Author Archive

IACCM, Regression to the mean, and other topics of the week

May 17, 2013

NASA Sunspot Number Predictions for Solar cycl...

  • The humble founder of TPS planet – Captain TPS?…*running to the shower* – will be making an appearance on the, in this case inappropriately named, ‘Ask the Expert’ IACCM webinar series on June 6. I’ll be blathering on about prediction markets, crowdsourcing, and how they can be applied to procurement and the supply chain. You can register here. You have to be a member, but if you sign up close enough to the event, you can attend this one for free. Log in, listen, add your own thoughts, heckle me…just make sure you are there. You’ll either learn something, or watch me publicly embarrass myself, but either way, it’s a win for you.
  • While I’m on the topic, friend of the blog (and author) and CEO of IACCM, Tim Cummins writes a very informative blog on contracting that can be found here.
  • Least surprising, yet concerning, news of the week; the IRS scandal. So you mean that people with a substantial amount of power over other people’s lives have used that in a power in a biased way? Someone get Kahneman on the phone…
  • ‘The Un’ (of the Kim Family) has either gone quiet or the world’s news media has moved on to something more interesting. I wouldn’t be totally shocked to learn that his dad left him a script…’During the annual South Korean and USA joint military exercises, you shall take the following steps…’
  • Key quote from Thinking, Fast and Slow ‘We will not learn to understand regression [to the mean] from experience.’ (My note: among many other areas in which creative thought/problem solving/rationality is required). To put the quote in context, Kahneman is talking about the fact that most people base predictions of the future on a relatively small sample of readily available evidence without accounting for the fact that the correlation between that small piece of evidence and predictions of an uncertain future are less than 100%. We then take that evidence, and develop causal interpretations that are completely inaccurate.
  • Regarding job performance, I have witnessed this phenomenon more times than I care to remember. A couple random (or worse, influenced by selection bias) comments are taken as a proxy for overall performance (both good and bad). I would even go as far as to say that our visceral feelings about someone then bias overconfident people even further to selectively look for evidence of strong or weak performance. The good news is, if you are in a business environment, you can focus on looking good when an overconfident exec is watching and don’t worry much about the day to day (unless it results in a problem that then gains attention that can be pinned on you). The bad news? Well, if you do a great job everyday, but a random poor performance happens to be noted by someone influential, then you have a steep hill to climb. Ridiculous? Uh-huh.
  • Re-reading the stuff you have written in the past is always scary, but I went ahead and gave it a shot. I did not make the connection at the time between my article in The Journal of Prediction Markets and behavioral economics, but I now believe there is a link.  Our tendency is to predict more extreme outcomes than are truly likely based on our lack of understanding of regression to the mean (see discussion above). Prediction markets remove those errors by combining them with the errors of lots of other people, thus mitigating the extremeness of individual predictions. (If you can tell me what assumption I’m making here in the comments, you will win a free annual subscription to the TPS Report.)  Still think this is not having an effect on the information flow in your supply chain?

Acknowledging risks…ooh scary!

May 15, 2013
"John T. Raymond as the insurance agent i...

Random dude…I’ll bet you started to create a story behind this guy. (Photo credit: Wikipedia)

We are all irrational to some extent. That truth is undeniable. Fear affects our behavior whether we like to admit it or not. However, how we deal with that fear differs widely among organizations, which is affected greatly by the leadership in those organizations.

For a more thorough treatise on this topic, check out the McKinsey article on managing the people side of risk here.

I’ll take the lazy way out and add a couple random thoughts and experiences of my own. I have worked closely with a couple different organizations who are in similar situations with wildly varying standard operating procedures when it comes to risk. If risks were openly discussed with Organization A, the outcome of the conversation would be one of the following scenarios:

  1. The risk would be greatly exaggerated, and there would be a mad scramble to ‘fix’ the issue without regard to costs or resources. Blame would be assigned in a structured, post-event analysis. 
  2. The risk would be quickly dismissed as not valid if it was judged to be something requiring a top-level, systematic fix to which there was no readily apparent solution. Business would carry on as usual until the problem came to a head. There are no worse headaches than those caused by cognitive dissonance.
  3. Whoever raised the risk would be blamed for not having fixed it already as it fell under their area of responsibility. It would then be classified into either scenario 1 or 2.

In Organization B, there is a more rational approach to risk. Risks and assumptions are brought to the forefront. Sometimes, those risks would be acknowledged and accepted. Other times, an immediate fix was decided. In still other instances, there would be an acceptance of the current way of doing business as the cost would be too great to change, with a view to adapting in future decisions.

