# Correlations are Good, Causations are Better, but Models are Best!

the maverick recently penned a great post on Spurious Correlations, 150% Cost Savings and How to Justify Your Next Procurement Project that expounded upon the classic problem of second rate analysts, who didn’t read the classic post where the Brain gives Pinky a lesson in Statistics, using correlation to infer causation. If you listen to these analysts, you’ll find yourself in the same situation Roy Anderson was in when he was former MetLife CPO. Namely, the situation where if I added up all the promised savings from vendors and Aberdeen Reports, I’d be saving over 100% and suppliers would be paying me money! Not very likely, is it, but definitely the conclusion you’d draw if you stacked enough Aberdeen reports end to end!

After all, with enough data, you can find all sorts of near perfect correlations between (almost) completely unrelated data sets. For example, Pierre points out that if you go to tylervigen.com and check out the spurious correlations on the site, you’ll find out that there’s a near perfect correlation between

• the number of people who drown after falling out of a fishing boat and the marriage rate in Kentucky (r=0.95),
• the total number of computer science doctorates awarded in the US and the total revenue generated by arcades (r=0.99), and
• the annual number of automotive suicides and the number of Japanese passenger cars sold in the US (r=0.94).

And while you might believe that computer science doctoral candidates spend all their free time in arcades, do you believe that buyers of Japanese passenger cars buy them to commit suicide or that somehow the marriage rate in Kentucky has something to do with the number of people who drown after falling out of a fishing boat? (I hope not!)

As Pierre notes, it’s important to have a good ROI model that really looks at the “R” and the “I” realistically. A model that uses ranges that allows you, as an analyst, to play around with assumptions and adjust the results based upon modifications to the assumptions. Procurement might want to be aggressive, but management might want to be conservative. Procurement might assume an abundance of supply, but Engineering, knowing that only a couple of suppliers are qualified to produce the refined raw materials needed, might want to assume a lack of supply based on the fact that these refined raw materials are becoming increasingly sought after. And so on.

Without a detailed model that captures all the cost components and the assumptions they are based on, Procurement can’t be realistic in its projections or its project requests. Analyst reports with benchmark data are a great starting point to identify where to look for savings, but the savings still have to be validated before a proposal is put forward.

# Happy Canada Day! Now Learn the Pledge of Allegience.

I pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.

One more time.

I pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.

Got it? If you, my fellow Canadians, decide to give the Conservatives, and Mr. Harper in particular, one more turn in office (which is what it looks like you want to do based on recent polls, as summarized in last month’s National Post that puts Liberals at 32%, Conservatives at 31%, and the NDP at 28%, with the Liberals having the same slight lead they had before they lost the last election). Now, the doctor likes our Southern neighbours, but also likes that Canada has its own identity, which is one that it appears Harper is very likely to sell for what he believes is greater economic stability. So, fellow Canadians, before you elect Harper again, you better learn the pledge of allegiance. You could need it as early as next Canada day. So, before you move on to your Canada day festivities, say it with me one more time. (Third time’s the charm.)

I pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.

And now, just like Northern LOLCat, you know it too!

# Are Conferences Perpetuating Supply Chain Stasis?

It’s conference season, and you know what that means. Thousands of people flocking to ISM next week to hear about the “state-of-the-art” practices and technologies that will revolutionize your supply chain, take you into the modern age, and prepare you for what comes next. Except they won’t.

For the average organization that still hasn’t adopted a modern e-Sourcing or e-Procurement system, the technologies being presented by even the vendors who haven’t updated their core platforms since last decade will still be revolutionary and for the average organization that is just dipping their toes into the waters of modern supply management processes, the talks will be inspirational and progressive and, for all practical purposes, look like a transition from the industrial revolution to the information age. (And, for some organizations, it will be. But it won’t prepare you for what comes next.) It will be like seeing the world through rose coloured glasses for four days straight. By the end of the conference, the average attendee will be in awe of the possible and leave in a state of hippie bliss (until he gets back to the office and crushing reality cracks his lenses and he’s forced to again see the cold and depressing blue sky, the blood red losses, and the blackness of the bottomless pit that new ideas get tossed into).

But for a leading organization, the majority of technologies will be outdated, the practices insufficient, and the talks sleep inducing. That’s because, for the most part*, it will be the same vendors as last year, the same practices that were being presented as revolutionary five, if not ten years ago, and different speakers giving the same scripted success talk that you have heard from the leaders who have used these technologies and processes for the last five years.

the doctor downloaded the thirty-four (yes, 34) page “brochure” for ISM and didn’t see one new idea in the entire publication. Not one. Moreover, while a few of the topics only became trendy in the last few years, there appear to be only two talks focussed on TCO (Total Cost of Ownership), one on integrated supply chains, and zero on supply chain modelling.

This is a serious problem. We’ve reached the point where supply chain success for the average organization is becoming dependent on preventing supply chain disruptions and failures. Supply chains span the globe, lean is the name of the game, JiT is widespread, disasters (natural and man-made) are on the rise, margins are thin, and customer loyalty and patience is thinner. It doesn’t matter how well you source if you can’t execute. It doesn’t matter how well you procure if you can’t control your costs. The best laid risk avoidance and mitigation plans are worthless if you can’t monitor for risks and implement mitigation plans at appropriate times. The best spend analysis system in the world is useless if the data is incomplete or too dirty. You can’t optimize what you can’t model. And so on.

Moveover, every savings opportunity you identify at one stage of the supply chain or management process can result in a larger loss at a different stage if the opportunity is not analyzed appropriately. Sure you can save money by consolidating supply, but if a single source is unable to deliver and the organization has to buy on the spot market at the last minute, the 5% savings could be a 10% loss. Reducing inventory can significantly reduce the 25% inventory overhead cost, but could result in stock-outs that lead to million dollar revenue losses if the organization runs too lean and a transportation strike cuts off the just-in-time supply. Better supplier oversight and management can certainly increase quality and reliability, but is the additional cost of the SRM systems and staff to manage the relationship less than the additional value generated?

True value comes from looking at an integrated supply management process, which might take the form of a full category management lifecycle or a complete strategic sourcing execution lifecycle, modelling the physical supply chain and associated costs, and computing the full total cost of ownership of the current scenario and an expected improvement.

But good luck finding anyone who looks at the supply chain as a whole from this perspective, especially when few people will even address the subject.

And this is why the doctor does NOT attend ISM. When you’re trying to identify the next evolution of supply management, or even if you are a true leader, unless you enjoy preaching from the pulpit, it’s a little depressing.

* There will be some exceptions.