Procurement Management Essay

This essay has a total of 7441 words and 35 pages.

Procurement Management

Despite some disagreement on the exact nature of the future of supply chain management
development, it would appear inarguable that as corporations continue their preparations
to enter the new millennium, the global environment will increasingly serve as a critical
element in the value creation process of supply chain management.

International trade will exceed $17 trillion by 2020. Global logistics represents nearly
20% of the world’s gross national product. A corporation’s success in the global
marketplace depends largely on its capabilities in global logistics. Unfortunately, the
general level of understanding of global logistics is low. International trade
professionals and mangers do not typically include general logistics principles in their
planning and conversely logistics professionals and managers do not generally include
trade principles in theirs.

Due to the lack of mutual understanding, corporate global logistics costs including
in-transit inventory, international transportation, and financial transactions, payment
delays, and duty drawbacks are often 30% to 50% higher than necessary. In addition,
without worldwide inventory and order visibility, intelligent mode selection, customer
service suffers.

In addition, advances in information and logistics technologies have made political
boundaries obsolete in terms of markets, sourcing, and societal requirements; and domestic
companies vulnerable to global competitive and economic forces.

To better understand this critical linkage, the first question one needs to ask is: Why
should senior management care about them? Developments during just the past two years at
three major U.S. corporations provide the answer, boldly underscoring the impact of supply
chain management on modern business:

n Dell Computer, founded on a vision of customer-responsive order fulfillment, has seen
its stock price mushroom nearly 200-fold since 1990. "We already have a quick-ship plan
for large customers where we can deliver a machine within 48 hours of an order," offered
Michael Dell, the founder and chairman of the computer manufacturer. (Serwer, pg 34)

n Boeing Aircraft, one of America's leading capital-goods producers and top exporters, was
forced to announce writedowns of $2.6 billion in October. The reason? "It is blaming
'raw-material shortages, internal and supplier parts shortages, and productivity
inefficiencies....'" (The Wall Street Journal, Pg. A2)

n Procter & Gamble, long revered for its marketing acumen, also drives its supply chain
hard. The company estimates it saved retail customers $65 million through logistics gains
over the past 18 months." According to P&G, the essence of its approach 'lies in
manufacturers and suppliers working closely together...jointly creating business plans to
eliminate the source of wasteful practices across the entire supply chain.'" (Carson, pg.

Clearly, supply chain management - good or bad - directly affects corporate performance.
However, considerable disagreement exists over the future of supply chain design and
deployment in the global marketplace.

When queried, senior supply chain professionals express a broad range of views on their
future role, despite current widespread recognition of the field's growing importance. In
fact, in one recent conference sponsored by Mercer Management Consulting, the MIT Center
for Transportation Studies and Logistics Management & Distribution Report magazine leading
corporate supply chain executives agreed on only a few key points when asked to predict
supply chain management's role in the 21st century. (Logistics Management & Distribution
Report's, pg.13.)

First, supply chain executives were nearly unanimous in their belief that in the future,
the emphasis will shift to the broader supply chain from the narrower logistics
discipline, to derive the greatest value. Second, supply chain management will provide
true competitive advantage only when new concepts, practices, and performance are combined
to sharply affect companies' and customers' bottom lines. Third, supply chain managers
must harness the leading external drivers of change, including rising consumer demands,
globalization, and information/communication. Fourth, the future responsibilities of the
supply chain manager will change, although his or her organizational level may be similar
to today’s.

Building on this lively debate on the future role of supply chain management, this author
would emphasize that it is particularly critical for corporations seeking to maintain
competitiveness in the global marketplace as we enter the next millennium to closely
examine the role of supply chain management. Furthermore, while most procurement
management analysts are firmly bullish on the future role of supply chain management in
providing a competitive edge – nevertheless, most believe achieving this edge will pose a
major challenge for most companies.

Finally, in addition to the changes that will need to be introduced, these organizations
must also immediately begin looking at the exigencies involved in the supply chain
function and seek to identify what particular actions may be implemented today to advance
that vision. In essence, this means that a critical examination of supply chain design is
essential to a firm's future prosperity and even survival.

