The Purchasing Challenge in the 1990’s in the Service Industry, May 16, 1988

PRESENTED BY IRA A. LIPMAN
CHAIRMAN AND PRESIDENT
GUARDSMARK, INC.

TO THE NATIONAL ASSOCIATION OF PURCHASING MANAGEMENT
73RD ANNUAL INTERNATIONAL PURCHASING CONFERENCE
THE OPRYLAND HOTEL
NASHVILLE, TENNESSEE

MAY 16, 1988

THANK YOU.

I WAS HAPPY TO ACCEPT THE INVITATION TO SPEAK HERE TODAY BECAUSE OF THE GREAT RESPECT I HAVE FOR THE ROLE OF PURCHASING IN ANY ORGANIZATION.

WHEN I STARTED GUARDSMARK IN 1963, I DID NOT HAVE THE WHEREWITHAL TO HIRE A PURCHASING MANAGER. IT WAS ONE OF THE MANY JOBS THAT FELL TO MY LOT, LIKE WRITING SALES LETTERS, TYPING SALES LETTERS, AND MAILING SALES LETTERS-ALONG WITH EVERYTHING ELSE THAT GOES INTO RUNNING A COMPANY, FROM SETTING STRATEGY TO ARRANGING FOR FINANCING.

OVER TIME, I LEARNED PURCHASING AND I STILL REMEMBER HOW MUCH THAT I OWE TO A GREAT PURCHASING MANAGER, R. M. KUGLER, OF CAMPBELL SOUP CO. ONE THING HE TAUGHT ME WAS HOW IMPORTANT A PROFESSIONAL, DEDICATED PURCHASING MANAGER CAN BE IN CONTRIBUTING TO THE SUCCESS OF ANY COMPANY. IF MORE CHIEF EXECUTIVES HAD A BETTER UNDERSTANDING OF THE CENTRAL ROLE PLAYED BY PURCHASING, WE WOULD HAVE MANY MORE PROFITABLE COMPANIES IN THE UNITED STATES!

TODAY, PURCHASING, LIKE OTHER CORPORATE FUNCTIONS, IS FACING NEW CHALLENGES AS CORPORATIONS TRY TO ADAPT TO THE ENORMOUS CHANGES OCCURRING IN THE MARKET PLACE. THESE CHANGES ARE SO RAPID AND SO VAST THAT MARKETS APPEAR AND DISAPPEAR LIKE THE SMILE OF THE CHESHIRE CAT. WITH THE SPEED OF TIME-LAPSE PHOTOGRAPHY, REVOLUTIONARY IDEAS SPAWN INNOVATIVE PRODUCTS THAT LEAD TO THE CREATION OF ENTIRELY NEW INDUSTRIES, LIKE INFORMATION PROCESSING, ADVANCED TELECOMMUNICATIONS, AND BIO-GENETICS. PROFESSIONAL TRAINING AND BLUE-COLLAR SKILLS NO LONGER LAST A LIFETIME, BUT A DECADE, AS AUTO WORKERS IN DETROIT RETOOL FOR DIFFERENT CAREERS AND DOCTORS IN NEW YORK FACE PERIODIC RELICENSING EXAMINATIONS.

CHANGE IS AFFECTING MORE THAN THE ECONOMY. OUR WHOLE SOCIETY IS SHIFTING INTO NEW LIVING PATTERNS. THE CONVENTIONAL NOTION OF THE

NORMAL FAMILY AS A WORKING FATHER WITH A NON WORKING MOTHER AND TWO CHILDREN REPRESENTS ONLY 4 PERCENT OF AMERICAN FAMILIES TODAY. GRANDPARENTS HAVE MOVED TO RETIREMENT COMMUNITIES OR NURSING HOMES; MOTHERS HAVE MOVED OUT OF THEIR HOMES AND INTO OFFICES; CHILDREN HAVE MOVED INTO DAY-CARE CENTERS.

THESE NEW LIVING PATTERNS HAVE CREATED NEW NEEDS, FOR NURSING AND OTHER HEALTH-CARE PROFESSIONALS, CLEANING SERVICES, AND DAY-CARE WORKERS. LABOR- AND TIME-SAVING TECHNOLOGIES HAVE HELPED: SELF- CLEANING AND SELF-T1MING OVENS, SELF-DEFROST1NG REFRIGERATORS, PERMANENT PRESS CLOTHES, DIRT-RESISTANT FABRICS, AUTOMATIC DRAFTING OF CHECKING ACCOUNTS, BOOKS ON CASSETTE TAPES FOR COMMUTERS, DOLLS THAT TALK TO CHILDREN, CELLULAR CAR-PHONES, AND THE U.S.A. TODAY IN PRINT, AND IN SEPTEMBER, ON TELEVISION AS WELL. CHANGES LIKE THESE AFFECT ALL OF US, AND THEY CAN BE TIED TO STRUCTURAL SHIFT’S AND BASIC TRANSFORMATIONS TAKING PLACE IN THE ECONOMY, IN THE FAMILY, IN THE WAY WE WORK AND COMMUNICATE, IN THE WAY WE ORGANIZE, AND IN THE WAY WE RELATE TO INSTITUTIONS.

THE PACE OF CHANGE IS ALSO ACCELERATING, WHICH MAKES ADAPTING TO SUCH MASSIVE SHIFTS MORE DIFFICULT. NEW PRODUCTS THE VIDEO CASSETTE RECORDER IS AN EXAMPLE-CAN GO THROUGH AN ENTIRE LIFE CYCLE FROM BIRTH THROUGH GROWTH TO MATURITY IN A SINGLE DECADE. INTRODUCED ONLY TEN YEARS AGO, VCR’S CAN NOW BE FOUND IN 53 PERCENT OF AMERICAN HOMES.

