The Point by Buyers Meeting Point
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Book Review: Lean TCO
We often talk about how procurement and supply management professionals need to focus less on negotiating savings and more on creating value. But the actually process we are supposed to follow to accomplish that can be unclear. The first challenge is how to go about creating value, and the second is how to make sure the value created is recognized by other departments in the organization – like finance or operations. ‘Lean TCO’, written by Tim O’Meara, presents an approach to facing both.
The strengths of this book are based on the fact that it is written based on Tim’s professional experience as a Lean practitioner, and therefore all of his recommendations are backed up by real-world examples. Most of that experience is as a supplier, and although the book contains valuable lessons for both buyers and suppliers, I liked the approach of reading a book of advice on increasing efficiency written by a supplier who has seen – and maybe more importantly – been hurt by buy-side cost displacement.
What are Lean and TCO?
Although the title of the book presents lean and TCO as a combined concept, it is worth considering each alone.
Lean is a methodology aimed at the creation of value through elimination of waste. The Lean management philosophy became famous based on its use in the Toyota Production System in the 1990’s. Lean principles may be used to improve process flows, manufacturing practices, and of course, supply chain efficiency.
TCO is short for Total Cost of Ownership. The idea is that any item or service you purchase costs more than its price alone. There are the costs of shipping, handling, storing, and restocking at each point in the supply chain. Any inefficiency or leakage between any supplier and any customer anywhere in the supply chain that leads to you increases your costs. Therefore, the approach in this book advocates reducing the costs for your supplier to do business so you can benefit from gained cost efficiencies.
Consumable Supply Categories
The lean principles outlines in Lean TCO are specifically related to consumable supply categories. This doesn’t mean that they wouldn’t work on other categories, but the turnover rate, inventory challenges, and cost ratio between purchase and delivery make consumables the easiest target for management under this approach. Some examples of supply categories are: maintenance consumables and repair parts, industrial and safety supplies, first aid supplies, office supplies, and janitorial products.
What should procurement professionals take away from this book?
From a procurement (versus lean) perspective, there are a few key take aways – some more actionable than others. But as our ultimate goal should always be to keep expanding the perspective we bring to the work at hand, all will improve our performance and creativity.
Thinking we accurately capture the total cost of any product or service will almost always be an over statement. We simply do not have the visibility back into the supply chain, or measurements of the indirect costs our internal practices, to fully document the total cost. There are two things we can do to at least actively minimize totals cost: we should drive out inefficiency in our own company wherever we find it, and we must learn to evaluate our suppliers’ ability to manage their own costs and supply chains on our behalf.
Our suppliers are more of a resource than we know: and we think we know how important they are to our operation. Time is always of the essence, but finding opportunities to sit and listen to our suppliers’ advice about how we can eliminate cost, waste, and inefficiency may yield some surprising ideas. Although there were many examples of the author’s supply company struggling with buying organizations that simply deferred their costs to their suppliers, there were only a few examples of buyers seeking opportunities to improve, and asking their suppliers for help.
The fact that Lean TCO is written from a supplier’s perspective means that many of the cost reductions are felt first by the supplier and second (as pass through savings) by the buying organization. Although at first glance it may seem like procurement organizations are asked to do a lot of work to save their suppliers money, working towards ‘pass through’ savings has an advantage – if the savings can be seen at the line item level, then it is much easier to get the rest of the organization to recognize them.
Think of this as a ‘laundering’ process. Procurement needs to increase efficiency as opportunities are uncovered. But if we try to claim those internal savings ourselves, they are called ‘soft savings’ and either discounted or not recognized at all by the rest of the organization. Alternatively, if we route that savings to our company through a supplier, it gets counted. So maybe not all of the savings makes it all the way back to our bottom line, but getting credit for some of the savings is better than getting credit for none of it.
Basic Lean Terminology
You can be an absolute novice to lean practices and still take a great deal of value away from Lean TCO. If this describes you, I suggest starting the book by reading the section on ‘Visual Supply Management and Kanban’ (pages 78-85) because the case study in this section illustrates the proper usage of many of the practices advocated in the book, as well as the improvement process and a good example of a desired outcome.
There are only a few instances of ‘terminology’ or acronyms that non-lean practitioners might find useful:
Six Sigma - Six Sigma is a business management strategy, originally developed by Motorola in 1986. Six Sigma became well known after Jack Welch made it a central focus of his business strategy at General Electric in 1995, and today it is widely used in many sectors of industry. Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Black Belts", "Green Belts", etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets (cost reduction and/or profit increase). (Wikipedia, Six Sigma)
DMAIC - Six Sigma projects follow two project methodologies inspired by Deming’s Plan-Do-Check-Act Cycle. These methodologies, composed of five phases each, bear the acronyms DMAIC and DMADV.DMAIC is used for projects aimed at improving an existing business process. DMAIC is pronounced as "duh-may-ick".
The DMAIC project methodology has five phases:
- Define the problem, the voice of the customer, and the project goals, specifically.
- Measure key aspects of the current process and collect relevant data.
- Analyze the data to investigate and verify cause-and-effect relationships. Determine what the relationships are, and attempt to ensure that all factors have been considered. Seek out root cause of the defect under investigation.
- Improve or optimize the current process based upon data analysis using techniques such as design of experiments, poka yoke or mistake proofing, and standard work to create a new, future state process. Set up pilot runs to establish process capability.
- Control the future state process to ensure that any deviations from target are corrected before they result in defects. Implement control systems such as statistical process control, production boards, visual workplaces, and continuously monitor the process.
Some organizations add a Recognize step at the beginning, which is to recognize the right problem to work on, thus yielding an RDMAIC methodology. (Wikipedia, Six Sigma)
5S - 5S is the name of a workplace organization method that uses a list of five Japanese words: seiri, seiton, seiso, seiketsu, and shitsuke. Transliterated or translated into English, they all start with the letter "S". There are five primary 5S phases: sorting, straightening, systematic cleaning, standardizing, and sustaining. The list describes how to organize a work space for efficiency and effectiveness by identifying and storing the items used, maintaining the area and items, and sustaining the new order. The decision-making process usually comes from a dialogue about standardization, which builds understanding among employees of how they should do the work. (Wikipedia, 5S: Methodology)
-- Kelly Barner, Co-owner, Buyers Meeting Point
About Tim O’Meara
Tim is a lean methodology executive and consultant with broad engineering, manufacturing, supply chain, and Information Technology experience. He is now launching VPCard, a firm providing web-based SaaS solutions for managing Indirect Spend, accelerating procurement efficiency, and automating vendor payment.