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THE BENEFITS OF LEAN AND LEAN ENTERPRISE ARE NOW WIDELY RECOGNIZED
Lean Procurement and Supply Chain Management are part of a continuous improvement
methodology. However, Lean is not the lean and mean version – disabling cuts to
procurement in the name of Lean. Lean cannot be accomplished with only a Lean tools
approach, as improvement tools are valuable but not the silver bullet, as leadership
and change through people are also needed. A Lean supply chain does not operate
just-in-time on so little inventory that it is ready to collapse at any moment. And it’s not
automating processes without first rethinking them. A lean supply chain can be defined
as: a dynamic ecosystem comprised of processes, products and companies working
together smoothly to deliver products and services, adding value to the entire network
as they meet customer requirements in a cost-effective manner. This white paper
will focus on demystifying Lean Procurement and showing how it can be an effective
approach to improving Procurement and Supply Chain Management.
Parts of Lean have been adopted in some form by companies in many industries:
manufacturing, healthcare, financial services, education. How and even whether
Lean applies specifically to Procurement and Supply Chain Management is less
understood.
WHAT IS LEAN ?Figure 1
These are the five core Lean principles (from Lean Thinking by James Womack
and Daniel Jones., 2003, Productivity Press):
Specify value from the standpoint of the end customer. This can include:
quality, speed, cost, flexibility and service. The opposite of value is waste
-- often defined as anything that consumes resources but which adds no
value to the customer.
Identify the value stream, that is, all the steps required to bring a product
or service to the end customer. Eliminating, whenever possible, those steps
that do not create value.
Flow is making the value-creating steps occur in tight sequence so that the
product or service will flow smoothly to the customer without stoppages,
waste or redoing things.
Pull is letting customers pull value from the next upstream activity in order
to eliminate waiting time and other wastes when processes are pushed.
Perfection is the state where value streams are identified and processes
take place, creating perfect value with no waste, with all components
working in a virtuous circle of continuous improvement.
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LEAN PRINCIPLES AS APPLIED TO PROCUREMENT AND SUPPLY CHAIN MANAGEMENT
Lean principles (Figure 1) are universally applicable to all businesses, not just to manufacturing,
which is where they were first applied. Once lean principles are understood, they can be
practically and successfully applied to improve Procurement.
HOW THE 5 LEAN PRINCIPLES APPLY TO PROCUREMENT AND SUPPLY CHAIN MANAGEMENT?
Lean PrincipleDefinition Applied to
ProcurementProcurement Actions
Specify value Understand and define business requirements and establish clear sourcing requirements for products and services and performance expectations for suppliers
Translate corporate strategies and goals into procurement strategy
Seek the input of stakeholders outside of Procurement including the needs of the end customer and internal customers during the sourcing requirements-gathering process to ensure that specific business requirements are understood.
Develop and communicate supplier performance expectations that directly impact value creation to meet customer requirements for cost, quality, time and technology.
Create value through customer-supplier partnerships as, for example, in a collaborative innovation initiative or in value analysis.
Develop good business relationships with key and critical suppliers. The strength of the customer-supplier relationship will determine how successfully critical issues, wastes and cost drivers can be identified and mutually addressed.
Identify the value stream
Create standard, repeatable procurement and supply management processes
Simplify the value stream and eliminate unnecessary and non-value added tasks to help reduce errors and enable Procurement staff to spend more time on value-added activities. Review major processes such as sourcing, procurement, supplier management with the objective of improving them. Find, reduce or eliminate wastes and inefficiencies, reduce cycle times and the cost of resources.
Value stream mapping (VSM) is the principle tool for analyzing the value stream and identifying both value and waste. VSM goes beyond a typical flow chart by visually and specifically calling out waste throughout a business process.
