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WHITE PAPER Lean Sourcing By Richard Metz & Bernardo Nicoletti http://www.goxglobal.com About the Authors Richard Metz: Programmer, Entrepreneur, COO, Consultant – Richard Metz spend the best part of a decade delivering transformation projects at General Electric being a buyer of outsourced services. Since 2007 he has been busy selling outsourcing services. So he now uses a unique combination of technology, business, and financial experience to help IT Directors, finance directors, executives, and government officials avoid undue risk when outsourcing IT services Bernardo Nicoletti has over 30 years of international technology and sourcing experience. He has held leadership positions in Alitalia Airlines, Sigma Plus, Galileo International and General Electric, including several years as Chief Technology Officer of GE Money and Chief Information Officer of GE Oil & Gas. Throughout his career, Bernardo has been particularly active in vendor negotiations & management, achieving unprecedented cost savings and quality improvements. Bernardo has authored 10 books on management strategy and he has spoken at numerous international events. He graduated from the Polytechnic School of Turin, Italy and has an MSEE from Carnegie Mellon University, USA. This white paper describes how to use Lean Six Sigma processes for effective sourcing. It seems that after a severe economic crisis, we are finally recovering. One of the lessons learnt by businesses has been the need to be as agile as possible. In this way, they will be able to adapt rapidly to changing socio-economic conditions. The sourcing department must take into account this imperative, since in many cases an agile organization makes more use of external vendors for its non-core activities. In order to help the Business to become more agile, it is essential for sourcing to aim to make sourcing itself as lean as possible by improving its processes and right- sourcing. On this respect, there are more and more opportunities connected not only with outsourcing, but also with BPO (Business Process Outsourcing) and more recently with KPO (Knowledge Process Outsourcing). The best methodology to reach the target of more agility is Lean Six Sigma and its tools. Lean Six Sigma combines the best of two distinct methodologies - Six Sigma, which helps in reducing the number of defects and the variation of the outputs; and - Lean Thinking which helps in reducing the cycle times and the lead times. A certain number of companies, such as Motorola, GE and Toyota have achieved excellent results by the use of these methodologies, in fields such as production, maintenance, marketing and finance. Various consultancies and thought leaders have developed a specific adaptation of the methodology to help sourcing and procurement in its client organizations to become more agile. At GOX, for example, we call this 'Lean Sourcing'. The methodology is based on the application of DMADV, one of the tools in Lean Six Sigma. DMADV allows companies to obtain drastic improvements in their business processes. The next step is to combine Lean Six Sigma with digitization. The idea is first to make the processes lean and then to digitize them. In this way, it is possible to reap the benefits of the automation of a process which has been optimized. The name DMADV derives from the initials of the steps in the application of the methodology: Define, Measure, Analysis, Develop and Verify. It is essential to apply this methodology in strong partnership between the sourcing, quality and target organizations (such as IT, finance or operations). Stakeholders from all parties need to align in setting up and staffing both the improvement project and the project team. Lean sourcing specialists can assist, and even help lead these projects at a client organisation. Perhaps more importantly, the organisation must treat the initial DMADV project as the beginning of an iterative cycle that generates continual improvement. Process improvement should not be triggered by a 'problem' or 'challenge', but rather become ingrained in the organisational culture. In outsourcing, the results of the methodology combined an outsourcing methodology that empowers multiple levels of the organisation to help attain its goals (such as Project Based Outsourcing), can yield significant results, on average: - Cost reduction between 20% and 40%; - Speedier responses to the need of the Business; - More flexibility; - A wider range and pool of talents from outsourcing companies, - Reduction of risks with the Vendors. In the next section we shall give more information on the methodology and its successful implementations. The name DMADV derives from the initials of the phases in the application of the methodology: Define, Measure, Analysis, Design and Verify. Lean Sourcing: The first step: Define The objective of many organizations nowadays is to accelerate the exit from the crisis and fuel the growth by making the organization more agile. In this way, it is possible to avoid some pitfalls of the recent past. The best methodology to reach the target of more agility is Lean Six Sigma and its tools. Lean Six Sigma combines the best of two distinct methodologies: - Six Sigma, which helps in reducing the number of defects and the