Posts Tagged ‘Procurement’

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?

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.

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.

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.

Setting KPI’s

March 18, 2013

Brief and to the point. Setting KPI’s is difficult, but people tend to make it more difficult than it is. Check out smartcompany.com’s take on setting KPIs. It is mostly in line with my own view, apart from the fact that where they say you can either have many or few, I would strongly emphasize ‘few.’ Especially from the perspective of procurement or managing people.

KPI Park

This area is very near to my heart as I have seen this done badly in a number of ways including:

  • KPI’s that are unrealistic or way out of the control of the party being measured. Nothing will be 100% within anyone’s control, but there needs to be some correlation between the KPI and reality.
  • KPI’s that, if completed, would have very little effect on overall performance. I have been in multiple situations in which I could either perform to the KPI, or I could do the stuff that helps my organization perform better, but not both. Don’t be the organization that makes the employee or supplier make that choice…
  • Don’t be falsely scientific. Formulas that assign 1-10 or high, medium or low should not be part of a mathematical formula. In statistics, high medium or low are called ‘factors’ and are treated differently than qualitative variables. If you think about it logically, ‘medium’ is not necessarily 33% higher than ‘low.’
  • KPI’s not tied to any strategy or even impetus for improvement. If the onus is put on one individual to change the world, but they are not allowed to affect change, then the result is absurdity.

If you are going to tear down, then you must build it back up as well right?

  • Make stretch targets that are achievable – innovative people like to be challenged with reasonably difficult targets…and then get rewarded for doing so. They have to feel, however, that they are possible and that they have the mandate to fundamentally change the way we are currently doing business (how could you get breakthrough results without major change?).
  • Make KPI’s ‘intermediate’. I.e. don’t target suppliers with an increase in your share price (how could they possibly influence the psychological swings of hedge fund investors?), but target them with improvements in productivity in your organization that could be reasonably expected to contribute to a rise in share price.
  • Make them together with the supplier/employee. It is almost a cliche at this point, but people and organizations respond much better when they contribute to the forming of the KPI’s by which they will be judged. They will have insight into what makes for better performance.

There is probably many more on both sides of the line. Give me your KPI success or failure stories in the comments section. If you do, you’ll get a free one-year subscription to TPS planet.

The week in review

March 15, 2013

Top model Gisele Bündchen, SPFW

Laziness reigns supreme here on TPS planet. Every Friday, I think “should I delve deeply into a complex topic, or should I go with a notes column?” It pretty much goes without saying which wins.

  • It was good to see the new Pope adopt a stance of humility…if the ‘leader as servant’ role is promoted as a result, well, the Pope will have done business a great service.
  • “Amanpour” (CNN International) actually lives up to the hype. Even when the topic is not of particular interest to me, I still enjoy the show.
  • I love a good tech titan spat, so naturally the increase in Apple vs. Samsung rivalry rhetoric has me excited. I don’t suppose Tim Cook or JK Shin play hockey?
  • In procurement news, Procurement Leaders reports that Diageo is set to decentralize its supply chain. It is a good reminder to procurement, and business people generally, that sometimes greater central control is not always better. Good decision-making involves considering the likelihood that someone else knows more or is in position to perform better. I wonder how well their forecasting works…
  • With all the hype about share price rises and improved corporate profits, let’s not forget about all the value procurement can bring to the table…says the guy who makes his living doing procurement…
  • Advanced negotiation involves mastering whatever context in which you find yourself. The New England Patriots convinced Tom Brady (who could name his price) to take less than what he otherwise could have gotten. How? In short, by framing the debate in terms of the impact to the team around him. Instead of the advantage being with the guy that knew the budget (the salary cap), they convinced Brady to take less for the good of the team. Then they let his friend and trusted teammate – Wes Welker – leave for a relative pittance. My hunch is that Brady would not be inclined to do the same thing all over again. The upside for the Patriots? Tom Brady is 35, and his contract likely takes him through the end of his career. The upside for Brady? He’s still married to Gisele Bündchen.