Interactions between buyers and suppliers can harbor hidden cost drivers. Work collaboratively with key suppliers to create a high-level extended enterprise value stream map to find processes and practices that create waste and cost at both customers and suppliers. Companies may be unaware of the extent that their business processes and practices, while seemingly cost-effective within their own four walls, create and multiply waste and cost at suppliers that result in higher internal costs, higher supplier prices, service failures, quality problems and customer complaints.
Pull Purchasing/SCM ensures that high-quality and best value products and services are provided on time, when needed by both internal and external customers
Pull means that purchasing activity begins at the order of the customer (internal or external) as opposed to a push system, which may involve ordering and storing material in advance of customer needs.
Optimize inventory by keeping minimal, but sufficient inventory in the supply chain pipeline in order to provide appropriate and cost-effective service levels without disruptions.
Use blanket purchase orders, making releases as material or services are needed rather than going through a requisition process and creating POs each time a product or service is reordered.
Pull can also relate to the processing of POs and paperwork, to the extent that paperwork is used.
Reducing unnecessary movement and routing of orders helps eliminate processing bottlenecks and helps reduce order to delivery cycle time and can help reduce wastes such as inventory, waiting time, and transport.
Use pull to obtain goods and services from suppliers when the customer signals a need. Not all suppliers are capable of pull or demand planning and will often stockpile inventory to respond to customer orders. Holding inventory can create additional cost and bottlenecks at a supplier that are passed on to the customer. Encouraging and/or helping suppliers implement Lean reduces bottlenecks and cost at the supplier and enables better pull and flow in the supply chain.
Flow Improve, streamline and scale procurement/SCM processes, using the standard processes identified and developed during the specify the value stream stage
Apply standard work to procurement. Key procurement processes should be improved, standardized and implemented throughout Procurement. Procurement and supply management software can help support and scale procurement and supply management processes and enable efficiencies. Standardizing and documenting improved processes and best practices is known in Lean as “standard work.” While standard work has traditionally been applied in manufacturing, it is highly applicable to procurement. Standardizing work helps eliminate waste by consistently applying good practices. It also forms a baseline against which to measure future improvement activities.
Keep goods and services flowing in a smooth, uninterrupted and cost-effective fashion from suppliers to customer firms to end customers
Perfection Measure and monitor procurement performance and supplier performance and drive continuous improvement in all procurement processes and practices
Measure performance to help provide the information to more effectively meet customer requirements.
Identify additional waste and inefficiencies in the value stream and continually improve the performance of the Procurement function and of suppliers.
Adopt Lean within and between both customer and supplier firms so that each business works to eliminate waste and cost while adding value to customers.
Scale and continually streamline procurement and supply chain processes to add value by minimizing transactions, reducing total cost, and working with the best possible suppliers who meet requirements.
8 WASTES AS APPLIED TO PROCUREMENTThe focus in Lean on eliminating waste (the opposite of value) usually reduces costs, though
cost reduction is not the sole objective. Lean categorizes wastes by eight types. Procurement
is full of waste as well. The 8 Wastes pertain directly to the Procurement and the supply chain.
Wastes in Procurement can be readily identified and reduced or eliminated. The value that
Procurement can add is visibly increased when these wastes are reduced.
