Harvard Business Review
Purchasing Must Become Supply Management
The stable way of business life many corporate purchasing departments enjoy has been increasingly imperiled. Threats of resource depletion and raw materials scarcity, political turbulence and government intervention in supply markets, intensified competition, and accelerating technological change have ended the days of no surprises. As dozens of companies have already learned, supply and demand patterns can be upset virtually overnight. How can a company guard against disastrous sup-
ply interruptions and cope with the changing economics and new opportunities brought on by new technologies? What capabilities will a profitable international business need to sustain itself in the face of strong protectionist pressures? Almost every kind of manufacturer will have to answer these questions. Some companies have already responded to the growing pressures. For example: o Finding that purchasing outlays had increased in less than one year from 40% to 70% of the cost of goods sold, one European office-equipment manufacturer began to rely more heavily on American and Japanese suppliers, revise its materials planning system to reduce in-process inventories, and require its divisions to add people with electronics and foreign language skills to their purchasing staffs. o Through contracts that include long-term shipping charters and run to 1988 with suppliers in countries as distant as Brazil, the Japanese steel industry has secured an 18% cost advantage over its chief U.S. and European competitors. o Hoechst (the German petrochemical giant) has established ties to Kuwait and DuPont recently acquired Conoco as part of their new acquisition strategies. This reflects a long-term approach to supply security that other chemical companies like Dow Chemical in the United States and BASF in Europe have used to good advantage.
In many companies, purchasing, perhaps more than any other business function, is wedded to routine. Ignoring or accepting countless economic and political disruptions to their supply of materials, companies continue to negotiate annually with their established networks of suppliers or sources. But many purchasing managers’ skills and outlooks were formed 20 years ago in an era of relative stability, and they haven’t changed. Now, however, no company can allow purchasing to lag behind other departments in acknowledging and adjusting to worldwide environmental and economic changes. Such an attitude is not only obsolete but also costly. In this article, the author offers pragmatic advice on how top management can recognize the extent of its own supply weakness and treat it with a comprehensive strategy to manage supply. He leads the reader step by step from the roots of the problem to the implementation of a solution. Mr. Kraljic is a director in the Düsseldorf office of McKinsey & Company, Inc., the international consulting firm.
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o Cabot Corporation, faced with growing scarcity of chromium, vanadium, niobium, titanium, and other metals critical to its operations, set up a mineral resources division that developed an overall corporate supply strategy and explored new options, ranging from the purchase of ore in the ground to the start-up of joint ventures for primary metal processing. Cabot also acquired a London-based trading company to supplement existing purchasing skills with special trading expertise and access to the London metals market. o U.S. auto manufacturers who customarily relied on domestic materials procurement are now reevaluating their supply schemes and broadening their scope of potential suppliers. Ford not only manufactures parts of its “world car,” Erika, in several foreign subsidiaries but also buys transmission...