STRATEGIC MATERIEL MANAGEMENT

by

David N. Burt

Michael F. Doyle

University of San Diego

San Diego, California 92110

619-260-4868

30U

Strategic materiel management is the process of designing,

developing, and optimizing the management of the outside materiel

system in a dynamic global environment.

Strategic materiel management requires the integration of three

sets of activities:

o actions taken today to ensure the required flow of materials

and technology from present and future suppliers in a dynamic

global environment filled with uncertainty,

o state of the art operational activities including quality,

velocity and productivity enhancement of required materials

and services within a framework of continuous improvement to

ensure the firm's competitiveness,

o the management of internal and external relationships required

to ensure success with the strategic and operational materiel

activities.

THE BENEFITS OF STRATEGIC MATERIEL MANAGEMENT

The principle benefit of strategic materiel management (in

addition to survival) is the generation of a sustainable competitive

advantage. Strategic materiel management plays a key role in five

basic objectives most firms will recognize:

o the design, development and production of defect free products

(Quality)

o using time to competitive advantage (Velocity)

o reducing all-in-cost (Productivity Improvement)

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o achieving and maintaining technological superiority

(Technology)

o managing the inherent risks in the outside materiel

environment (Risk Management)

There are several important economic drivers impacting on today's

business community: the globalization of world markets, the push

toward niche marketing, velocity (time based competition) , quality

based competition, cost advantages, the geometric acceleration in new

technology and new product offerings, and the relentless push toward

high volume manufacturing with lot sizes as small as one. These

pressures demand a renewed and a thorough evaluation of the firm's

strategic materiel management system.

At a theoretical level, each sourcing and manufacturing step is a

link in the product's value chain originating with mother earth and

ending with the end user. The firm with the best managed and most

efficient strategic materiel management system for a given product

realizes advantages which translate directly into improved quality,

market share, cost efficiency, and profits.

Each of these five identified objectives offers significant

leverage for the materiel function to contribute to the sustainable

competitive advantage of the firm as discussed below.

Quality

The Ford Motor Company affirms that "Quality is Job #1". This

outstanding call to action correctly establishes quality as the

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organization's superordinate objective. The importance of quality has

been extensively documented by many outstanding industrial and

academic leaders. There is little value in yet another review of this

subject, other than to observe that quality is an important value

chain issue. This means that the job of quality extends from mother

earth through all subsequent operations no matter what they are or

where they are performed. The ultimate customer is the judge who will

decide the success or failure of the value chain; by buying a product

from firm "A", which feeds firm A's upstream value chain or by buying

a competitive product from firm "B", which feeds firm B's upstream

value chain. Money enters this system only when the ultimate customer

buys a product. Transactions within the value chain simply pass

portions of the ultimate customer's money along the chain.

Strategic materiel management plays the key role in producing

quality products during the design, development, and sourcing of

materials which are defect free. These materials, when integrated

during production, result in quality products which have a high

likelihood of success in the market place. During design and

development activities, quality is "designed in" by the firm's design

team. This team should include: design engineers, process engineers,

quality engineers, procurement and marketing professionals, and the

firm's supply partners. The traditional approach of relying on the

firm's design engineers to preform all design and assume total

responsibility for the quality, acceptability, producibility,

reliability and procurability of the products has been a major source

of quality problems.

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For example, designers frequently develop requirements for

materials to be furnished by outside suppliers with little or no

regard for the suppliers' process capabilities. As a result, defects

and variation in incoming materials occur. Such materials are the

source of process yield losses, rework, scrap, and unfortunately,

defective products being sent to customers.

Quality also is greatly enhanced when standardized carefully

prequalified materials are designed into the product. Hewlett-Packard

has invested millions of dollars developing its catalog of standard

components. These items are furnished by carefully qualified

suppliers. Hewlett Packard design engineers are encouraged to specify

such standard components. At many Hewlett Packard divisions,

specification of other then cataloged standard components requires the

approval of the plant or division manager. The use of such

standardized items has played a key role in Hewlett Packard's tenfold

reduction in incoming defects and the enhancement of the quality of

its products.

Sourcing, the process of identifying and selecting suppliers with

the capability and motivation to provide defect free materials, plays

an essential and an interdependent role in the firm's efforts to

produce quality products. Like design, sourcing is a team

responsibility. Sourcing is a crucial activity. As the late Lamar

Lee often said, "selection of the right source is the key to obtaining

the right quality, at the right price, on time."