In addition, though, to be sure, it is far too large and complex an issue to fully analyze
in this brief review, it is the intent of this essay to stimulate further exploration of
future-oriented supply chains among all members of the supply chain community with an
especial focus on the international factors guiding management.

II. Forces Shaping Supply Chain Management
From the many factors potentially involved, most experts concur that three specific
business and economic forces will provide the most impact future supply chain management.
These factors may be divided by: Consumer demand, Globalization, and

In addition to these three factors, this author also believes that three additional topics
demand attention and will be equally critical to future supply chain design. These topics
are: Competition, Regulation, and Environmental concerns. (*This is not to say, however,
that other factors - for example, organized labor and transportation technology – will not
impact future supply chain design, for they will almost certainly play a role.
Nevertheless, the limited scope of focus of this essay preludes rigorous analyses of all
factors. For further discussion of this issue, please see the “Endnotes” section)

1. Consumer Demand
"There has been a secular shift in power from the supplier to the customer," (Slywotzky
and Morrison, pg. 13) Corporations today work to balance low cost with high level of
service, and customization with availability. The new paradigm for many products and in
many segments of the marketplace will be that customers demand "all of the above."
(Slywotzsky and Morrison, pg 13)

This means instant availability of customized products - inexpensively and wrapped in a
high service bundle. The bar will continue to rise inexorably on expectations of choice,
service, speed, and cost. These expectations are fostered by consumers' experience in a
few influential areas: home computers (thanks to companies like Dell Computer and Gateway
2000), clothing (from L.L. Bean, Lands' End, or J. Crew), books (from and
Barnes & Noble), and overnight package delivery (UPS and FedEx). In these areas, products
are becoming better, cheaper, and available faster and faster.

Customers now expect such performance from other segments of the economy as well. In fact,
if you examine the automobile manufacturing industry, one can see evidence of these
heightened expectations. For instance, the 1999 Toyota Camry and Ford Taurus are better
equipped and less expensive than the 1998 models they replace. These and other automakers
are moving toward delivering vehicles within a very short timeframe (VW, for example, aims
to deliver a made-to-order vehicle within two weeks of customer order). Cadillac already
offers near-custom vehicles within 24 hours of customer order in the Florida market. The
trend clearly is to offer consumers what they want, when they want it, and at a price
lower than today's, in real terms.

2. Globalization
Most observers expect dramatic shifts, in the medium term, in global demographics and
economic power. Indeed, the most competitive corporations, whether based in the United
States, or in Europe discovered long ago the attractiveness of parts and product sourcing
from China, Mexico, and other emerging economies.

In addition to sourcing overseas, these corporations have also been investing in these
emerging nations' markets. This trend will accelerate as these economies pick up steam.
More American-style hands-off economic management will accompany the move toward
western-style democracies throughout the world.

In fact, some vestiges of economic central planning are in the process of being
discredited as South Korea, Thailand, Malaysia, Indonesia, and many other economies
undergo gut-wrenching structural transformation, dictated by the terms of an IMF bailout.
Even Japan is mired in a stubborn recession that will require structural changes similar
to those forced on its neighbors. These transformations will only accelerate the long-term
development of East Asia and South America.

In addition, demographics, combined with compelling economic forces, are moving to close
the inter-nation income gap, virtually assuring that the world marketplace will be far
different in the 21st century. For example, by the year 2015, Asia-Pacific's GDP, despite
current setbacks, will exceed that of North America or Europe, while Latin America will
enjoy the fastest growth over the 1990-2015 period.

Indeed, the entire locus of business - the consumers, the production, the corporate
headquarters, and the indirect economic, social and environmental impacts - will shift
dramatically, challenging the traditional western/northern business mindset. Not only will
businesses need to serve far-flung markets around the globe, but companies also will have
to provide comparable levels of service worldwide. The communications revolution and
globalization of consumer culture will not tolerate hand-me-down automobile designs or
excessive delivery times even in markets like China, India, or Indonesia.

