Economic concerns rise, purchasing fights for a piece of the action
By Jim Morgan -- Purchasing, 11/18/1999
In 1900 William McKinley, the 25th President of the United States was running for reelection. He was ebullient and generally considered to be a bully booster of the United States and its business community. As McKinley saw it, this nation of 70 million inhabitants was on its way to at least another 50 years of unimpeded growth. In fact, it was as a bully booster of U.S. business that Mr. McKinley lost his life. He was shot down by an assassin's bullet while attending the Pan American Exposition in Buffalo, N.Y., in August of 1901.But even though McKinley, and his successor, Theodore Roosevelt, saw much to boost in American industry, their ebullience was less than universal among the leaders of industry. For starters, the U.S. economy that had expanded greatly in the decades following the Civil War had of late been experiencing a series of problems that were considerably more than mere growing pains. Panics and market crashes seemed to be occurring with greater frequency, real wages were actually shrinking in many industries, labor problems were growing, and periods of unemployment were regularly popping up across the country. Rapid growth in many industries was being replaced by stagnation.
More to the point for many business executives, their ability to turn sales increases into profits were getting harder to do. Costs in a growing number of industries, especially in the manufacturing area, were getting more difficult to understand or to control. In many cases inventories were becoming unmanageable and competition more fierce.
In 1900, the job of purchasing agent was not exactly a prestige position. To begin with, purchasing was a latecomer as a specialized corporate function and its responsibilities were not all that well established. Indeed, at the beginning of the 20th Century, in many corporate purchasing departments, major responsibilities involved observing rules, regulations, and procedures put in place by accountants to establish paper trails and satisfy concerns about taking prudent action to discourage larceny.
The idea that purchasing was mainly responsible for spending the company's money wisely was not universally accepted or understood. That's because in the 1900s even the largest corporations were often proprietorships or very closely controlled corporations and the idea of ceding responsibility for spending the company's money to a specialist was greeted with less than universal acceptance by owner-managers. Often purchasing was one of the last hands-on responsibilities to be given up by top corporate managers noted Allegheny Ludlum's famed director of purchasing, E. F. Andrews, in an interview with Purchasing Magazine many years later.
And in 1900, even though the likes of Rockefeller, Carnegie, Mellon, Harriman, and Morgan were in the process of building huge publicly traded companies, it was still an era when the founders played intimate roles in running the companies they founded. When they finally came around to transferring purchasing functions to purchasing specialists it was done reluctantly, grudgingly, and with a large number of "protections' created to keep these purchasing people honest.
For the most part, few purchasing managers had control of all or even a majority of their companies' purchases. Even in many large companies, the "important' purchases continued to be handled by the top levels of management while purchasing dealt with processing the paperwork.
The attitudes of non-purchasing personnel toward purchasing specialists were often a "mixture of amusement, indifference, hostility, and contempt," according to Paul V. Farrell, former chief editor of Purchasing Magazine. Salespeople were, understandably, in the forefront of those hurling the epithets. Not far behind were plant foremen and superintendents who generally liked their current practice of doing their own purchasing. In blunt terms, the purchasing function entered the 20th Century as a weak latecomer, fighting for turf.
The general perception was that purchasing offices were staffed by huge cadres of clerks who possessed little practical knowledge of company supply needs. Among purchasing's most brutal antagonists industrial buyers were mainly portrayed as dullards who concerned themselves with squeezing vendors for rebates and kickbacks. Indeed, graft figured prominently in the negative pictures of purchasing portrayed by detractors in the early years of the 20th century. As the nation entered the new century there seemed to be a common understanding that much graft passed through the hands of those responsible for company business and that purchasing departments were mainly instruments for concentrating and collecting graft.
Though there is scarce evidence of the validity of such innuendos, the graft moniker pursued the purchasing profession well into the second half of the century. In fact, the need to overcome the perception of purchasing as an unprofessional, graft-seeking function is generally credited for the popularity of the title of purchasing agent among purchasing personnel. A purchasing agent, as described in one impassioned article recruiting membership in a professional purchasing organization of the day was "one who acts as an official representative of a company in the procurement of goods and services for that company."
According to the reasoning of the time, use of the term purchasing agent gave implied legal status to the function under the various laws of agency. It also conferred an implied status to the function vis-a-vis other corporate functions such as production, design, accounting, etc. Most important, a careful reading of articles in the "Purchasing Agent© (the original name of Purchasing Magazine), indicates that buyers hoped that use of the purchasing agent title would confer on the purchasing function an aura of professionalism it did not have and sorely needed.
Talk of fraud and corruption were in the long run the least difficult obstacles faced by the new profession. A much more persistent negative that buyers and purchasing agents had to face up to were the charges that in most cases purchasing was a pseudo function--lacking credentials as a profession or as a significant function. Accountants, designers, engineers, marketing people, it was charged, could show their professionalism in terms of academic achievement or their contribution to corporate competitiveness. Purchasing, on the other hand, was forced for a long time to play a reactive role--especially in manufacturing industries. Other functions determined needs and suppliers and often did the negotiating. Purchasing handled the paperwork. True, purchasing was a job that involved the handling of great amounts of resources, but in most cases the activity was restricted to physical transactions, not value judgements.
Thus it was that in the first decades of the 20th Century, gaining respect, changing attitudes, and winning a place in the corporate management structure were major preoccupations of "purchasing professionals." Respect and acceptance were eventually achieved, but in most cases it took persons who were willing to extend themselves, to take risks, and often to involve themselves in activities that in the 1900s were not considered to be part of the purchasing function.
A good example of this willingness of a small cadre of purchasing professionals to extend themselves was related many years ago by a former production manager for the Ford Motor Car Co. The tale took place in 1906 when Henry Ford and Company worked out of a small garage-type factory in Highland Park, Mich. The production manager/pattern maker and the company's purchasing agent got together after hours developing the scale model of an automobile body. As the production manager put his model together piece-by-piece, the purchasing agent calculated piece-by-piece the cost of materials and labor. The hand-made auto body was an exact prototype of the car body that would be part of Ford's new model N automobile.
The model-making was in response to a bid made by a major carriage maker to produce the car body. The company was considered to be just about the best maker of carriages in that part of Michigan. Unfortunately, the quoted per unit price of $152 was thought to be a bit steep by the purchasing agent and production manager. They, of course, were disciples of their boss, Henry Ford, who saw the future of the motor car industry in terms of being able to make cars so economically that regular working people could afford them!
As the two worked away building the car body model, they were also building a cost model of what each of the major components of the car body should cost. Between them they priced out the materials costs, approximate labor costs, and overhead. They came up with a cost figure for the auto body of just under $50 per unit.
Three days later when the president of the carriage company sauntered into the purchasing agent's office, he was thunderstruck by the purchasing agent's cost analysis. He fumed and stormed out of the purchasing agent's office. Finally he was persuaded by Henry Ford, himself, to negotiate the price. They went over the purchasing agent's projections--raised some figures, lowered others, compromised on others--and eventually agreed on a price of $72 per unit--which accounted for a profit of just under $20 per auto body for the supplier.
The car body was for Ford's Model N. And even though Ford didn't sell many of the Model N, the cost analysis lessons learned by the production manager and purchasing agent figured prominently in the success of the Model T that followed.
In the years between the turn of the century and the outbreak of World War I, many individual purchasing professionals in many parts of the country were doing much the same thing. By extending themselves into areas in which they traditionally were expected to have no more than a marginal interest, and demonstrating significant insights into the economics of goods and services, they gradually won the grudging respect and cooperation of other corporate functions. In a fair number of companies executive management, itself, was taking an interest in what these buying specialists were capable of achieving.
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