THE INFORMATION EXPLOSION IS ANOTHER EXAMPLE OF HOW THE PACE IS ACCELERATING. IT TOOK THOUSANDS OF YEARS TO ACCUMULATE THE INFORMATION NOW STORED IN ALL THE WORLD’S LIBRARIES AND COMPUTERS. IT WILL TAKE ONLY EIGHT YEARS BEFORE THAT INFORMATION IS DOUBLED!

TWO OF THE MOST IMPORTANT AND RAPID CHANGES ARE ONES THAT DIRECTLY AFFECT PURCHASING MANAGERS. THE FIRST IS THE SHIFT TO A SERVICE-BASED ECONOMY. THE OTHER IS THE DEVELOPMENT OF INTENSE AND UNBRIDLED MARKET COMPETITION, BOTH FROM NEW DOMESTIC ENTRANTS AND FROM OVERSEAS.

THE SHIFT TO A SERVICE-BASED ECONOMY HAS OCCURRED OVER THE LAST THIRTY YEARS. IN FACT, IT WAS IN 1956 THAT THE NUMBER OF WHITE-COLLAR WORKERS SURPASSED THE NUMBER OF BLUE-COLLAR WORKERS IN THE UNITED STATES. THAT TREND ACCELERATED WITH THE BIRTH OF NEW SERVICE INDUSTRIES AND THE DECLINE OF MANUFACTURING. THE TREND IS HIGHLIGHTED BY THE FIGURES ON JOBS GROWTH. IN THE DECADE OF THE 70’S, 19 MILLION NEW JOBS WERE CREATED, BUT ONLY 5 PERCENT WERE IN MANUFACTURING. A FULL 89 PERCENT OF THOSE NEW JOBS WERE OUTSIDE THE ENTIRE GOODS-PRODUCING SECTOR. TODAY THE SERVICE SECTOR EMPLOYS APPROXIMATELY 70 PERCENT OF AMERICAN WORKERS.

THE RECENT GROWTH IN MANUFACTURING DUE TO THE DECLINE OF THE DOLLAR IS A SMALL COUNTER-TREND THAT WILL NOT AFFECT THE LONG- TERM SHIFT TO A SERVICE-BASED ECONOMY. AND TO POINT OUT THE GROWTH OF SERVICE INDUSTRIES IN NO WAY BELITTLES THE IMPORTANCE OF MANUFACTURING TO THE AMERICAN ECONOMY. AS A MATTER OF FACT, MANUFACTURING COMPANIES ARE THE CLIENTS FOR MORE THAN 25 PERCENT OF OUR NATION’S SERVICES.

THE PRESS FOCUSES ON THE PLIGHT OF LAID-OFF AUTO WORKERS, WHO AVERAGED ALMOST $25,000 A YEAR IN 1986, REDUCED TO FLIPPING HAMBURGERS AT THE LOCAL MCDONALD’S FOR A MINIMUM WAGE, TO POINT UP THE DRAMATIC SHIFTS OCCURRING IN OUR ECONOMY. AND IT IS TRUE THAT 37 PERCENT OF ALL NEW JOBS CREATED BETWEEN 1978 AND 1984 PAID LESS THAN $9,200 A YEAR.

BUT MANY OF THOSE NEW JOBS PAID A GREAT DEAL MORE THAN THAT, AND MANY PAID MULTIPLES OF WHAT THAT AVERAGE AUTO WORKER MADE BEFORE BEING LAID OFF.

THE PROBLEM FOR THE AUTO WORKER, AS FOR OTHERS WHO HAVE LOST JOBS IN MANUFACTURING, IS THAT OUR NEW ECONOMY HAS PLACED A PREMIUM ON EDUCATION, UNDERSTANDING OF TECHNOLOGY, AND SPECIALIZED SKILLS. INFORMATION PROCESSING, TELECOMMUNICATIONS, AND HEALTH SERVICES ARE JUST A FEW EXAMPLES OF BURGEONING INDUSTRIES THAT DEMAND HIGHLY SPECIALIZED SKILLS FOR THE MANIPULATION, PACKAGING, AND TRANSMITTING OF INFORMATION, THE PRODUCT THAT IS AT THE CORE OF

THE NEW ECONOMY.

THE SHIFT TO A SERVICE-BASED ECONOMY HAS HAD MANY FAR-REACHING EFFECTS. THE NEW SERVICE INDUSTRIES NEEDED A NEW KIND OF EMPLOYEE. IF THE ASSEMBLY LINE IN THE FACTORY NEEDED A WORKER WHO WORKING ALONE COULD REPEAT THE SAME ACTION A THOUSAND TIMES WITHOUT VARIATION, THE OFFICE IN THE SERVICE INDUSTRY NEEDED THE OPPOSITE: A WORKER WHO AS PART OF A TEAM COULD HANDLE A NUMBER OF TASKS SIMULTANEOUSLY AND WHO ADAPTED TO EACH NEW SITUATION AS IT AROSE. THE NEW SERVICE WORKERS HAD TO BE HIGHLY SKILLED, WELL EDUCATED, FLEXIBLE, ADAPTABLE, AND ABLE TO EXAMINE PROBLEMS FROM NEW PERSPECTIVES. THEY HAD TO BE WILLING TO TAKE RESPONSIBILITY FOR SEEING A TASK TO COMPLETION. IN OTHER WORDS, THEY WERE ENTREPRENEURIAL.

IT WAS NO ACCIDENT THAT COINCIDING WITH THE SHIFT TO A SERVICE ECONOMY, THERE WAS A BURST OF NEW ENTREPRENEURIAL ACTIVITY. ACROSS THE COUNTRY INDEPENDENT-MINDED EMPLOYEES WENT INTO

BUSINESS FOR THEMSELVES, MOST PROVIDING SERVICES EITHER TO CONSUMERS OR TO LARGER COMPANIES. AND THEY PROSPERED. IT’S FORTUNATE FOR US THAT THEY DID, FOR THEY CREATED MOST OF THE NEW JOBS NEEDED TO ABSORB THE MILLIONS OF AMERICANS ENTERING THE WORK FORCE. BETWEEN 1969 AND 1976, NINE MILLION NEW JOBS WERE CREATED IN THE UNITED STATES, AND NONE OF THEM WERE CREATED BY THE FORTUNE 1,000.