variation of the outputs; and - Lean Thinking which helps in reducing the cycle times and the lead times. The methodology is based on the application of DMADV, one of the tools in Lean Six Sigma. DMADV allows companies to obtain drastic improvements in their business processes. The name DMADV derives from the initials of the phases in the application of the methodology: Define, Measure, Analysis, Develop and Verify. In an organization, before DMADV, there would be a Preparatory phase. Giving for defined the Context, Vision and Strategy of the organization, the main activity in the Preparatory phase would be the prioritization on which process we want to start. In the case of Sourcing, it could be the Request for Information, the Request for Quotation, the Order to Pay and so on. At the end of this preparation, it would be important to set up a Lean Six Sigma committee. It is necessary to submit the proposal of the process to tackle to the committee for its approval. In the Lean Six Sigma jargon, this step is called Tollgate 0. Once decided the process for the DMADV, the first phase of the methodology would be the Define, the main activities in this macro step are: - Define the process and the problem which we want to improve; - Definition of the macro-objectives for the initiative; - Decision on the Project leader; - Set up the team which will go through the application of the methodology: - Kick off the project and communicate to the entire organization (and in some cases also to the vendors); - Assess current environment (suppliers, organization, process); - Define Product/Service requirements (current and expected); - Identify opportunities and quantify potential benefits; - Build implementation plan (Analyze and Develop). The deliverables of this phase are: - Current process documentation, from an organization, physical and Information Systems point of view. In the latter case, it is important to define also the interfaces with the other processes in the organisation; - The SWOT (Strengths, Weaknesses, Opportunities, Threats), Stakeholder and risk analysis; - The stakeholder requirements; - The project plan through the development phase; - A rough and initial Cost Benefit Analysis. All these aspects can be summarized in a document that normally is called Project Charter. This document is submitted to the Lean Six Sigma committee for approval. In Lean Six Sigma jargon, this step is called Tollgate 1* Lean Sourcing: Measure In the last section, we covered the first step of Lean Sourcing, "Define", as based on the Lean Six Sigma methodology. We will now review the second step, "Measure", as part of the DMADV approach. The basic premise of the first step, Define, is to lay the groundwork for a successful programme. Before beginning the "measure" phase, we should have: - Defined the key process or problem to be addressed - Agreed upon the goals of the initiative - Identified the key stakeholders involved in the project - Gained consensus and approval to move forward with the project The key objectives of the "Measure" phase include the following: - An accurate measurement system, based on *stakeholder-approved* definitions - Sufficient information to validate the need and quantify the potential benefit - Specific objectives to be met by the remainder of the initiative - Approval (or agreement not to move forward) with the remainder of the project Many initiatives falter or even fail in the Measure phase because it is very easy to get bogged down in data collection activities. Often, information is not readily available, or is 'hidden' across different groups, teams and stakeholders. In cases where no previous data has been collected, it may take weeks, or even months for a new measurement system to start producing meaningful information. Further, in cases where there is a great deal of data, simply putting the means in place to collect information can be an entire project in itself! A few things to keep in mind when conducting the "Measure" phase of a Lean Sourcing initiative: - Don't ignore the standard measures, such as number of vendors (stratified by function/service), service quality, time to pay, number of transactions, and utilization of products/services... It doesn't have to be complicated! - Be cognizant of spin-off projects, such as time tracking for services, or asset management for software and hardware products. Such projects are very helpful in squeezing waste out of the budget, but the absence of these tools shouldn't stall a lean sourcing initiative. Often, simply reducing unnecessary suppliers and tracking & enforcing basic performance metrics can provide an enormous benefit. - In cases where the implementation of a new measurement system cannot be avoided, be sure to treat its implementation as a formal project. Done properly, this can be a big win by itself! - Consult your steering committee and key stakeholders often. You' may well be burrowing deep into the details, so high-level reviews will help keep the big picture in focus. - Data doesn't need to come from an IT system! Even subjective data, such as satisfaction surveys and focus group discussions can yield actionable information. At the very least, it will provide a good sanity check for other data you collect. - Its OK if a large-scale programme isn't there. Although projects