Standardization and reduction of complexity in procurement
During last 30 years procurement significantly changed due to active implementation of different e-technologies and globalization in the business life. As a result, we received an opportunity to achieve the significant advantages from computerization of whole «procure to pay process», starting from vendor selection and finishing by stock management via modern ERP-system.
Now procurement professionals try to find new ways of realized economy achieving. One of such way is attempt to receive 10–15% economy ion the stage of defining the customer requirements. Complexity reduction and standardization allows to receive such effect.
Standardization is focusing on implementation technical standards on the top place. The first stage in this process is defining the group of items or spare parts, which can be replaced by standard spare parts. This is continued by selection of such industrial standards best suited for job based on defined criteria.
Reduction of complexity means decrease the number of types, shapes, sizes, options etc. It often includes the next steps: designing of variant trees, identifying of potential and creation of the maximum alternatives, designing a business case, creation of an action plan. These proposals allows procuring fewer parts with increased volumes in the future and achieving attractive purchasing prices.
The good example of standardization was in aviation industry when it was replaced more than 30% of customized spare parts on the standard ones. As a result, the company achieved 25% decrease of material costs ii.
The good example of reduction complexity was in marketing trade equipment industry. Subsidiaries of international companies used more than 15 specifications of umbrellas due to different sizes. As a result global procurement team together with stakeholders decreased this quantity to 4 specifications with 4 standard sizes. As a result, the multinational company achieved a million dollars’ worth economy.
These examples showed that procurement professionals should focus their maximum attention not only on modern procurement tools like vendor appraisals, cost regression analysis but also on old well-known practices as standardization and complexity reduction.
i M. Leenders, P. F. Johnson, A. Flynn, H. Fearon. Purchasing Supply Management. — 13th Edition. — The McGraw−Hill Companies — 2006. — 564 p.
ii C. Schuh, R. Kromoser, M. F. Strohmer, R. R. Perez, A. Triplat. Purchasing Chessboard: 64 Methods to reduce cost and increase value with suppliers. — 2009. — Springer-Verlag Berlin Heidelberg. — 215 p.
Originally published at blog.anadolugrubu.com.tr on February 11, 2015.