SIX OF THE NINE MILLION WERE CREATED BY SMALL BUSINESSES. THE OTHER THREE MILLION CAME FROM STATE AND LOCAL GOVERNMENT.

FROM 1980 TO 1986 THE FORTUNE 500 CREATED ZERO JOBS. IN EACH OF THOSE YEARS, AN AVERAGE OF 600,000 NEW BUSINESSES WERE INCORPORATED. AND IN 1986, THE TEN FASTEST-GROWING BUSINESS CATEGORIES WERE ALL SERVICE- OR TRADE-RELATED.

THE TREMENDOUS NUMBER OF NEW BUSINESS FORMATIONS HAS HELPED TO PLACE THE PURCHASING MANAGER IN THE SAME POSITION AS THE CONSUMERIN THE NEW ECONOMY: THE POSITION OF BEING OVERWHELMED WITH CHOICE. THE INCREASING DIVERSITY OF OUR ECONOMY CREATES NOT ONLY MORE CHOICE, BUT ALSO MORE CONFUSION. NEW SUPPLIERS WHO USE NEW METHODS, NEW MATERIALS, NEW DISTRIBUTION SYSTEMS CONSTANTLY SEEK OUR BUSINESS, AND CONSCIENTIOUS BUSINESS OWNERS OR PURCHASING MANAGERS MUST CONTINUALLY RE-EXAMINE THEIR SUPPLIER SITUATION TO ENSURE OPTIMAL RESULTS.

IS IT BETTER TO MAKE OR TO BUY? IS IT BETTER TO USE DOMESTIC SUPPLIERS, OR ONES THAT ARE OFF-SHORE? AMERICAN COMPANIES, OR FOREIGN? A FOREIGN COMPANY WITH DOMESTIC PLANTS? OR AN AMERICAN COMPANY WITH OFF-SHORE FACILITIES? WILL THE NEW WAVE OF PROTECTIONISM AFFECT THE SUPPLY OR THE PRICE? IS IT BETTER TO CHOOSE A LARGE SUPPLIER WHO DOESN’T PARTICULARLY NEED THE BUSINESS, OR A SMALL SUPPLIER WHOSE ACTIONS CAN BE INFLUENCED?

COMPLICATING THE CHOICES THAT FACE PURCHASING MANAGERS IS THE NEW NEED TO COME TO GRIPS WITH THE RISE OF THE SERVICE ECONOMY. AS

PURCHASING MANAGERS EXPAND THE SCOPE OF THEIR ACTIVITIES TO THE PURCHASING OF SERVICES, ENTIRELY NEW CONSIDERATIONS COME INTO PLAY.

FOR EXAMPLE, MEASURING THE QUALITY OF A SERVICE IS NOT THE SAME AS MEASURING THE QUALITY OF A PRODUCT. HOWEVER MUCH WE TRY, SOME THINGS JUST CANNOT BE QUANTIFIED. WE CAN MEASURE, POUR, COMPARE, BUILD MATRICES, AND CHART GRIDS, BUT WHAT MAKES FOR EXCELLENCE DEFIES OUR EFFORTS TO LIMIT IT, DEFINE IT, SAY IT IS “THIS” AND NOT “THAT:’

HOW DO WE PLACE A VALUE ON MORALE? OR LOYALTY? OR EFFICIENCY? OR COMPANY SPIRIT? PURE TALENT CAN BE BOUGHT BY ANY COMPANY THAT’S WILLING TO PAY THE PRICE IN THE MARKET PLACE. BUT A COMPANY CULTURE THAT MOTIVATES EMPLOYEES TO BE THEIR BEST, TO REACH THEIR GREATEST POTENTIAL-THAT CULTURE CANNOT BE BOUGHT OFF A SHELF OR DESIGNED ACCORDING TO SPECIFICATIONS. IT MUST BE BUILT OVER YEARS, GRADUALLY, LIKE A CORAL REEF, WITH THOUSANDS OF EMPLOYEES EVERY DAY USING THEIR BRAINS, AND MUSCLE, AND SPIRIT IN A COMMON CAUSE.

ACCORDING TO ARISTOTLE, “CHARACTER IS ACTION.” HE WAS TALKING ABOUT DRAMA, BUT HIS EQUATION EQUALLY APPLIES TO ECONOMIC ANALYSIS. FOR A COMPANY IS AS A COMPANY DOES, AND THAT APPLIES PARTICULARLY TO SERVICE COMPANIES.

WHAT A MANUFACTURING COMPANY DOES CAN BE MEASURED PRECISELY. ITS STANDARDS CAN BE EASILY DEDUCED FROM THE QUALITY OF ITS PRODUCTS. BUT MANY COMPANIES’ STANDARDS ASSUME-AND PLAN FOR-A CERTAIN LACK OF QUALITY. THEY ARE SATISFIED IF A CERTAIN PREDETERMINED PERCENTAGE OF THE PRODUCT-2 PERCENT, 5 PERCENT, 10 PERCENT-IS DEFECTIVE. IT’S CALLED AN ACCEPTABLE DEFECT RATE.

IF YOU ARE THINKING OF BUYING WIDGETS FROM GLOBAL WIDGET CORPORATION, YOU WANT TO KNOW WHAT IT CONSIDERS TO BE AN ACCEPTABLE DEFECT RATE. IT MIGHT BE 30 WIDGETS PER THOUSAND, OR 40, OR 50. THE NUMBER DOESN’T REALLY MATTER.

