O'Connor looks back
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Jim Morgan, Editorial Director Emeritus -- Purchasing, 1/20/2004 2:00:00 AM
“There was a day-not too long ago-when a career in purchasing was a nice, safe, sane, sedentary way to make the mortgage payments. It isn’t anymore, nor is it likely to be so again,” says John F. (Jack) O’Connor, recently retired publishing director of Purchasing magazine.
Indeed, O’Connor, who began his career as a purchasing journalist at McGraw Hill Publishing in the early 1960s, sees purchasing becoming “more intense, more high risk, more visible with each passing month.” Publisher Kathy Doyle, says that O’Connor has developed a unique and valuable perspective on purchasing and its place in American business. The flavor of that perspective shows up in this recent interview:
Early 1960 to 1973
Jack O’Connor reviews his days as a purchasing journalist in five broad time slots-with the first beginning around 1960. Back then, he says, purchasing functioned at a relatively low transactional level-working with lists of goods and shopping for “best buys.” The principles of materials management were just coming on the scene and were mainly theoretical.
In essence, materials management called for creation of new functional “materials” centers headed by materials vice presidents. Proponents argued the need on these points: (1) dollars spent by buyers were considerable (35-65% of all corporate spending); (2) functions such as production scheduling, purchasing, transportation, and distribution needed to be better integrated, (3) leverage and integration in the supply area required executive clout.
Initially, notes O’Connor, the idea of a materials management department headed by a materials tsar was greeted with enthusiasm, but it failed to live up to promise. Instead of leveraging purchases and driving integration, the MM function in many firms resulted in little more than creation of more functional silos. Few departments progressed beyond the creation of positions and departments. The net result often was little more than promises of action. Instead of leveraging purchases and driving integration, MM often resulted in creation of more functional silos.
Plain and simple, by the late ‘60s materials management was overshadowed by import worries. In an ironic twist, many of the companies that had been destroyed in World War II and rebuilt with U.S. largess, were now flooding U.S. markets with high-quality goods. The plant and equipment used in rebuilding was newer and more productive than that used by U.S. firms.
1973 to Early 1980s
But cheap imports and materials management lost their relevance one day in 1973, when purchasing execs awoke to find themselves in the middle of an Arab attempt to shake down oil buyers. Oil and many other raw materials and semifinished goods were suddenly unavailable and purchasing managers found themselves in situations far more complex than concerns about imports. A lot of raw materials were suddenly neither cheap nor available, says O’Connor.
The near doubling of prices over a few weeks’ time started to propel the rate of inflation that had already been building up since the late 1960s. Almost overnight uncertainty began to spring up over the assurance of sources of supply. Plentiful and certain sources of raw materials, which had been one of the pillars of America’s postwar economic success, suddenly were in doubt.
The inflation worry came to a head one day in 1973 when the Secretary of the Treasury announced that the U.S. dollar would be allowed to “seek its own level-to float as a world currency.” With that brief statement it became an admitted fact that the U.S. was mired in a state of chronic inflation. Driven by a need to improve competitiveness, top management began looking desperately to purchasing and materials managers for many needed answers.
The first problem needing attention involved availability of low-cost raw materials. In the early days of the Arab boycott, the rumor mill was grinding out all sorts of materials shortage stories. Indeed, many in executive management positions were near panic. Fears of shortage spread from oil to metals, packaging, chemicals, plastics, and a wide range of semi-finished mechanical, electrical, and electronic component parts.
Despite loss of interest in materials management theories in the late ‘60s, executive management in many companies re-embraced MM in the 1970s. “Vice presidents of purchasing and materials were being appointed by the carload.” In many purchasing departments the title of sourcing specialist began to have a cachet all its own.
In addition to dealing with the specific problems of ensuring sources of supply, purchasing was finding itself held in new esteem as a source of new ideas for reducing costs. Early purchasing involvement in design planning, for example, began to receive greater support at executive management levels.
Also, early in the 1970s many companies took a second look at Materials Requirement Planning (MRP) and Materials Resource Planning (MRP II). MRP had been developed in the late ‘50s and early ‘60s as a means to improve material planning, reduce inventory costs, and reduce plant downtime through the comprehensive use of computer power.
Using the vast speed and memory resources of the computer, MRP II was touted as an extension of MRP that would maximize productivity in marketing, purchasing, finance, and engineering. MRP II was said to be capable of “converting scheduling information into dollars.”
Unfortunately, says O’Connor, even on a second try, neither approach was impressive. Both failed to satisfactorily support either the purchasing function or management of suppliers. In short, he notes, their complex computer-aided systems were weak in dealing with bloated inventories, long leadtimes, shortage lists, and expediting. Instead, companies turned to simpler, more visual approaches. Most turned to versions of the Japanese approach called just-in-time (JIT) ordering. JIT works on the premise that manufacturers’ bloated inventories are not caused by a lack of good sales forecasting, but a lack of good control over in-plant processes. Instead of depending on complicated programming, JIT concentrates on squeezing down the time between when an order comes in and moves out.
Mid 1980s to 1990
By the start of the ‘80s the consensus was that the worst of the price hemorrhaging was over. Chronic inflation was being ridden down with the aid of harsh but effective fiscal and monetary policies of the Federal Reserve. Many of the shortage scares of the mid-1970s were put to rest. U.S. business had gotten rid of any complaisance it might have harbored about competition. For its part, purchasing began taking on a new role in corporate thinking and planning.