The important thing to remember is that in business, there is no such thing as a free lunch. Decisions that impact profitability are complex and do not involve easy solutions. The test? If they were easy, someone would have already figured out the way forward.

So what can we do? The first step is developing the mental discipline to overcome one’s gut reaction to hand out blame. Where issues are complex, our mind tends to distill the world’s randomness by creating stories, often assigning malevolent motives to people that, in fact, had no such motives. Understanding this tendency will provide some perspective, so that next time, risks can be openly discussed.

The next step is to choose which risks are truly the most important, and be relentless in finding and implementing the answer. If we swing wildly from one worry to the next, based on the randomness of one person’s perspective, we’ll be stuck in an eternal loop. However, if we pool our mental resources, talented people working together can do extraordinary things.

Did Anyone Notice That…

May 7, 2013
English: Christiane Amanpour at the Vanity Fai...

The queen of news reporting…Christiane Amanpour!

In my last post, I was fooled by randomness, or more specifically, by my System 1 thinking. I had hoped that a couple Kahneman fans would call me out in the comments section – though that is not to imply that my rush to judgement was intended as a test (it wasn’t)!

What am I talking about? Well, in my last post, I called out Bangladeshi Prime Minister Hasina based solely on her appearance on Christiane Amanpour’s excellent show. Now, if we think about it, it makes zero sense to base our entire judgement of her ability to govern on one appearance on one news show. I don’t know if we have any experts on Bangladeshi government  residing here on TPS Planet, but I am certainly not one. I would need a great deal more information on her regime, their policies, and their effectiveness in managing change before making even the slightest judgement in this regard.

The story is a great illustration of how our minds work, though. Our system 1 makes rapid judgements about individuals. When there is little evidence of a particular trait available, we fill in those gaps in information with what we do know – substituting good qualities when we have an overall good feeling about someone and vice versa. On a blog post meant to entertain, the consequences are not dire. In other cases – negotiation involving known suppliers being one – we need to take steps to avoid that bias.

We’ll explore those in greater detail in the days, weeks or months that follow…whenever my lazy System 2 gets itself motivated again.

Bangladesh, Kahneman, and Browsers

May 2, 2013
Daniel Kahneman

Daniel Kahneman (Photo credit: Wikipedia)

Random notes make yet another appearance on TPS Planet today. Today’s excuse? My System 2 is a little overloaded after a week of deep procurement thought. Guess what I’m currently reading…

  • Looks like Bangladesh has deeper problems than poorly constructed buildings…and that’s not to underestimate the building problem. Prime Minister Hasina of Bangladesh embarrassed herself on Amanpour Thursday evening.
  • Just found out that Kahneman and Nassim Taleb are friends (or at least outwardly friendly). This revelation gives me a warm glow inside…I feel my own cognitive dissonance slowly melting away as two of my favorite intellectuals have found some common ground.
  • Currently powering my way through Thinking, Fast and Slow by Kahneman. There are so many good parts that it is hard to randomly choose one, but when has randomness ever stood in the way of fairness, right?! During his discussion of people that are seemingly dominated by System 1 (rapid, but often inaccurate) thinking, I couldn’t help but recall dinner conversations in which I became bored beyond belief as System 1 cannons made the air murky with their dark smoke.
  • Jon Stewart may be the funniest man of our current generation. He has proven that generating a laugh at the expense of one’s opponents is approximately 30 times (trust me…I’m a stats guy!) more effective than giving a lecture. 85% of all statistics are invented on the spot anyway.
  • Firefox is attempting to do the near impossible – i.e. make me switch browsers. A couple years ago, a few reports that Safari was insecure (teenagers can be so cruel), led me to hop on the Mozilla wagon train. Now, even though I have allowed cookies in my Firefox preferences, I’m blocked from, among other things, reading my favorite right-wing propaganda business news in the Wall Street Journal.

Have a great weekend, and for heaven’s sake, leave a comment. There are enough of you out there that I should be getting more than the occasional spam bot trying to sell knock-off Nike’s.

The TPS Report hits the road

May 1, 2013
Conférence supply chain

Random Supply Chain Conference. Conférence supply chain (Photo credit: Pierre Metivier)


Well, I wouldn’t say we ‘hit the road’ exactly…unless by hitting the road, you mean that we pressed the little green button on Skype.


Anyway, friend of the blog, Dustin Mattison made a mistake invited me to discuss how prediction markets could be used in the supply chain, commodity modeling, and solving problems through data analysis among other topics.


Did I have anything intelligent to say? You’ll just have to click over to the Future of Supply Chains Blog to find out.