WHAT DOES MATTER, WHAT GIVES INSIGHT INTO THE CHARACTER OF GLOBAL WIDGET CORPORATION, IS THE VERY FACT THAT IT LABELS FAILURE AS

ACCEPTABLE. IT PEDDLES SHODDY GOODS FOR FULL PRICE. IT TRANSFERS TO YOUR COMPANY THE COST OF QUALITY INSPECTION. WE MIGHT SAY THAT GLOBAL WIDGET IS ITSELF DEFECTIVE, THAT IT HAS A CHARACTER FLAW, A BASIC MORAL FAILING THAT, GIVEN THE RIGHT CIRCUMSTANCES, WILL BECOME A TRAGIC FLAW AND LEAD TO ITS DOWNFALL.

IN THE ECONOMIC TRAGEDY WE HAVE WITNESSED OVER THE LAST 15 YEARS, ACCEPTANCE OF MEDIOCRITY HAS PLAYED A MAJOR PART. OVER THE LAST 5 YEARS-AS IN A MEDIEVAL MORALITY PLAY-THE SPIRIT OF EXCELLENCE HAS BEEN SUMMONED TO COME BACK ON STAGE AND GIVE MEDIOCRITY THE DRUBBING HE DESERVES.

IF CHARACTER IS ACTION, WE HAVE TO ASK WHAT A COMPANY DOES. BUT IN THE SERVICE ECONOMY, WE HAVE TO ASK NOT ONLY WHAT A COMPANY DOES, BUT HOW IT DOES.

IF GLOBAL WIDGET HAS A ZERO DEFECT RATE AND DELIVERS THE CORRECT NUMBER OF WIDGETS ON TIME TO THE CORRECT DESTINATION, AND ALL AT A

FAIR PRICE, THEN IT IS EASY TO PLACE A VALUE ON THE RELATIONSHIP WITH GLOBAL WIDGET. AND IF TWO SUPPLIERS MAKE THE SAME WIDGET, OF EQUAL VALUE AND AT THE SAME PRICE, THEN OTHER FACTORS ARE GIVEN EXTRA WEIGHT. THE LENGTH OF THE RELATIONSHIP, THE DESIRE TO LIMIT DEPENDENCY ON ONE SUPPLIER, OR PERSONAL RELATIONSHIPS CAN BECOME DETERMINING FACTORS.

FOR EXAMPLE, A SUPPLIER WITH A LONG-STANDING RELATIONSHIP CAN BE EXPECTED TO MEET THE NEED WHEN AN EXTRAORDINARY SITUATION ARISES.

BUT IN SERVICES, NO TWO SUPPLIERS EVER OFFER EXACTLY THE SAME QUALITY, BECAUSE PEOPLE ARE THE HEART AND SOUL OF A SERVICE COMPANY. IT IS ESSENTIAL TO REMEMBER THAT THE PRODUCT OF A SERVICE COMPANY IS THE PERFORMANCE OF ITS PEOPLE. WITHOUT THAT, NO UNDERSTANDING OF SERVICE INDUSTRIES IS POSSIBLE. AND PURCHASING MANAGERS MUST DEVELOP AN UNDERSTANDING OF SERVICES IF THEY ARE TO PURCHASE SERVICES IN A WAY THAT WILL BENEFIT THEIR COMPANIES.

THIS MASSIVE GROWTH IN SERVICE- AND INFORMATION-BASED INDUSTRY, WITH ALL ITS IMPLICATIONS FOR OUR ECONOMY AND SOCIETY, HAS BEEN ACCOMPANIED BY INTENSE COMPETITION, FROM BOTH DOMESTIC AND FOREIGN COMPANIES. BEGINNING IN THE LATE 70’S AND ACCELERATING THROUGH THE 80’S, DEREGULATION HIT A NUMBER OF INDUSTRIES- INCLUDING TRUCKING, AIRLINES, AND FINANCIAL SERVICES-LIKE A SLEDGE HAMMER. COMPANIES THAT HAD ENJOYED PROTECTED MARKETS SUDDENLY DISCOVERED THAT THEIR COMPETITIVE SKILLS, DULL FROM DISUSE, WERE IN URGENT NEED OF SHARPENING. AT THE SAME TIME, ACROSS THE RANGE OF AMERICAN INDUSTRIES, NEWLY FORMED BUSINESSES WERE CARVING OUT PROFITABLE NICHES LONG IGNORED OR POORLY SERVED BY LARGE CORPORATIONS.

THE MOST SERIOUS SHOCK CAME WITH THE DISCOVERY THAT COMPETITION HAD BECOME GLOBAL. THE UNITED STATES HAS LOST NOT ONLY INTERNATIONAL MARKETS, BUT ALSO ITS OWN MARKETS TO NEW ECONOMIC POWERS LIKE SOUTH KOREA, HONG KONG, SINGAPORE, TAIWAN, AND JAPAN. MANUFACTURERS MOVED PLANTS OVERSEAS TO TAKE ADVANTAGE OF LOWER

WAGE RATES AND BETTER QUALITY CONTROL SYSTEMS. U.S. INDUSTRY LOOKED OUTWARD, TO STUDY THE SUCCESSES OF OTHER COUNTRIES, BUT ALSO LOOKED INWARD, TO SEE WHAT COULD BE DONE TO REPAIR THE U.S. INDUSTRIAL MACHINE.

A NUMBER OF THOSE REMEDIAL ACTIONS THAT FOLLOWED HAVE HAD A DIRECT EFFECT ON PURCHASING MANAGERS. LOOKING TO TRIM WASTE AND CORPORATE FAT, THOUSANDS OF COMPANIES ENGAGED IN “DOWNSIZING,” OR CORPORATE STREAMLINING, A POLITE TERM FOR THE ELIMINATION OF JOBS. SINCE 1979, OVER 1.5 MILLION MANAGERIAL AND PROFESSIONAL POSITIONS HAVE BEEN ELIMINATED THROUGH DOWNSIZING.

