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?

"Lean Versus MRP" or "Lean and MRP"?

I attend many Lean conferences throughout the year that focus on different areas of the supply chain. Presenters there often state how the concept of material requirements planning (MRP) is outdated and works as a detriment to Lean thinking. In addition, there have been many articles published that discuss the "Lean versus MRP" debate. I recently had an email conversation with Derek Singleton about this very topic. Derek is an enterprise resource planning (ERP) market analyst and writes for the Software Advice website. He has some interesting ideas about the use of software during the planning process, and I'd like to share his thoughts here:

Three Ways Manufacturing Software Can Adjust to Lean Principles

There’s a long-standing debate between manufacturing planning strategies. The debate is between proponents of material requirements planning software -- better known as MRP software -- and lean manufacturing advocates.

The crux of the dispute boils down to whether sophisticated software tools are needed to adequately plan production. Proponents of MRP software believe that today’s complex manufacturing challenges require formal planning tools to get an accurate picture of the production requirements. Lean advocates, on the other hand, argue that these planning tools actually get in the way of accurate planning because they’re too slow and transaction-intensive to pace to actual consumption, or adjust to demand fluctuations.

Three Components to Incorporate in Manufacturing Software

I see three main ways that manufacturing software can evolve to adapt to the demands of lean manufacturing. Each way focuses on bringing lean principles front and center of manufacturing software packages.

1. Make Value Stream Mapping a Core Software Component - One of the most important tools in lean manufacturing is create a value stream map to outline the flow of information and materials in the manufacturing plant. Modeling how information and materials flow through a shop floor will allow manufacturers to more easily identify production bottlenecks.

2. Monitor Cycle Times Intensely - The most important metric to know in manufacturing is how long it takes for materials to arrive on the dock and to leave in a completed product. In order to improve cycle times, these times need to be monitored and tracked. A subset of monitoring and tracking cycle times is keeping track of production status.

3. Locate Key Places to Add or Remove Inventory - While there’s ample functionality in manufacturing software for determining what to stock and how much to stock, there is little functionality to help manufacturers figure out where to stock. Functionality that can tell a manufacturer where to stock will help them figure identify the best places to protect against volatility, which will ultimately help avoid product shortages.

These are a few ways that I can see manufacturing software changing to adapt to the requirements of lean manufacturing. However, I’d like to hear your thoughts. What needs to change in manufacturing software to adapt it to lean manufacturing principles?

What do you think of Derek's ideas? What are your views on the role of MRP within a Lean initiative?

True Cost Versus Piece Price in the Supply Chain

Chris Harris is one of the authors of a new book titled Lean Supplier Development: Establishing Partnerships and True Costs Throughout the Supply Chain, and I recently asked him the following questions in an email: "Why shouldn't the decision of where to source a purchased component be made on piece price alone? And, just what is 'true cost' and why should it be considered?

Here is Chris Harris' concise reply:

"The piece price of an component -- the comparison of one supplier’s piece price to another’s -- is typically the driving factor for selection of one supplier over another. But unfortunately, piece price only tells us a fraction of the cost that is actually borne by your organization when sourcing a component. The piece price only takes into account the price for which the supplier is willing to sell the item -- it usually includes the supplier’s manufacturing costs and overhead costs and profit, but it may or may not include factors such as the cost to you, the customer, for transportation of the component to your location and many other concealed costs.

When you evaluate a supplier’s cost, I believe you should always use a true cost methodology. The true cost methodology does indeed consider the piece price as a part of the equation but also takes into account other costs that fall into one of three categories: change costs (the cost of switching from one supplier to another), risk costs (the cost that you can reasonably predict could occur in the course of doing business with a supplier), and ongoing costs (the costs you'll bear during the duration of time that the new supplier is providing you with product)."

What are your considerations when purchasing parts or components? Do you use any type of "true cost" model?

The Lean Plateau

According to this article on the Supply Chain Brain forum, which details survey results provided by Capgemini Consulting, "dissatisfaction with lean initiatives is highest one to two years after initial launch." As expected, the initial enthusiasm resulting from practical process improvements of first-time kaizen events and the application of Lean tools soon gives way to stagnation or backsliding because "long-term behavioral changes have not yet become embedded in the organization." In other words, if an organization's culture is not altered or transformed, the Lean initiative will eventually hit a sluggish plateau.

The article contends that the absence of four correctly functioning key factors -- Leadership, Recognition, Strategic Alignment, and Performance Management -- often lead to an initiative's inability to sustain. I have always maintained that there is that crucial disconnect between the application of Lean tools and and true behavioral change when participants are just "applying" but not "understanding." In your experiences, what causes Lean initiatives to stall? Can participants who expressed enthusiasm and optimism for the Lean initiative when it commenced, but are now disheartened at two-year mark, be reinvigorated?

The Kanban Business is Thriving

With the risk of sounding like an advertisement for a particular company, I was happy to read this article detailing the 2009 successes of web-based kanban tool provider Ultriva. It appears that this slow economic environment hasn't hindered the company's growth. Essentially, I appreciated the implication of this article: even this tough economy has not distracted many manufacturers' with complex and intricate global supply chains from focusing on reducing the massive waste and improving efficiency.

Any company that expands it operations into culturally and technologically diverse regions introduce a whole range of new procurement, distribution, time, security, and scalability problems. In addition, one of the most common roadblocks I hear about is the integration of a kanban methodology into an existing enterprise resource planning (ERP) system because lean is action-oriented while ERP is data-driven. Have you addressed and overcome these problems? Has your company reconciled the use of lean principles and scheduling software?

Implementing Lean With Your Suppliers = Partnership

I was quite impressed with this case study of a lean supply chain initiative, written by Steve Crom, that appeared on the Supply Chain Management Review site. Other than the substantial reductions in inventory and cycle time, note these important qualitative results:

• Direct lines of communication between the parties involved: purchasing, planning, customer services, manufacturing, quality in both organizations, for quick response and problem solving.
• A sense of teamwork between organizations, the foundation for making breakthrough improvements that last.

These results cannot be drawn on a value stream map or expressed on a spreadsheet. These accomplishments rely on the people running the process and influencing the culture of the transformation.

Note some of the requirements to maintain and replicate the process:

• Select suppliers who share in the belief that more is to be gained by working in partnership than in traditional, arms-length relationships.
• Pick the team leader carefully, interpersonal skills are key.
• Appoint a full-time project coordinator.

Here is yet another instance in which the success clearly rests not only on particular employees technical skills, but their attitudes and interpersonal abilities. "Leading" here means making the important decisions AND possessing the ability to communicate and inspire.

Does your organization cultivate leaders who inspire responsibility and partnership?