In these and in many other more subtle ways, strategic materiel

management plays the key role in ensuring a flow of defect free

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products through the downstream value chain to the firm's ultimate

consumers.

Velocity

Until rather recently, velocity has been a largely overlooked

strategic weapon. But the 1990's will see velocity emerge with

importance equal to that of quality! Velocity combines the benefits

of compressed development and production cycle times.

Velocity is the acceleration of ideas and materials on a pre­

planned course to provide worthwhile and timely products and services

which meet the needs of targeted customers. In order to achieve

success with velocity, new and strategic approaches to materiel

management must be embraced.

The Japanese are able to transform a design concept into a

quality product in half the time of many of their American

competitors. American industry is doing better with the manufacturing

cycle time component of velocity. Motorola has so reduced

manufacturing cycle time at its Boynton Beach facility that a pager

which used to take several weeks to produce can now be produced in two

hours. If ordered at 8 a.m., the product will be produced and shipped

the same day. The two components of velocity provide a tremendous

competitive advantage to firms which have learned how to gain and

employ them.

Productivity Improvement

Historically, those responsible for the sourcing of materials and

services have made two major errors in the area of cost: they have not

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conducted careful and objective make-or-buy analyses and they have focused

on the "price" of the item being sourced instead of focusing on its "all-

in-cost . "

Several years ago, Arjay Miller, former President of the Ford Motor

Company, told one of us, "We wasted more time and money at Ford making

things we should have bought and buying things which we should have made

than in any other activity." All too often emotions and wishful thinking

result in decisions to make an item which could be out-sourced at a far

lower all-in-cost. Obtaining the right all-in-cost requires a careful

analysis of all of the costs of making and of out-sourcing.

The shift in focus from "purchased price" to "all-in-cost" plays the

major role in helping the firm achieve and maintain its cost

competitiveness in our global economy. "All-in-cost" is the summation of

the purchase price and all in-house costs involved in receiving and

converting the purchased material into a finished product, including any

costs resulting from field failures attributable to defects in the

purchased item. Figure 1 provides a graphic representation of in-house

costs. The white areas within the various components of in-house cost

represent the lowest obtainable cost for that activity based on current

technology. The wavy areas represent waste which would be avoided if the

right materials of the right quality were specified and received.

Needless to say, incoming defects are a result of failures in the

strategic materiel management system including its design, development,

and sourcing activities.

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B'igure 1

In-House Costs

Customer Returns and Lost Sales

Warranty, Service and Field Failure

Process Yield Loss

Rework

Lost Productivity

Production

Storage

Inspection and Testing

Incoming Transportation

Unavoidable costs . Base cost which cannot be avoided

Avoidable costs,Copynght © 1990, Burt, Norquist, and Anklesana

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Technology

Technology represents the richest opportunities for future

strategic materiel management improvement. But, as the richest, it is

also the best guarded and most difficult to realize. The guard

standing at the door of the technology gold mine is the firm's own

technology paradigm. This paradigm blocks ideas from "outside" and

thereby prevents the early recognition and adoption of the concepts

involved. Worse still, is the failure of many firms to recognize or

to fully utilize the technology, engineering, and R&D available for

free within their own materiel base.

Technology has a critical strategic dimension: to develop

internally or to purchase externally? In this age of technology

expansion, many firms are quickly realizing that it simply is not

possible or affordable to develop all required technology internally.

This realization drives difficult strategic choices about which

technology to develop and own and which technology to purchase, in the

form of assemblies and component parts. These choices are not easy.

The ramifications have far reaching consequences.

Technology planning is one of the most important drivers of the

strategic materiel management planning process. It simply is not

reasonable to manage a firm's outside resources without any

consideration of the strategic implications of the firm's technology

road map. Yet the vast majority of western firms do not actively

consider outside technology as part of an integrated strategic

approach to the achievement of competitive advantage.

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Innovation, technology's bedfellow, can play a major role in a

firm's success. The history of innovation in the world appears

random. When or where will the next breakthrough innovation occur?

The only thing certain seems to be that it will occur where it is

least expected. Innovation is an important strategic objective. It

involves both the internal and external environments. Each value

added element or operation within the upstream value chain represents

an innovation candidate. This extends the traditional innovation

concept considerably and opens up many interesting additional sources

of innovation. The problem is the random nature of innovation. The

answer is to proactively monitor the external environment. Such

monitoring is more than the marketing intelligence system many firms

currently employ. It includes a system for innovation monitoring that

actively looks at the entire value chain and each value added element.