The International Economy:
Economic turmoil and violent riots in Indonesia did not just spell chaos for the locals in
1998. It crumpled business activity for a customer that brought New Orleans-based Standard
Supply & Hardware Co. to the country. Standard Supply, which also operates an on-site
store in the Persian Gulf for oil and petrochemical customers, was forced to scale back
its expansion plans in Indonesia. The $40 million-plus distributor, which sells oilfield,
welding, safety, MRO and mill supplies, will be watching closely this year and in the
coming years for a reversal of Indonesia's plunging currency, bank defaults and other
problems. "Our customer over there is experiencing dramatic declines in his business so
plans to broaden the scope of our involvement in 1999 are waiting for the level of
activity to improve," company president Mac Hadden said in December. "We are selling into
this market but at levels that are much lower than anticipated at this time last year."
(Stuart, pg 25)

Despite the turbulence, Hadden is not giving up on Indonesia, which by some accounts
suffered the worst among battered Asian economies in 1998. In fact, he says the country's
troubles will weed out those suppliers that are truly serious and have the staying power
to eventually grow with customers in the region.

Similarly, to enter other overseas markets, distributors advise U.S.-based suppliers to
prepare thoroughly for obstacles - and not just the differences in tariffs, currency and
economic upheaval you may or may not expect. Corporations venturing overseas into new
markets, regardless of their size need to select partners carefully to set up a joint
venture or affiliates, which may require trying out several suitors, experienced
distributors say.

The expense and time doing that should more than pay for itself when you reap the local
expertise to navigate government bureaucracy and cultural differences. Whether it's going
abroad to serve an existing customer or negotiating agreements with foreign-owned firms,
successful distributors do extensive due diligence and commit themselves for the long
haul. "As for the red tape and problems of exporting, yes, there are many roadblocks and
speed bumps along the way, so if you aren't serious enough to become a subject matter
expert, you will probably lose," says Hadden. "However, the flip side of that is: if you
are willing to go the distance to learn all the ins and outs, and learn who the players
are, and how to play the game, then, that becomes a competitive advantage." (Stuart, pg

Partnering around the world
Choosing the right partners to set up joint ventures or affiliates on foreign soil is
vital and often consumes more time than expected. Doing that dance proved a cornerstone of
Airgas, Inc.'s efforts to establish itself in the Russian Far East. (Business Wire 15:14)
The industrial gas, welding and safety supplies distributor used its experience serving
oil companies in arctic Alaskan conditions to move onto Sakhalin Island, which is north of
Japan. Drilling and refining natural gas and oil drilling is about to boom on the island.
The Sakhalin shelf has an estimated 55 billion barrels of oil alone and U.S. companies
such as Exxon-Mobil and Arco will invest more than $50 billion over 10 years there.

Neither Russia's political instability nor the effects of the devalued ruble have been
major obstacles for Airgas. Suppliers like Airgas are paid in U.S. dollars. Instead, Dan
Tatro, senior vice president for the NorPac region says a key challenge was finding a
Russian partner to split half of the business with, as Russian law requires of foreign oil
companies and suppliers. (Business Wire 15:14)

Import duties and customs mix-ups also caused heavy delays, though Airgas expects to open
a store on the island within 14 months. Supplies, which early in December had totaled
about $100,000, are being shipped from Seattle.

Over the course of a year, Airgas managers met with principals at Russian firms to "ferret
out" a suitable partner, says Tatro. (Business Wire, 15:14) The company's first trips to
the island came in 1997 as managers tagged along with visiting congressional delegations.
The Russian partner Airgas picked last fall is not an industrial distributor.

