Is it Time to Stop Blaming Governments and Start Blaming Economists for All the Economic Turmoil?

How many recessions has North America had in the last two decades? How long has the Eurozone crisis been going on? Does anyone know anymore? It’s been nothing but doom and gloom for years. Doom and gloom which immediately followed periods of growth that was too rapid or optimism that was too unfounded. What the heck happened?

We can blame the governments for failing to keep the currencies in check and failing to invest in innovation and jobs, we can blame the private sector for trying to rampage out of control, or we can blame the economists who give everyone bad advice. Maybe that’s what we should be doing. According to some very recent research, by Emre Soyer and Robin Hogarth, which is being published in a special section in the July-September 2012 issue of the International Journal of Forecasting, we have “The Illusion of Predictability” [preprint] (How Regression Statistics Mislead Experts) which can be succinctly summarized by saying “economists are overconfident [and] so are you” (as summarized by Justin Fox over on the HBR blogs).

Soyer and Hogarth did a study with 257 economists who were asked to read about a regression analysis that related independent variable X to dependent variable Y and then answer questions about the probabilities of various outcomes. When the results were presented in the typical manner (as average outcomes followed by a few error terms), the economists did a really bad job of answering the questions. They paid too much attention to the averages, and too little to the uncertainties inherent in them, thereby displaying too much confidence. Moreover, they did only slightly better when they were shown the numerical results plus scatter graphs. Only the economists who were shown only the graphs actually got most of the answers [close to] right.

In other words, when the data is presented in standard form, statistically literate experts are just as likely to glom (glom glom) onto the point estimate and discount the uncertainty as innumerate journalists and make the same mistakes. (They could use Pinky and the Brain’s refresher refresher lesson on statistics.) Ouch!

We in Supply Management know that the world is often much less predictable than economists would lead us to believe — having to deal with the effects of demand spikes, supply shortages, currency fluctuations, labour strikes, and natural disasters on a(n almost) weekly basis — and that no economic model is going to capture the full extent of the reality of the situation. It’s too bad that an average economist doesn’t, because if (s)he did, then maybe the advice wold be better, and the markets would, as a result of more rational actions, be more stable and make our job a little easier. In the interim, we can do our part by making sure that we help procure any services that require an economist or economic analysis and insure that such economist or group has a tendency for presenting, and analyzing data, the right way without unnecessary exuberance, one way or the other. Because this result, captured in the preprint, is scary:


72% of the participants believe that for an individual to obtain a positive outcome with 95% probability, a small X (X < 10) would be enough, given the regression results. A majority state that any small positive amount of X would be sufficient to obtain a positive outcome with 95% probability. However, in order to obtain a positive outcome with 95% probability, a decision maker should choose approximately X=47.

Simple math says that the majority of the participants were off by a factor of 5 (or more). Ouch! Late last year the BBC ran a point of view article that said we should beware of experts when it comes to running things. Maybe they were right!

Happy Procurement Independence Day

It’s the 6th anniversary of Procurement Independence Day, first celebrated at the Coupa Cabana Cafe back in 2006.  I hope it was a good one for you!

Coupa is still going strong, as you might have guessed from the flurry of press releases coming out of their doors lately.  Before the summer is over, we will be checking in on Coupa to not only see where the past year has taken them, but, more importantly, where the next year is taking them.  Their pace of development has not relented, and they have even more cool stuff coming down the pipe later this year. 
We will review some of the forthcoming capabilities in detail and see whether they are ready to make the leap to the big-time with the Series E injection they just raised in May.  They’ve come a long way from the new kid on the block they were six years ago, going from a few sales in the low end of the mid-market to a lot of sales in the high end of the mid-market to making progress in the Fortune 500, where they recently landed a few significant customers.  Will they be able to turn that into a few dozen Fortune 500 customers and become one of the next big pure-plays in the space who fill the void left by the recent acquisitions of Emptoris and Ariba?  And will they be able to successfully penetrate the European market?  Only time will tell, but I can say that the fact that they have almost 300 customers with a 95%+ renewal rate is certainly nothing to scoff at and pretty telling.  
Stay tuned.  SI was one of the first blogs to bring you in-depth coverage of their capabilities when they were just starting, and it will be one of the first to bring you in-depth coverage of their new platform capabilities that might just make them a true Fortune 500 / Global 3000 player in the coming years.
While you wait, you can revisit some of the classic posts or sing a few songs from the “A” side:

“e” does not change the fundamental nature of anything

Purchasing Insight just ran an awesome article by Ian Burdon who talked about the “e-wheels on my wagon”. Attempting to carefully explain why the e-Procurement debate is at least ten years behind the curve (and that if you’re not doing proper e-Procurement by now, you probably just crawled out of a cave somewhere … or at least that’s the doctor‘s interpretation), he makes a great point that has been often missed in the internet age that must be repeated:

If you take a text which is riddled with “e” this and “e” that, the first thing to do is to strip out all of the “e”s. If it then looks like nonsense, it will not be improved by putting the “e”s back. More than a decade after the dot.com boom one hopes people would be less credulous but, alas, marketing budgets are long and memories are short.

