The changes that have affected purchasing over the last 15 years are greater than those of the previous 150 years. To appreciate how we arrived at where we are today requires a brief understanding of the evolution of purchasing and supply chain management, although some might argue the last 15 years resembled a revolution. This evolution covers seven periods.
Period One: The Early Years (1850-1900)
Some observers define the early years of purchasing history as beginning after 1850. Evidence exists, however, that the purchasing function received attention before this date. Charles Babbage’s book on the economy of machinery and manufacturers, published in 1832, referred to the importance of the purchasing function. Babbage also alluded to a “materials man” responsible for several different functions. Babbage wrote that a central officer responsible for operating mines was “a materials man who selects, purchases, receives, and delivers all articles required.”
In the textile industry, the selling agent often handled purchasing and was also responsible for the output, quality, and style of the cloth. The selling agent was responsible for all purchasing decisions, since the grade of cotton purchased was a factor in determining the quality of the cloth produced. Customer orders transformed into purchase orders for cotton and subsequently into planned production.
The greatest interest in and development of purchasing during the early years occurred after the 1850s-a period that witnessed the growth of the American railroad. By 1866, the Pennsylvania Railroad had given the purchasing function departmental status, under the title of Supplying Department. A few years later, the head purchasing agent at the Pennsylvania Railroad reported directly to the president of the railroad. The purchasing function was such a major contributor to the performance of the organization that the chief purchasing manager had top managerial status.
The comptroller of the Chicago and Northwestern Railroad wrote the first book exclusively about the purchasing function, The Handling of Railway Supplies-Their Purchase and Disposition, in 1887. He discussed purchasing issues that are still critical today, including the need for technical expertise in purchasing agents along with the need to centralize the purchasing department under one individual. The author also commented on the lack of attention given to the selection of personnel to fill the position of purchasing agent.
The growth of the railroad industry dominated the early years of purchasing development. Major contributions to purchasing history during this period consisted of early recognition of the purchasing process and its contribution to overall company profitability. The late 1800s signaled the beginning of organizing of organizing purchasing as a separate corporate function requiring specialized expertise. Before this period, this separation simply did not exist.
Period Two: Growth of Purchasing Fundamentals (1900-1939)
The second period of purchasing evolution began around the turn of the twentieth century and lasted until the beginning of World War II. Articles specifically addressing the industrial purchasing function began appearing with increasing regularity outside the railroad trade journals. Engineering magazines in particular focused attention on the need for qualified purchasing personnel and the development of material specifications.
This era also witnessed the development of basic purchasing procedures and ideas. In 1905 the second book devoted to purchasing-and the first non railroad purchasing book-was published. The Book on Buying contained 18 chapters, each written by a different author. The editors devoted the first section of the book to the “principles” of buying. The second section described the forms and procedures used in various company purchasing systems.
Purchasing gained importance during World War I because of its role in obtaining vital war materials. This was due largely to purchasing ’s central focus of raw material procurement during this era (versus buying finished or semifinished goods). Ironically, the years during World War I featured no publication of any major purchasing books. Harold T. Lewis, a respected purchasing professional during the 1930s through the 1950s, noted that there was considerable doubt about the existence of any general recognition of purchasing as being important to a company. Lewis noted that from World War I to 1945, at least a gradual if uneven recognition developed of the importance of sound procurement to company operation.
Period Three: The War Years (1940-1946)
World War II introduced a new period in purchasing history. The emphasis on obtaining required (and scarce) materials during the war influenced a growth in purchasing interest. In 1933, only 9 colleges offered courses related to purchasing. By 1945, this number had increased to 49 colleges. The membership of the National Association of Purchasing Agents increased from 3,400 in 1934 to 5,500 in 1940 to 9,400 in the autumn of 1945. A study conducted during this period revealed that 76 percent of all purchase requisitions contained no specifications or stipulation of brand. This suggested that other departments within the firm recognized the role of the purchasing agent in determining sources of supply.
Period Four: The Quiet Years (1947-Mid-1960s )
The heightened awareness of purchasing that existed during World War II did not carry over to the postwar years. John A. Hill, a noted purchasing professional, commented about the state of purchasing during this period: “For many firms, purchases were simply an inescapable cost of doing business which no one could do much about. So far as the length and breadth of American industry is concerned, the purchasing function has not yet received in full measure the attention and emphasis it deserves.”
Another respected purchasing professional, Bruce D. Henderson, also commented about the state of affairs facing purchasing. In his words, “Procurement is regarded as a negative function-it can handicap the company if not done well but can make little positive contribution.” He noted that purchasing was a neglected function in most organizations because it was not important to mainstream problems. He went on to say that some executives found it hard to visualize a company becoming more successful than its competitors because of its superior procurement.