Innovation does not limit itself to marketing and engineering: the

next major breakthrough may well involve a supplier (the plastic

squeeze bottle for ketchup) or a technology from left field (the

impact of the transistor on the slide rule) . Strategic materiel

management must include an active plan to monitor, recognize and

implement innovative ideas available throughout the materiel system.

Risk Management

The objective of risk management is to identify and reduce risks

to an acceptable level. Some risks (those we will call known-unknowns

or reasonably anticipated ones) can be dealt with through the

development of contingency plans. It is the unknown-unknowns which

drive us to distraction!

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In addition to the risks inherent in quality, velocity,

productivity, and technology, two other areas are addressed by

strategic materiel management: the risk of supply disruptions and the

risk of significant unanticipated price increases.

The primary, but by no means only, way of dealing with these

aspects of risk is through the establishment and management of

partnerships or strategic alliances. Much has been written on the

pros and cons of partnerships. One thing is clear: carefully selected

partners, carefully Grafted agreements which benefit both partners

through good times and bad, and carefully managed partnerships

significantly reduce risks in all of the areas discussed.

In the 1970's, Timex established partnerships with its key

suppliers. In most instances, Timex established itself as a

"preferred customer". During the two material shortages of the 70's,

Timex's position as a preferred customer protected its continuity of

supply. As more than one wit observed, "Timex never missed a beat due

to supply disruptions."

Established, well maintained partnerships also greatly reduce the

likelihood of price shocks when compared with the traditional, spot

buy. The partners work together to control cost growths requiring

price increases.

Having discussed the benefits of strategic materiel management,

we now turn our attention to the three principle strategic materiel

activities.

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STRATEGIC MATERIAL MANAGEMENT ACTIVITIES

As shown in figure 2, there are three major categories of

strategic materiel management activities.

Figure 2

Materiel Management Activities

THE OPERATIONAL AREA:

THE STRATEGIC AREA:

THE RELATIONSHIP MANAGEMENT AREA:

:-£SAT!3r;AL ACTIVITIES

Operational Activities

As shown, operational materiel activities (design, development,

sourcing, materials management, forecasting, cost analysis, and

logistics) provide the base of strategic materiel management.

Strategic Activities

Strategic materiel management activities ensure that the function

fits within the corporate (or SBU) strategy. This match ensures the

timely availability of technology, materials, and services of the

right quality at an acceptable all-in-cost. Activities include:

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technology and innovation monitoring, the development and maintenance

of a strategic materiel information system, the development of

strategic materiel plans, and participation in the corporate (SBU)

planning process. It should be noted that the strategic materiel

management activities frequently go upstream through several links of

the materiel system to the supplier's supplier and beyond.

Relationship Management

This crucial set of activities focuses on both internal relations

and external ones. At the Ford Motor Company, they talk about tearing

down department walls. At Zerox and Motorola, they talk about cross

functional teams. Carlisle and Parker talk about "mandate teams". No

matter what we call them, we are finally recognizing the importance of

cross functional team approach to such strategic materiel management

activities as planning, design, development, and sourcing.

External relationship management focuses on how the firm

interfaces with its suppliers. Several approaches to supplier

relationships are possible. They can be compared and evaluated by

using a continuum, (Figure 3) the opposite ends of which represent the

two extreme positions. The optimum strategy for any given firm will

normally be some point between these two positions based on the firm's

particular circumstances.

Figure 3

Continuum .Buyer/Supplier

Strategic Alliances

TotalOutside

Purchase

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Vertical integration can be appealing and may represent a sound

strategy for some firms. Arguments favoring vertical integration were

addressed by Ted Kumpe and Piet Bolwijn in their article

"Manufacturing: The New Case for Vertical Integration" Harvard

Business Review, March/April, 1988. In this provocative article, the

authors state "the solid corporation acquires suppliers along with

technology". Much of the authors' research was conducted at N.V.

Philips where significant performance improvement was attributed to

Philips' vertical integration approach. In a follow-on letter to the

editor Harvard Business Review March/April, 1989 (a response to our

letter in the same issue) Messers Kumpe and Bolwijn state:

"Due to increasing technology development, the added value of

products and their know-how are rapidly moving up the value

chain. Add this to the need for large companies to quickly

implement new technology into their products, and that results in

products with improved price/performance ratios.

This means that nonintegrated companies would, to an increasing

extent, be dependent on their suppliers for both their know-how

and their ability to follow competition. A large company that's

well run would be faster (emphasis added) than its non integrated

competitors in such circumstances."

