Saturday, 14 May 2016

Industry Practice - 'Value Stream' Exploitation - Identifying New Possibilities (Part 5.5)

Previously shown was how engineering in all its guises has effectively built civilisation as we know, with the automobile the most comprehensive and complex of engineering solutions known to consumers and so the public at large.

Manufacturing was shown to be engineering's counterpart, for far too long forgotten and left in the shadows of notionally post-industrial economies of the West, increasingly viewed as less pertinent within an arguably over-weighted ' Services Economy' and 'Digital Economy'. A rebalancing of that bias now underway thanks to the impetus of ecological consumerism, requiring a step-change forward regards society's interaction and infrastructure, and the eco-impact of the everyday products used.

This portion of this long and very detailed web-log and essay, concentrates upon the topic of Procurement, both as a function within the corporate structure, and perhaps even more critically, the manner in which Procurement when married to 'joined-up thinking' can have a massively advantageous effect upon the step-change of economic progress as part of the national economic agenda and for the social good.

Today, with the consequences of the global recession still very evident, and the need to implement next-generation materials, solutions and services, the purchasing process of those materials, solutions and services is an unglamorous but fundamental issue to be addressed.

It is well recognised that Purchasing and the increasingly systemised Procurement process has had to become increasingly professionalised to match the expanding needs and complexities of small, medium and large projects within private and public organisations. Once again, as in so many areas, the commercial discipline tended to initially follow in the foot-steps of military practice, often seen as 'best practice' given the need to “sweat every penny” for maximum or optimal results.

The discipline has thus grown in its own right, as ever greater attention is drawn to its role within a large often cross-disciplinary and amalgamated activity. So whereas once the Procurement Dept was deemed to simply be a last port of call to enact manufacturing and product decisions; given its external leverage, it has become ever more integrated into both the individual firm's and public body high-level decision-making – with increasing visibility of public-private partnerships - and consequentially ever more clinical and exacting in its own workings.

This department is the prime contact for the ordering and inventory monitoring of bought-in 'goods-inward' items and services from suppliers; centrally with the responsibility for supplier identification, assessment, approval, contract negotiation, payment and re-negotiation on future projects.

Inevitably, Purchasing's importance to a firm depends upon the company's size. When part of a large conglomerate it would effectively operate as a central buying function on behalf of all the divisions, using its innate buying power to gain sizeable discounts from suppliers; in the automotive realm, from office stationary to production-line assembly stations.

This said, the role and strength of Procurement is best exemplified within the large conglomerate structure, when the 'national champion' within a developing country. Indeed, this conglomerate template almost necessary to effectively centrally organise the beginnings of the capitalist model within such a country or region.

It is that 'national champion's' ability to leverage its scale in the purchasing of basic commodities and/or processed materials that raises the profile of the critical Purchasing process.

Since national growth is largely dependent upon firstly mass-industrialisation and thereafter consumerism, sheet steel, rubber, plastics and glass are procured in massive quantities and so at favourable rates. That saving very possibly boosted by the use of internal transfer pricing within the vertically integrated organisation. This first applied to the the vital task of creating basic infrastructure and secondary the creation of expansionary enabling processing activities, thereafter applied to the manufacture of B2B abd B2C goods.

One such example is that of the beginnings of TATA Sons, now the trust-based holding company to India's TATA Group, itself with old entrepreneurial family cross-interests.

Established in 1868 as a trading house, its founder Jamsetji Tata recognised the domestically replicate the previous industrial achievements of British, Germans, French and Americans. Critically to do so the importance of a 'snow-ball' conglomerate structure so as to enable rapid development, and importantly appropriate purchasing needs and costs accordingly.

Core to this was the ability to create vertical and horizontal integration of new enterprises, such as the backward integration of a hydro-powered energy generator to befit the expanding needs of the textile loom factory. That allowed him to purchase energy at a lower rate and as and when further capital expenditure was needed within the power-house or textile factory, the additional marginal expense could be absorbed by either the end textile wholesale agent, or if necessary more comfortably absorbed by either business.

The advantages to Procurement of the vertically integrated conglomerate firm was of course maximised by Henry Ford. Having started originally as largely a 'component integrator' - taking other firm's parts to build much of his initial series of lesser known cars, such as the original Model A – he soon recognised the need to control as much of the component manufacturing process as possible, so as to control and reduce costs. His Baton Rouge plant was dedicated to doing exactly that with the Model T, with the (failed) ambition that was 'Fordlandia' to self-grow the rubber required for tyre-making demonstrating the extent of his cost-consciousness.

Thus in the formative stages of a nation's economic growth strategy or those early years of a growth sector 'conglomeratisation' to enable the most effective use of Procurement was vital. It was recognised that as low as possible cost-base would allow for both regional economic expansion within a country, and for a firm the ability to capture market share through lower competitive pricing to the end user.

Critically for a nation or conglomerate, the ability to use those commodities and processed materials across a wide range of similarly fabricated and constructed consumer durable goods would act as the cornerstone of economic growth.

As the accompanying graphic depicts, as per abilities with sheet steel and product engineering, this industrial model was deployed in the 1930s/40s by General Motors for its Frigidaire domestic appliances division (targeting urban areas) and by National Harvester (targeting rural areas), and by Ford for a plethora of products, from auto-accessories to aeroplanes.