DOWNSIZING MAKES EVERYONE A LITTLE MORE INSECURE AS CONSULTANTS AND ANALYSTS STUDY HOW WORK IS ORGANIZED TO STREAMLINE PROCEDURES, EXAMINE POLICIES, AND STRIP AWAY LAYERS OF BUREAUCRACY.

ANOTHER RESULT OF THE SELF-STUDY DONE BY U.S. INDUSTRY WAS RELATED TO THE TREMENDOUS SURGE OF ENTREPRENEURIAL ACTIVITY. IF THE BEST

EMPLOYEES WERE THE MOST ENTREPRENEURIAL-INDEPENDENT, HIGHLY RESPONSIBLE, FREE-THINKING, FULL OF IDEAS-HOW WAS A LARGE CORPORATION TO KEEP SUCH EMPLOYEES IN-HOUSE? THE PROPOSED SOLUTION WAS TO GIVE THEM THE KIND OF ENVIRONMENT THEY NEEDED TO THRIVE.

MANY CORPORATIONS HAVE ATTEMPTED TO BECOME “INTRAPRENEURIAL,” GIVING MANAGERS MORE FREEDOM FROM BUREAUCRATIC RULES, MORE RESPONSIBILITY WITH LESS INTRUSIVE OVERSIGHT, AND THE NECESSARY RESOURCES TO ACHIEVE THE ASSIGNED GOALS.

THE “INTRAPRENEURIAL” MOVEMENT IS A SOLID SIGN THAT SENIOR MANAGEMENT IN U.S. INDUSTRY TODAY IS MORE WILLING THAN PERHAPS EVER BEFORE TO LISTEN TO GOOD, SOUND IDEAS FOR IMPROVING A COMPANY’S OPERATIONS. IT IS A GREAT OPPORTUNITY FOR THE PURCHASING MANAGER WHO HAS A CREATIVE IDEA ON HOW TO ADD TO THE BOTTOM LINE WHILE ENSURING EXCELLENT QUALITY.

IN ADDITION TO DOWNSIZING AND INTRAPRENEURSHIP, OUTSOURCING HAS ALSO GROWN IN FAVOR. THE TREND HAS ACCELERATED RAPIDLY WITH REGARD TO SERVICES, AND IT GOES HAND-IN-HAND WITH THE TREND TO DOWNSIZING. NEWLY “LEAN AND MEAN” COMPANIES WILL THINK LONG AND HARD BEFORE THEY AGAIN PAD THEIR PAYROLLS WITH EMPLOYEES WHO ARE NOT ABSOLUTELY NECESSARY OR WHO PERFORM FUNCTIONS THAT CAN BE EASILY CARRIED OUT BY OUTSIDE CONTRACTORS.

LOWER OVERALL COST IS OBVIOUSLY A MAIN CAUSE OF THE TREND TO OUTSOURCING OF SERVICES. EMPLOYEES ARE EXPENSIVE, ESPECIALLY CONSIDERING THE HOST OF COMPREHENSIVE BENEFIT PACKAGES THAT HAVE BECOME STANDARD. AND THEY ARE BOTH EXPENSIVE AND DIFFICULT TO REMOVE FROM THE PAYROLL WHEN A CHANGE IN STRATEGY OR THE MARKET PLACE OCCURS. THAT IS THE SECOND AND LESS OBVIOUS CAUSE OF THE INCREASED OUTSOURCING OF SERVICES. COMPANIES TODAY MUST REMAIN FLEXIBLE TO MOVE WITH THE SPEED AND AGILITY OF THE SWIFTLY CHANGING MARKET PLACE.

OUTSIDE BUSINESS SERVICES TODAY RANGE FROM MAINTENANCE AND CLEANING SERVICES TO LEGAL AND ENGINEERING CONSULTING. ALL TYPES OF CLERICAL WORK, PRINTING, ADVERTISING, MARKETING, PUBLIC RELATIONS, TRANSPORTATION, COURIER SERVICE, HEALTH AND WELLNESS PROGRAMS, AND PRIVATE SECURITY CAN ALL BE PERFORMED OR CARRIED OUT BY SUPPLIERS OF BUSINESS SERVICES. THERE’S THE WHOLE RANGE OF CONSULTING SERVICES: LAWYERS, DOCTORS, LOBBYISTS, TRAVEL AGENTS, SALES TRAINING SPECIALISTS, COMPUTER EXPERTS, AND IMAGE CONSULTANTS ARE BUT A FEW.

COMPANIES NOT ONLY CONTRACT FOR SERVICES, THEY ALSO CONTRACT FOR PEOPLE. ONE MILLION PEOPLE ARE EMPLOYED IN FULL-TIME TEMPORARY POSITIONS BY TEMPORARY AGENCIES. NOT ALL OF THEM ARE SECRETARIES OR CLERICAL WORKERS. MANY ARE PROFESSIONALS, AND UP TO ONE-THIRD ARE PLACED IN FACTORY JOBS. ADD TO THAT ONE MILLION THE 8.3 MILLION, CLASSIFIED AS SELF-ENHILOYED, WHO OFTEN CONTRACT WITH COMPANIES FOR THEIR SERVICES, AND THE PERCEPTION OF THE SERVICE MARKET GROWS IMMENSELY.

THE INCREASED GLOBAL COMPETITION HAS LED TO ANOTHER MOVEMENT IN U.S. INDUSTRY, THE TREND TO JUST-IN-TIME PURCHASING. IT IS EASY TO SEE HOW JUST-IN-TIME SYSTEMS FIT IN AN ENVIRONMENT OF DECREASING MARKET SHARE, CORPORATE STREAMLINING, AND OUTSOURCING. AND JUST-IN-TIME HAS PROVEN ITS USEFULNESS AS A VALUABLE MANAGEMENT TOOL IN MANUFACTURING.

