Fundamental failings in Lean procurement
Many companies’ approaches to applying ‘Lean’ principles to their procurement operations are fundamentally flawed and misconceptions about the idea are rife, according to experts from a top industry consultancy.
Speaking exclusively to Supply Chain Digital, experts from Hitachi Consulting championed the use of Lean principles, most commonly associated with production and manufacturing, in procurement operations.
The famous Lean approach, adopted by companies all over the world, considers the expenditure of resources on anything that doesn’t create value for the end customer as waste and seeks to eliminate unnecessary processes within this framework.
The concern, however, is that companies are losing out by either not fully understanding the practice or not committing themselves enough to the change in thinking adopting it requires.
Cédric Parentelli (pictured, right), Vice President Supply Chain for Hitachi Consulting, said: “The problem goes to board level. Even in an organisation that has 60 percent spend on outside buying, often they don’t even place procurement in the hierarchy.
“In most countries – UK being an exception – procurement is seen as a low paid function. The positioning at board level is not really well understood and generally speaking is suffering from not being well positioned in most organisations.”
Errors in thinking
Parentelli has identified three major misconceptions he often comes across when assisting clients.
The first is companies thinking of Lean procurement as merely the optimisation of an internal process. It is not, said Parentelli, merely about cutting cost of the procurement function and reducing the number of people. While this can be a fraction of the process, other things must be considered. For example, while procurement is about buying, it is important to buy quality and employ people who understand the service level that needs to be achieved.
The second error is in considering lean procurement as an independent function, setof activities, tools, or approaches and failing to ensure it works sufficiently with the interface.
“Some will have this narrow view,” said Parentelli. “You can reduce inventory or reduce cost but the level is very minimal.”
The last misconception, and perhaps the biggest one, is in considering automation or IT tools as lean procurement. These are merely enablers, which can be necessary and effective if used in the optimum scenario, but procurement will not be made Lean by having them.
Parentelli added: “That goes for all; supplier management tool, automation tool, requisitioning tool, the whole shebang.
“That is the fundamental error. At the end of the day, the fault is to think that it is not about people. Lean is about people, lean procurement is about people. It’s the way they work, it is about increasing leadership, increasing the performance. It is about really changing the behaviour and changing the way of working. Reducing the waste with the same, or even improved, output. That is what lean procurement is about.”
Breaking down walls
Greg Kinsey (pictured, right) is Vice President of Marketing for the EMEA Region at Hitachi Consulting and has identified a problem with what he calls ‘Silos’. Many companies have developed strong functional silos, with key performance indicators set within. The problem comes when these KPIs don’t align and the flow of work from one silo to the “nest” is interrupted.
These interruptions can cause a break in the flow and generate excessive buffers of work. Communication can be additionally hampered, with a downstream silo not getting what it expected as upstream didn’t understand what that team wanted.
Lean Procurement, therefore, must be part of a total Lean way of operating and one of the major breakthroughs Kinsey has made with client companies is in breaking these silos down so that things flow across the value stream rather than getting thrown over the walls of the different silos.
Kinsey said: “I think leading edge companies are now realising they have got to look at their whole value stream together. They can’t simply do a project to improve procurement because what they would end up doing is sub-optimising part of the chain while moving the problem upstream or downstream.
“Many people approach us and say ‘I have a problem in this part of my supply chain,’ it might be procurement or another part, we tend to then lift that discussion and talk about the whole supply chain and help them see that there are actually systemic issues across the whole, not unique to procurement.”
A poor performing company will either focus on tools or on reducing cost, while a strong performing organisation takes an end-to-end approach, with a lean procurement aspect linked to the rest of the supply chain and operations.
This will focus on the people within the organisation, on breaking the silo and delivering value with an end-to-end flow.
EU and US agree end to Airbus-Boeing supply chain tariffs
The EU and US have agreed to resolve a 17-year dispute over aircraft subsidies, suspending tariffs on billions of dollars' worth of goods that have plagued procurement leaders on both sides of the Atlantic.
Under an agreement reached by European Commission Executive Vice-President Valdis Dombrovskis and US Trade Representative Katherine Tai on Tuesday, the tariffs will be halted for a period of at least five years.
It will bring an end to punitive and disruptive levies on supply chains that have little to do with the argument, which became embroiled in the trade battle. Businesses on both sides of the dispute have been hit with more than $3.3bn in duties since they were first imposed by the US in October 2019, according the EC.
The US imposed charges on goods upto $7.5bn in response to a World Trade Organisation ruling that judged the EU’s support of Airbus, its biggest aircraft manufacturer, unlawful. A year later in November 2020, the EU hit back. The WTO found the US had violated trade rules in its favourable treatment of Boeing, and was hit with EU duties worth $4bn.
In all the tariffs affected $11.5bn worth of goods, including French cheese, Scotch whisky, aircraft and machinery in Europe, and sugarcane products, handbags and tobacco in America. Procurement leaders on both sides of the fence were forced to wrestle with tariffs of 15% on aircraft and components, and 25% on non-aircraft related products.
Boeing-Airbus dispute by the numbers
- The dispute began in 2004
- Tariffs suspended for 5 years
- $11.5bn worth of goods affected by tariffs
- $3.3bn in duties paid by businesses to date
- 15% levy on aircraft and 25% on non-aircraft goods suspended
Both sides welcome end to tariffs
European Commission President Ursula von der Leyen branded the truce a “major step” in ending what is the longest running dispute in WTO history. It began in 2004.
“I am happy to see that after intensive work between the European Commission and the US administration, our transatlantic partnership is on its way to reaching cruising speed. This shows the new spirit of cooperation between the EU and the US and that we can solve the other issues to our mutual benefit,” she added.
Both aircraft manufacturers have welcomed the news. Airbus said in a statement that it will hopefully bring to an end the “lose-lose tariffs” that are affecting industries already facing “many challenges”. Boeing added that it will “fully support the U.S. Government’s efforts to ensure that the principles in this understanding are respected”.
The US aerospace firm added: "The understanding reached today commits the EU to addressing launch aid, and leaves in place the necessary rules to ensure that the EU and United States live up to that commitment, without requiring further WTO action."
This week’s decision expands upon a short-term tariff truce announced in March this year. The EC says it will work closely with the US to try and further resolve the dispute, establishing a Working Group on Large Civil Aircraft led by each side’s trade minister.
Airbus last month signalled to suppliers that post-pandemic recovery was on the horizon, telling them to scale up to meet a return to pre-COVID manufacturing levels. “The aviation sector is beginning to recover from the COVID-19 crisis,” said Airbus chief executive Guillaume Faury, adding that suppliers should prepare for a period of intensive production “when market conditions call for it.”