One of the most well-known success stories of Lean implementation within the procurement and supply chains happened in Lockheed Martin. This company is the result of a merger of two large companies (Lockheed and Martin Marietta) that resulted in the amalgamation of eighteen different corporations working as individual entities. The aftermath of the amalgamation within the procurement and supply chain department meant eighteen different MRP systems, eighteen different ways of purchasing, eighteen different ways of part numbering, and so on, creating a complex and inefficient process.
When Lockheed Martin launched their “LM21 Operational Excellence” program to implement the Lean Six Sigma methodology in their procurement and supply chain processes, they envisioned cost savings in the order of $3.7 billion over a four-year period. Savings of about $4 billion were achieved after four years. One of the executives of this program said, “So far, we were able to reduce the cost of procurement by 50% while reducing the lead time for purchase order processing by over 40%, greatly improving our internal customers’ productivity and satisfaction.”
Lockheed Martin, in the same way as Toyota and many other businesses with a strong Lean culture, worked their way towards the improvement of their procurement and supply chain processes by a careful prioritization of their suppliers. This prioritization led them to partner with the most relevant vendors in order to develop a ‘common language’ to set up mutual understandings of quality standards, compliance with lead times, etc. The Lean Six Sigma methodology was successfully used for the implementation of that ‘common language’ along the supply chain, generating substantial cost savings as mentioned above. These success stories gave precedence to the point of becoming a trend for many businesses that seek the implementation of a Lean culture, not only to remain competitive but also to qualify as ‘Lean vendors’ and gain new customers.
What is Lean?
The lean methodology was developed with the ultimate goal of reducing costs and increasing efficiency by identifying and eliminating activities in a given process (service or manufacturing) that fail to add value and yet consume resources. In the lean terminology, value is defined as ‘what the customer is willing to pay’. As a result, lean is heavily oriented not only to efficiency and cost reduction but also to creating value to ensure customer satisfaction.
On the other hand, Six Sigma is a system developed with the goal of controlling variation and making processes more consistent and reliable to ensure the quality of deliverables. The combination of Lean with Six Sigma results in a faster creation of value at the lowest possible cost.
Lean/Continuous Improvement within Procurement & Supply Chain
Although procurement and supply chain issues may differ from one industry to another, in our consulting practice we have observed similarities across several industries that are quite astonishing. For instance, in the mining industry we have observed that a significant source of delays and inefficiencies in the procurement process came from an excessive number of ‘approval steps’. We have also observed a similar problem in the telecommunication industry, where we have come across situations in which purchase orders of very low dollar amounts required the signatures and approval of two managers and three executives.
Other common procurement and supply chain issues repeatedly appear in multiple industries:
- Lack of compliance with quality standards
- Lack of compliance with delivery deadlines
- Price fluctuations
Additional challenges to the procurement of goods and commodities include requirements to comply with expiration dates, as is commonly the case in the food, beverages and health care industry.
These procurement and supply chain operational challenges should be measured and monitored with very simple and tangible KPIs that could, over time, provide insight about improvements or inefficiencies. In a previous blog regarding the health care industry, we have mentioned a Lean case study in which a hospital reduced the setup times required to prepare surgical trays by reducing the number of surgical tray setup configurations from 12 to 2. This improvement not only meant a significant reduction in labour costs and setup times but also had significant implications for procurement. Reducing the number of surgical trays decreased the so-called costs of complexity: procurement was able to reduce the number of items to be purchased while increasing the volume of the items being procured. This paradigm shift allowed them to negotiate better terms and prices with their vendors, generating further cost savings.
Another KPI typically monitored in procurement, regardless of the industry, is the number of items in back orders. In the textile and retail industry, we came across cases in which this KPI grew undesirably to such levels that 50% of the time of an employee was devoted to following up with those orders. We can also share success stories related to the reduction of inventory values as well as the work in process (WIP). The use of Kanbans and other Lean techniques have helped our clients accelerate the flow of WIP and have also been instrumental in addressing discrepancies issues between the quantities observed in shelves and those shown in the MRP system.
Further procurement and supply chain issues can normally be found in situations in which the volumes being demanded are above those being offered. In those cases, working in partnership with suppliers becomes more crucial than ever, and strategic planning as well as change management techniques to get the buy-in of vendors becomes essential.
The process mapping tools provided by Lean such as Process Map Flow, Value Stream Maps and Spaghetti Diagrams are always useful to visualize the sources of redundancies, delays, recoils in the process, excessive handling of goods or information, and many other inefficiencies that consume a significant number of resources in a procurement or supply chain process.
In the cases of procurement of goods that need to comply with quality standards determined by well defined tolerances or specification limits, working in partnership with your internal or external suppliers to set up a statistical process control (SPC) is of paramount importance. The SPC will be instrumental in determining the process capability, and indicators such as Cp and Cpk or Pp and Ppk. This powerful tool will be extremely useful for determining further process improvements, the Sigma Score of your process, the defects to be expected and, as a consequence of this, the financial benefits that you can expect to achieve when improving that process. Undoubtedly, this type of improvement in your process will also deliver higher rates of customer satisfaction. During our consulting practice we have observed a wide range of examples of critical to quality (CTQ) variables in the procurement of goods that need to be monitored in a process capability analysis. Some of the most common examples include the compliance with specification tolerances related to dimensions or to the concentration of certain chemicals, to name a few examples. However, there are further statistical tools that have successfully delivered significant benefits to operations within procurement and supply chain, such as correlation analysis, regression, statistical predictions, hypothesis testing, and many more.
Lean Six Sigma Implementation & Training
At AMSaxum we help our clients with the implementation of process improvement projects and provide onsite corporate training on lean six sigma/continuous improvement methodologies. There are Government grants available in Canada and the USA to cover the cost of corporate training.
Government Funding & Assistance Options
In addition to the tangible benefits possible through lean, the research and development efforts (labour, materials and subcontracts) required in supply chains could be eligible to be recovered through government funding, such as through the Scientific Research & Experimental Development (SR&ED) program in Canada.
For companies in North America, specifically, there could be applicable grants to aid in upfront costs such as capital investment and employee training. AMSaxum experts in government funding help with the application of these grants and with the preparation of SR&ED claims.
There are additional tools that can aid in improving overall efficiency, such as an RCCA labor tracking solution we offer, which is an application for collecting data or for tracking labour or KPI efficiency.
For more information on continuous improvement and Government funding in procurement and supply chain call AMSaxum at 905-315-6847 or contact us here.