Here are ways that the classic 8 Lean wastes can apply to Procurement:
Type of Waste Procurement Examples
Overproduction
Ordering and stocking more goods than needed; too many reviews and approvals during PO process; conducting non-strategic or non-critical sourcing events that don’t yield sufficient ROI; producing too many reports that are not read or used; bottlenecks of large batches of paperwork;
Waiting
Delays caused by shortages of qualified staff; waiting for processing of POs and contracts; waiting for scorecard results; waiting for materials and/or services to arrive; waiting for needed information; linear rather than simultaneous workflows; backlog of PO and contract requests
Inappropriate or over processing
More approvals and reviews than needed; too many bidders in a sourcing event; dealing with too many suppliers for one item; too many handoffs in A/P; difficult or onerous contract language that delays contract completion and signing and the purchasing process
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Type of Waste Procurement Examples
Unnecessary inventory
Early or over-ordering inventory or services; inaccurate inventory or forecasting information; make to stock; filing cabinets full of paper; schedule changes that cause excess inventory/waste at suppliers and subsequent costs that get passed along to customers
Unnecessary motion
Walking, searching (usually due to inefficient workflows and layouts); exchange of contract paperwork between contracting agent and supplier
TransportingToo much handling and transporting of paperwork around a facility, i.e. excessive handling of accounts payable paperwork; material flows requiring multiple stocking and picking operations
DefectsPaperwork errors; POs and contracts with missing or inaccurate scope and/or terms and conditions; supplier errors and quality issues; quality escapes to customers, lost paperwork
Unutilized or underutilized talent
Purchasing personnel needing to spend too much time on administrative rather than strategic and value-added tasks
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LEAN BENEFITS ARE FINANCIALA 2015 APQC Procurement Benchmarking Study of 769 companies found that those who are
implementing Lean in their Procurement functions need only one-fifth as many employees in
Procurement as those who had not initiated Lean in Procurement. Cutting headcount was a
result of improved processes and efficiencies from Lean and not just a headcount-reduction
program. For every $1B in spend, top performers implementing Lean had 22 people in
Procurement contrasting with those in bottom-performing companies not implementing Lean
who required 117 people in Procurement on average.
CRITICAL SUCCESS FACTORS
Lean procurement and supply chain require systems thinking. Adopting Lean in Procurement
and Supply Management can deliver quantifiable improvements. Developing a Lean supply
network helps firms leverage their own Lean processes far beyond what they can do alone.
Lean Procurement requires leadership, a proactive approach, and communications within the
customer firm and with supplier firms. Rather than attacking the symptoms, firms must look
at the causes and drivers of waste and non-value added activities and processes.
Leadership commitment &
involvement
Involve internal stakeholders & suppliers
Focus on corporate goals & the
long term
Trainning
Measure, track & communicate progress
& ROI
Leadership commitment &
involvement
For example, inventory reduction is a result of lean thinking, process improvement, and waste
reduction and is not successful or sustainable as a focus by itself. Purchasing cannot focus on
the strategic rather than administrative if its processes are not effective enough to allow it.
Likewise, cutting procurement headcount without improving underlying processes can cripple
procurement, reduce its effectiveness, and increase costs rather than save money. Applying
Lean to Procurement and Supply Chain Management can deliver positive operational and
financial impact within a firm and its extended enterprise.
SPEND MANAGEMENT CLOUD SOLUTIONS HELP ENABLE LEAN PROCUREMENT
Cloud Source-to-pay Solutions can help companies enable Lean procurement by providing
functionality and process synergies that help eliminate wasteful activities and increase
procurement productivity and are key to specifying, identifying, flowing and perfecting
business processes and increasing overall Procurement value. Some key areas where spend
management tools can help include:
Comprehensive, modular, source-to-pay suite on a single, natively integrated code base:
With all the business, supply and risk information about the vendor readily available, your
procurement and finance professionals can dramatically increase their productivity and
automate compliance of sourcing, contracting and transactional interactions with the vendors
An out-of-the-box best practice solution with pre-defined processes, workflow steps and
templates can help your users get value quickly
Easy-to-configure platform, providing the business agility you need to quickly adjust to
change. From workflows, to screen formats and colors, to alerts and triggers, to role-based
configurations and deployment models, configure what is unique in your industry and quickly
apply it
Routing to anyone for any purpose so that users easily handle complex multi-hierarchy
conditional workflows, reverse sequence based on events and triggers. Users can see
the visual workflow in a drag and drop whiteboard style user interface and see workflow
transitions change in real time
Multiple connectivity options to an ecosystem of suppliers and buyers and partners to
collaborate deeply and manage transactions efficiently. You can onboard 100% of your
suppliers quickly and provide them with real time visibility into invoice status while reducing
the time and effort involved in answering Accounts Payable queries.