are typically kicked-off as a response to a seemingly obvious need, sometimes the data will say otherwise. Halting an expensive initiative for lack of clear benefits is as good as running a successful project! At the end of the "Measure" phase, you will have a clear understanding of the problem at hand, the future target, and a discrete way of measuring your progress towards the goal. In our next chapter, we will review the third phase, "Analyze", which covers the "how" improvements can be made. Lean Sourcing: Analyse We will review the third step, "Analyse", as part of the DMADV approach. Additionally, we will address several risk mitigants to avoid common project failures. The most important prerequisite to kicking off the analyse phase is to have clearly demonstrated a meaningful potential benefit, and to understand very specifically how you will judge (i.e. measure) the effectiveness of any subsequent solution. However, there are scenarios where you may consider moving into the analyse phase without this: - There wasn't enough time or resource to collect conclusive information and data on the current sourcing programme - A key stakeholder (leadership, board member, etc) insists on moving forward for qualitative strategic reasons - The measure phase proved inconclusive, and only by analysing and even piloting solutions can you understand the true cost benefit analysis. If any of these scenarios apply, there may still be good reason to begin the analyse phase, but it should be done with the full understanding and approval of key stakeholders. Most importantly, stakeholders should accept the very real possibility that the result of the analyse phase may be to do little or nothing. The key objectives of the "Analyse" phase include the following: - The solution. During the analyse phase, you will have looked at various solutions that may be part of any lean sourcing initiative, such as: reducing vendor counts, implementing SLA tracking systems, renegotiation programmes, multi-sourcing, process improvements and IT systems for vendor and purchasing management. After reviewing the cost/timeline/benefit of these options, a future state solution should be identified. - Multi-Generational Project Plan. While very simple solutions may only need one 'generation', most solutions will need to be implemented in phases over time to maximize benefit while minimizing disruption to the business, additional cost and other forms of stakeholder fallout. - Pilot Preparation. A carefully chosen target area (perhaps a single business unit, a single element of the plan, etc) should be chosen. The goal of the pilot (conducted in the next phase) is to prove the efficacy of the solution, build support for the greater program, and to refine the plan for the overall programme. Ideally, steps can be taken during the Analyse phase to prepare the pilot group/process for a quick ramp-up given approval. - Updated Stakeholder Review & Management Plan. The end of the analyse phase is perhaps the most critical time to have a detailed, updated stakeholder management plan. Many projects do not make it to this point, and so people may not be truly engaged or aware of what's happening. Once this tollgate is passed, real change will begin to happen, and it is imperative to have the people who will make that happen fully on board. - Approval (or agreement not to move forward) to implement the solution. The analyse phase takes a step back out of the detail, and asks you to look again at the broader programme. In addition to the specific solution, special attention must be paid to the stakeholder plan. In sourcing, there are often long-standing and deep relationships between key people inside your organisation and the suppliers you will be working with. These relationships must be identified, classified, and ideally leveraged for the success of the programme. In some cases, mitigation plans may be necessary to avoid unhappy stakeholders jeopardizing the success of your programme. A few things to keep in mind when conducting the "Analyse" phase of a Lean Sourcing initiative: - Avoid the pressure "to deliver". In an ideal world (at least from the shareholder's perspective), everyone in a business is focused solely on the growth and success of the business. In real life, people are focused on the growth and success of their careers. Therefore, you may be under pressure, both personally and from leadership, to "get something done". It's very hard to demonstrate the value of not doing something, but it will be much harder to demonstrate the value of something that shouldn't have been done. - Enable yourself to have frequent and regular "wins". This holds true with any project... The best way to keep momentum, funding and support for a programme is to show results. Further, solutions that have several benefit-yielding milestones are easier to manage, and the risk of failure is significantly reduced. Even if an element of your plan consists of implementing complicated new systems, try to include changes and improvements that can be completed in the near term. - Be very wary of "visionaries". Oftentimes, stakeholders may push you towards certain solutions because of a their "vision" about how things should be. Unless those visions align with what you've concluded during the analyse phase, avoid