As Yogi Berra so eloquently put it: "It’s Deja Vu all over again!" And Déjà vu it is, in markets served by PBS and EMS companies. Having worked for over 35 years with dozens of the country’s largest OEM’s, I see a reversion of their buying practices from Value Buying to simple Price Buying. And this is having a devastating effect on their supply base. The explanation for this development is, to paraphrase another eminent scholar: "It’s the economy, stupid!" And undoubtedly, that’s true. But whether it’s wise is another matter. Let me explain.

As a consultant, my clients have included a wide range of companies in the computer, telecommunications, and electronics-related equipment and instrumentation industries. For years, and in varying degrees, their buying policies and practice tended to reflect oversimplified notions of competition and its effectiveness in creating purchase value. The commonly accepted rationale was to get three bids – that was the magic number – from "approved" sources, and place the business with the low bidder. Looking back in hindsight, it’s clear that this approach was simplistic. It downplayed, or even ignored, purchase costs other than price. Further, it assumed that merely because sources were approved, their quality, delivery, technical service and support performance were equal. Although this should have been readily recognized, there was poor understanding at the time of the impact by purchasing practice on bottom-line results. And It took a confluence of soul-searching factors to bring this reality home.

The first of these factors was the ravaging effects of Japanese competition on American automotive, electronics, and appliance manufacturers. It soon became clear that their competitive advantage lay in the effectiveness of their manufacturing and procurement practices. Concepts like Total Quality Management and Just-in-Time Supply enabled the Japanese to reduce their cost of product by focusing on purchase costs other than price – costs of quality failure, costs of delivery and availability, costs of possession. Starting in the mid-80’s and early 90’s, American companies acknowledged the validity of these concepts and began, seriously, to implement them.

Once this occurred, a flood of complementary concepts and practice followed. Probably the driving force behind most of these was what has come to be known as Process Reengineering. As defined by its originators, Hammer and Champy, this is the "rethinking and radical design of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed." With purchase costs comprising the largest single element of product cost, the purchasing process became a prime candidate for reengineering. Through reengineering, purchasing was no longer seen as a stand-alone operational function. It was now seen as one activity in a broader process of supply management. No longer was price to be the sole determinant of source selection. It was only one cost of acquisition, ownership, and use.

A direct consequence of the reengineering movement was the development and implementation of Outsourcing. Once known as subcontracting, and confined to the farming out of simple parts and subassemblies, Outsourcing expanded to include product design, turn-key production, technical, financial, and professional services. And to manage this external supply base, OEM’s drastically reduced the number of suppliers they purchased from. With suppliers who complemented their core competencies, OEM’s entered into partnering-type relationships. Such suppliers became "preferred" suppliers, whose planning, scheduling, and control activities were integrated within a common company network. The rapid development and implementation of advanced information technology greatly accelerated this process.

As these supply management concepts progressed, economies, here and abroad, entered that expansionary phase of the 1990’s. New product development, speedy time to market, value-added innovations became the management mantra. These objectives drove the expansion and implementation of the new supply management paradigm. And that paradigm, in turn, drove economic growth. Some would call this a classic case of the chicken or egg analogy.

But here we are now with the economy in a funk, and near-term prospects poor. And alas, it’s Déjà vu again. All the rationale that underpinned modern-day supply management – Purchase Value, total costs of quality, availability, and use – have been shoved aside for current and continuing price reduction. Not only are OEM’s pressing their suppliers for immediate price concessions, but they’re conditioning their purchase decisions on specific price reductions in the future. Granted that pricing pressure in their markets is intense, but at some point the economy will revive. And, when that occurs, I’m afraid that price-buying OEM’s will feel the ill effects of their short-sighted purchasing practices.

This will happen because price buying leads to wider-scale price deterioration. And price deterioration reduces revenue, and eventually erodes capital. We’re already seeing the impact of this erosion in the growing list of bankruptsies, attrition through mergers, and bargain-basement takeovers. Surely, and steadily, the domestic supply base is being decimated. And since the law of supply and demand has not been repealed, when business revives OEM’s may be hard-pressed to find adequate sourcing for new product development, advanced manufacturing technology, or rapid time-to-market objectives. These will not be satisfied by large-volume offshore suppliers, and that’s a fact not fully recognized in today’s markets. What is a fact, however, that should not be too difficult to grasp, is that what goes around, comes around.

It’s ironic that having seen the benefits of a Value-oriented purchasing paradigm, OEM’s can so quickly abandon it for short-term price advantage.