What is Lean Procurement?
You may have heard of lean project management or lean software development. Lean is an approach or philosophy that seeks to maximize customer value by minimizing waste. The lean approach has been applied to everything from executive coaching to product development — and naturally, to procurement.
In the past, organizations have viewed the potential to apply lean to procurement functions as limited. Typically, lean procurement translates to streamlining and automating procure-to-pay (P2P) activities. And while automation is a great way to capture more value from procurement, it’s not the only way to apply lean thinking in procurement. Read on for more information about lean thinking and how it can help improve purchasing at your organization.
Background: what is lean thinking?
The Lean methodology originates from Toyota, where, following WWII, consumers began demanding more choices in the car market — desiring different models, sizes, shapes, and colors. This demand required Toyota to expand its manufacturing operation to include different materials, product lines, and skilled labor.
Lean stems from Toyota’s approach during this time, founded on two key principles: jidoka and just-in-time. Jidoka in Japanese roughly translates to “automation with a human touch,” a method of quickly identifying and correcting issues that may cause faulty production. “Just-in-time” requires refining and coordinating each step in the production process to only produce what is required for the next phase in the sequence. Lean aims to dramatically lower waste in any process, whether it’s car manufacturing, procurement, or project management.
Ultimately, lean approaches seek to maximize customer value while minimizing the company resources used. It tries to find the perfect balance between quality and efficiency. In procurement, this translates to things like optimizing inventory controls, streamlining procurement, and minimizing indirect spend.
The basics of lean procurement
The general approach of lean — limiting waste while maximizing quality — can be applied to procurement in a few different ways.
Broadly speaking, lean procurement seeks to decrease waste that happens from procurement processes not working properly. Lean procurement can help companies gain transparency over their supply chain, localize waste, and balance “necessary waste” with things like maverick spend. Applying lean principles can dramatically impact the organization’s cash flow and improve profit margins.
Lean procurement depends on e-procurement and sourcing solutions to automate and streamline labor-intensive processes. Implementing a platform like Fairmarkit to bring all spending into one centralized, transparent system allows companies to source materials as needed, eliminating duplicate inventory and rogue spend. Likewise, lean procurement’s just-in-time approach to inventory reduces drag on the balance sheet and optimizes the supply chain.
“Suppliers selected and assessed the same way will have the same purchasing structure and can be more easily integrated into flexible production processes. Being reliable and flexible means a competitive edge,” wrote one procurement firm.
Just making a few small changes to follow the lean procurement methodology can have a big impact. But, there’s more to lean management in procurement that going beyond the basics can achieve.
How to apply lean procurement
Experts at McKinsey say that lean procurement offers many more opportunities beyond streamlined efficiency.
“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,” wrote McKinsey.
The consulting firm goes on to outline five steps to implementing a lean approach to procurement. These include:
- Gain an understanding of the organization’s needs: evaluate the procurement function as it relates to the organization’s internal teams, as well as the organization’s end customers.
- Simplify, automate, and streamline processes: design a procurement function that uses technology to meet those needs in the most efficient way possible.
- Build the skills of your procurement team: split the procurement responsibilities clearly between strategic and operational priorities, and ensure structures and training are in place to help meet those priorities.
- Measure performance: use indicators and metrics that relate specifically to value-creation (for instance, “the function’s overall cash and profit-and-loss contributions”).
- Create a culture of continuous improvement: change the mindset of those in the organization toward meeting consumer needs and eliminating waste.
By thinking about lean procurement more deeply, organizations can begin to gain a competitive advantage in the market. An industrial company in Europe that adopted lean procurement was able to increase the efficiency of its direct sourcing by 20%, and the efficiency of its indirect sourcing by 25%.
Adopting holistic lean procurement in the steps outline above can take time — behavior change is never easy. But, simple changes, like implementing automation in your sourcing process, can help put your procurement team on the right track for less waste and maximum value.
For more advice on optimizing procurement, check out Fairmarkit’s blog, The Source.