Procurement governance – not as painful as it sounds

February 28, 2013
HONDA CB750. 1969-2003. 750cc FOUR CYLINDER.

HONDA CB750. 1969-2003. 750cc FOUR CYLINDER. (Photo credit: ronsaunders47)

 

I have been thinking lately – yes, yes, the fire department has been notified – about procurement governance. It then follows that neither you nor I will have trouble sleeping tonight.

 

Since I won’t be writing a textbook on the subject, I’ll just pick two items that I think should be considered that, in many cases, are not.

 

  • The Decision-making process – Often, the process for making-decisions is an afterthought. The person or small group that makes decisions assumes that he/she/they accurately represent what is A). Right or B). The will of the group around them. However, ask Loewenstein, Surowiecki, Taleb, or J.S. Armstrong how that generally works out. Two words “Sub” + “Optimal”. Say them together now. Good.
  • Emergent Strategy – I love creating and building systems. It feels like we are being scientific, even though business can only uneasily borrow concepts from our more systematic brothers and sisters.  It feels like we can build a system that, if everyone just performs their role, will work brilliantly. And again, we’ll be….well, right! The problem is that reality has no particular interest in our feelings, and that some of the best strategies emerge from the ground up. Soichiro Honda, can you hear me? Giving people the skills and knowledge to think creatively, and then empowering them to take advantage of opportunities should be part of our approach to governance. My own tendency is to go all out on the rational planning thing, but knowledge and experience tells a different tale.

 

Go forth and do great things.

 

 

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The week in review

February 22, 2013
Paul Krugman, Laureate of the Sveriges Riksban...

Paul Krugman, Laureate of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 at a press conference at the Royal Swedish Academy of Sciences in Stockholm (Photo credit: Wikipedia)

Leadership from Tom Moore

February 10, 2013

I’ve often felt that the military (with all its faults firmly acknowledged) and high level sports (same) have benefited from excellent leadership…much more so than is generally found in the business world.

The quote below from ProFootballTalk.com is excellent evidence of my theory. American football coach, Tom Moore, could have been talking about a procurement department, consultancy, or technology services company.

“Football is a game of people,” Tom Moore said. “There are lots of systems. One of the things you want to make sure you do, and it’s what we are doing, you don’t come in with preconceived ideas. You don’t say, ‘I’m Tom Moore and this is what we’re going to do.’ It doesn’t work that way.”

There are not many in the business world intelligent/wise enough to adapt to the strengths of their people…those that do have a marked advantage over the competition.

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No PED’s…just cat man energy – the natural way

February 4, 2013

Category Management in procurement needs an energy boost. That much is clear.

Energy

Windmills…not much energy, but they sure are pretty! Energy (Photo credit: Open Days – European Week of Cities and Regions)

Now, am I suggesting a call to “Dr.” Anthony Bosch? No, not unless you have a bunch of hats that are too big.

So, if PED’s are unacceptable, what can we do to give our category management projects an energy boost? Well, let’s start with the process to be followed. Step 1…have one! If you make it up on the fly, the risk is that your stakeholder group will spend too much time and energy discussing the process, and not enough time making stuff happen. You – the procurement guy/gal – need to come prepared with your process…hopefully one that, well, works.

So what makes a category management process work? For one, it’s flexible. Not all categories are the same, so it needs to be applicable to a wide range of categories. Think of the process as if it were a platform like Facebook, and the category team is a group of friends. Lots of different groups of friends – with lots of different interests – use Facebook (even you anti-system types…admit it!).

The second one is that it is simple and practical. I have seen processes that go into painstaking detail and cover every objection, but real life happens outside the graphic. Pretty diagrams may impress your friends, but rigorous application of they key points drive value.

Finally, keep up the momentum. The art of the procurement professional is motivating people to make it happen. Go forth and do great things!

www.prometheusprocurement.com

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