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Reducing Purchase Order Lead Time by 33% Using Lean Six Sigma - GoLeanSixSigma.com

George Wong’s Green Belt Project Storyboard involved a cycle time reduction process dealing with purchase order creation. The goal was to reduce the time to create and deliver a purchase order to a supplier from 3 days to 2 days, while also reducing the time to enter quotation information from 5 hours to 4 hours. These goals were successfully met in less than two months.

Process analysis revealed substantial non-value-added activities, especially for approvals. There were six potential root causes identified, two of which were confirmed by data, while the other were refuted. These validated root causes led to elimination of two approvals and revision of the process to allow multiple parallel inputs, improving overall flow.

A monitoring plan was established to track cycle times and respond if they become excessive. The improvements in this process can potentially be applied to other locations throughout the world.

– Bill Eureka, GoLeanSixSigma.com Master Black Belt Coach

Executive Summary

Business Case

Reducing purchase order lead time will help our suppliers appreciate the efficiencies of our PO process and allow them to deliver items to the manufacturing plant in a timely manner. This can enhance the relationship with suppliers and allow for negotiating better price for ordering material items and services.

Root Causes Analysis

Data showed the purchase order approving process requires too many levels of approvers, a long time to check request codes, lots of time needed in entering an order, not having the supplier listed in the PO system, and not an easy way to re-order a specific item a previous order.

Solutions Implemented

  1. Created a new approval flow process that only two signatures are required.
  2. Created a new form for ordering new item or services.
  3. Created a new from for PO requester to efficiently collect necessary information from a new supplier.
  4. Re-designed the order form to allow a requester to select item(s) from previous order.

Project Results

Purchase order lead time has decreased from 3 days to 2 days. Order entry time has decreased from an average of 5 hours to 4 hours or less. Requesters have shown a higher level of confidence to inform requesters that PO will be issued within 2 days. 10 more suppliers have become a “preferred vendor” and offered 5% discounts on each purchase of value >$500.

Graphical Display of Improvement

Improved Purchase Order Lead Time - GoLeanSixSigma.com

Improved Purchase Order Lead Time

Operational Definitions

  • Purchase Order (PO) Lead Time: Total cycle time from the moment the supplier provides the quotation to the moment they receive the corresponding purchase order.
  • Suppliers: Companies that provide specific parts and service to XYZ Company
  • Preferred Vendor: A supplier qualified by the purchasing department to be the primary source for ordering certain parts and service. A vendor is considered preferred when it offers at least 5% discount to stock items in each order.
  • Stock Item: An item that is readily available for shipment from the supplier to XYZ company
  • Purchase Order Approver: A person beside the purchase order requestor to approve the issuance of a purchase order

Project Charter

Problem Statement

In the last 3 months, we have been receiving complaints from the parts suppliers about how long it takes for them to receive a purchase order after sending us the quotations. Current cycle time average is 3 days. If this continues we may not have enough parts to manufacture our products and lose 5% discounts from our preferred vendors. We could also lose revenue as some batches will not be manufactured on time for our customers.

Goal Statement

Reduce the cycle time to deliver a purchase order to supplier from an average of 3 days to 2 days or less. Reduce the time to enter quotation information into the PO system from an average of 5 hours to 4 hours or less by July 15th.

Scope

  • Process Start: Official quotation arrives from the supplier
  • Process End: Deliver Purchase Order to supplier (via fax or email)
  • In: Parts required for manufacturing each product, process steps, length of time for entering quotation into system
  • Out: Replace existing electronic PO system, hiring more data entry persons, order larger quantities in each order

Business Case & Benefits

Purchase Order Cycle Time improvement would result in a faster response of our suppliers to deliver parts to our manufacturing plant. Purchase Order time reduction could also translate into monetary benefits because suppliers will be willing to offer discounts for being qualified as a “preferred” vendor.

