Can Lean Principles Be Applied to Procurement and Purchasing Processes?

While there are many books written on the basics of the "supply" side of the supply chain (i.e. strategic sourcing, sourcing/procurement and purchasing), however, there hasn’t been much written on those areas from a Lean perspective. That situation was rectified when Paul Myerson published his significant book entitled Lean Demand-Driven Procurement: How to Apply Lean Thinking to Your Supply Management Processes.

I recently spoke with Paul Myerson and asked him: "Why haven’t organizations placed more emphasis on applying Lean principles to procurement and purchasing processes?" Here is his complete response:

While there are a fair number of books, articles, and blogs written on the basics of the “supply” side of the supply chain (i.e., strategic sourcing, sourcing/procurement, and purchasing), there hasn’t been much written on those areas from a Lean perspective. This is quite surprising, considering not only that supply chain costs (primarily procurement and transportation), can range from 50% to 70% of sales, resulting in what is known as the “profit-leverage” effect (measured by the increase in profit obtained by a decrease in purchase spend), but also helps drive downstream quality, productivity, and efficiency.

If you were to ask someone who knew a bit about Lean thinking how they defined Lean procurement, they would probably say that it’s about increasing productivity for procurement staff so they can spend more time on value-added activities rather than administration. While that is certainly true, it is also important to extend the view to how it connects and interacts with other processes, functions, suppliers, and customers, as today, procurement plays an important role in improving the flow of information and materials throughout the entire supply chain.

It is important to establish best practice Lean procurement functions that go beyond contract negotiation and establish crucial operational requirements, utilizing strategic sourcing activities such as market research, vendor evaluation and integration to support Lean activities such as Just-In-Time and Vendor Managed Inventory (VMI) programs.

Furthermore, inventory management and sourcing supply chain decisions are directly linked to a company’s financial performance and can, as a result, can affect a company’s cash flow and profitability.

Therefore, a procurement organization must consider:

• The prevention of production disruptions due to inventory or material shortages, while remaining flexible to meet changes in customer demand or cope with market volatility.

• The trade-offs of inventory carrying costs and customer service levels.

• Optimal buying quantities that consider the trade-offs of inventory carrying cost and volume discounts.

• Moving from reactive to proactive procurement operations.

In summary, Lean procurement provides opportunities for process improvements and savings through cost reduction, eliminating wasted time and efforts, and improved cost analysis, and can improve contract compliance and develop better, sustained partnerships with suppliers and other business partners.

What do you think of Paul's perspective on Lean procurement? Does your company apply Lean principles to its procurement and purchasing processes? What results have you seen?

What Is the "Toyota Template"?

Lean implementations, operational excellence initiatives, and even specifically, the Toyota Production System (TPS) are often misconstrued as simply a methodology focused on the formulaic implementation of tools. In a recent book entitled The Toyota Template: The Plan for Just-In-Time and Culture Change Beyond Lean Tools, the author -- Phil Ledbetter -- posits that the building of TPS, with the goal to eliminate waste, evolved as problems were encountered and solutions put in place and a wonderful byproduct of it was the growth of a problem-solving culture throughout Toyota that is unique in the business world. I spoke with Phil this month and asked him: “What is the Toyota template and how does it help sustain a Lean implementation?” Here is his response:

The Toyota template is about the relevance of the Toyota Production System to any type of business today. It succinctly identifies the key elements, places them in a logical, sequential or of implementation, and explains how each contributed to the formation of the Toyota culture. It's a blueprint for any business interested in a true lean transformation. The gold standard is Toyota and my book, The Toyota Template, demonstrates how businesses can use the "template" to arrive at a truly Lean, just-in-time production system.

Specifically, The Toyota Template explains the critically important elements of the Toyota Production System, analyzes the sequence of implementation as the system developed, and places these elements in a logical order of implementation based on the history and current knowledge. In addition, it addresses the effect of each element on the culture and some of the reasons for Lean implementation failures, including the problem with the value stream mapping.

