By James P. Womack. There are really two ways to think about a supply chain. One is a market of many bidders orchestrated by Purchasing. The second is a stable set of partnerships with a small number of suppliers created by Purchasing. In the fading world of mass production the overwhelming choice of supply chain professionals was to orchestrate markets: Set qualifying standards and encourage as many bidders as possible. Then depend on market dynamics to drive suppliers to higher levels of efficiency while providing lower prices and better service to the buyer. In the emerging world of lean production, supply chain managers seek to create win-win relationships with a small and stable supply base by focusing on the shared value creation process – what we call the value stream – that flows through the supplier firm into the buyer firm. Instead of accepting the pricing, quality, delivery, and flexibility levels offered by the best current supplier, the lean supply chain manager works with suppliers to challenge every step in the value creating process and gradually move it toward perfection. Doing this involves an entirely different set of skills from traditional mass-production purchasing. In particular, it requires that purchasing managers learn to see the value stream – the sequence of value creating steps required to design, make, and deliver the product – and learn to remove the waste, mistakes, and rigidities. Instead of awaiting successful results as the market grinds on the suppliers, lean purchasing professionals focus relentlessly on improving the value creating process to insure successful outcomes. Recently Dan Jones and I have provided a simple guide for this thought process in our workbook Seeing the Whole (Lean Enterprise Institute, 2002, www.lean.org). We show how purchasing managers can draw a simple value-stream map for a given component stretching all the way from raw materials into the hands of the end customer. The map shows every step involved in the ‘current state’ of the value stream, including the value of each step, and the time and effort required. From the current-state map it’s easy to apply lean principles to create a ‘future state’ and even an ‘ideal state’ that the supplier should be able to achieve by working with the purchaser. This tool was not developed by theorizing but instead on many walks Dan and I have taken over the years with purchasing managers and buyers along their value streams. It has only been through these continuing exercises (which continue today) that we have been able to understand the tools purchasing staff need to move from mass to lean. One of the most striking aspects of these walks is the initial assumption of purchasing managers that what goes on inside their own organization is irrelevant to supplier performance. Their attitude almost invariably is that suppliers are there to do everything they can to make the customer happy and to be replaced if they can’t. Then, as we walk along the value stream, the reality gradually begins to dawn that supplier costs are in many cases the direct consequences of customer behavior: Out-of-control engineering change processes that require repeated adjustments to production activities at the supplier; sclerotic process certification requirements which discourage suppliers from performing kaizen on their processes; and erratic schedules from customers that bear no relation to daily shipping requirements. One of the key findings always is that purchasing must look inward at the rest of its own firm as well as outward at the supply base. The awareness building on these walks goes the other way as well. As we proceed, suppliers routinely state that they have already done ‘the lean thing’ and have examples of 5S, set-up reduction, cellular manufacturing, and poka-yokes for quality improvements to demonstrate this. The sad fact we often observe is that the purchasing professionals have absolutely no capacity to evaluate these claims – many of which are bogus. Nor do they have the skills to point out the root causes of waste in supplier operations. From their past experience, the buyers know how to take bids and how to play suppliers against each other, but they usually have no knowledge of how to raise the performance of even the best suppliers to a higher level while removing fundamental causes of cost. This then is the new challenge for lean purchasing. Every senior manager and every buyer needs to gain the fundamental knowledge required to analyze every value stream and create a plan for essential improvements. This takes time and effort and results are only achieved slowly at the start. But the improvements are continuous and accelerate over time. By contrast, the market-based approach, in which the buyer never examines its own behavior and simply looks for new supply sources to keep the pressure on existing suppliers, can produce quick results. And the recent experiments with reverse auctions produced initial results even faster. But then performance plateaus or even falls backwards as suppliers conclude they can no longer work for tiny or even negative margins. What else can be expected when no attention has been paid to fundamental cost drivers? And there is little prospect of further improvement. Where do you stand as a supply professional? Here’s a simple test: * If you are currently calling your suppliers to talk about price and to demand price reductions without specific reference to cost drivers, you are a mass production supply chain manager. * If you are calling to talk about the value creation process and specifically how to reduce costs (and prices) by taking out wasted steps along every value stream while improving quality and responsiveness, you are a lean supply chain manager. We hope you are becoming the latter. We are certain that the future lies with the lean supply chain and the lean purchasing organization, as pioneered many years ago by Toyota. Based in Brookline, Mass., USA, the Lean Enterprise Institute (LEI) is a nonprofit training, publishing, and research organization founded by James Womack, PhD, in August 1997. It has developed simple but powerful tools for implementing a set of ideas known as lean production and lean thinking, based initially on the Toyota Production System and now extended to an entire Lean Business System. For more information, visit LEI at www.lean.org.