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Value-able Lessons for Procurement

Lean thinking when applied to procurement has more potential than you might think.

Not surprisingly, up until now lean procurement has heavily focused on cost as it is a significant percentage of a company’s revenue (often ranging from 50% to 70% of sales) and to some degree on streamlining and automating procure-to-pay (P2P) activities (i.e., the transactional flow of data that is sent to a supplier as well as the data that surrounds the fulfillment of the actual order and payment for the product or service).

However, in a recent article from McKinsey, the authors argue that “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.”

In fact, at one company, McKinsey found that strategic buyers often devoted less than 40% of their time to these core activities. They felt that cutting their administrative and reporting activities and optimizing their core processes could allow buyers to focus more than 70% of their time on strategic activities, which is like doubling the size of strategic procurement without having to add any headcount.

According to the article, bringing lean management discipline to purchasing requires action in five areas:

1. Develop a deep understanding of the needs of procurement customers—not only the internal business units that work directly with the procurement department, but also the organization’s end customers.

2. Simplify, automate and streamline processes to meet those needs as efficiently and effectively as possible, both in strategic procurement and in operational procurement.

3. Build the skills and structures procurement needs to achieve those goals, including a clear split between strategic and operational procurement roles.

4. Function must tighten its performance management, using indicators that focus on real value creation.

5. Organization must systematically change the mindsets and behaviors of its people, creating a culture that focuses on continuous improvement in meeting customer needs and eliminating waste.

In one client example, McKinsey found that by developing a single set of standard methods, the company increased the efficiency of its direct-sourcing activities by around 20% and its indirect sourcing activities by 25%. Additionally, by creating a center of excellence, they were able to reduce spending by double-digit percentages across a wide range of categories.

It goes to show that lean thinking when applied to procurement has even more potential than many people think.

Paul Myerson is an instructor, Management and Decision Sciences at Monmouth University. He is the author of four books in the field of supply chain and logistics management, a developer of a Windows-based supply chain planning software, and co-author of a lean supply chain and logistics management simulation training game by ENNA.

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