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Supply Chain News: Bringing Lean Thinking to the Procurement Function

 

McKinsey Says Big Opportunities from Focusing Lean on Strategic Procurement Processes

 

Nov. 27, 2017
SCDigest Editorial Staff

Can the principles of Lean that have proven themselves so well on the factory floor deliver similar value when applied to procurement?

Yes say a quartet of consultants from McKinsey in a recent article on the firm’s web site, arguing that while some companies have employed Lean thinking to improve procure-to-pay processes, "Lean management’s capacity to deliver significant value in strategic procurement has largely been ignored."

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In the strategic domain, for instance, McKinsey says understanding exactly why particular activities exist can lead to rapid, significant savings in time and resources for strategic personnel.

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One reason why Lean is often not considered in procurement is because staff and administration costs are so low, often just 0.3 and 1% of spend in most industries, McKinsey says. That leaves chief procurement officers to believe Lean offers little opportunity to reduce costs further.

CPOs are looking at the opportunity the wrong way, McKinsey argues. By applying Lean, companies can shift the percent of time procurement managers spend on areas that deliver real value, such as building a deeper market understanding in key categories, identifying and qualifying new potential suppliers, or negotiating the best possible contracts.

"At one large industrial company, our workload analysis found that strategic buyers often devoted less than 40% of their time to these core activities," McKinsey says. "The rest was lost on distractions such as administration, filling in reporting templates, and completing tasks that should have been the responsibility of operational procurement staff."

By applying Lean, that value-added time could rise to 70% of a buyer’s total effort - the equivalent of doubling the size of the strategic procurement function without adding a single person, McKinsey notes.

It adds that "Standardized activities, fewer processes, better-qualified buyers, continual people development, and resources sharply focused on activities that add real value - this is what we understand as Lean procurement."

This idea is especially timely given the rise of digitization tools, which should be factored in when looking at Lean opportunities in procurement.

The Five Areas for Lean Procurement Action

Making the Lean transformation requires activity in five key areas, McKinsey says. Those are:

Understand the Customer: Sometimes, McKinsey says, purchasing functions are guilty of delivering what they think is best for the rest of the business, rather than what actually is best. To bridge the gap, companies need a systematic approach to understanding their customer needs, with structured interactions, business collaboration portals, and voice-of-the-customer interviews.


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Leaders "recognize the role of procurement as a "demand shaper," and they value its input on topics such as specification management or purchase volumes that can often unlock savings," McKinsey says.

Standardize Processes: Once a company understands how procurement’s activities generate value for the business, it can explore new paths to deliver the value more efficiently using traditional Lean tools such as value-stream mapping, McKinsey says, and can be applied at both the strategic and more tactical/execution areas of procurement.

In the strategic domain, for instance, McKinsey says understanding exactly why particular activities exist can lead to rapid, significant savings in time and resources for strategic personnel.

Build the Organization and Capable People: "Becoming Lean in procurement usually means redefining the organization from the ground up - starting with a clearer distinction between strategic and operational purchasing roles," McKinsey says. It adds that "Ultimately, the resulting changes make these strategic personnel remarkably cost-effective."

McKinsey says that advanced procurement organizations therefore pay considerable attention to capability building.

Manage Performance: Procurement must be measured at the individual supplier level, the individual buyer level, and the function as a whole, McKinsey says.

Effective performance management supports Lean purchasing departments in two ways. First, the right metrics, targets, and review processes show where the function is performing well and reveal opportunities for further improvement. Second, by focusing on the metrics that matter, and rigorously applying automation and standardization, companies can often reduce their overall tracking and reporting burden, freeing up more time for value-adding activities.

Encourage the Right Mind-Sets and Continuously Improve: In a Lean culture, "It becomes the responsibility of each purchaser to continually question the activities he or she conducts and to propose better ways of doing them," McKinsey says.

It adds that there are a range of methods that helps these new ways of behaving take root, and companies can see significant improvements from even seemingly basic steps, such as a 15-minute daily huddle where each procurement team discusses one best-practice element and one critical problem and its resolution.

Procurement functions that have embraced Lean management have achieved rapid, significant impact, McKinsey concludes. For example, by applying Lean one European firm was able to free up a significant amount of its buyers’ time, allowing them to become more strategic.

This enabled the company to reduce spend by double-digit percentages across a wide range of categories, McKinsey says, and other companies could see similar results from Lean.

What do you think of applying Lean to procurement - or McKinsey's perspective? Let us know your thoughts at the Feedback section below.

 

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