these ideas (diplomatically, of course) at all costs. In cases where you cannot, make every effort to document their expectations discretely so that you can measure your own success as a product of achieving their 'vision', not as the possibly negative result of their idea. I doubt that there is any one factor contributing more to high-profile project failures. - Know the full stakeholder impact of your decisions. Let's say one of the decisions made is to reduce the number of IT development service providers by 50%. There are clear winners and losers both inside and outside the organisation - the suppliers being downsized or eliminated, and the IT leaders who champion them, may push back very strongly. Those suppliers getting a bump should be very happy with the plan. Remember to address both. If you are expending effort to manage the "losing" stakeholders, you should also reap some benefit for the "winners". As with any framework, it is important to keep the big picture in sight. Detractors state that methodologies such as these merely add an inordinate amount of bureaucracy and work to a process that should be "common sense". And in some ways, they are correct. It is easy to look at a process or programme from the outside and have a good idea about how it should be run and managed. However, as a project or programme manager working in the detail, with pressure coming from all over the organisation, it is very, very easy to lose sight of the big picture. The key is to use the frameworks as the means to remain on the right path - not as a series of ends which must be satisfied. Lean Sourcing: Design We will review the fourth step, "Design", in our DMADV approach. As in previous steps, we will address several risk mitigants to avoid common project failures. At GOX, we often refer to this as a "build" phase, because the primary goal is to execute the pilot defined in the Analyse phase. While virtually every activity undertaken should ultimately reside in refined, ongoing processes, there are often several "one-off's" that fall outside of future sourcing processes. For example, vendor consolidation is (ideally) a one-off or as-needed activity, while managing and maintaining the right supplier mix is an ongoing process. The other caveat to remember is that unlike many internal processes, it may be very tricky to fully ring-fence a Lean Sourcing pilot. For example, if part of the solution involves introducing a new project- based outsourcing process, or moving from single- to multi-sourced models, your suppliers may react as if the entire organisation has committed to the shift before it actually has. The key objectives of the "Design" or "Build" phase include the following: - Vendor Preparation. The vendors that will be involved in the pilot run of your Lean Sourcing programme will need to be prepared for upcoming changes. In cases where a process is significantly changing, use incentives to help ensure their compliance. Incentives can be direct (e.g. promising more business, penalties, bonus) or indirect (e.g. making it clear that new projects and services will only be procured via the new process). - Contractual Work. Depending on the nature of your pilot, you may need to either renegotiate certain aspects of existing contracts and/or negotiate new contracts with suppliers that you are introducing. In many cases, however, it may make sense to work off informal agreements throughout the Design and Verify steps as it is likely that additional process and strategy changes will be necessary. - Process & Technology. The new processes must be laid out and communicated thoroughly to internal teams. Additionally, now is the time to install and configure any technology to be used in supporting these new processes. - Stakeholder Prep & Close Monitoring. In analyse we did the analysis - now its time to get ready and ramp up. In the same way that your suppliers need to be informed and bought into the new processes, so must your internal teams. Frequent and regular updates and open forum meetings should be scheduled throughout the late Design and Verify stages. - Support Structure. Any tools or people that will be used in supporting your Lean Sourcing initiative should be put in place. These can include instructional websites, a help line, sourcing support staff. It is important to use your support team both as a facilitator as well as a measurer of the challenges and successes of the programme. - Pilot Kickoff. Once the stage has been set, your processes laid out, technology pilot in place (where applicable), and your suppliers and internal stakeholders are ready, it is time to begin using the new processes and enter into the "Verify" phase. A few things to keep in mind when conducting the "Design" phase of a Lean Sourcing initiative: - Your suppliers are not machines. Don't lose sight of the fact that strong supplier relationships can still trump any process rigor you've put into place. A competitive bidding process, for example, can reduce costs dramatically, but if your supplier becomes disenfranchised, quality and timeliness will be impacted. - Stay flexible. It may not be feasible to change some or many of the processes and contractual agreements that are currently in place... at least not in the short term. While you do not want to treat these as barriers