Fujio Cho, Ohno protege' and former Chairman of Toyota Motor Corporation, has said, "Many good companies have respect for individuals, and practice kaizen and other TPS tools.... But what is important is having all the elements together as a system. It must be practiced every day in a very consistent manner, not in spurts." The Toyota Template shows exactly how to develop this system. 

What do you feel are the major hindrances to a successful and long-term Lean implementation? 

The Training Within Industry (TWI) Programs -- Are You Using Them Correctly?

An important new book by Donald Dinero just recently hit the streets titled The TWI Facilitator's Guide: How to Use the TWI Programs Successfully. In it, Don explains how practitioners of TWI (Training Within Industry) often alter the programs without understanding the underlying principles. These changes, he contends, have made the programs less effective. During a recent conversation with Don, I asked him specifically: "How have the TWI Programs been recently misused?" Here is his complete answer:

The TWI “J” Programs have many success stories -- those recorded both in the initial period of 1940-1945 and also in the contemporary period after they had been re-introduced. On the other hand, there have been instances in which the TWI Programs have not achieved their intended objectives giving people the idea that “TWI won’t work in our facility because we’re different.” If the TWI Programs are not yielding the intended results, they are not being used properly. Here are some ideas about how these programs are misused which subsequently leads to their being ineffective.

Each of the TWI Programs teaches a skill and each skill is learned for a specific purpose. Just in Time (JIT) teaches us how to transfer knowledge. Job Methods Training (JMT) teaches us how to see waste and improve a process. Job Relations Training (JRT) teaches us how to effectively prevent and deal with personnel issues. For a given program to be seen as useful, the problem that it addresses must first be identified, defined, and quantified. If this is not done, we won’t know whether or not we have achieved what we set out to achieve.

Another area of misuse is when people underestimate the effort and time required to master the skill necessary for the program’s proper use. Outwardly, each program is simple because it is represented by a four-step method. Many practitioners do not realize that it usually takes many hours to fully understand and get a “feel” for how to use each program. Attending a 10-hour session will introduce you to the concepts and methods of each program, but it takes many hours afterward to gain mastery of each program.

A third area of misuse is when practitioners attempt to change a program either to improve it or to have it fit a time schedule or some other parameter. The programs were designed to fit people’s needs and as those needs change, the founders believed the programs should also change. A key point here is that there are some principles in the programs that should not be changed unless society’s behavior changes. Ignoring these principles leads to their being ineffective.

What do you think of Don's thoughts on the misuse of the TWI programs? What have been your experiences when implementing TWI?

Porsche Gets Its Speed from Toyota

I just read this great article over at the Bloomberg Businessweek site titled Porsche ‘Shock Therapy’ Spurs VW, Lufthansa Efficiency Drive. Other than pointing out that Porsche currently has the highest profit margins in the industry, the article discusses how Porsche, under the auspices of CEO Wendelin Wiedeking, began benchmarking Toyota's Lean production techniques back in the 1990s. This current success could indeed be attributed to the lessons learned from Toyota.

One section of the article -- "Taught By Toyota" -- points out how Porsche fully embraced a JIT (just in time) delivery system in cooperation with its suppliers: "Porsche took steps to fine-tune cooperation with suppliers to ensure factories received parts just when they were needed on the assembly line."

For years, Toyota has been operating its "Toyota Production System Support Center" at its North American manufacturing and engineering headquarters in Kentucky "where it holds ongoing seminars for outside companies, as well as schools, hospitals and charities." It appears Porsche has followed this lead as well as it has established its own consulting division and has worked with such clients as "Deutsche Lufthansa AG, Volkswagen AG, and Meyer Werft GmbH" who have "all turned to Porsche to make their manufacturing processes more efficient."

In 1993, Porsche "had a net loss of 122 million euros ($162 million) and sales of no more than 14,000 cars" and now in 2010 posted an "operating margin in the automotive unit in the fiscal first quarter of 19 percent" and earned honors in J.D. Power & Associates’s annual quality study.

What do the readers of this blog think of Porsche's success? Does it come as a surprise? Is Porsche building a new culture within its organization?