Chapter 1:

Introduction: Why You Need a

Lean and Agile, Demand-Driven
Supply Management Process

A procurement organization needs to consider:

• The prevention of production disruptions due to inventory or
material shortages, while remaining flexible to meet changes in
customer demand or cope with market volatility.
• The trade-offs of inventory carrying costs and customer service levels.
• Optimal buying quantities that consider the trade-offs of inventory
carrying cost and volume discounts.
• Moving from reactive to proactive procurement operations.

You can zero in on these opportunities in procurement by focusing on

the eight wastes below:
• Transportation: Excess paperwork and transporting materials
and component inventory around a facility more than would be
otherwise needed.
• Inventory: Ordering inventory or services early or in excess due to
poor visibility or inaccurate information in material requirements
planning (MRP) systems, which in turn may be driven from
inaccurate end item forecasts.
• Motion (or movement): Walking, bending, or searching. Includes
manual inventory tracking and control, having internal material not
directly located close to where it is needed.
• Waiting: Personnel, material, system, and tool waiting or delay. This
includes employees waiting for deliveries, approvals, data, or correct
materials and services to arrive. This also can include waiting for
supplier performance measurement results, or the processing of
purchase orders and contracts.
• Overproduction: Excess paperwork in process due to purchase
order processing bottlenecks. Ordering materials without internal
customer need, as well as having more work-in-process or finished
goods inventory than necessary to meet demand adequately.
• Over-processing: This can often be found in developing quotations,
purchase order processing, order acknowledgements, and invoicing.
It can result in information being held up; for example: guidelines
that require too many competitive bids, more approvals required
than necessary to proceed with issuing purchase orders, etc.
• Defects: This waste refers not only to the quality of materials, but
also to paperwork errors requiring rework and supplier errors. This
also includes information from a material or service requester not
efficiently received or processed (e.g., missing or wrong standards
and no confirmation from supplier on purchase orders), or incorrect,
or of poor quality.
• Skills: Staff spending too much time on administrative tasks rather
than on continuous improvement, and thereby missing opportunities
to increase the supply chain surplus through collaboration with internal and external supply chain
partners. This would include
unsynchronized processes resulting from frequent changes to
decisions already made, long lead-times, and wrong material
delivery schedules. It can often be the result of the lack of, and proper
support (training and otherwise) for, a true Lean culture that should
permeate an organization.

Organizations can use a variety of Lean tools to identify and reduce or

eliminate waste, such as:
• Value stream mapping (“VSM”) diagrams the flow of materials and
information from customer to supplier through your organization
separating value-added and non-value-added activities. A VSM of
internal procurement and purchasing processes can create a future
state that is both streamlined and improved.
• Quality at the source, based on the concept of performing quality
checks at every stage of a process, can allow early supplier integration
and problem-solving competence by expanding the viewpoint to the
total cost of quality.
• One-piece-flow, or batch size reduction, can be created by
establishing local suppliers to assist with flexible manufacturing
and supply chain strategies for shorter inbound transportation
distances and consistent deliveries to help smooth demand
fluctuations.

A demand-driven supply chain, on the other hand, is:

1. Driven by customer demand where products are “pulled” to market
by customers: The companies in a supply chain work more closely
together to sense and shape market demand by sharing information
and collaborating with each other. By doing so, they achieve greater
and more timely visibility into demand.
2. Flexible and responsive: Minimizing the effect of long material leadtimes
by adopting postponement strategies.
3. Efficient, with waste minimized in the procurement cycle: Without
Lean procurement, buyers spend the much of their time on nonstrategic
processes like tracking down order statuses, purchase order
entry, and maintaining individual spreadsheets for analysis. Often
as a result, they miss opportunities for mutually beneficial supplier
negotiations and process efficiencies.

Most procurement executives said they are investing heavily in

innovative technology solutions. For example, 70% said they were
investing in self-service portals, 45% said they were investing in cloudbased
computing, 42% said they were investing in mobile technologies,
and 16% were investing in social media technology.
Spend analysis is the largest focus for technology investments (38%
of executives saying this area is most likely to receive investment in the
survey), followed by contract management (37%), e-sourcing tools (30%),
supplier relationship management technology (29%), and requisition-topay
solutions (24%).
However, this must be tempered by the fact that the majority of
procurement organizations do not have a clear digital strategy in place,
with 60% of procurement executives stating that they hadn’t yet formulated
such a strategy.
Also, and surprisingly, while involvement in risk management and
mitigation is a growing area of focus for procurement executives, only 25%
are involved in it now.
This lack of focus in a digital strategy and a low level of risk management
and mitigation involvement can result in significant disadvantages to an
organization in today’s volatile global supply chain

So, what might a Lean procurement strategy look like? At the very least,
it should focus on the following objectives:
• Collaboration with key functional areas: Lean sourcing involves
the creation of a strategy for future success through internal
collaboration (for example, purchasing and operations working more
closely together). This is accomplished by streamlining procurement
operations and purchasing while at the same time improving
financial performance.
• Identify and implement sourcing savings: Use Lean kaizen strategies
to reduce costs in areas such as logistics management through
consolidating shipments, improved inventory planning and
management, and cost analysis. Lean sourcing relies on effective,
sustainable cost reductions that don’t reduce quality or reliability,
balancing sourcing and operations requirements.
• Improve quality and reduce waste: Lean sourcing relies heavily on
reducing waste in all forms, including wasted time, efforts, and
capital. These issues can be addressed by improved compliance and
process improvement and standardization.
• Achieve ongoing additional cost reduction and process improvement
opportunities through collaboration with supply partners: Lean
sourcing involves collaborating with suppliers to develop better
contract terms, optimized transport costs, and a stronger and more
effective supply network minimizing the chance for disruptions.

Lean procurement organizations need to understand and select suppliers

based upon a multitude of factors that influence total enterprise cost, both
tangible and intangible.
The elements of total enterprise cost include:
• Sourcing supply cost, quality, service, and risk factors.
• Tariffs, trade, and duties.
• Logistics cost, quality, service, and risk factors.

Lean factors to consider include:

• Supplier integration and demand management
• Reduce product complexity
• Synchronized processes
• Part standardization; SKU rationalization
• Reduced inventory
• “Pull” most products
• Joint product design
• Collaborative cost take-out

Strategic sourcing factors include:

• Company-wide approach
• Proactively managing supply risk
• Total cost of ownership/total cost request for quotes (RFQs)
• Global reach