WHITEPAPER BECOMING LEAN

IN PROCUREMENT AND SUPPLY MANAGEMENT

By Sherry R. Gordon

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 info@ivalua.com

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