The arrival of Ronald Reagan in the White House brought with it a new era of business optimism. For the most part focus was directed to the manufacturing sector where the U.S. seemed to be suffering its most serious setbacks. Some of the villains were surprisingly obvious. Others took time to find. In any case the villains tended to sort themselves out into these categories:
1. U.S. companies were being priced out of many markets.
2. Quality of many American-made products was often found lacking.
3. Excess inventory was choking production facilities and soaking up scarce investment capital.
4. Management was often unsuitable and/or redundant.
The first three categories could be solved by the direct, albeit painful, approach. High costs, for instance, could generally be traced to waste-in sourcing goods, in manufacturing products, in planning new products and product designs, in the deployment of inventory, in allocating corporate resources. In most cases dealing with unsuitable management came later.
In O’Connor’s estimation, the early ‘80s marked turnaround time. Purchasing, now more often calling itself supply, began to work more closely with other functions looking for causes of noncompetitive pricing, bad quality, and unacceptable waste. Causes and solutions to many of the problems often crossed functional boundaries.
Tackling the problems of quality soon became a major pursuit of purchasing/supply departments. Purchasing/materials/supply managers stressed three areas in tackling quality improvement. First was the need for a common language of quality-an understanding that quality is not relative, but conformance to requirements. Buyers also recognized the need for a more formal method of communication. “Too much of what purchasing does,” noted the head of one company’s supplier quality team, “is done at the last minute and not made really clear to suppliers.” A third area recognized as critical-especially for purchasing managers-was the need for those responsible for buying quality to have an understanding of what’s needed-strategically.
In dealing with pricing, quality, and waste problems, purchasing/ supply/ procurement managers began taking a more active part in insuring that suppliers have the competence needed for performing at world class levels. By the end of the 1980s, for instance, many key suppliers were performing their own quality inspections. In JIT areas more teams of purchasing professionals were working with suppliers to assure that they could perform the higher service requirements of JIT without having to raise inventory levels.
Such analytic tools as benchmarking, reverse engineering, and competitive analysis also began to be used extensively to analyze internal competitive strengths and weaknesses, to examine strengths and weaknesses of competitors, and to seek best practices.
1990s to Mid 1990s
As the ‘90s approached the signs were clear: Business was trimmer and better able to compete. Still, there was one more move that many firms felt they needed to make. Reengineering (sometimes called downsizing, right sizing, or restructuring) began to be promoted as the best way to bring the corporate structure in line with its processes. In many cases, notes O’Connor, what the reengineers found when they started to examine organizational structure was redundancy. Large numbers of managers (middle and upper) were mainly involved in confirming decisions and actions already taken.
As more and more reengineering reports were completed, heads began to roll. In many cases the big problem was that the old function silos no longer matched up with the processes that were taking place. In many companies, for instance, the supply function was truncated by artificial department walls that separated purchasing from production control, logistics, design, and finance.
In some instances cross-functional teaming was urged by the reengineers as a temporary move on the way to a completely changed supply operation. Much of the reengineering that took place in this period dealt with allocating the resources needed for world competition. In a growing number of companies the best answers appeared to lie in greater use of outsourcing and contract manufacturing.
Contract manufacturing is usually described as a form of outsourcing. Loosely defined, outsourcing involves the taking of an operation or function traditionally performed in-house and jobbing it out to a contract manufacturer or third party service provider. Outsourcing provides a way for conserving corporate resources for use where they are most effective. Because many companies no longer have the resources to be the best at what they do, they look for suppliers with strengths where they are weak.
Mid 1990s to present
By the mid-to late ‘90s much of the thinking that started with the reengineering movement began evolving into new ways of looking at business. One particularly important area of that thinking directly affects traditional purchasing departments. Called integrated supply chain management, it essentially is an effort to win economic advantage by expert deployment of sourcing, buying, and supply resources.
Supply chain management deals with the integration of the processes required to deliver value to the external customer. Integration of processes involves linking the many steps along the way from determination of the product or service that the customer wants to creation of that new product or service. It achieves this integration through the use of a new product development process, which is linked to an order fulfillment process that assures delivery of that product or service anywhere in the world.
Will integrated supply chain management actually be a significant driving force in American industry? The answer to that question, says O’Connor, rests on the achievement of these seven goals:
1. Flow of information that formerly was held secret needs to be formalized and used in strategies rather than sets of microdecisions.
2. In order to have organizations work together, all parties to the strategy need to be operating at similar knowledge and skill levels.
3. Ability to perform strategic self assessment-internally and with key customers and suppliers.
4. Common metrics must be developed and used and they need to be aligned around effectiveness keys to gaining customers.
5. There is a need for strategic information not normally associated with the traditional way data is collected, stored, and used.
6. Logistics is vital to supply chain integration. Competition will require firms to have a combination of logistics capabilities that enables them to position inventory, move items direct to points of consumption at faster rates, and use postponement strategies.
7. As Jack O’Connor sees it, perhaps the most important thing that can be said about the whole subject of supply chain management is that the concept is complex. As such “it often lends itself to the nostrums of bureaucrats and technocrats.” Still, he notes, among those firms that are succeeding at it, their success seems to lie in combining a strategic overall plan with achievement of specific objectives.
Senior Manager, Materials Management #11193
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