Procurement and Purchasing:
Buying into Lean
While supply chain costs, primarily procurement and transportation, can range from 50 to 70 percent of sales, some companies place too much emphasis on the traditional focus of reducing material costs in supply processes.
Applying Lean principles to procurement and purchasing processes can identify non-traditional sources of waste, in some cases creating a paradigm shift that results in additional benefits to the entire supply chain.
For the sake of clarity, we will define procurement (or sourcing) as the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation, and negotiating contracts. It can also include the purchasing activities required to order and receive goods.
Purchasing, on the other hand, is the process involved in ordering goods such as request, approval, and creation of purchase orders and the receipt of goods.
Using Lean thinking principles creates opportunities in internal procurement and purchasing processes and externally, upstream with suppliers.
Internally, there may be opportunities to improve and streamline procurement and supply management processes as well as to implement practices to improve efficiencies and performance, eliminate wasteful activities, and reduce total cost. Externally, Lean principles can involve better integration and collaboration with key suppliers to ensure they meet established product and service performance requirements.
You can zero in on these opportunities by focusing on the eight wastes (also known as TIM WOODS):
- Transportation. Excess paperwork and transporting around a facility.
- Inventory. Ordering inventory or services early or in excess.
- Motion. Walking, bending, or searching.
- Waiting. Waiting for supplier performance measurement results, or processing of purchase orders and contracts.
- Overproduction. Paperwork in process and purchase order processing bottlenecks.
- Overprocessing. Quotations, purchase order processing, order acknowledgements, invoicing.
- Defects. Paperwork errors requiring rework, supplier errors.
- Skills. Spending too much time on administrative tasks rather than on continuous improvement.
You can use various Lean tools to reduce or eliminate waste, such as:
Value Stream Mapping internal procurement and purchasing processes creates a future state that is both streamlined and improved.
Quality at the Source allows early supplier integration and problem-solving competence by expanding the viewpoint to the total cost of quality.
One-piece-flow can be created by establishing local suppliers to assist with flexible manufacturing and supply chain strategies for shorter inbound transportation distances and consistent deliveries to help smooth demand fluctuations.
Ultimately, companies expect their procurement and purchasing organizations to provide materials and assemblies on time, and to meet their demands. By applying these Lean principles to procurement and purchasing processes, businesses will experience multiple benefits throughout the supply chain.
Parts of this column are adapted from Lean Supply Chain & Logistics Management (McGraw-Hill; 2012), Lean Retail and Wholesale (McGraw-Hill; 2014) and Supply Chain and Logistics Management Made Easy (Pearson, 2015) by Paul A. Myerson with permission from McGraw-Hill and Pearson, respectively.