To make a long story short, good e-Procurement is good Procurement, whether you’re using paper and pen, telephone, fax, the Internet, or HyperNet (in the year 3000). As the author astutely notes, e-Procurement is more than e-Sourcing, P2P, and e-Invoicing, and the end goal goes well beyond savings. Proper e-Procurement is about more than merely buying things over the World Wide Web. Proper e-Procurement supports a proper Procurement strategy, which encompasses everything from corporate planning and market analysis to understanding and working with the whole supply chain in an effort to deliver the corporate strategy. That goes well beyond putting a pencil in your shopping cart by way of a punch out. And it certainly goes well beyond endless debates about structured documents which entirely miss the scale and nature of the transformational opportunities available.

So don’t get sucked in by the e-Hype. Look for solutions that deliver real Procurement value, and you will not be among those acting like they just crawled out of the e-stuary. And if you need a good guide on how to start, after checking out SI’s recent post on a good lesson in e-Procurement System Selection (courtesy of Discount Tires) and the X-emplification (Day 5) and X-asperation (Day 6) posts, as well as the SI e-Procurement 3.0 Illumination (here), don’t forget about the Enterprise Software Buying Guide as well as SI’s recent 2-parter on How Much That Enterprise Supply Management Solution Really Costs (Part I and Part II) and you’ll be well on your way.

Informationalization Is Important

Simply put, the more informed you are, the better you are going to be able to source and procure. And this recent article over on the HBR blogs on why you need to integrate data into products, or get left behind just scratches the surface.

As the post notes, virtually every product and service can be made more valuable through informationalization. The GPS example provided is classic. Turn-by-turn directions make the car more valuable as the driver can keep his eyes on the road, get to his destination faster, and, during delivery, avoid left turns that just lead to extended idling at busy intersections. And, as predicted by Stewart Taggert, half of the value in the delivery of a shipping container from halfway around the world would be in the data associated with the container. Good information allows you to calculate in-transit time, and associated costs, loading and unloading costs, storage costs, insurance costs (as you can appropriately determine the chance of accidental loss or theft), etc.

But the best example of the value of informationalization is how it allows you to optimize your sourcing decisions. The more you know about your product options, shipping options, associated costs, and the inherent value of each product versus your other options, the more accurately you can model your options. The more accurately you can model your options, the better chance you have of determining the solution with the lowest cost, the lowest risk, the highest value, and the best value (defined as risk reduction, profit generation capability, etc — whatever makes sense) to cost ratio. And this is how leading Supply Management organizations can save 12%, on average, off-the-top in an optimization-enabled sourcing event — and even more if they collaboratively work with their peers to identify all of the options that may be available and all of the associated tradeoffs. As pointed out in SI’s recent paper on “Top Ten Technologies for Supply Management Savings Today”, integrated, collaborative sourcing can often identify savings opportunities of up to 30% or 40% on categories that were exhaustively combed for savings in the past.

Plus, good information allows your organization to:

  1. constantly improve products and services by way of the fact that you are able to
  2. collect more relevant, timely, accurate, detailed, and integrated data.

And when you have relevant, timely, accurate, detailed, and integrated data, you can take out your best-of-breed data analysis tool, use the tips and tricks SI outlined in it’s free e-book (co-authored by Bernard Gunther of Lexington Analytics, now a division of Opera Solutions) on Spend Visibility: An Implementation Guide, and extract even more value for the organization by optimizing not just Supply Management spend, but utilization, service, warranties, Marketing & Legal spend, and every other product and service activity that burns capital and/or creates organizational value.

The (Board) Gamer’s Guide to Supply Management Part I: Ticket to Ride

I’m excited to introduce this brand-new summer series. Running once every week or so, this series will help you understand

  • what Supply Management is, if you want to know about this new and exciting career and you are an avid (board) gamer
  • how to take your Supply Management game to the next level, if you are new to the job and are having difficulties understanding some of the basics across the many areas that you have to master, and
  • how to hone your analytical skills in your-off time to do a better job and, ultimately, master many of the nuances of supply chain management and optimization.

