Procurement Purchasing

Written by Sarah Provost
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Procurement purchasing of goods and services is a field that has recently undergone some radical changes. Two factors that have influenced these changes are the explosion of online purchasing and the widespread adoption of the Japanese "Just-In-Time" or "Lean" management model. These two factors working together are creating a synergistic transformation of procurement purchasing methods and concepts.

The Lean managerial model was developed in Japan in the mid-1980s by Taiichi Ohno, at Toyota. The four principles of Lean thinking are: Center on People, Postponement, Optimization and Eliminating Waste. "Center on people" means that workers should be given the widest possible range of activities and responsibilities, rather than creating a workforce of narrowly focused individuals. "Postponement" means waiting to take action until it is necessary, thus eliminating costly backlogs.

"Optimization" refers to being aware of the flow of a process. Each step has an input and an output, and the productivity of the whole is directly related to the efficiency of each step. "Eliminating waste" speaks for itself, yet there may be areas in your company's process where things are done because they always have been, but do not actually add any value.

Lean Procurement Purchasing

How does this model apply to the procurement purchasing process? The first principle, "center on people," suggests that some aspects of procurement can be decentralized by allowing employees to do their own purchasing within clear guidelines. It also puts a spotlight on the personal relationship between purchaser and supplier. "Postponement" means limiting purchases until they are actually needed, thus avoiding a build-up of inventory that may not be used promptly or at all.

"Optimization" in procurement purchasing refers to the elimination of bottlenecks. The three areas where bottlenecks most often occur are approvals, RFPs and inquiries. Lean procurement would decentralize the approval process, eliminating the bottleneck that occurs when one person must approve all purchases. Validating requests for proposals and supplying information can be facilitated by the use of software, one of the ways in which Lean procurement purchasing intersects with E-procurement. All of these steps go toward eliminating waste in the procurement process, but you should also take a look at your current policies to be sure there are no unnecessary steps.

Online Procurement Purchasing

"E-procurement" is the current buzzword in procurement purchasing. The three primary techniques for streamlining procurement are private trading exchanges, public trading exchanges and reverse auctions. Recent research indicates that savings realized by using these procedures range from five percent to 40 percent, with the average around 15 to 20 percent.

Lower prices are only one of the advantages of E-procurement. By creating a standard procedure for purchasing, the procurement process can be made 20 to 25 percent more efficient as well. Much of this improvement comes from eliminating redundancies and clerical and administrative tasks that can be done by software.

There is one caveat regarding E-procurement, however, especially as it relates to Lean purchasing, and that concerns relationships with suppliers. While reverse auctions are a highly efficient way to bring costs down, suppliers can become resentful when forced to bid for your business. Don't become too focused on cost at the expense of other factors. Balancing price, quality and reliability is still of primary importance.

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