WHAT HAS NOT BEEN NOTED IS THAT JUST-IN-TIME WORKS EQUALLY WELL IN PURCHASING SERVICES. THE SAME FACTORS THAT APPLY IN ONE CASE APPLY IN THE OTHER.

FOR EXAMPLE, JUST-IN-TIME REQUIRES THAT THE SUPPLIER PUT IN PLACE SYSTEMS TO ENSURE THAT THE SUPPLY EXACTLY MEETS THE DEMAND OF THE BUYER. THE SAVINGS CAN BE ENORMOUS: HEWLETT-PACKARD COMPANY HAS LOWERED ITS CARRYING COSTS $600 MILLION A YEAR, AND IT IS NOT ALONE IN DISCOVERING THE VERY REAL COSTS OF WAREHOUSING.

MANY SERVICES ARE ALSO “WAREHOUSED” IN THE FORM OF EMPLOYEES. CONSIDER HOW MANY EMPLOYEES ENGAGED IN SERVICE-EVEN WITHIN

MANUFACTURING COMPANIES-RARELY PERFORM A USEFUL FUNCTION EIGHT HOURS A DAY ALL YEAR ROUND. HOW MANY OF THEM ARE CARRIED ON THE PAYROLL TO ENSURE THEIR PRESENCE WHEN THEY ARE NEEDED? MOST INDUSTRIES HAVE SEASONAL VARIATIONS, AND MOST SERVICE FUNCTIONS HAVE THE SAME KIND OF VARIATION BETWEEN BUSY TIMES AND SLACK TIMES.

THE NEED FOR SERVICE EMPLOYEES MIGHT BE HEAVIEST AT CERTAIN TIMES OF THE WEEK, MONTH, QUARTER, OR YEAR. OR THE NEED MIGHT BE CONNECTED TO PARTICULAR EVENTS: PUBLICATION OF THE ANNUAL REPORT, INTRODUCTION OF A NEW PRODUCT LINE, OR PREPARATIONS FOR THE COMPANY PICNIC.

KEEPING EMPLOYEES ON THE PAYROLL ALL YEAR ROUND WHEN THEY ARE ESSENTIAL ONLY AT CERTAIN TIMES BRINGS WITH IT A CARRYING COST, JUST THE SAME AS THE WAREHOUSING OF WIDGETS. THOSE COSTS COULD BE PARED WITH THE ADOPTION OF JUST-IN-TIME PURCHASING OF SERVICES.

MAKING JUST-IN-TIME WORK REQUIRES THAT SPECIAL ATTENTION BE PAID TO THE BUYER-SUPPLIER RELATIONSHIP. THE SUPPLIER MUST DELIVER QUALITY

GOODS OR SERVICES WHEN THEY ARE NEEDED AND BOTH THE QUALITY AND THE DELIVERY MUST BE CONSISTENT. A SENSE OF PARTNERSHIP MUST BE DEVELOPED BETWEEN THE PARTIES AND THAT REQUIRES A SPECIAL UNDERSTANDING OF EACH OTHER’S PROBLEMS AND NEEDS.

THAT KIND OF RELATIONSHIP TAKES EFFORT, AND FOR PRACTICAL REASONS, CANNOT BE ESTABLISHED WITH A HOST OF SUPPLIERS. SINGLE-SOURCING WORKS FOR MANUFACTURING AND THERE IS NO REASON IT CANNOT WORK FOR SERVICES. MANY COMPANIES ALREADY HAVE LONG-ESTABLISHED TIES TO PARTICULAR SERVICE SUPPLIERS, BUT WITHOUT THE SPECIAL UNDERSTANDING AND COMMITMENT REQUIRED BY JUST-IN-TIME PURCHASING.

SOLIDIFYING AND EXPANDING THOSE RELATIONSHIPS INTO A FORMAL JUST-IN- TIME SYSTEM WOULD BRING THE ADDED ADVANTAGE OF BETTER QUALITY CONTROL. LONG-TERM RELATIONSHIPS WOULD PROVIDE INCENTIVES TO THE SUPPLIER TO GUARANTEE EXCELLENT QUALITY THROUGH IMPLEMENTATION OF MORE EFFECTIVE QUALITY CONTROL SYSTEMS BECAUSE THE SUPPLIER KNOWS THAT THE UP-FRONT COSTS ENTAILED BY A GUARANTEE WILL BE RECOVERED OVER THE LIFE OF THE RELATIONSHIP.

IMPLICIT IN SUCH A SYSTEM IS THE REALIZATION THAT, IN ORDER OF IMPORTANCE, VALUE COMES BEFORE COST. A GUARANTEE OF EXCELLENT QUALITY HAS VALUE; MUTUAL UNDERSTANDING HAS VALUE; A BELIEF IN PARTNERSHIP HAS VALUE; THE PROVEN ABILITY TO MEET SPECIFICATIONS AND CHANGING NEEDS HAS VALUE. SELECTING A JUST-IN-TIME SUPPLIER ON A COST BASIS ALONE IS A LIMITED APPROACH, EVEN IN MANUFACTURING.

IN DEALING WITH SERVICES, SELECTING A SUPPLIER WITH COST THE ONLY-OR THE CRITICAL-CRITERION MAKES NO SENSE AT ALL. QUALITY IS A MUCH MORE DIFFICULT CONCEPT TO APPLY IN SERVICES THAN IT IS IN MANUFACTURING. THERE, GOODS EITHER MEET THE MINIMUM SPECIFICATIONS OR THEY DON’T. BUT HOW ARE THE MINIMUM STANDARDS OF QUALITY DEFINED FOR SERVICES?

WITH SERVICES, COMPETITIVE BIDDING THAT USES COST AS THE SOLE CRITERION VIRTUALLY GUARANTEES THAT THE WINNING BID WILL BE OFFERED BY THE COMPANY WITH THE LOWEST QUALITY STANDARDS. IT WORKS THAT WAY BECAUSE A SERVICE COMPANY THAT IS DETERMINED TO WIN A BID CAN SLASH ITS QUALITY CONTROL COSTS AS LOW AS NECESSARY TO MAINTAIN A PROFIT MARGIN.