to success (or an excuse for failure), you may well need to work around them. If any of these incumbent factors seriously impact the success of the programme, they should be thoroughly addressed with top-level stakeholders so that they can either remove the barrier, or reset expectations accordingly. - Empower your operational team. Possibly the single biggest source of failure in big sourcing initiatives is the mismanagement of operational stakeholders. Once the sourcing groundwork has been laid, the programme and project managers responsible for delivering those services become both your biggest weapon and potential failure point. While sourcing teams can manage and monitor overall spend and service levels, the people who interact with your suppliers on a daily basis have the ability to closely monitor and manage these services. They can detect service erosion far earlier than IT or sourcing leaders, and if properly empowered, they can also resolve these issues before they snowball. Conversely, disenfranchised managers may use new sourcing processes as an excuse for failure, undermining the entire initiative. At the end of the "Design" stage, you will have your processes and in-scope teams ready for the pilot run. The goal should be to have strong buy-in from senior management, your operational teams and your suppliers . The solutions that you plan to pilot may have changed somewhat during this phase due to incumbent processes and contracts, or because concessions needed to be made in order for all parties to work together successfully. Provided that the ultimate solution set you plan to pilot has a strong projected ROI, you can move on to the "Verify" phase, which you can read more about in our next monthly edition. Lean Sourcing: Design We will review the final step, "Verify", in our DMADV approach. As in previous steps, we will address several risk mitigants to avoid common project failures. And finally, the question, "What exactly did I just do?", becomes clear. In a perfect world, your pilot delivered better than expected results, and you are fully confident in "flipping the switch", and immediately rolling out new sourcing processes and systems throughout the business. In reality, "Verify" is generally an ongoing, iterative process of continual improvement, tweaking and expansion of your programme. The likely best case scenario is that you will begin to see actual cost savings, or the clear path towards savings as a result of your pilot - There is often an "unwinding" period whilst existing contracts are closed out, or service providers switched, and these expected 'investments' will start paying for themselves in the near term. In these cases, the Verify stage is used to validate the measurement system in place, to develop a full-term rollout plan, and to execute. In a more middle-of-the-road scenario, you will find that your pilot provides the foundations for success, but that certain aspects are either more difficult or costlier than anticipated. Possibly the most common issue faced is finding that a sourcing strategy that looked great on paper, didn't work out as expected once the actual consumers in your company started using the resultant products or services. This generally happens when a far stronger emphasis is given to renegotiations and rate reductions than is given to supporting and preparing the consumers (generally IT and operations managers) to be successful. While this is by no means a show- stopper, it should certainly be addressed in subsequent rollout plans through training, stakeholder management, and even compromise. In unfortunate cases where the expected benefits are not delivered, it may be time to rethink the fundamental aspects of your Lean Sourcing strategy. In addition to the lack of consumer readiness, the issues uncovered during a pilot can include: - Supplier capability challenges. Reducing supplier count can save a great deal of time cost, but it may create gaps across the product and service set. - Product or service failure. Switching or consolidating suppliers runs the inherent risk of a process or product in the company failing. - Slow adoption or no adoption. Unless you have a CEO-mandate behind you, there needs to be something in it for the consumers. If there is no perceived benefit, you may get little more than polite lip service. Even in these cases, it is critical to quickly identify and address the "misses" before your stakeholders become disillusioned. Almost by definition, any sourcing organisation can become leaner and more effective, yet the steps each must take can be very different. Remind your stakeholders frequently that a "pilot" is intended to uncover these very challenges, and that it has been decidedly successful in doing so! The pilot should also uncover short-term opportunities that can be used to maintain momentum for the programme whilst the larger strategic component is reviewed. Unlike the other stages, there is hardly a discrete "end" to the Verify stage. As a sourcing leader you should have time-bound targets based on savings, efficiency and/or simplification. However, a commitment to continual review and improvement should not only keep your organisation lean, it will deny your successor an opportunity to look like a hero!!
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