Ground rules change, industry struggles to stay competitive
By Jim Morgan -- Purchasing, 11/18/1999
Suddenly in 1973 the rules of business competition changed almost overnight. It started with an oil boycott by Arab producing countries, which, in turn, began to drive the cost of oil into the stratosphere. The near doubling of prices over a few weeks' time began to propel the rate of inflation that had already been building up since the late 1960s. Continued spending on the war in Vietnam, added to a number of social welfare spending increases, was simply too much for the economy to take in its stride.For a time, an even deeper cause for alarm seemed to be knocking on purchasing department doors. 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 alarm 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 United States 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 that needed to be dealt with involved the availability of cheap raw materials. In the early days of the Arab boycott of the oil market, the rumor mill was busily grinding out stories about all kinds of serious shortages of raw materials. And despite the fact that most purchasing specialists were skeptical, many in executive management positions were near panic. Fears about oil shortages began to attach themselves to metals, paper, packaging, chemicals, plastics, and a wide range of semi-finished mechanical, electrical, and electronic component parts.
Despite the fact that the materials management theories of the prior decade had failed to produce much in the way of results, executive management in many companies embraced the concept with open arms. Vice presidents of purchasing and materials management 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 continued to be held in high esteem as a source of new ideas for reducing costs. Early purchasing involvement in design planning began to receive greater prominence at the executive management level.
During this period of reemergence in the status of the purchasing/materials function many companies took another hard look at 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.
As explained by its proponents, MRP was a system that established precise control over scheduling production and vendors. Using the vast speed and memory resources of the computer, MRP II became an extension of that to improve not only production and material scheduling, but also to get the most from such functions as marketing, purchasing, finance, and engineering. MRP II was said to be capable of "converting scheduling information into dollars to make a company game plan."
Unfortunately, neither of the new approaches worked very well because they failed to satisfactorily support either the purchasing function or the management of suppliers. Perhaps the biggest problem was that the complex computer-aided systems failed to satisfactorily deal 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. The JIT approach says that a major reason for manufacturers' bloated inventories is not their lack of good sales forecasting, but their lack of good control over in-plant processes.
Instead of depending on complicated computer programming, JIT concentrates on squeezing the time from when an order comes in the door and goes out the door. Usually first to go are theoretical lot sizes and feeding queues. JIT also concentrates on building closer supplier relationships, elimination of defects, elimination of machine down-time through mandatory routine maintenance, and heavy emphasis on worker involvement in the decision-making process. Also becoming clear was the fact that JIT, with its heavy emphasis on cutting waste throughout the process, required procurement people with much wider visions than the ordinary transaction processor.
By the early '80s, there was a general consensus that the worst of the hemorrhaging was over. chronic inflation was being ridden down with the aid of harsh but effective oikuxues of the Federal Reserve. Many of the shortage scares of the mid-1970s were put to rest. Most important, U.S. business had gotten rid of any complaisancy it might have harbored about competition. For its part purchasing was beginning to take on a whole new role in corporate thinking and planning.
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