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Roger Jensen

Lean

Lean Purchasing for Manufacturers

Expanding lean applications for increased profit

Published: Monday, February 13, 2017 - 13:02

For several decades, manufacturers have been pursuing lean on their shop floors to reduce costs and improve lead times through waste elimination and process improvement. They have been less successful, however, in reaping lean’s potential benefits in their purchasing, planning, and supply chain operations, areas that promise significant potential improvement.

Identifying and eliminating the 8 Wastes; reducing nonvalue-adding activities; and creating 5S workplaces, standard work, and continuous improvement have been the tools that have permitted successful lean implementers to survive and thrive in an increasingly competitive world. The Oregon Manufacturing Extension Partnership (OMEP) has assisted many clients in applying lean on the factory floor and in developing lean cultures, with incredible results. A 2015 study found that OMEP had delivered more than $1 billion in direct economic impacts within Oregon through cost savings, job creation, and increased sales since 2002.

Many may not realize how valuable lean is in their purchasing operations.

How lean purchasing can improve your ROI

Did you know that 50 to 60 percent of spend for the average manufacturing company occurs in its supply chain? Raw materials, indirect materials, shop supplies, purchasing and planning, salaries, office supplies, third-party services, transportation and logistics (including reverse logistic costs for rejects and returns), among others, contribute to this significant total of fixed and variable costs. Direct manufacturing costs, the traditional focus of lean activities, generally account for less than 25 percent of spend.

Did you also know that numerous studies have consistently found that the ROI for purchasing organizations range from a multiplier of 1.1 at the low end to more than 10 for top companies? ROI in this case is defined as the total cost of the purchasing function (salaries, benefits, supervision) divided into the financial impact delivered by the organization (cost savings, cost avoidance).

In other words, even the worst-performing purchasing organizations deliver positive returns to their companies, since every one dollar saved anywhere on the profit-and-loss statement falls directly to the bottom line as one dollar in profit.

Yet for many manufacturers, purchasing, planning, and supplier management are shoestring operations focused primarily on tactical activities. These can look like:
• Issuing purchase orders
• Expediting deliveries
• Resolving payment issues
• Addressing quality problems
• Finding new suppliers

Often, these operations are staffed by capable employees “promoted” from other roles but with minimal training and limited strategic responsibility. Further, these buyers often lack the bandwidth to do strategic work because they are so bogged down in day-to-day transactional work. How can manufacturers attack the large supply-chain spend opportunities and improve the ROI of their materials team? With lean purchasing, of course.

Applying lean principles to purchasing

Lean purchasing uses the same methodology as shop-floor improvement practices.

Identify your current state
All lean improvements begin by assessing the current state to identify existing capabilities and opportunities. Lean purchasing considers purchasing and supply chain maturity, supply-chain network visibility, supplier and supply risk management, spend segmentation, cost management, metrics, and process mapping to accurately define how a company’s supply chain organization functions in real time, and uncovers opportunities for future improvement.

Create your future vision
Although the core of lean practice is continuous improvement, it is essential to know where the company needs its purchasing and supply chain capabilities to be in the future. Ideally, the organization’s vision will be directly aligned with the company’s vision, defining the aspirational goals that will guide how (and when) the purchasing organization will achieve essential goals and develop required capabilities.

Establish the next target condition
Once a company has identified where it is and where it aspires to be in the future, the next step is to determine the immediate goals, timelines, and actions to begin moving forward toward the vision. These strategies are essential for employees throughout the company to understand what’s important and to involve everyone in supporting and participating in the changes. These strategies need to be established with a clear understanding of the supports and challenges to success within the organization.

Experimentation and one-degree shifts
Continuous improvement is often described as a journey toward a destination (the vision), which is also true for lean purchasing. It’s critical for purchasing and materials teams to begin working immediately on projects and activities that move the entire organization toward the next target condition. At OMEP we talk about one-degree shifts—continuous, small changes every day or week—and experiments that, over time, move functions and processes inevitably toward the long-term vision. In lean purchasing, this encompasses buyer skills and training, simple visual material management systems, process improvements, systems utilization, development of standard work, and the overall elimination of low- and nonvalue-added activities that prevent buyers from focusing on strategic activities and continuous improvement.

PDCA
The plan-do-check-act (PDCA) cycle is as relevant for purchasing and supply-chain management organizations as it is on the shop floor. Team members and managers need to constantly assess the current state in contrast to the next target condition, and challenge themselves to define and take action on the next experiment that will move the function forward. Set goals. Try changes. Evaluate the results. Make adjustments. Repeat.

If you assess your current state, create your future vision, establish your strategies and action plans, implement improvements to eliminate nonvalue-adding activities, develop strategic capabilities, and then measure your progress, you’re well on the way to a healthy and thriving manufacturing company. These types of adjustments can increase profits and improve your competitiveness.

To learn about lean purchasing firsthand, feel free to attend the Lean Purchasing Workshop coming up on Feb. 23, 2017; there are still a few spaces available.

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About The Author

Roger Jensen’s picture

Roger Jensen

With a B.S. in Engineering from Northwestern University, and an MBA in Production & Operations Management from Cornell University, Roger Jensen has more than twenty-five years of experience leading global manufacturing engineering, supplier quality engineering, and sourcing organizations to introduce and rapidly improve products, processes, and suppliers.