendor Self-Inspections
Adopting a digital platform to improve quality performance across the supply chain has many benefits. We’ll show you an analysis on the return on investment on quality of two retailers – Sophie’s Shop and D-Moda.
Sophie’s Shop adopted a digital platform for quality management and implemented a vendor self-inspection program, while D-Moda stayed with traditional methods to manage quality.
Key takeaways:
- Third-party inspection services are widely used by brands and retailers to manage product quality. However, these services haven’t been able to drive long-term quality improvements across a global supply chain.
- Third-party inspection services are costly and don’t always drive better results, the reason why some brands and retailers consider implementing a vendor self-inspection program instead.
- Brands and retailers that decide to implement a vendor self-inspection program can dramatically reduce the cost of third-party inspections and increase the quality performance of their suppliers.
- This case study explores two different approaches to quality management, which are third-party inspections versus self-inspections.
- You’ll read about the challenges, rewards, and cost-savings of these approaches from the perspective of two apparel and footwear retailers.
Sophie’s Shop and D-Moda are both apparel and footwear retailers. They source their products from multiple countries and suppliers, the majority of them in Asia. Sophie’s Shop and D-Moda have dozens of stores and a complex global supply chain they rely on to produce.
Sophie’s Shop and D-Moda produce and sell thousands of different SKUs every season. For this reason, quality assurance is very important for both retailers, since the cost of poor quality can add up quickly and ultimately affect consumer loyalty.
Sophie’s Shop and D-Moda rely on third-party inspections for quality control. They work with third-party inspection providers that conduct quality inspections based on the retailers’ specifications.
The cost of each third-party inspection in Asia is around $240 man-day, averaging 1.5 man-day per inspection.
In a single year, Sophie’s Shop and D-Moda were spending about $1.8 million in inspections. However, they were not seeing significant improvements in product quality or supplier performance. The same defects were occurring again and again.
Sophie’s Shop and D-Moda made their suppliers pay for the third-party inspections, so the cost of these inspections is shared between the retailers and their suppliers. Although Sophie’s Shop and D-Moda absorbed most of the cost of third-party inspections, defective products were shipping, and at that time it was too late to correct them.
Looking for solutions
The challenges with product quality that Sophie’s Shop and D-Moda were facing encouraged the quality teams of these companies to look for solutions.
Sophie’s Shop:
Solution
Sophie’s Shop decided to adopt a digital quality management system (QMS). This is because a digital QMS will allow Sophie’s Shop to collect and analyze better data to create visibility and support its quality program across its global supply chain.
Sophie’s Shop ensures the new system has deep data analytics capabilities, since analyzing and sharing data insights in real-time are key to driving continuous improvements.
To cut the cost of third-party inspections, Sophie’s Shop wants to migrate to a model of factory-led self-inspections. Self-inspections will allow Sophie’s Shop to empower its suppliers to take ownership of their quality, as well as constantly gather data about product quality on the factory floor.
With the implementation of a self-inspection program, Sophie’s Shop wants to create the right incentives for suppliers to have a long-term commitment to quality improvement.
Sophie’s Shop plans to give their suppliers more opportunities to conduct self-inspections depending on their quality performance – those suppliers who perform well will be allowed to conduct more self-inspections and cut the number of third-party inspections.
By encouraging self-inspections, the overall cost of third-party inspections and quality management would significantly lower for Sophie’s Shop and the suppliers.
Digitize pen and paper processes to capture data that is not currently being leveraged
Fill in information gaps across the supply chain to build an end-to-end digital journey of quality activities
Connect digitally with suppliers for better communication and partnership management
Share information across a network so all suppliers have real-time access to critical event data
Reduce the overall cost of their quality program by allowing low-risk factories to self-inspect and allocating the resources spent in third-party inspections to high-risk factories and non-compliant inspections.
Investment
The investment Sophie’s Shop made in a digital quality management system is of $60,000 during the first year. The investment the suppliers of Sophie’s Shop made the first year was, on average, $2,000.
Sophie’s Shop invested in a yearly subscription, and also required their suppliers to invest and use the digital platform for their quality activities. While hesitant at first to place this ask on suppliers and factories, the digital platform Sophie’s Shop chose could also deliver a high ROI and benefits to suppliers and factories.
The adoption of a digital platform represented an opportunity for the suppliers and factories to digitize their internal quality operations, beyond Sophie’s Shop’s purchase orders, and improve the way in which they manage quality.