Timeline

PhasePlannedActual
DefineJune 10thJune 10th
Measure June 15thJune 17th
AnalyzeJuly 10thJuly 12th
ImproveJuly 15thJuly 14th
ControlAugust 1stAugust 10th

Team Members

PositionPersonTime Commitment
Team LeadProduction Manager25%
SponsorPlant Supervisor15%
Team MemberFinance Manager15%
Team MemberStock Room Manager10%
Team MemberPO Entry Admin10%

Voice of the Customer (VOC) Translation Matrix

VOC Translation Matrix - GoLeanSixSigma.com

Key Takeaway: Project needs to address Purchase Order Lead time which will impact on delivery times as well as suppliers relationship.

SIPOC

SIPOC - GoLeanSixSigma.com

Key Takeaway: The scope of this project goes from the point of receiving the quotation to the point at which the purchase order is sent to supplier.

As Is Swimlane Map

"As Is" Swimlane Map - GoLeanSixSigma.com

Key Takeaway: Requirement for multiple levels of approvals and checks leads to a lot of hand-offs and overall cycle time.

Data Collection Plan

Data Collection Plan - GoLeanSixSigma.com

Key Takeaway: Data collection was spread out among different groups covered a 6-week period. Most data can be retrieved by a query.

Baseline Data

Purchase Order Lead Time (Receivable Items)

Purchase Order Lean Time (Receivable) - GoLeanSixSigma.com

  • Average: 53.70 h (2 days 5.70 h)
  • Standard Deviation: 13.08 h
  • Minimum: 24 h
  • Median: 54 h
  • Maximum: 90 h

Purchase Order Lead Time (Services)

Purchase Order Lean Time (Services) - GoLeanSixSigma.com

  • Average: 48.42 h (2 days 0.42 h)
  • Standard Deviation: 12.16 h
  • Minimum: 18 h
  • Median: 48 h
  • Maximum: 84 h

Key Takeaway: The baseline shows that for purchase orders, the Lead Times for both receivable items and service were above the 48 hr requirement.

Fishbone Diagram

Fishbone Diagram - GoLeanSixSigma.com

Key Takeaway: Initial brainstorming indicates that excessive approval signature requirement and PO entry times might be potential root causes.

5 Whys

Why do Purchase Orders take so long to deliver to the supplier?

Because it requires approval from many departments.

Why does it require approval for purchasing, production and finance?

Because each department needs to verify accuracy and purpose of each PO request.

Why does the PO accuracy verification take time?

Because each PO needs the department supervisor to approve.

Why does a PO need a supervisor to approve?

Because the plant manager agree to the approval requirement.

Why does the plant manager agree to the plan?

Because it was agreed in a meeting five years ago.

Key Takeaway: Root Cause Analysis will focus on verifying hand-off to approver in each department impacting Purchase Order Lead Time.

Process Analysis

Process Analysis - GoLeanSixSigma.com

Key Takeaway: Many steps are non-value adding or non-value-adding but required – lots of opportunity to remove “waste” including approval times.

Hypothesis Confirmations (I)

Histogram of Production Approval Time

Hypothesis 3 (TRUE): Production Approval Time – (Before Change)

Histogram of Production Approval Time - GoLeanSixSigma.com

  • Sample Size: 100
  • Average: 6.49 h
  • Standard Deviation: 2.10 h

Histogram of PO Delivery Time

Hypothesis 6 (FALSE): PO Delivery Time (Before Change)

Histogram of PO Delivery Time - GoLeanSixSigma.com

  • Sample Size: 100
  • Average: 0.79 h
  • Standard Deviation: 0.29 h

Hypothesis Confirmations I - GoLeanSixSigma.com

Key Takeaway: Data shows that Production supervisor takes 7 hours to approve a PO, while PO delivery takes < 2 hours (i.e approving time is an issue, not PO delivery time).