Decision-making incorporating behavioral economics

April 15, 2013

Vienna Debate Workshop-Finale

The McKinsey quarterly delivers the goods once again. Check out Allen Webb’s article based on his interview with Chip Heath and Olivier Sibony. Read the article and sign up for the newsletter. There is the occasional business jargony fluff piece, but there are also enough gems to make it worth tolerating the daily emails.

About the only thing that we disagree on is the need for more debate to make better decisions. In theory, I guess debating would help. However, one of the dynamics that they miss is that debate generally entails people with their mind already made up, squaring off with each other in an effort to make themselves look smarter than their counterpart. No one really ‘wins’ a corporate debate…the team with more power – whether formal or informal – gets their way. Debating also represents a gamble on the part of the more junior person. No matter what they say, there are many people who feel, at a visceral level, that debate equates to disloyalty. If you are the junior guy or gal, there is nothing in it for you to risk that the more senior personnel in the room are not That Guy. If you really want a better decision, aggregate independently-formed viewpoints.

Having picked apart the article, however, the point above is the only one with which I can find fault. It was especially helpful for the pointers on approaching people about improving their decision-making…or negotiation skills. I.e. no matter how obvious it is to those of us in the know, one cannot directly tell people they are biased and expect to sell them something. (getting nervous and starting to tremble) .

These guys actually won me over with their clear disdain for bureaucracy and slowness…even pointing out that the word ‘process’ conjures up painful connotations. They continued their courtship with examples of the confirmation bias…one that is almost impossible to miss once you understand it. Finally they sealed the deal with their emphasis on experimentation – i.e. getting back to reality.

If they would have spoken about prediction markets, they would have had an expedited selection to the TPS Report’s Hall of Fame. You know, if that existed.

Culture, Irrationality, Arnie and Guan. Boom.

April 12, 2013
  • Company culture is huge. From my time as a military officer to production manager and consultant, I have always taken a keen interest in the type of culture that exists wherever I go. McKinsey has an excellent take on the ‘givers and takers’ of company culture. A ‘giver’ culture is one where employees freely help each other as opposed to being pitted against one another. In this particular study, this factor was the greatest single predictor of success for various intelligence units. From my own experience and using a bit of logic, I believe that where there is what I call a ‘hero and blame’ culture, it is impossible to have a ‘giver’ culture.
  • In case you don’t go through the trouble of actually reading the article…there is a great story in there about Pixar division heads, Ed and Alvy. To make a long story short, they were asked for a list of employees to lay-off. Their list contained two names; Ed and Alvy. Obviously, establishing a giver culture starts at the top. It involves giving credit where its due – i.e. to everyone involved. I was once in a situation in which one person would routinely say things like ‘I did this great thing’ (One of these stories involved a possible sale to some sort of high government official from Kazakhstan…so there was a bit of delusion artfully stirred into the mix as well) and sometimes ‘I and (person of equal rank/position) are really good at X’. Miraculously, no one else seemed to live up to this lofty standard. Needless to say, the culture could have used a bit of a boost.
  • If you are a fan of Arnold Palmer, and you are a fan of helping children with social, emotional, and behavioral problems, then you have a great opportunity in front of you. Click on Adelphoi USA’s website for an auction that contains cool stuff from Arnie’s personal collection. But only if you promise to come back.
  • Guan Tianlang shoots one over par on the first day of the Masters. Guan’s interview afterward was just as impressive as his round. 14 years old, Chinese, and doing an interview in English on worldwide television. By the end, I wanted to feed him the answers as he became progressively more terrified, but still an amazing performance. I probably care more about Guan making the cut than just about anything else that could happen this weekend.
  • Good negotiation lesson from my own experience that is highlighted by the the North Korea stand-off. When faced with an irrational actor – often caused by anger, ego, etc. – try to stay cool and resist ratcheting up the tension. Stand your ground and work behind the scenes to change the balance of power. Create a situation such that the bully can throw all the tantrums they want, but it won’t make a bit of difference to you.
    Arnold Palmer


We’ve got notes – Agile, Jackall, and ‘The’ Un,

April 6, 2013
Cover of "Moral Mazes: The World of Corpo...

