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?