The template was thereafter used by the Japanese in the 1950s/60s/70s with its Keiretsu companies such as Toyota, Mitsubishi, Mitsui and Sumitomo; though with greater B2B industrial and export focus given Japan's limited living-space for big-ticket consumer goods, and its historic conservatism regards personal expenditure for consumerism.

The pattern replayed again in S.Korea from the mid 1980s/1990s/2000s with the likes of Hyundai-Kia and Samsung, but perhaps more balanced between inter-industrial, domestic consumers and foreign exports given the types of products created.

And most recently the experiences of Chinese SOEs (State Owned Enterprises) which likewise have sought to chronologically target: intra-industrial, inter-industrial, foreign export and domestic consumer.

So whilst the Procurement as a discipline spans a wide variety of firms, small to mega-cap, its functional power, and so corporate advantage, unsurprisingly comes with scale.

As such it, in this early phase of capitalism, can operate in a similar manner to the central function of a command economy, effectively setting demand levels to heavily influence supply prices, and sometimes vice versa, depending upon external forces, but typically aggregating for the gain of both demand and supply sides at various points of the economic cycle.

For western firms, with the industrial decentralisation of the late 20th century, this then appears a long lost age. With even the BRIC countries now set to expect industrial de-conglomeration for economic reform to help growth of local stock markets with newly divested independent entrants. So instead this 'play-book' aimed at the new Pioneer Economies.

Yet seemingly paradoxically, perhaps Procurement within the 21st century Triad regions is instead set for revitalisation, as part of the more recent 'holistic' and 'economic-eco-systems' mentality.
This itself seemingly seeking to mimic the intentions of the original 18th and 19th century conglomerates, such as the East India Company.

Today the likes of Apple, Google-Alphabet and Facebook have been on a new-era buying spree of small “IoT” and associated “life-solutions” firms; everything from intelligent home appliances to delivery lockers, from 'virtual reality' to very probably the advent of 'realised virtualities' (in the same way that 2-D Disney films were made real in 3-D Disneyland).

As such new Procurement eco-systems look to become increasingly apparent with a new trend of 'big buying' by these extremely cash-rich mega-cap global giants...thus re-emphasising American soft-power.

Procurement across: precious minerals / commodities, processed materials, part-finished products, wholly finished products and a myriad of bought-in services across: (en mass) new 'cottage-industry' providers to the contracting of large tracts of work from external all products, services and people.

As such the idea of synergistic (conglomerate) 'eco-systems' should be revisited, with undoubtedly Procurement centre-stage with Corporate Strategy.

Perhaps more immediately visible and over the mid-term we see that Berkshire Hathaway's own partial economic 'eco-system' illustrates the idea of plausible synergies between two or more categories of sector holdings.

Recreational Vehicles and the required fitting of 'livings systems' (insulation, heating, air-conditioning, lighting, cooking, ablusions etc) and those similarly required within the speedily erected dwellings of its Fabricated Housing companies. At first glance, the world's of RVs and Houses appear very separate worlds, but they are not; they share the same fundamental requirements. As such even though they have both historically been very different sectors, the likelihood is that they will increasingly converge into the future.

[NB A similar perspective underpins the take-over proposal by Johnson Controls (HVAC, batteries, interiors in vehicles) for the remnants of Tyco Industries (fire, safety and security systems for buildings)].

Hence, propelled by Tech-Co's interest in diverse networked systems and the IoT, we could very feasibly be at the beginning of a new era of returned intra and inter 'Conglomerate Co-operation'.

NB Just as the financial instrument called the 'Co-Co' (contingent convertible) has been designed to provide a boost to the balance sheet at a 'tipping-point' event, so a very different returned 'Co-Co' business philosophy, should likewise to to the good of investors through a Procurement led synergies].

Very interestingly, it seems that just as Japan's Keiretsu experience late phases of depletion, so it seems Wall St and Palo Alto have sought to build-up their own versions. If this then becomes a renewed prevailing school of though for Chairmen, CEO's and Advisors, there could feasibly be a return to 're-conglomeratision' in the USA.

This likewise possibly used as a defensive mechanism by the traditional auto-players to fend-off the threat of massively powerful new entrants. It was mentioned in Part One that Tier1 suppliers would be presently reluctant to engage with Google, Apple etc, yet the fortress-like cash cushions of the Technology companies' balance sheets means that it could over time seek to take sizeable holdings across those publicly listed Suppliers or even go so far as to re-create whole supply sectors for themselves.

Previously in the late 1990s, to stabilise relations and contain component costs Ford bought back into Visteon, having previously divested this once vertically integrated division. Similarly, in 2005 the steering division of the once 'toxic' portion of spliced Delphi was acquired by GM.

And likewise (away from the incessant deal-making of America) stability of supply and transfer costs are the reasons that PSA maintains much internal control over Faurecia (interiors, lighting) and FIAT-Chrysler retains close ownership of Magnetti Marelli (sub-system components), Teksid (castings) and Comau (assembly line design and installation).

If commodity prices specifically stay low, and energy costs likewise 'range low', given the cash-book threat of Tech companies seeking to gain auto-manufacturing entry, there could be a new impetus for the established auto-players to buy back into its Tier 1 and Tier 2 supply base.

Procurement then as a discipline as part of a possible new age of merger and acquisition, may well step again into the commercial limelight.