At the other end of this philosophical continuum is the concept

of independent buyers and sellers relying on the invisible hand of the

marketplace to establish terms and conditions of sale on a case by

case basis. Opportunism and adversarial relations frequently result.

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Somewhere near the center of the continuum are buyer/seller

strategic alliances. The competitive advantages available to both

parties through a well conceived and professionally implemented

strategic alliance are well documented. The case of Atlas Door

Company as outlined by George Stalk Jr. in his 1988 Harvard Business

Review article, "Time - The Next Source of Competitive Advantage", and

recent books like Changing Alliances by Dyer, Salter & Webber, The

Reqis Touch by Regis McKenna and Beyond Negotiation by Carlisle and

Parker describe strategic alliances and their benefits.

From a practical point of view, each firm wrestling with these

important issues must find a balance between the two extreme positions

represented in the continuum. Total vertical integration is seldom

achievable or advisable. And one hundred percent purchase content

turns a manufacturing firm into an assembler of its suppliers'

products and technologies. Some purchase content, some

interdependence with supplier firms appears to be unavoidable. The

level of integration and the degree of purchase content are basic

strategic choices each firm must make. Each firm's position must be

consistent within the context of its competition, industry, strategy,

and corporate culture. These choices drive basic elements within the

firm's business strategy development.

THE DEVELOPMENT AND IMPLEMENTATION OF STRATEGIC MATERIEL MANAGEMENT

The authors have concluded that effective strategic materiel

management can not be developed or implemented in a vacuum by the

materials/purchasing organization. This is not a simple purchasing

plan. This is a major sub-section of the firm's strategic materiel

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business plan, as shown in Figure 4, and must be integrated with the

marketing and conversion plans of the firm.

Upstream Materiel Strategy

Corporate Strategy

Business Strategy

ConversionManufacturing

Strategy

Distributionand SalesStrategy

©Copyright June 1989 Competitiveness Research Institute and The Prisma Group

Corporate Strategy Elements

Figure 4

Managers at firms which have implemented strategic materiel management

are justifiable proud of their success. However, they are quick to

point out that, like quality improvement, the task is immense and

requires considerable senior management attention, constant monitoring

and continuous improvement. Each of these pioneering organizations

has invested great time and energy in achieving improved results.

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Their leadership, accomplishments, and painful lessons are available

as a guide which can make the journey easier for others who are

equally motivated to follow.

THE DUTCH APPROACH

The Dutch are regarded as among the world's leaders in global

enterprise. This is not too surprising; they have 400 plus years of

global experience. In 1985, several leading Dutch organizations

recognized their vulnerability to the vissatudes of their strategic

materiel environments. These seven organizations (N. V. Philips,

Royal Dutch Shell, PTT, AKZO, DAF Trucks and the Ministery of Defence)

joined forces to establish the ISFAH program.

The program's twin objectives are to: develop strategic materiel

(supply) planners and develop strategic materiel (supply) plans. A

twenty contact day program which is completed over the course of

twelve months. During the first six months of the program, future

materiel (supply) executives are exposed to state of the art

principles in the areas of procurement, strategic materiel planning,

and relationship management.

During the second six months, candidates develop a strategic

materiel plan for their sponsoring firms. The work is performed under

the mentorship of ISFAH faculty.

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On completion of the program f the sponsors are rewarded with both

a strategic materiel planner and a strategic materiel plan - one ready

for implementation! To date, approximately 150 mid-career executives

have completed this program.

THE STRATEGIC MATERIEL MANAGEMENT INSTITUTE

OF THE UNIVERSITY OF SAN DIEGO

During the 1980's, the University of San Diego established itself

as one of the premier American research and teaching institutions in

the field of procurement. The University's School of Business'

undergraduate and graduate programs are accredited by the AACSB. In

1988, the University introduced a procurement major in its MBA

program. A four course concentration in procurement is being

introduced at undergraduate level in the 1990-91 academic year. The

University is the originator of the highly regarded Procurement Forum,

now in its fifth year. Three leading texts and numerous procurement

oriented articles have been published by University faculty. The

University's status as a leader in procurement education and research

resulted in Motorola's assignment of one of the co-authors as

Executive in Residence. In summary, the University of San Diego was

the logical choice to develop America's Strategic Materiel Management

Institute.

The Institute was established to meet two objectives: (1) to

increase the knowledge and understanding of strategic materiel

management and (2) to forge partnerships with sponsors to develop

strategic materiel plans and planners.

