QUESTION ONE [40]

Purchasing power:Leanmanagementcreatesnewvalueinprocurement

Inmostorganizations,leanmanagementrunsintoanimportant wall:theonebywhichthe 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 (P2P) activities. Lean management's capacity to deliver significant value in strategic procurement has largely been ignored.

Thereason maybeobvious.Despiteprocurement'sinfluence,itsoperatingcostsareusually very low: on average, between 0.3 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.

Thatmind-set shouldchange.Properly applied,thedisciplinesandsystemicthinking oflean management can become a strategic weapon: aligning purchasing more tightly to internal customers'realinterests,helping leadersrethinktheend-to-endprocurement 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,identifyingandqualifyingnewpotentialsuppliers,ornegotiatingthebestpossible contracts? In all likelihood, much less than you think.

Abroader andmorethoughtfullean-managementperspectivedoesn't justhelpcompanies 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, allocatedto near or offshore shared-service centers, outsourced, or stopped altogether. Standardized activities, fewer processes, better-qualified buyers, continualpeople development,andresourcessharplyfocusedonactivitiesthataddreal valuethis is what we understand as lean procurement.

Theadvent ofleandisciplineinpurchasingistimelyforanotherreason: digitalissettohave huge impact on the function, with many new solutions that extend beyond today's P2P 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.

Applyingalean 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-quotationor RFQsystems) 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, thefunction's overall cash and profit-and-losscontributions). Finally, andmost importantly, the organization must systematically change the mind-sets and behaviors of its people, creatingaculture thatfocusesoncontinuousimprovementinmeetingcustomer needsand eliminating waste.

Standardizeprocesses

Onceacompanyunderstandshowprocurement'sactivitiesgeneratevalueforthebusiness, it can explore newpathsto deliverthevaluemoreefficiently. Value-streammappingatool adapted from manufacturingcan 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.

Theapproach appliesequallywelltostrategic andoperationalprocurementprocesses,but with a few important differences in execution. Procurement functions that have embraced lean management have achieved rapid, significant impact.(Source: McKinsey & Company, 2017).

1. Most purchasers and suppliers recognise a need for cooperation to achieve cost, quality, delivery, andtimeimprovements. Itis importantforboth partiestocollaborate and share the wins and risks associated with the business and partnership. Discuss some of the elements critical for building effective supplier relationships (10)

2. The process of aligning supply management goals with corporate objectives is important for supply management and supply chain managers. Analyse the four-level integrated strategy development process (12)

3. Organisations tend to evolve through four phases as they become mature and sophisticated.Briefly describethefourphasesoftheevolving sourcingstrategies(8)