And I know what you’re thinking. Those of you who are avid gamers are saying, “Cool! Not only do I get to put those countless hours mastering Settlers of America, Puerto Rico, and Steam to use, but I finally get an introduction to Supply Management that isn’t as exciting as watching paint dry!” and those of you who (think you) are expert practitioners are saying “Has the doctor finally flipped his gourd? Has he finally downed one pan-galactic gargle blaster too many (while trying to work his way through all the earthly equivalents, given the difficulty of obtaining an Algolian Suntiger tooth) in the presence of the Sourcing Maniacs?” (Keep up, they’ve been missing since leaving for an extended [European] vacation in January of 2010.) To the gamers, I say game on and to the rest of you, I say not yet. Bear with me and you just might learn something. Or at least have fun trying.

Even though (The Settlers of) Catan is the classic board game that is typically used to introduce newbies to the genre of strategic games, and the second game used by Wil Wheaton In Exile in TableTop to introduce you to the world of recreational board gaming, we’re going to start with Ticket to Ride because it’s about the easiest game out there and a great way to introduce you non-gamers to gaming (and you gamers to Supply Management).

As explained by Wil Wheaton in TableTop Episode 4, Ticket to Ride is
so elegant and so simple [that] you can teach it faster than it takes to set it up. You can even convince your wife to play it with you. And even better, if you don’t know anything about Supply Management, you can learn some of the important principles that will stay with you throughout your Supply Management Career.

And not only is it one of the simplest games to start with, as Wil explains, Ticket to ride is the 2004 German game of the year. That’s sort of like winning the Academy Award for board games. It’s kind of a big deal.

So where do we begin? With the basic rules, of course. The best summary of those can be found in TableTop Episode 4. As explained by Wil, when we play Ticket to Ride

We are railroad barrons attempting to connect cities together across North America in the age of steam. At the end of the game, the player with the most points will be declared the winner. … To get those points, we can perform one of three simple actions on every turn. We can draw cards face up from the board or from the deck of mystery. We can cash in cards of the same colour to play a train down and claim a route. If a player is feeling particularly saucy, he can draw a ticket. If you complete the route outlined on the ticket before the end of the game, you receive bonus points. However, it’s a little risky. Because if you do not complete that route, those bonus points count against you in the final scoring. … Ticket to Ride is a modern day classic. You can learn it in minutes but you will be playing it for the rest of your life. All aboard.

So how does this help you learn, better understand, and master Supply Management? It’s simple.

If you are a gamer who wants to understand what the new and exciting field of Supply Management is,

  • In Supply Management, when shipping goods, you can use one of the carriers (in the face up cards) you have used in the past or try a new one (from the deck of mystery) who may (or may not) better serve your needs
  • When you need to ship something quickly and demand on carriers in the region exceeds available shipping capacity, you can use reserved capacity (in your claimed routes) to get your priority goods on time (and potentially sacrifice the ability to get future shipments on time)
  • Simply getting foreign goods onto sovereign soil is not success. If you cannot get the goods the last few miles from the dock to the warehouse or the last mile from the warehouse to the customer, you have not complete the route and have not succeeded in your task. (Just like getting four out of five tracks is not enough to claim a five track route.)

If you are a novice Supply Manager, the game helps you understand that resources and options are always limited and you are always jockeying for position against your competition. The reason that Ticket to Ride is hard to win (and hard to master) is that only one of the double tracks on a route can be claimed in a 2-3 player game, and there are only 2 tracks on a route in a 4-5 player game. You’re always competing against your opponents for tracks to complete your routes and, even worse, you don’t know what routes your opponents are trying to complete, just like in Supply Management. In Supply Management, if your competition knew your complete route, they would know what factory you’re sourcing from, what store/end-user the product is going to, and based upon knowledge about the factory (and supplier) and the store (and customer base), they would not only be able to extrapolate your supply strategy (which could be one of your competitive advantages) but also be able to predict what type of product you are sourcing (and possibly extrapolate your market strategy). That’s not what you want (especially if you’re Apple).

And if you are an expert, the game helps you hone your Supply Management instincts. Yes, you need instincts. When do you lock down a logistics / distribution contract? Analytics only takes you so far. At some point you have to lock the deal in, and if you’re spot-buying, timing gets you the best price. It also increases your observation skills. If you see capacity declining rapidly on preferred routes, you know you have to lock in. But if you can see capacity declining on nearby routes, then you know a spill-over is inevitable. (And in Ticket to Ride, the best players can see routes forming and lock in tracks that they need before their competitors.)

It’s a great starting point. And if you can’t wait to get started, I have great news! You don’t even have to wait until you get a chance to rush to your local game (and comics, if you’re in a small[er] town) store to pick up a copy. Since many of you have an iOS device, you can download Ticket to Ride for iPhone or Ticket to Ride for iPad right now! (Goal: Exceed 160 points.) Happy barroning!