Tony Lockwood is a published author, lifestyle entrepreneur, high-performance business coach and senior consultant who works with Executive teams to orchestrate the development and delivery of strategic plans to advance market share/penetration and achieve profitable growth.
What competitive advantage can you deliver through Lean Procurement?
Many organisations are facing financial pressures such as the challenge to deliver against targets where economic confidence is low. An obvious option in the face of such a challenge will be to tighten the belt – most likely in the form of variable cost reduction, the most severe being headcount reduction. However, the loss of experienced procurement staff now when you may want them on the payroll when the weather vane starts to turn later, might not be the best option if your organisation is in a position to consider alternatives.
Lean is traditionally linked to manufacturing operations, and even there, something for the shop floor. However, Lean principles can – and should – be implemented across the whole organisation. So, focussing on procurement, where’s the link, and what are the options?
First, a quick lesson in Lean:
The key aim of Lean is to deliver greater operational efficiency through the elimination of waste and continuous improvement. In a procurement context, one example would be to optimise your processes to reduce the overall procurement cycle, thereby delivering any savings achieved faster. By reducing the ‘cycle time’, you can run more projects, deliver more savings, ensure better quality SRM… the options are there. Don’t forget, procurement can easily be the biggest contributor in an organisation looking to cut costs.
It is a well know fact that, assuming a net return on sales of 10%, a 1% procurement saving has the same effect on the bottom line as a 10% increase in sales. By having the additional capacity to deliver a greater number of improved commercial agreements, outsourcing non-core business activities and so on, the procurement function can either be a real profit contributor, or give the business the opportunity to reduce prices whilst protecting net profit.
So, what are the ‘wastes’ associated with Lean? The classic seven wastes and how they could relate to a procurement context are:
1. Delay – This could be an internal customer waiting for Procurement to help them with their purchasing requirement; a report that is not delivered on time; or taking too long to respond to a request. The cost to Procurement is that internal customers could decide to do it themselves next time instead of involving you.
2. Duplication – An example of this is where you have to re-enter data or copy information into another system because the two systems do not talk to each other.
3. Unnecessary movement – If a process means that you have to queue several times between activities or you do not receive a one stop service then the unnecessary movement has been created. Processes should pull work through when capacity is available rather than force you to take work to the activity.
4. Unclear communications – This waste is the result of having to seek clarification before taking action or confusion about how to perform an action. This wastes time in having to get the answer to your questions.
5. Incorrect inventory – Being out of stock, being unable to get exactly what was required or having to use a substitute service are all examples of waste from incorrect inventory.
6. Missing the opportunity to retain or win customers – A speedy and effective service is the way to win the hearts and minds of internal customers and have them returning for more. This will not happen if the providers of the procurement service fail to establish rapport, ignore their customers and are unfriendly or even rude.
7. Errors in service – This results in a defective service to internal customers and creates work to rectify the situation.
‘What did you improve today?’ should become a foundation principle in the organisation, underpinned by strong senior leadership. In isolation, any one waste might be seen as a triviality that is not worth looking at, but this is where the concept of ‘continuous improvement’ (Kaizen) makes its contribution. The principle of continuous, small incremental steps to improvement is one of the bedrocks of Lean.
Putting all of this in place is undoubtedly a challenge, but the benefits can be immediate, sustained, and above all make one of the single biggest contributions to your organisation’s financial health in these challenging times.
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