Purchasing power: Lean management creates new value in procurement

In most organizations, lean management runs into an important wall: the one by which the purchasing department sits. In our experience, to the extent most procurement functions have thought about lean management at all, they have viewed it primarily as a way to streamline and automate procure$-$to$-$pay $($P$2$P$)$ activities. Lean management$$s capacity to deliver significant value in strategic procurement has largely been ignored.

The reason may be obvious. Despite procurement$$s influence, its operating costs are usually very low: on average, between $0\mathrm{.}3$ and $1$ percent of spend in most industries. For procurement leaders who see lean as a tool for wringing out efficiency improvements, those numbers hardly seem to promise much potential.

That mind$-$set should change. Properly applied, the disciplines and systemic thinking of lean management can become a strategic weapon: aligning purchasing more tightly to internal customers$$ real interests, helping leaders rethink the end$-$to$-$end procurement process $($from suppliers through to manufacturing and ultimately to external customers$),$ and transforming the effectiveness of strategic procurement activities.

Think of what procurement people do each day. How much time do strategic buyers spend on truly value$-$adding activities, such as building a deeper market understanding in key categories, identifying and qualifying new potential suppliers, or negotiating the best possible contracts? In all likelihood, much less than you think.

A broader and more thoughtful lean$-$management perspective doesn$$t just help companies maximize the effectiveness of their current processes. It also allows companies to take a more integrated view of the value each individual buyer creates. It helps them answer important strategic questions, such as which activities should be kept in$-$house and which should be automated, allocated to near or offshore shared$-$service centers, outsourced, or stopped altogether. 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.

The advent of lean discipline in purchasing is timely for another reason: digital is set to have huge impact on the function, with many new solutions that extend beyond today$$s P$2$P automation and could transform the end$-$to$-$end procurement process. Tools such as standardized should$-$cost analyses, work$-$flow portals to manage the full strategic$-$sourcing process, and access to huge external supplier databases for market research will allow strategic buyers to spend even more of their time focusing on the right things. And the efficient, structured processes enabled by lean management provide the perfect framework for integrating these new tools.

Applying a lean lens

Bringing lean$-$management discipline to purchasing requires action in five areas $($see sidebar, $$How one leader brought lean management to procurement$).$ The first step is to develop a deep understanding of the needs of procurement customers: not only the business units that work directly with the procurement department, but also the organization$$s end customers. Next is to simplify, automate, and streamline processes to meet those needs as efficiently and effectively as possible, both in strategic procurement $($such as with standardized request$-$for$-$quotation$$or RFQ$$systems$)$ and in operational procurement $($such as with no$-$touch order processing$).$ Third is to build the skills and structures procurement needs to achieve those goals, including a clear split between strategic and operational procurement roles. Fourth, the function must tighten its performance management, using indicators that focus on real value creation $($for example, the function$$s overall cash and profit$-$and$-$loss contributions$).$ Finally, and most importantly, the organization must systematically change the mind$-$sets and behaviors of its people, creating a culture that focuses on continuous improvement in meeting customer needs and eliminating waste.

Standardize processes

Once a company understands how procurement$$s activities generate value for the business, it can explore new paths to deliver the value more efficiently. Value$-$stream mapping$$a tool adapted from manufacturing$$can be a powerful way to separate the worthwhile steps in a process from the wasteful ones, so that the process can be simplified and redesigned.

The approach applies equally well to strategic and operational procurement processes, but with a few important differences in execution.Procurement functions that have embraced lean management have achieved rapid, significant impact.

With reference to the case study, discuss the primary purchasing objectives