How Does Continuous Improvement Help Procurement?

Six Sigma is a methodology whose origins can be traced to manufacturing and uses metrics to determine the quality of the processes. What is its objective? To fine-tune processes to perfection. This is done by identifying faults and reducing deviations within the system. Six Sigma has been found to boost the motivation of staff, quality and overall efficiency.

Applying Six Sigma to procurement processes involves the use of analytical tools provided by the methodology, and using these tools to improve human resources for higher productivity. Six Sigma provides techniques that are efficient in discerning errors in the organization’s procurement processes.

Application of Continuous Improvement in Procurement

With Six Sigma’s continuous improvement process, you can tackle any type of procurement processes within your organization. As you begin the process, you need to remember that the first step in Six Sigma’s DMAIC is Define. The first step demands that the targeted process be clearly outlined and that it should be determined whether the process can be completed within a reasonable time frame and produce a significant return on the process invested in it. The following are some of the procurement processes where Six Sigma has been successfully executed:

Reduction of Cycle Time

Six Sigma seeks to reduce waste by using quality metrics to identify errors. Using CTQs as a benchmark, those procedures that are Critical To Quality are given a higher priority. These techniques can be applied to many different processes including invoice approval, contract development, supplier on-boarding, requisition to order, amongst others.

Transaction Quality

Besides determining purchase orders that do not require corrections, other projects to be considered are:

• First-pass invoice match rates
• Requisitions that are correctly coded and classified
• Electronic orders
• Line item visibility spend

While Six Sigma is a methodology and not a standard that is not most ideal to use here, attaining more than a 90% score across these measures is a sure sign of high performance.

Adoption of Technology

Six Sigma may also be used to track the key variables that indicate adoption after implementing a new system. The methodology suggests that both the adoption rates of internal users and vendors be tracked as the part of the best practices that will guarantee an ROI for the technology investments made by the organization. Some examples include:

• Six Sigma can be used to track the percentage of internal users adopting new tools. It is important to note that adoption rates for applications that are tailored specifically for procurement yield higher adoption rates than enterprise-wide applications. In enterprise-wide applications users will often use other methods of completing the transaction as long as these methods are available to them.
• The percentage of vendors with electronic transaction systems. Here the 80-20 rule should be applied. Focus on the 20% of the suppliers responsible for 80% of the spend and prioritize them over the 80% responsible for 20% of the spend.
• The fraction of indirect RfQs that are from e-sourcing. A score of 85% for indirect RfQs is excellent while for direct a good score is about 50% and over.

Compliance

The application of Six Sigma comes from the recognition that every process has a designed output. Therefore Six Sigma can be used to pinpoint those errors that may result in non-compliance. This is important for profitability and as well as reducing the regulatory risks associated with the process. Some areas that could be tracked include:

• Contracts created, purchase orders issued, invoices paid, and suppliers on-boarded, without following the right procedures
• Pinpointing suppliers who are not ideal for the business or those that have been blacklisted in the past
• Identify RFQs that do not meet standards such as competitive bidding or includes a broader list of suppliers
• Identify vendor certificate and contracts that are about to expire, are expired, or in the process of auto renewal

Conclusion

Six Sigma can be of great benefit to an organization looking to enhance its human resources. Staff can be released from processes that contribute to waste and errors, as they focus on core tasks that are of more value to the organization.

As a tool for continuous improvement, Six Sigma encourages a paradigm shift in the way the organization handles and implements procurement processes. A leaner chain is created as the variations that lead to wastage, whether with processes, equipment and human resources, are eliminated. This learner chain yields better results for both internal and external clients.