Cover via Amazon

  • One of the ways we can take the next step in category management maturity is to become agile. Stay tuned for a fuller development of what this means. For now, I’ll just say that it involves empowerment of teams, treating team members with respect, and harnessing collective intelligence. It involves a higher level of leadership that borrows from what the US Army calls ‘Commander’s Intent’ – i.e. the commander can’t be there to make every decision (or slow things down tremendously if they could), but can influence decisions by focusing on the overall objective.
  • A challenge in becoming agile is that otherwise intelligent ‘knowledge workers’ have, in some cases, become so dependent on falling back on managers to ‘just tell me what you want me to do’ that it will be hard to re-activate the initiative that has gradually been pounded out of them over the years.
  • Couldn’t resist one more on agile…if Hoverstadt and others are to be believed, 70% of change projects fail. Part of the issue – within procurement anyway – is that we spend a good deal of time discussing and training on strategy development, but less time in what makes projects work. One of the keys to strategy is really to have one – whether it is perfect or not is a fun debate, but the key is making a decision and then driving forward. Consultants sometimes like to encourage the development of a big, slow document. The reality is that slow and painful does not drive benefits…action does. Recognizing this reality, then, becomes the first step to making projects agile. We can’t know exactly how the implementation will go up front. So, let’s establish some guiding principles, get them agreed, and get moving. There is a great deal more to making category management agile…that really is just a tease. The challenge awaits.
  • Hilarious quote that I stumbled upon from Robert Jackall in Moral Mazes ‘the basic principles of decision-making in this organization and probably any organization are: (1) Avoid making any decision if at all possible, (2) if a decision has to be made, involve as many people as you can so that, if things go wrong, you’re able to point in as many directions as possible.’ Do we have any hope of moving beyond the blame culture (except in small pockets, of course)?
  • Did anyone see Jon Stewart’s roasting of Kim Jong Un this week? Incredible stuff.

Taleb, Kahneman, and…Rajakovich?

April 4, 2013

Ok, so the headline might be a bit deceptive. I was not actually, physically present

Nassim Nicholas Taleb

when these two scholars met. But if we take the meta-universe as our context, then I could…oh, I’ll just move along.

Check out this discussion between Daniel Kahneman and Nassim Nicholas Taleb. Trying to summarize an 80-minute discussion would make me an even larger fool of randomness than I was before, so I’ll just subject you to some of it instead! Cha-ching.

A key point of the discussion centered around the following theme: Size means fragility. In percentage terms, the larger the project, the greater the overruns; the larger the organization, the more susceptible they are to risk of bankruptcy; generally, the greater the degree of centralization, the more susceptible we are to extreme negative outcomes.

Most people will understand this point at some level. Taleb used the example of government, the economy, and large banks. I’ll use the example of decision-making in just about any context. Where one person or a small group of people make decisions from on high without a very good knowledge of the details of a situation, they may make small gains in terms of continuity. They may also cause large problems.

The effect is even worse when the person or group is focused on things that will have little impact, instead of those that will have a large one.

Procurement’s role – a behavioral economist’s perspective

March 25, 2013

Regions of the cerebral cortex associated with...

Procurement’s role in a modern, giant corporation – discounted by many – is to promote ‘decision efficiency.’ ‘Decision efficiency’ may sound like some piece of business jargon, but it is actually the fundamental reason why procurement is absolutely necessary to an organization. Here’s why:

When people spend money on something, there is some amount of pain associated with that purchase. For some of my tightwad friends, this pain is almost unbearable. Spendthrifts, on the other hand, are particularly good at fooling themselves – i.e. shutting it out of their minds.

I hear the procurement naysayer crowd now…’that’s great for individuals, but what about organizations.’ Ok, maybe you weren’t saying that, but I’ll go ahead and refute it anyway.

People experience the pain of paying to the degree to which they feel directly affected by it. So, while a budget holder may feel mildly connected to the pain of spending some of her budget, the next layer removed will feel even less. By the time we get to the maintenance supervisor that runs out to Home Depot/B&Q on a regular basis, he may actually look forward to some time away from the plant.

Even the budget-holder, however, will be much more in tune with the utility (pleasure/usefulness) derived from an expense or ‘investment’ than the pain. After all, it is one line of expenditure, and the only incentive is to stay within the budget. This phenomenon is called ‘hedonic efficiency.’ I.e. the budget holder wants the benefit and to sweep the expense out of mind as quickly as possible.

What does that mean in practical terms. A). Ownership – i.e. to be able to control the good or service purchased B) Prepayment – i.e. get the money out of there and forget about it.

So, where does procurement come in? We promote decision efficiency. In practical terms this may mean leasing or renting, paying only for what we use (avoiding the prepayment bias), and making opportunity costs explicit. To the extent that we show the utility the business receives against the costs involved, we become an effective conscience for the business. We are there to prevent bias.

Companies – specifically executives – must first be cognizant of the biases that impact them. At that point, they will recognize the need for procurement to be there to counteract those biases.

Procurement has a responsibility here too. We must present the case as clearly and rationally as possible. There is an interdependency present as well. If the business continually shows they do not want to be inconvenienced with the facts, procurement receives the implicit message that their lives will be easier if they just remain quiet.

CEO’s – yep, pointing directly at you – take note.

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