"We reference check and sit down with them in their environment," he says. "There are a
number of companies that purport to be Russian trading partners. You have to really listen
to their stories. Many try to frighten you off with stories of the Russian Mafia and
payoffs; those scare tactics usually turn us off. We found one that has connections with
the government" and reached a deal. Tatro says his company has not been asked to payoff
government officials. (Business Wire, 15:14)

Airgas has already felt bureaucratic slowdowns though. Recently it participated in a joint
effort by U.S. and Russian trade groups and an Alaska university to train Russian workers
in the region. Airgas sent about $100,000 worth of welding equipment to the Sakhalin
Institute, which was held four months in customs until December. Airgas' customers
encounter many obstacles and "we don't know all the horror stories," he says. "We would
not be there at all if not that we're dealing with American companies and paid in U.S.
funds." (Business Wire, 15:14)

Arriba en Mexico
Just over a year ago, fast-growing industrial and construction supplies distributor Hughes
Supply, Inc. took a major step into Mexico, purchasing a trading company with offices
there. The move is already paying off. The acquired firm, Merex Corp., has two companies
in Mexico, one which represents manufacturer Detroit Diesel Corp. and other diesel supply
part companies, and another firm selling an array of industrial MRO products. The
acquisition quickly established Hughes and brought it salespeople familiar with the
landscape. It also bolstered Merex's relationship with Detroit Diesel, which sought a
well-backed American vendor, says Juan Jose Elizondo, manager for Hughes Supply in Mexico.
(Hughes Supply)

After nine months, Detroit Diesel is exploring awarding Merex franchise rights over
additional territory in Mexico that caters to the truck and marine diesel market. The
Hughes division also expects to expand into another region along the Gulf of Mexico, where
Hughes Supply will again represent Detroit Diesel and open a new branch for
industrial-construction supplies. "It's a prime location from which to serve the growing
offshore industry in Mexico," Elizondo says of Ciudad del Carmen and Villahermosa. "I see
Mexico as our greatest opportunity internationally," adds Richard Puig, Hughes'
international business development manager. (Hughes Supply )

Puig advocates two main ways to seize opportunities in Mexico - bid on projects for
state-run oil and utility companies, and seek to represent U.S. manufacturers there.
Merex's experience and contacts have helped Hughes improve its position in a cumbersome
local bid process for jobs from the government-owned companies, he says. "That's what's
great about having a knowledgeable group of Mexican employees," he says. "They know how to
work the process." Recently, for example, Hughes won a $3.5 million order to deliver large
pumps to Pemex, the state-run oil company, which are used in oilfield drilling to maintain
pressure in the well. Merex represents an American pump manufacturer and worked on the
order for nine months in an open bid process.

In some instances, Hughes Supply bids for work by contacting consortiums of U.S.-Latin
American engineering firms, many of which have offices in U.S. cities like Houston. Other
leads come from representatives or agents which Hughes has working for them in countries
like Venezuela, Columbia and Brazil. "We have guys on the ground," says Puig. "They know
the products. They do not have to be bilingual because we are bilingual. Nevertheless, you
have to watch him to make sure he is going to bat for you. In Latin America, everyone has
side deals."

Dewey offers this advice: distributors that enter a foreign country attempting to
establish a "beachhead," or branch without a local partner or affiliate, can expect a
difficult road. "We've found that working with existing companies we've had knowledge of
over a number of years enables us to make much better decisions regarding investing in
foreign operations," he says.

Mexican earnings boost Vallen
It's a safe bet that Vallen Corp. will continue to focus on its Mexican affiliate, which
contributes mightily to the bottom line. For more than six years, the safety supplies
distributor and manufacturer has maintained a 50 percent interest in Proveedora de
Seguridad Industrial del Golfo S.A. Sales at Proveedora vaulted 113 percent last year.

Its successes include signing a $26 million contract with the Mexican state oil company to
furnish safety training and consulting, gas detection and respiratory equipment, plus
manage safety supplies for its exploration and production division.

Combined with sales at its Canadian affiliate, Century Sales and Service Limited, net
earnings from Vallen's two foreign affiliates totaled $3.4 million last year, up nearly $2
million over 1997. That is a formidable slice of Vallen's total net earnings, which rose
17 percent, or by $3.5 million, as a percentage of sales. The firm's fiscal year ends in
May. Earnings from abroad would have been greater if not for an exchange rate variance
with the Mexican peso ($338,000 less), according to Vallen's annual report.