IN THE SHORT-TERM, LACK OF QUALITY MAY NOT HAVE AN OBSERVABLE EFFECT ON TILE BOTTOM LINE. BUT SOONER OR LATER THE BILL COMES DUE. A DRAMATIC EXAMPLE OCCURRED SOME TIME AGO IN NEW YORK, WHERE GUARDSMARK PROVIDED SECURITY FOR AN INVESTMENT BANKING FIRM ON THE 41ST TO 44TH FLOORS OF A BUILDING NEARING COMPLETION. A SEVERE FIRE BROKE OUT, OUR FLOORS WERE PROMPTLY AND PROPERLY EVACUATED, AND THE COMPUTER TAPES, WHICH WERE ESSENTIAL TO THE FIRM’S CONTINUING OPERATIONS, WERE SAFELY STORED. THE INVESTMENT COMPANY WAS BACK IN BUSINESS THE NEXT DAY. IN CONTRAST, GUARDS FROM ANOTHER COMPANY ACTUALLY GUIDED OFFICE WORKERS TO THE ELEVATORS. TWO OF THE GUARDS DIED IN THE FIRE.

YOU MAY HAVE HEARD OF A SIMILAR SITUATION THAT OCCURRED EARLIER THIS MONTH WHEN A FIRE BROKE OUT IN A LOS ANGELES BANK BUILDING. A SECURITY GUARD FROM A COMPETITOR FIRM TURNED OFF THE SMOKE ALARMS IN VIOLATION OF FIRE REGULATIONS AND SENT A MAINTENANCE MAN TO FIND OUT WHAT WAS SETTING OFF THE ALARMS. THE MAINTENANCE MAN IDLED IN THE ELEVATOR ON THE 12TH FLOOR. YOU GET WHAT YOU PAY FOR.

ANY NUMBER OF INDUSTRIES COULD PROVIDE ILLUSTRATIONS OF HOW THESE MAJOR TRENDS THAT I HAVE MENTIONED AND THEIR EFFECTS ARE CHANGING OUR ECONOMY AND THE WAY WE DO BUSINESS. THE PRIVATE SECURITY INDUSTRY IS AN EXCELLENT EXAMPLE. THE SHIFT TO A SERVICE ECONOMY OVER THE LAST 30 YEARS COINCIDED WITH EXPLOSIVE GROWTH IN PRIVATE SECURITY, WHICH NOW PROVIDES JOBS FOR OVER 1.1 MILLION PEOPLE. THAT’S DOUBLE THE NUMBER OF ALL THE LAW ENFORCEMENT PERSONNEL IN THE COUNTRY.

THE INDUSTRY CONTINUES TO GROW AT A 15 PERCENT RATE TO MEET THE INCREASED DEMAND, WHICH HELPS TO EXPLAIN WHY THERE ARE NOW 13,000 COMPANIES PROVIDING GUARD AND INVESTIGATIVE SERVICES. THE TREMENDOUS GROWTH IN THE NEW BUSINESS FORMATIONS IS AIDED BY EASE OF ENTRY AND GENERAL LACK OF GOVERNMENT REGULATION.

THE RAPIDLY INCREASING DEMAND FOR PRIVATE SECURITY SERVICES REFLECTS THE ECONOMIC AND SOCIETAL TRANSFORMATIONS NOW TAKING PLACE. RISING CRIME RATES, PRODUCT TAMPERING, AIRPLANE HIJACKINGS, INDUSTRIAL ESPIONAGE, WHITE-COLLAR CRIME, AND TERRORISM ALL FEED

THE DEMAND FOR PROTECTION SERVICES. SOME SECURITY SERVICES HAVE COME INTO BEING AS A DIRECT RESULT OF MAJOR TECHNOLOGICAL ADVANCES AND EVEN WHOLE NEW SERVICE INDUSTRIES. COMPUTERS, NUCLEAR ENERGY, SOPHISTICATED LISTENING DEVICES, AND OTHER DEVELOPMENTS HAVE LED TO THE CREATION OF NEW AND HIGHLY SPECIALIZED SECURITY OPERATIONS.

THE PRIVATE SECURITY INDUSTRY HAS ALSO BENE111 1 ED GREATLY FROM THE NEW COMPETITIVE ENVIRONMENT. MARKET GROWTH HAS FUELED A VAST NUMBER OF NEW BUSINESS FORMATIONS IN PRIVATE SECURITY, AND CREATED THOUSANDS OF NEW JOBS. UNFORTUNATELY, MOST OF THESE COMPANIES OFFER A VERY LOW LEVEL OF QUALITY, AND AS A RESULT LIVE OFF LOW-BID CONTRACTS AND SEGMENTS OF THE INDUSTRY WHERE MARGINS ARE MINIMAL.

DOWNSIZING AND OUTSOURCING HAVE BEEN A BOON TO THE PRIVATE SECURITY COMPANY WITH A TRACK RECORD OF EXCELLENCE. THE TREND TOWARD OUTSOURCING OF SERVICES IS PERFECTLY ILLUSTRATED BY WHAT IS OCCURRING WITHIN THE INDUSTRY. IN 1978, CONTRACT SECURITY HAD

ABOUT 55 PERCENT OF THE MARKET WITH PROPRIETARY SECURITY FORCES MAKING UP THE REMAINDER. BY 1985, CONTRACT SECURITY’S MARKET SHARE HAD RISEN TO 65 PERCENT, AND THE RATE OF GROWTH HAS SHOWN NO SIGN OF SLOWING DOWN.

