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Quantifying impacts of steel supplier quality to compare suppliers' rationalized costs
Tinplate used in the food can manufacturing industry is supplied by steel manufacturing firms across the world that have different capabilities and varying levels of quality. The goal of this paper was to identify the impact of steel defects on a can manufacturing company. The author studied the fundamental structure of a 3 piece can manufacturing process and used cost estimates to look at the contribution margin differences between the sale of prime quality cans and cans claimed for a steel defect. The information from the margin comparison was applied to the overall contribution margin as the percentage of defects increases over the total supply. The relationship between margin and changes in the claim rate was used to analyze 2 theoretical suppliers and identify the price implications if the customers have different levels of quality. The results show that defects always represent a loss due to the reduced contribution margin of replacement production and that as defect rates increase the contribution margin will decrease. These results support the conclusions of previous studies on the customer perception of quality and the correlations between quality and profitability. There are implications for suppliers that have differences in relative quality compared to competitors. Higher quality is important for maintaining and improving customer-supplier relationships.