Of course, to gain footing on foreign soil, most distributors cannot acquire a local firm
as easily as $2 billion Hughes Supply did. However, suppliers may take steps similar to
what Vallen Corp., Hughes and others have done in Latin American countries.

Vallen, a safety supplies distributor and manufacturer, operates in at least 20 locations
in Mexico through a 50-50 position with an established Mexican affiliate. "Everything we
do in Mexico or another country is processed and managed through our partner," says David
Dewey, a vice president and managing director of Houston-based Vallen. "We believe having
local people who know the customers, customs, government requirements, etc. and share in
the profits is the best avenue for doing business in foreign countries." (Vallen Annual
Report 1997, pg. 28)

In one Latin American country, for example, Vallen has spent more than 1 1/2 years setting
up a joint venture with a partner the company has known for more than six years. "We bring
to them a knowledge of distribution, an expertise on our products and our industry," he
says. "They provide the knowledge of the industries, the geography, and the customs. We
compliment each other very well." ()

Political Factors
Volatile politics overseas can be the unknown factor that suddenly threatens expansion
plans. Venezuela's presidential election in December did just that. Oil companies and
their suppliers wondered if the president-elect, a former paratrooper who led a failed bid
to overthrow the government in 1992, might nationalize industries. A favorite of poor
Venezuelans, President-elect Hugo Chavez gave mixed signals with his stated support to
open up foreign oil investments and to review certain privatization and oil industry

A few days after the election, business leaders were generally relieved by the more
moderate tone of Chavez's comments, said Kurt Allen, international sales manager for
Lamons Gasket Co. "We're reading the papers and relying heavily on the partner we have
down there, who we feel we have to have a trusting relationship with," he said.

American made or foreign trade?
Is American made losing its stature? The fact that more and more manufacturers are
accepting foreign product might indicate just that. And results from the recently
published “Facing the Forces of Change” Study, produced by Arthur Andersen and the
Distribution Research & Education Foundation, reveal a distinct trend: Distributors are
carrying more products from overseas, and expect to do more of that in the future.
(Prohammer, 1998, pg 44) Based on the needs of manufacturers to operate more efficiently,
many are turning to foreign sourced products, and distributors are responding by stocking
more product made from outside the United States.

In the 1995 Facing the Forces of Change study, distributors indicated that only 10 percent
of their sales were from products made outside of the U.S., and predicted that sales of
offshore-sourced products would grow to 18 percent of revenue by 2000. (Prohammer, 1995,

However, just three years later in the 1998 study, distributors report that the sales of
imported products already account for 20 percent of their sales, far exceeding the 1995
forecast. Moreover, the respondents to the DREF study say that within five years, the sale
of offshore-sourced goods will grow to represent 29 percent of sales. (Prohammer, 1998, pg

Rick Prohammer, author of the report and a partner at Arthur Andersen where he is
assistant director of its wholesale distribution program, says that represents a
significant challenge for distributors. "Distributors can either be ambassadors of that
product into the [American] market and capture market share, or lose market share to
foreign-sourced product," Prohammer said. (Prohammer, 1998, pg 77)

Barry Porteous, president of Porteous Fastener Co., a master distributor, says his firm
gets 80 percent of its inventory overseas. The biggest advantage is in price; imported
products can often be 20 to 30 percent cheaper than those produced in the States. Porteous
says distributors who ignore the movement to imports may miss a chance for market share.

However, Alan Gilbert, president of Quality Mill Supply Co. in Columbus, Ind., says
imported product makes up a very small percentage of his sales, and that American made is
still very much alive, although he would not hesitate to chase products overseas. "I think
American made is still a strong statement," says Gilbert. "Our job is to better understand
the needs of our customers. "If they want a product from across the pond or somewhere, and
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