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The Institute's research focuses on the three interdependent

components of strategic materiel management: state-of-the-art

operational activities including: product design and development,

sourcing, pricing, and postaward activities; (2) strategic activities

including: the strategic materiel information system, strategic

material plans, and purchasing's role in SBU and corporate strategic

planning; and (3) relationship management including: mandate and cross

functional teams and the various aspects of supplier relationships

ranging from vertical integration through strategic alliances to one

time transactions. The Institute actively solicits research topics

which allow an increase in our understanding of strategic materiel

management.

In order to meet the objective of developing strategic materiel

plans and planners, the Institute is developing a seven month program

patterned after its highly successful Dutch counterpart. Nine days of

intensive education and training combined with the experience gained

developing a strategic materiel plan while under Institute mentorship

result in the development of executives qualified to meet the

challenges of our uncertain global environment.

The Institute is co-directed by the authors and is governed by a

board of distinguished advisors including: Paul Moffat, former VP

Material, Texas Instruments and former president of the NAPM; Warren

Norquist, World Wide Manager of Purchasing and Materials, Polaroid and

recipient of the Edwards Medal from the American Society for Quality

Control, Robert Paul, VP Materiel, Lockheed Corp f Dave Nelson, V.P.

Purchasing, Honda of America; Mark Alexander, Bechtel Corp and Paul

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Viko, VP Purchasing, American Express. The faculty consists of a

blend of practitioners from world class procurement operations and

leading universities with expertise in the areas of procurement ,

operations, quality, materials management, strategic planning, and

relationship management.

It is our belief that the Strategic Materiel Management Institute

will accelerate the evolution of purchasing and material management

into a strategic function.

EXCELLENCE IN MATERIEL MANAGEMENT

The competitive changes that are being forced by global

competition and customer focused marketing are demanding increased

attention. It has become clear that quality products, outstanding

marketing, focused manufacturing, and improved velocity can not be

achieved without a new strategic approach in the long overlooked

materiel function. Implementation of a tailored materiel management

plan will move the firm's materiel function (step by step) to stage

four as depicted in Figure 5. At stage four the materiel function can

fully and actively participate as a strategic competitive weapon for

the firm.

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STAGES IN THE DEVELOPMENT OF THE STRATEGIC MATERIEL MANAGEMENT FUNCTION

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CONCLUDING REMARKS

Strategic materiel management has not enjoyed the same intense level

of academic research and executive focus as have other core business

areas. This benign neglect has resulted in a relative vacuum of

understanding. This deficiency has, in many cases, handicapped problem

identification and the development of effective competitive responses.

The global competitive environment forces a re-examination of this core

business function, both in North America and in Europe. In virtually all

cases, such a re-examination indicates that professional practices judged

as outstanding only a few short years ago no longer measure up on the new

global standard.

This dynamic shift in understanding and benchmark criterion has

caught most firms unprepared. Some firms have spent considerable energy

on improvement efforts with mixed results; some outstanding, many

disappointing. The concept of strategic materiel management offers a

systematic means of gaining the benefits of this critical function without

repeating the entire range of experience already attempted.

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1. An American Samurai, Gary Jacobson & John Hillkirk, Macmillan Publishing Co., New York, NY, 1986.

2. Well Made In America, Peter C. Reid, McGraw Hill, New York, NY, 1989.

3. Changing Alliances, Davis Dyer, Malcolm Salter & Alan Webber, Harvard Business School Press, Cambridge, MA, 1987.

4. The Regis Touch, Regis McKenna, Addison-Wesley Publishing Co. Inc, Reading, MA 1985.

5. Beyond Negotiation, John Carlisle & Robert Parker, John Wiley & Sons, Chichester, UK, 1989.

6. Time - The Next Source of Competitive Advantage, George Stalk Jr. Harvard Business Review^July/August,1988 Reprint 188410.

TM7. Zero Base Pricing : Achieving World Class Competitiveness

Through Reduced All-in-Cost, by David N. Burt, Warren E. Norquist & Jimmy Anklesaria, Probus Publications, Chicago IL, 1990.

8. "Purchasing Operations: Underutilized Resource in StrategicManagement", Charles Hinkle and Michael F. Doyle, Proceedings ofthe Strategic Management Society, Boston, October 1987.

9. "Strategic Purchasing's Role in Ensuring Product Quality", by David N. Burt, Sloan Management Review, Spring, 1989.

10. Purchasing and Materials Management: Text and Cases, (5th ed.), Donald W. Dobler,David N. Burt,and Lamar Lee,Jr., McGraw Hill Book Company, NY, 1990.

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