Hypothesis Confirmations (II)

Histogram of Data Entry Time

Hypothesis 1 (FALSE): Data Entry Time (Before Change)

Histogram of Data Entry Time - GoLeanSixSigma.com

  • Sample Size: 100
  • Average: 5.19 h
  • Standard Deviation: 0.56 h

Histogram of Purchasing Approval Time

Hypothesis 2 (TRUE): Purchasing Approval Time (Before Change)

Histogram of Purchasing Approval Time - GoLeanSixSigma.com

  • Sample Size: 100
  • Average: 6.46 h
  • Standard Deviation: 2.11 h

Histogram of Finance Approval Time

Hypothesis 4 (FALSE): Finance Approval Time (Before Change)

Histogram of Finance Approval Time - GoLeanSixSigma.com

  • Sample Size: 100
  • Average: 0.85 h
  • Standard Deviation: 0.30 h

Histogram of Operations Approval Time

Hypothesis 5 (FALSE): Operations Approval Time (Before Change)

Histogram of Operations Approval Time - GoLeanSixSigma.com

  • Sample Size: 100
  • Average: 2.00 h
  • Standard Deviation: 0.59 h

Impact Effort Matrix

Objective: Reduce Purchase Order Lead Time From 3 to 2 days
Sponsor: Production Manager
Stakeholder: Department VP

Impact Effort Matrix - GoLeanSixSigma.com

Key Takeaway: The team decided not to send out approval notices to Purchasing and Production, eliminated two approval requirements and designed a new item PO information form.

Risk Management

FMEA Form

Process/Product Name: Items Delivered to Production On Time
Responsible: Manager
Prepared By: Team Lead
FMEA Date (Orig.): May 1st, (Rev.): May 6th

FMEA - GoLeanSixSigma.com

Key Takeaway: Calling the supplier to confirm delivery dates would lead to lower risk of running out of parts for production.

To Be Swimlane Map

To Be Swimlane Map - GoLeanSixSigma.com

Key Takeaway: New process flow reduces two approvals and allows for concurrent inputs in multiple departments.

Before & After Time Data

Purchase Order Lead Time – Before and After (Including Receivable and Services)

Purchase Order Lead Time (Before Change)

Purchase Order Lead Time (Before Change) - GoLeanSixSigma.com

  • Sample Size: 200
  • Average: 50.97 h (2 days 2.97 h)
  • Standard Deviation: 12.98 h
  • Minimum: 18 h
  • Median: 54 h
  • Maximum: 90 h

Purchase Order Lead Time (After Change)

Purchase Order Lead Time (After Change) - GoLeanSixSigma.com

  • Sample Size: 100
  • Average: 23.64 h (1 day)
  • Standard Deviation: 8.72 h
  • Minimum: 4 h
  • Median: 24 h
  • Maximum: 48 h

Key Takeaway: Implemented solutions significantly decreased the PO lead time.

Monitoring & Response Plan

Monitoring & Response Plan - GoLeanSixSigma.com

Key Takeaway: The monitoring plan factors in both the times for data entry into PO and Finance approval, along with the overall PO lead time.

Innovation Transfer Opportunities

Innovation Transfer Opportunities - GoLeanSixSigma.com

Key Takeaway: Most of the improvements can be transferred to non-US XYZ manufacturing sites for reducing PO lead time.

Project Storyboard

George Wong

George Wong is a Product Development Leader with 25 years of experience in the pharmaceutical industry. He has worked in all phases of development for large, mid-size, and start-up companies, and accumulated significant achievement in preformulation, formulation, manufacturing, and regulatory submissions. He leads global cross-functional CMC teams and is a strong technical manager of oral solid, biologics, injectable, topical, ophthalmic, transdermal, and novel dosages in cGMP regulated facilities.

Bill Eureka

Bill Eureka is a Senior Consultant at GoLeanSixSigma.com and has over 40 years of success helping leading organizations achieve their continuous improvement goals. He’s an experienced trainer, mentor and coach with the ability to relate to all levels within an organization. Bill is also a Professor in the School of Business at Davenport University.