Lean Procurement Improvement Strategies

Global commerce has changed the dynamics of supply chain management in recent times. Global procurement although has its advantages of low cost sourcing, but increases the overall risk and cost of the supply chain with increased lead times and inventory. Large companies have already initiated programs to get visibility of the extended supply chain to squeeze out additional cost. If the goal is trying to utilize the natural resources effectively, we should all look at material from “extraction” to “recycled”.

In the demand driven world with ever shortening of product life cycle, it has become challenging for the procurement organization to ensure the right material is always available in the right quantity and quality. Procurement organizations can no longer afford long material lead-times which leads to increased inventory and susceptible to forecast accuracy. Supplier performances are continuously being measured and suppliers who cannot deliver consistently on time and quality are quickly replaced. To reduce the overall cost of the supply network, companies have embraced lean and six-sigma process improvement techniques to eliminate redundancies and wasteful practices.

The key challenges for the procurement organization are 1) preventing shortages of material when required, 2) maintaining high quality standards, 3) reducing inventory investments, 4) reducing supply side lead times and 5) Embarking on a continuous process improvement practice.

The top three things that have been identified by companies to step into a procurement improvement program are visibility, improved business processes and inventory management. Visibilities to supplier performance, inventory, quality & inspections, lead times, on-time delivery, contract compliance are extremely important. Maintenance of supplier related content and keeping it updated, though an added task, is imperative to improve the overall business processes. Visibility and real time inventory update by location helps to make prudent decisions on purchasing and purchasing process latency. Business processes are hard to change but a key source for non-value added tasks. Companies need to identify steps in their business processes are that are redundant and adding lead time to the procurement process. Reducing the need for entering purchase order information can be an example of business process change. A practice of generating a purchase order based on material consumption can save a lot of time and effort. Inventory management practices have to be in place to reduce the overall cost. Classifications of procured items into groups of high runners, low runners, high risk and low risk have to be identified to determine the level inventory that has to be maintained without the risk of shortages and efficient operational performance.

Companies who have excelled in Lean procurement practices have moved from a “push” to a “pull” environment with increased visibility and building a collaborative environment with their suppliers. There is less reliance on ad-hoc phone calls but have the system generate orders based on material movement. The material depletion at the consumer are used as a medium to send signal for the supplier to replenish material. Companies have also improved on the past practices of replenish order quantity where a large batch of material is ordered each time when the material goes below a critical level. Frequent smaller batches of orders can not only provide a signal to suppliers but help the supply chain to reduce the level of inventory. The other strategy for companies is to develop a responsive supply chain. The demand should be propagated not only within the enterprise but across the network. Proper processes should be in place to propagate the demand variability across the network so that inventory levels are sized correctly to reduce the disruption in operations. A responsive supply chain will help reduce the lead times and help proactively manage shortages. Companies should also eliminate all waste in the procurement process. Buyers spend a significant amount of time entering purchase orders, tracking order status, maintaining private excel sheets which consume time from actually doing effective work. Creation of a procurement hub which is transparent across the network and integrated with the individual supplier systems are some of the steps taken by high performing companies.

The Control Room – Next Generation of Managers

Computing horsepower has increased tremendously over the years. I was at NASA Houston recently, and was amazed to see how little technology was used to put the first man on the moon. I was informed that the entire operation was controlled by the horse power equivalent to 3 PC’s. The amount of copper to lay the wiring was equivalent to the length of going around the earth almost 3 times.

Not sure how to interpret the decision – If 3 pc’s can put a man on the moon then do we really need all that extra memories to run a factory. A typical manufacturing factory will have at least 10 – 20 servers with memory ranging from 2 - 10 GB of RAM.

If we target the main thrust of change over the years, it has been the transformation of information sharing. One of my clients claimed that it would take 3 - 4 weeks to get a report for the entire spend in the organization. This induces latency in the decision making process and reduces the flexibility of the company to react to changes quickly.
The main thrust of technology is not only helping in solving complex problems but the dissemination of gigabytes of information quickly and in real time to enable fast decision making. To enable such massive amount of data flowing between equipment, operations, maintenance, engineering and corporate it requires substantial bandwidth and RAM to process and distribute the information to the stakeholders.

The role of “Autonomation” – which is the inclusion of human intelligence in operations – will become an important aspect of manufacturing. Toyota developed the technique of self-correcting operations where the operation would stop automatically when a defect is detected. This process allows management of multiple machines by fewer people. The role of technology to enable operations to be automated is also related to processing of information. The real time status of the equipment including capturing the signals from active and passive sensors and processing them intelligently to a digestible metric enhances the ability of the company to manage the company with fewer individuals on the floor.

The classic example is Wall-Street. The value of currency is changing by the second depending on multitude of factors from around the world. The currency valuations are available real-time to everyone and decisions on buy & sell are almost real-time, even by a common person sitting in a remote place – while sipping margarita in Cancun. If Wall-Street can do it, so can manufacturing companies. I see the next generation of manufacturing managers sitting in a Control Room – making decisions based on the real-time feedback from the operation. The decisions will be implemented and the results will be visible real-time for the next set of corrective actions.