Most suppliers were open to this investment since digitizing their internal quality operations was on their roadmap already, and doing it alongside Sophie’s Shop would help them reduce the cost of rolling out new technology.
D-Moda
Solution
D-Moda decided to increase the number of third-party inspections. D-Moda hopes that by conducting more inspections they’re going to get more reports and thus will have more information about product quality in the supply chain.
D-Moda also decided to expand its internal quality team to manage quality operations across its production hubs. By expanding the team, D-Moda wants to streamline communications with suppliers and prevent quality defects.
D-Moda still uses Excel to record and store data about product quality.
Investment
D-Moda increased the number of third-party inspections they were executing globally from 5,000 to 8,000 per year. D-Moda has 160 suppliers worldwide and each supplier has to now do 50 third-party inspections per year.
The total cost of third-party inspections was now at $2.88 million per year, up from $1.8 million.
D-Moda makes its suppliers pay for part of the third-party inspections conducted at their factories, so the cost increased for both D-Moda and its suppliers.
Each third-party inspection still costs, on average, $240 man-day and there are 1.5 man-day per inspection.
Impact on quality performance after 1 year
After 1 year, Sophie’s Shop and D-Moda are experiencing very different realities in their quality and compliance management.
This is what Sophie’s Shop and D-Moda were able to accomplish after 1 year:
1. Self-inspections versus third-party inspections
Sophie’s Shop implemented a self-inspection program across its supply chain. Sophie’s Shop was able to identify high and low-risk factories based on the readily available analytics of their QMS. All of the data was collected using the platform’s mobile app and was automatically consolidated to make Sophie’s Shop’s decision process trustworthy and seamless. Sophie’s Shop started spending more resources in helping high-risk factories improve their performance, while allowing low-risk factories to manage quality independently and perform more self-inspections.
To successfully transition to a risk-based and dynamic quality management approach, Sophie’s Shop relied on the automated capabilities of their QMS that could categorize and label supply chain partners with varying risk levels. This risk model used machine learning to automatically consider all the data and performance from quality activities, improving its accuracy overtime.
Sophie’s Shop was able to cut the cost of third-party inspections by almost 60% in the first year because Sophie’s Shop invested in third-party inspections only when a factory was at risk.
To effectively implement a self-inspection program, Sophie’s Shop set up a system of incentives where the suppliers and factories paid for the third-party inspections, and only those suppliers and factories that performed well could conduct self-inspections. This created a positive incentive for suppliers and factories to improve their quality, since they could dramatically cut the cost of third-party inspections by constantly delivering quality products.
Since Sophie’s Shop and its suppliers were connected on the same digital platform, information about product quality was shared seamlessly between them, creating transparency, accountability, and a single source of truth for all stakeholders.
Suppliers were incentivized to perform better because all information about their performance was available to Sophie’s Shop in real-time, and there was a clear incentive to reduce overall costs.
On the other hand, D-Moda increased the number of third-party inspections conducted across its supply chain.
This represented an extra cost of 37.5% in third-party inspections both for D-Moda and its suppliers.
The suppliers of D-Moda were unhappy with the extra cost of third-party inspections, since most of them already had their internal quality teams.
D-Moda analyzed the quality performance of suppliers each quarter, but didn’t identify any major improvements. When shipments arrived at D-Moda’s distribution centers, some products still had the same defects. When D-Moda tried to talk to the suppliers about these issues, the suppliers didn’t recognize their claims because they said the shipment was approved by the third-party inspectors.
The overhead costs for D-Moda were high compared to the benefit it was able to obtain from third-party inspections.
2. Evidence-based decision making and continuous improvement
Sophie’s Shop collected data about quality digitally, and the data was automatically analyzed by the system. One of the priorities for Sophie’s Shop was analyzing and sharing data insights with its suppliers. After 6 months, Sophie’s Shop was able to collect a great amount of data from factory-led self-inspections and identify trends that were previously unavailable. This allowed Sophie’s Shop to have a 360-degree view of quality performance across a complex production network.
Sophie’s Shop was also able to identify gaps and calibrate performance by looking at KPIs such as defect rate and pass rate between third-party inspections and factory-led self-inspections. This allowed Sophie’s Shop to proactively manage its self-inspection program and identify top performers.
With the availability of data for decision-making, Sophie’s Shop was able to implement targeted improvement efforts.
Sophie’s Shop was also able to share this data with suppliers, so everyone was on the same page in terms of performance and areas to improve. This created trust and accountability across their supply chain.
