April 14, 2011 Jan Buter Associate Partner IBM Global Business Services

Lean Procurement
NEVI/HAN Event

2011 IBM Corporation

Agenda Lean Procurement

1. Lean procurement, the concept 2. Basic conditions 3. An outlook to the future

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1. Lean Procurement Lean & Six Sigma is based on over 50 years of improvement thinking and experience. It s a company wide approach.
Just in Time (80s)
(Kanbans, Pull systems, Visual management)

Lean Manufacturing (90s)

(Machine that changed the world, Lean Thinking, Value Stream Mapping)

Total Quality Management (80s) Deming/ Juran (50s)

(14 points, statistical quality)

BPR (90s)
(down-sizing, to be processes, process owners)

Lean Six Sigma (00s)

Ohno (60/70s)

(SPC,Quality Circles, Kaizen)

(culture change/benchmarking, Baldridge/EFQM, ISO9000)

(Toyota Production System)

Motorola Six Sigma (80s) GE (80s 90s)

(Allied Signal)

Six Sigma (applied method for growth and productivity) Intensity of Change Customer Partnering (GE Toolkit, QMI, Customer CAP Change Acceleration Process CAP (Change method and tools) Kotter etc. Transformation Process Improvement (NPI, Supply Chain, Suppliers) & Leadership Best Practices (benchmarking, across and outside of GE, ending NIH) Work-out (Kaizen type, cross functional teams, boundarylessness, values) Strategy No 1 or No 2 in each business. Fix, close or sell

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1. Lean Procurement The 5 Principles of Lean Thinking

1. Define value from the customers perspective and express value in terms of a specific product or service
2. Map all of the steps value added & non-value added that bring a product or service to the customer

1 Specify Value

2 Map the Value Stream

7 Wastes
Transport

5. The complete elimination of waste so all activities create value for the customer by breakthrough and continuous improvement projects

Inventory Motion Waiting

5 Work to Perfection

Over processing Over production Defects

3 Establish Flow

3. The continuous flow of products, services and information from end to end through the process

4 Implement Pull 4. Nothing is done by the upstream process until the downstream customer signals the need, actual demand pulls product/service through the value stream

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1. Lean Procurement The 5 Principles of Lean Thinking

1 Specify Value 2 Map the Value Stream

7 Wastes
Transport Inventory

Supply market

5 Work to Perfection

Internal organization
3 Establish Flow 4 Implement Pull

Motion Waiting Over processing Over production Defects

The challenge of lean procurement is to roll out this concept to the selected suppliers

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1. Lean Procurement
Keiretsu

OEM Main contractors sub assemblies (1 tier) Component suppliers (second tier) Jobbers (third tier)

The Original Equipment Manufacturer (OEM) has impact on all layers

Raw materials suppliers

forward purchasing development programmes cascade process of improvement accept dependency and manage it Toyota manages 4 tiers, Ford only 1

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1. Lean Procurement
Lean Procurement is often driven by a logistics pull concept: JIT-example implemented 70/ 80 + inplants modular consortia

Can be a supplier as well

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1. Lean Procurement Lean (procurement) does not only apply to repetitive manufacturers

Retail chain

Construction company

Industrial Automation Systems (projects)

Essential is to optimize all processes including the processes of the suppliers in the network, so act together!

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2. Basic conditions
For Lean Procurement knowing and managing the supply base is crucial, but it starts with understanding the demand
iterative process

Supply
Influence factors

Supplier strategies for (group) of products services (commodity)

Demand
Driving force

Characteristics of the supply market # suppliers entry barriers for new entrants substitutes currency political environment

Characteristics of demand demand pattern life cycle forecast horizon specification R&D plans budgets

Goal: find optimal match

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2. Basic conditions
Managing suppliers is also a process

Analyse actual situation

Determine future needs & development

Setup supplier strategy & development plan

Long-term supplier relation = partnership = part of supplier strategy

Supplier strategy is part of the sourcing strategy

Execute supplier strategy plan Monitor and feedback

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2. Basic conditions
Supplier Management could have the following result
Reduction of the supplier base

Limited number of good and attractive suppliers

Stronger position of good suppliers

Shift in client portfolio

Client selection?