Address all your spend - indirect spend, direct spend, services Procurement, assets in a single
native application that does not require customization or integration at the process, data or
reporting layers when trying to get a comprehensive picture of 100% of your spend.
Agile daily spend data refresh to power proactive decision making- daily refresh of spend data
that powers your spend management reports and dashboards, so you can review spend in
near real-time and respond with agility.
Powerful universal search allows you to find and search within any attachments across the
full Source-to-Pay and Risk solution.
Suite-wide alerting system provides alerts about problems such as insurance, performance,
and contract issues in order to avoid awarding business to non-compliant suppliers. For
example, alerts can help you avoid proceeding with a requisition if a supplier’s insurance
certificate is out of date. Buyers can stop an RFP award when alerted that supplier’s
performance has dipped below a given threshold. Or they can route an invoice for further
review because of chronic SLA violations documented during contract reviews. All of these
alerts can be set to trigger based on conditions easily managed across the suite of solutions.
VALUE DELIVERED BY THE IVALUA SOLUTION
The Ivalua Solution provides a proven, customizable procurement automation solution. With
the help of Ivalua, procurement organizations can achieve savings and enhanced strategic
business value. Through the Ivalua Suite, procurement organizations can take an active role
in business expansion, new product introduction, and sustainability, while simultaneously
achieving the key objectives of: increased savings, improved operational performance, and
reduced supplier costs.
The Ivalua Solution consists of
The Ivalua Suite provides a comprehensive,
modular, source-to-pay suite for 100% of
your spend on a single natively integrated
code base. It provides a deep foundation for
procurement excellence
The Ivalua Platform provides the core set
of technical components such as integration
toolbox, workflow, portal, administration
console, reporting, mobile interface and
user management
The Ivalua Cloud provides the NextGen
Cloud Factory environment to securely
access the Ivalua Suite, visualize update
impact, control update timing, scale
configurations with full reversibility
The Ivalua Open Network provides
connectivity to an ecosystem of suppliers,
buyers and 3rd party partners. You can
rapidly onboard, connect and collaborate
with suppliers without any supplier fees
StrategicSourcing Procurement
Contracts& Catalogs Invoicing
SpendAnalytics
SupplierManagement
IVALUA.COM
Headquartered in the heart of the Silicon Valley, Ivalua is the leading provider of Spend Management Cloud Solutions and recognized by top Analysts as a global market leader.
Our success is reflected in a 98% renewal rate within an active and engaged community of 250 customers across 70 countries achieving high performance empowered with the Ivalua Solution.
Our customers realize huge and rapid savings by improving visibility, streamlining and standardizing processes and increasing Procurement and Finance productivity. But the overall value from Ivalua goes far beyond immediate savings: Procurement teams also actively contribute to accelerate innovation, enable company growth, mitigate risks and increase compliance. Ivalua is committed to building sustainable business partnerships with its customers and actively supporting them in their journey towards business excellence.
+1-866-795-8982 [email protected]
Contact
Sherry Gordon is President of Value Chain Group, a consulting firm that helps companies and their suppliers deepen relationships and improve performance. Sherry is a management consultant, entrepreneur, writer, trainer, and business adviser. She was Founder and CEO of Valuedge, a supplier performance management software firm acquired by Emptoris (now part of IBM). Before starting Valuedge, she developed from inception then ran the New England Suppliers Institute, an organization focused on improving customer-supplier business relationships and on using lean enterprise practices and customer-supplier collaboration to improve performance. She held positions with several major manufacturing and distribution companies and management consulting firms. In addition to supply management, she has a functional background in quality and materials management, and expertise in continuous improvement methodologies and lean enterprise. Ms. Gordon is a leading authority on supplier evaluation and the author of the highly-regarded book, Supplier Evaluation and Performance Excellence: A Guide to Meaningful Metrics and Successful Results. Ms. Gordon earned a B.A. from the University of Michigan, M.A. from Columbia University, and an MBA from Simmons College School of Management.
ABOUT THE AUTHOR