A MAJOR REASON FOR THE SHIFT IS COST SAVINGS, AND THEY CAN BE SUBSTANTIAL. GUARDSMARK RECENTLY REPLACED A PROPRIETARY SECURITY FORCE AT ONE OF THE COUNTRY’S MAJOR FINANCIAL INSTITUTIONS. THE CLIENT WILL SAVE FROM $15-$20 MILLION OVER A TEN YEAR PERIOD. THE DANGER IN OUTSOURCING SERVICES WITH THE HOPE OF CUTTING COSTS IS THAT QUALITY WILL DECLINE. THE BUYER MUST BE ABSOLUTELY CERTAIN THAT THE SUPPLIER HAS A TRADITION OF EXCELLENCE, A DEDICATION TO SERVICE, AND ACTIVE, MONITORED QUALITY CONTROL SYSTEMS THAT ACTUALLY WORK.

OUTSOURCING FOR SECURITY SERVICES ALSO DEMONSTRATES THAT JUST-IN- TIME SYSTEMS CAN BE APPLIED TO PURCHASING OF SERVICES. SINGLE- SOURCING IS NOT A NEW DEVELOPMENT IN PRIVATE SECURITY. MY COMPANY HAS MANY LONG-TERM RELATIONSHIPS WHERE WE AND OUR CLIENTS SHARE

AN UNDERSTANDING OF OUR RESPECTIVE NEEDS, THE ROLE OF PARTNERSHIP, AND THE IMPORTANCE OF FLEXIBILITY IN RESPONDING TO THE SWIFT CHANGES THAT CHARACTERIZE TODAY’S MARKET PLACE.

ONE OF THOSE RELATIONSHIPS, BETWEEN GUARDSMARK AND A DIVISION OF THE PHILIP MORRIS CO., IS A PRIME EXAMPLE OF THE BENEFITS OF SINGLE- SOURCING. THE CLIENT KNOWS THAT WE ARE ON STAND-BY 24 HOURS A DAY TO MEET ITS NEEDS ANYWHERE IN THE COUNTRY, WITH MAXIMUM QUALITY, MAXIMUM EFFICIENCY, AND MAXIMUM VALUE.

A KEY ELEMENT IN A SINGLE-SOURCE RELATIONSHIP OF THIS TYPE IS THAT THE CLIENT FULLY REALIZES ITS SUPPLIER WILL RESPOND AS A PARTNER IN ANY EMERGENCY, WHETHER IT IS BUSINESS-RELATED OR A NATURAL DISASTER. IN A SPECIAL RELATIONSHIP, A SUPPLIER CAN BE EXPECTED TO RISE TO THE OCCASION, WITH A SHOW OF LOYALTY AND A SENSE OF EXCITEMENT THAT COMES FROM ACTING TOGETHER IN A COMMON CAUSE.

OUR CLIENTS KNOW THAT THEY COULD REALIZE SAVINGS BY REPLACING US WITH SECURITY COMPANIES THAT ARE LOW-COST IN THE SHORT TERM, BUT THEY ARE COMMITTED TO THE PROPOSITION THAT VALUE RANKS ABOVE COST. THEY ALSO UNDERSTAND THE DIFFERENCE BETWEEN SAVINGS IN THE SHORT- TERM AND POTENTIAL DISASTER IN THE LONG-TERM.

ON OUR SIDE, LIKE ANY JUST-IN-TIME SUPPLIER, WE RECOGNIZE THAT THE RESPONSIBILITY FOR QUALITY CONTROL LIES WITH US. WE ACCEPT THAT RESPONSIBILITY AND WE ADVERTISE IT, BECAUSE WE KNOW THAT DEVOTION TO QUALITY AND SUPREME EXCELLENCE WAS OUR WATCHWORD LONG BEFORE IT WAS ADOPTED BY THE CURRENT GENERATION OF MANAGEMENT CONSULTANTS.

FEW THINGS IN OUR SOCIETY HAVE GONE UNTOUCHED BY THE ENORMOUS CHANGES THAT OUR GENERATION HAS WITNESSED. THESE CHANGES HAVE AFFECTED OUR FAMILY STRUCTURES, OUR JOBS, OUR BELIEFS, THE WAY WE SEE THE WORLD AND THE WAY IT SEES US. COMING TO GRIPS WITH THIS NEW REALITY IS A CHALLENGE FOR ALL OF US, IN WHATEVER WE DO.

ONE THING WE CAN BE CERTAIN OF IS THAT CHANGE IS CONSTANT. THOSE WHO CANNOT ADAPT-WHETHER INDIVIDUALS OR BUSINESS ORGANIZATIONS- WILL BE LEFT BEHIND BY THOSE WHO KNOW THAT THE WORLD STANDS STILL FOR NO ONE.

AS PURCHASING MANAGERS, YOU HAVE BEEN AMONG THE FIRST TO FEEL THE FORCE OF MANY OF THESE CHANGES: NEW PRODUCTS, INNOVATIVE DESIGNS, DIFFERENT PROCESSES, A NEW UNIVERSE OF SUPPLIERS, METHODS, AND MATERIALS. BUT A NEW CHALLENGE IS FACING YOU AS YOU MOVE INTO THE 90’S AND INTO THE PURCHASING OF SERVICES.

THAT CHALLENGE OFFERS YOU A WORLD OF OPPORTUNITY IN HELPING YOUR COMPANIES MEET THEIR GOALS OF GREATER PRODUCTIVITY, EFFICIENCY, QUALITY, AND PROFIT. SEEK OUT SERVICE SUPPLIERS WHO SHARE THOSE GOALS, WHO SEE YOU AND YOUR COMPANIES AS PARTNERS AND NOT AS ADVERSARIES, WHO UNDERSTAND THE REAL MEANING AND IMPLICATIONS OF THE WORD “SERVICE,” AND THIS NEW CHALLENGE WILL PROVE TO BE EXCITING, REWARDING, AND PROFITABLE.

THANK YOU.