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Thu, Sep 16, 2021 12:03
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Week of 7 June 2021: Procurement Month Arrived Early This Year

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This is the month I talk about procurement. If you buyers or purchasing agents have been moping around for years, thinking you are not getting any recognition, those days are over. Suddenly, you are the center of attention.

Pricing and schedule are paramount these days. In the matter of six weeks to two months, we have gone from prices you would have recognized five years ago and schedules that gave you the choice of delivery this afternoon or tomorrow morning to laughter at the other end of the phone on price or schedule. These problems are landing on the desks of purchasing managers in high volume as you read this.

Used to being in control for several decades, purchasers are suddenly realizing they have little bargaining power. Backlogs are long, demand is high, and if you don't like the price, there is someone standing in line right behind you willing to pay it.

For me, this is one of the advantages of growing old. I have been here before. Related to decoupling of the US dollar to the gold standard, in August of 1971, President Nixon imposed price controls on nearly every good and service. Your humble co-op student, me, contributed to this great experiment as my co-op job salary was scheduled to rise that September from $3.00 per hour to the princely sum of $3.25. Never happened and I never, as a co-op, caught up. I noticed differences at the company where I worked, too. We designed and built industrial washing machines and ovens, primarily for the auto industry and the nascent two-piece aluminum beverage can industry. Overnight, electric motor deliveries for our machines went from six weeks to six months.

The price controls caused conditions to worsen. Inflation went from 4.29% in 1971 (considered outrageous at the time) to 11.05% in 1974 and then 13.55% in 1980. Prime interest rate went from 6% in the summer of 1971 to a high of 21.5% on December 19,1980 (still the record). At this point, all construction stopped. No one wanted to build anything when the interest on construction loans was hovering close to 25%. Credit worthy customers that could borrow money at or near prime were nearly non-existent.

Today, the prime rate is 3.25%, but according to Zillow the value of my home, which we will use as a proxy here, has increased 15% since the end of March this year--7 weeks ago. On an annual basis, that is an inflation rate of over 110%.

Clearly something has got to give. This economy is fragile and becoming more so by the day.

As a purchasing manager, your job has suddenly and drastically shifted. Your power to hold down prices is waning by the day. To be heroic these days, you need to keep you mill from running out of daily supplies and keep your construction projects, to the extent possible, on budget. In six weeks, your job has drastically changed.

Stress in such conditions as are imminent can move safety issues from the manufacturing floor to the offices. Engineers, managers and purchasing agents can become short tempered. Short tempers can lead to accidents.

Be safe and we will talk next week.


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