D-Moda didn’t have an automatic system to collect and analyze data. Instead, D-Moda relied on the information on third-party inspection reports for its decision-making.
Given that D-Moda had no way of automatically extracting data insights, its quality team didn’t obtain meaningful information that they could rapidly use to drive meaningful improvements.
D-Moda thought it had enough information and a solid strategy to collect information about product quality across its supply chain, but despite investing time and resources in trying to consolidate data and obtain meaningful data insights, D-Moda was unable to identify areas of high risk, mitigate risk, and improve overall quality.
The lack of visibility over performance made reporting and developing improvement plans very difficult and time-consuming.
3. Optimizing operational processes
Sophie’s Shop was able to bring all its quality operations and suppliers onto the same digital platform, centralizing quality-related activities and creating visibility about quality performance.
This allowed Sophie’s Shop to communicate with its suppliers in real-time on a digital platform, eliminating silos.
Also, since reports were shared on the digital platform, Sophie’s Shop didn’t experience any delays in the reporting of inspections or quality defects.
Suppliers and factories also benefited from a user-friendly mobile app that reduced their overall time per inspection, and removed the need to manually write reports for their self-inspections.
D-Moda was not able to centralize processes or communications, because they continued to use tools such as Excel to aggregate the data from different sources, such as third-party inspection agencies, their own inspectors, and factory-led self-inspections. D-Moda continued to send emails to communicate with suppliers.
It was hard for the quality team at D-Moda to keep up with the latest information when communications and reports were spread out across different channels.
D-Moda received the reports from third-party inspection agencies a couple of days after the inspection was executed, which created the challenge of correcting issues early on.
4. Supplier management
Sophie’s Shop was able to strengthen relationships with its suppliers and empower them to take ownership of product quality.
This created a quality-driven culture where suppliers felt accountable for their performance, and constantly worked towards improving it. Since the digital platform allowed Sophie’s Shop to use data to evaluate performance and set benchmarks, the suppliers felt they had to perform up to the expectations.
Additionally, Sophie’s Shop was able to easily communicate with its suppliers in case of an issue and kept a log of activities related to quality on the platform. This cut oversight costs and increased trust.
Sophie’s Shop didn’t feel like it had to police its suppliers, but rather was able to help them improve in areas where they were not performing well.
D-Moda didn’t change the way in which it interacted with suppliers, but instead forced them to pay more for third-party inspections.
This created frustration in the suppliers because they didn’t feel any incentive to improve.
Some of the suppliers that were committed to quality decided to stop working with D-Moda because of the high cost of managing quality and the few incentives.
Impact on ROI after 1 year
Sophie’s Shop invested $60,000 in a subscription to a digital platform that allowed the company to manage quality and improve supplier relationships. Sophie’s Shop got an ROI of 221%.
Sophie’s Shop was able to cut the cost of $1.8 million in third-party inspections by 60%, saving over $1 million during the first year. Sophie’s Shop is planning to cut further the cut of third-party inspections in the upcoming years, after the successful implementation of a vendor self-inspection program.
The suppliers of Sophie’s Shop also did an average investment of $2,000 on a digital platform in the first year. The suppliers saw an ROI of 14%. Suppliers that fully embraced their subscription-based platform and decided to use it for their own internal quality operations saw returns of up to 40%.
D-Moda invested $1.08 million more in third-party inspections across its global supply chain. The extra cost of third-party inspections was put on D-Moda’s suppliers, that in return had to increase the price of their products. However, the ROI D-Moda saw was negative.
D-Moda’s suppliers didn’t see any benefits in increasing the number of third-party inspections, and didn’t have any incentives to improve quality. Overall, the suppliers of D-Moda saw an increase in the cost of doing business with the retailer.
Conclusion
Quality teams have many questions about how to improve their quality programs and maximize their returns on investment. Most of Inspectorio’s clients were spending lots of money on their quality programs – both with their internal inspection teams and with third-party inspection providers. Still, they weren’t seeing significant improvements in product quality and supplier performance.
After adopting a digital platform and leveraging the power of technology for quality management, Inspectorio’s clients were able to better collaborate with their supply networks, improve their quality and compliance operations, and make data-driven decisions – not only justifying their investments but dramatically improving ROI.
Although Sophie’s Shop and D-Moda are fictional, the stories and information presented in this article come from real companies that have worked with Inspectorio or are currently working with Inspectorio to modernize and optimize quality and compliance. If you’re looking for new solutions, we can help you!
