We are hearing more and more about “re-shoring” of manufacturing. The Lean concept is becoming an accepted practice in progressive US manufacturing operations. It has helped to the make our domestic organizations competitive in the global marketplace.
“Lean” entails a complete change in philosophy from the traditional approach. It has proven to provide significant benefits in manufacturing operations. Can it be applied to purchasing operations?
Strategic purchasing is a critical operation. Purchasing budgets at many major corporations exceed the internal operating costs. Even with today’s low cost of financing, inventory carrying cost can exceed 1% monthly. As rates increase, this number will too.
The traditional purchasing approach is forecast driven. The ERP system utilizes sophisticated IT tools to generate a sales forecast in total and by product. This forecast creates purchasing requirements. With lead times on some components out as much as 3 to 5 months, the purchasing staff has to commit well in advance of order receipt. Unfortunately, forecasts have not proven to be highly accurate beyond current orders. The result is inventory that is not in balance with production requirements.
Our current forecast-based inventory management system is based on timing purchases to minimize costs including delivery and stock-outs. It is typically referred to as a “Push” process. Forecasting is a very difficult process. It is generally driven by historical results coupled with an estimate of future demand. Maintaining high forecast accuracy remains a challenge.
Did your system forecast the downturn that occurred in 2008-2009? Did it reflect the bounce back that began in late 2009? If it did, you were in the small minority of purchasing operations.
There is a better way. One of the basic concepts of Lean is—Create flow. If you can’t flow, “pull”, never push.
We will discuss the “pull” concept next time.