Magazine article Business Credit

Lean Sourcing: Creating Sustainable Purchasing Savings

Magazine article Business Credit

Lean Sourcing: Creating Sustainable Purchasing Savings

Article excerpt

In the past decade the concepts of "lean" and "strategic sourcing" both made it onto the corporate main stage, separately capturing the executive and media spotlight. Outsiders viewed lean as an art practiced by operational wizards or "Six Sigma Black Belts," adept at reducing waste and improving performance and efficiency. Lean achieved its magic by introducing new production and operational processes that improved organizational productivity. In the case of manufacturing, this resulted in reduced inventory, increased throughput and improved customer service levels. Lean also stressed lasting, collaborative relationships with suppliers and business partners.

Above all, as its supporters preached, lean is a journey, implemented through continuous Kaizen improvements. A lean transformation could take several years and typically involves complete process re-engineering. But lean success stories slowly began to emerge that captured the imagination of executives, making the time spent well worth it. Toyota's lean success illustrated to executives worldwide that lean could transform production and quality standards for an entire industry, changing the basis of competition.

Across the manufacturing sector, many organizations began to understand the improvements that lean could achieve. But the art of lean was still very much a mystery to many on the outside. In contrast, strategic sourcing stormed onto the stage in a take no prisoners, hammer-driven approach to cost reduction that was easy to understand. Strategic sourcing was everything lean was not: a one-time effort, a quick hit without any major internal process changes that was less than fully data driven. If lean was the Eastern medicine that focused on treating the corporate patient holistically over time--requiring active involvement on the patient's behalf in improving his condition--strategic sourcing was the prescription drug that immediately got its adherents hooked on quick-fix savings.

Popping the Sourcing Pill

How did strategic sourcing generate results? It treated the corporate patient by introducing a new type of structured tender and bidding process into purchasing (with increased competition and greater price transparency). As with cholesterol-reducing drugs, patients saw the impact of strategic sourcing almost immediately (but in a similar vein, the underlying cause of the maladies often went unaddressed).

Strategic sourcing was able to achieve tremendous savings for many of its adopters because 70 percent of a company's purchasing costs, on average, are tied up in what is being bought (the balance of the costs cover inventory, inventory carrying costs, procurement personnel and 'maverick buying'). However, most companies historically had tended to focus on inventory reduction (which lean and other initiatives addressed). When companies began to tackle purchasing cost reduction through strategic sourcing, the results could impact operating performance in months, not years (and without the serious collaboration of different internal teams). Dozens of research studies confirmed this as well. According to separate research efforts by organizations like CAPS, FreeMarkets, McKinsey, The Watch Group, and A.T. Kearney, every $1 saved through sourcing efforts was worth an estimated $5 to $25 in increased sales.

According to experts who lauded its adoption, the miracle of strategic sourcing was here to stay. But many purchasing organizations that implemented strategic sourcing processes and technology began to realize that they were leaving additional savings on the table and--perhaps most importantly--were not creating long-term sustainable partnerships with their supply base to improve other elements of supplier performance beyond price (e.g. on-time deliveries and quality). To go after these additional opportunities, some of these purchasing organizations began to coordinate their efforts with supply chain and operational executives inside their organizations. …

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