Articles began appearing during this period describing the practices of various companies using staff members to collect, analyze, and present data for purchasing decisions. Ford Motor Company was one of the first private organizations to establish a commodity research department to provide short- and long- term commodity information. Ford also created a purchase analysis department to give buyers assistance on product and price analysis.
The postwar period saw the development of the value analysis technique, pioneered by General Electric in 1947. GE’s approach concentrated on the evaluation of which materials or changes in specifications and design would reduce overall product costs. Although important internal purchasing developments occurred during this era, there was no denying that other disciplines such as marketing and finance overshadowed purchasing. The emphasis during the postwar years and throughout the 1960s was on satisfying consumer demand and the needs of a growing industrial market. Furthermore, firms faced stable competition and had access to abundant material-conditions that historically have diminished overall purchasing importance. The events that would normally cause an increase in purchasing importance were not present during the quiet years of purchasing history.
Period Five: Materials Management Comes of Age (Mid-1960s-Late 1970s)
The mid-1960s witnessed a dramatic growth of the materials management concept. Although interest in materials management grew during this period, the concept’s historical origins date to the 1800s. Organizing under the materials management concept was common during the latter half of the nineteenth century in the U.S. railroads. The combined related functions such as purchasing, inventory control, receiving, and stores under the authority of one individual.
External events directly affected the operation of the typical firm. The Vietnam War, for example, resulted in upward price and material availability pressures. During the 1970s, firms experienced material problems related to oil “shortages” and embargoes. The logical response of industry was to become more efficient, particularly in the purchase and control of materials.
Widespread agreement existed about the primary objective of the materials concept and the functions that might fall under the materials umbrella. The overall objective of materials management was to solve materials problems from a total system viewpoint rather than the viewpoint of individual functions or activities. The various functions that might fall under the materials umbrella included material planning and control, inventory planning and control, materials and procurement research, purchasing, incoming traffic, receiving, incoming quality control, stores, materials movement, and scrap and surplus disposal.
The behavior of purchasing during this period was notable. Purchasing managers emphasized multiple sourcing through competitive bid pricing and rarely viewed the supplier as a value-added partner. Buyers maintained arm’s-length relationships with suppliers. Price competition was the major factor determining supply contracts. The purchasing strategies and behaviors that evolved over the last half-century were inadequate were inadequate when the severe economic recession of the early 1980s and the emergence of foreign global competitors occurred.
Period Six: The Global Era (Late 1970s-1999)
The global era, and its effect on the importance, structure, and behavior of purchasing, has already proved different from other historical periods. These differences include the following:
·Never in our industrial history has competition become so intense so quickly.
·Global firms increasingly captured world market share from domestic U.S. companies, and emphasized different strategies, organizational structures, and management techniques compared with their American counterparts.
·The spread and rate of technology change during this period was unprecedented, with product life cycles becoming shorter.
·The ability to coordinate worldwide purchasing activity by using international data networks and the World Wide Web(via Intranets) emerged.
This intensely competitive period witnessed the growth of supply chain management. Now, more than ever, firms began to take a more coordinated view of managing the flow of goods, services, funds, and information from suppliers through end customers. Managers began to view supply chain management as a way to satisfy intense cost and other improvement pressures.
Period Seven: Integrated Supply Chain Management (Beyond 2000)
Purchasing and supply chain management today reflects a growing emphasis concerning the importance of suppliers. Supplier relationships are shifting from an adversarial approach to a more cooperative approach with selected suppliers. The activities that the modern purchasing organization must put in place are quite different from just a few years ago. Supplier development, supplier-design involvement, the use of full-service suppliers, total-cost supplier selection, long-term supplier relationships, strategic cost management, and integrated Internet linkages and shared databases are now seen as ways to create new value within the supply chain. Purchasing behavior is shifting dramatically to support the performance requirements of the new era.
It is possible to reach three conclusions about this new era. First, the reshaping of purchasing ’s role in the modern economy is underway in response to the challenges presented by worldwide competition and rapidly changing technology and customer expectations. Second, the overall importance of the purchasing function is increasing, particularly for firms that compete in industries characterized by worldwide competition and rapid change. Third, purchasing must continue to become more integrated with customer requirements, as well as with operations, logistics, human resources, finance, accounting, marketing, and information systems. This evolution will take time to occur fully, but the integration is inevitable.
The evolution of purchasing and supply chain management, while certainly not the most exciting piece of history one read about, does help us appreciate the growth in these areas over the last 150 years. Each historical period has contributed something unique to the development of purchasing , including the events that have shaped today’s emphasis on integrated supply chain management.