Be attractive as a client!
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2. Basic conditions
Lean Procurement also means streamlining the P2P process, necessary for contract management (incl. compliance)
Multi channel purchase to pay directs spend traffic through the most efficient transaction lanes

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2. Basic conditions
Overview of basic conditions and differences from traditional procurement:
Basic conditions for Lean Procurement:
Understand overall business strategy and objectives, align procurement strategy Understand spend pattern (DNA) By management agreed category strategies

Traditional Procurement
Business strategy not well understood All spend not known on a regular basis Category strategies not a vital part of decission making process together with management

Supplier management and supply market investigations is a continuous process

Optimal operational procurement process, input for contract management Procurement professionals who are able to influence all contributors to the procurement function (internal and external) KPIs reflecting contribution of processes and monitoring compliance Value contribution and TCO approach Value Management in particular Value Engineering (incl. ESI) to reallize cost avoidance for new products

Suppliers have to perform against contract, contract mainly product related and what if....
Tactical and operational procurement two different worlds Procurement professionals focussing on getting the deal done KPIs mainly base on contribution of the department Focussed on lowest price and savings

Focus on Value Analysis to realize cost savings of existing products

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3. An outlook to the future

............. the speed of future changes will be exponential..............

Quote CEO*: We are starting to think about things we couldn t do before, but with the restrictions of our limited global resources .
* IBM Publication Rethinking the Enterprise Jan. 2010
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3. An outlook to the future Companies/sectors are blurring already, this will evoluate rapidly in the future
IT Telecom Media

Traditional sectors

New products show the interlinkages/interdependancies already

This will evoluate very fast in all sectors/industries

Hybrid products/services
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3. An outlook to the future Vast majority of CEOs experience the New Economic Environment as distinctly different
The New Economic Environment
13% 18% 69%

More volatile
Deeper/faster cycles, more risk

14%

21%

65%

More uncertain
Less predictable

18%

22%

60%

More complex
Multi-faceted, interconnected

26%

21%

53%

Structurally different
Sustained change

Last years experience was a wake-up call, like looking into the dark with no light at the end of the tunnel.
President and CEO, Industrial Products, The Netherlands Not at all/to a limited extent To some extent To a large/very large extent
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Source: Q7 To what extent is the new economic environment different? Volatile n=1,514; Uncertain n=1,521; Complex n=1,522 ; Structurally different ,

3. Impact of developments by procurement

Find optimal mix between costs and value, if necessary differentiate: suppliers (networks) focssed on low costs suppliers (networks) focussed on value by being front runner
Cost reduction
Capital Cost of Activities Cost of Goods and Services

Value Generation
Marketing contribution Internal Productivity Market Value of Goods and Services

Strategy

Process

Organization

Technology

Performance Management

Procurement Foundation/infrastructure

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3. An outlook to the future

Impact of developments by procurement Speed of change is key, end to end processes necessary
More end to end projects/processes, less functional hierarchy For new products sometimes completely new supply markets have to be explored

To speed up time to market engage with supplier networks

Intergrated systems for supplier networks More integrated/delegated responsibilities

From mainly cost to value focus

Waste management becomes as strategic as bying direct materials (cradle to cradle)

An agile/LEAN organization is necessary to adopt the rapid changes of the market

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3. An outlook to the future

Charles Darwin (1809 1882) discovered ( to his surprise) that not the strongest and biggest species survived but the most adaptive!

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3. An outlook to the future

The message is clear:

LEAN (PROCUREMENT) IS NO OPTION BUT A PREREQUISITE TO SURVIVE!

Are we (human beings) adaptive enough to meet this challenge?

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contact:

Jan Buter IBM Nederland B.V.

jan.buter@nl.ibm.com

21 2010 IBM Corporation