Improving Supplier Selection & Management
Problem: Suppliers are often selected and managed based on weaknesses in our confirmation bias, leading to unnecessary pain.
What CanKahneman, Plato, Munger, and Antaeus Teach Us?
There are a great many insightful, prudent articles on the approach to supplier selection and management that goes something like (very simplified):
1. Define requirements
2.M Research suppliers
3. Create selection criteria (maybe get fancy and write and RFI and/or RFP)
4. Meet the “short list”
5. Update the business case
6. Select your top pick and negotiate contract (mostly features and price)
7.Manage vendor to contract
Many industries/companies (e.g., pharma, government, large industrial/financial services) include “just in case” steps (e.g., require RFP, require three bids) to handle the one time in the late 1880s such an event occurred. In practice, we know these to be in place largely due to a lack of trust and accountability. And, we should know that the vendor selection steps above, while prudent for meaningful investments, are not consistently followed and are NOT the reason many relationships fail.
In the interest of brevity and avoiding the start of your sleep pattern, the focus hereison setting forth supplemental concepts to “winning” with your vendors and partners. Or, said another way, some philosophical concepts that if adhered to, would have mitigated a good many failures I’ve witnessed… or owned.
"Mental Model: An explanation that helps us understand the world as it is, not how we want it to be – helping us to reduce the world’s complexityinto understandable"
I’ve increasingly focused on improving my decision-making process to dispassionately select and manage vendors: what went well, what didn’t and why? Herein are some lessons I’ve shamelessly stolen from the likes of:
• Greek philosophy (e.g., source of Antaeus’ power)
• Charlie Munger (e.g., Poor Charlie’s Almanack, USC Commencement)
• Atul Gawande (Checklist Manifesto)
• Daniel Kahneman (Thinking Fast and Slow)
• Excellent course from Farnam Street’s (Shane Parrish):The Great Mental Models
As rude as it is to attempt to summarize such great works in relation to Supplier Selection & Management, here goes…
Lesson #1: Keep Your Feet on the Ground
Greek mythology records the story of Heracles (we know him as Hercules) defeating Antaeus during one of his 12 trials (ok, he really completed 14, but…). Antaeus was an undefeatable wrestler as long as he kept his feet on the ground. He defeated so many passers-by that he built a temple to his father Poseidon from the skulls of those he vanquished. Antaeus’ mother was Gaia (mother earth) andfrom her he derived his insurmountable strength. Heracles defeated Antaeus by lifting him off the ground and crushing him in a bear hug. Our lessons:
• Keep your feet grounded in reality (but I suggest you pass on building a structure out of skulls).
• Decide where your company will really derive strength from this relationship– a list of not more than 2 or 3. Stay grounded on these and really prove they can be achieved and leveraged. After 20 years of this, I still use a seven-category model to define a clear “definition of success”.
• Don’t let obstacles such as a bureaucratic process deter you (bear hug anyone?).
Lesson #2: Critical Thinking and Mental Models
Ray Dalio (billionaire investor), Charlie Munger (another billionaire investor and Warren Buffet’s partner), Richard Burton (founder of Expedia, Zillow and Glassdoor) and many other extremely successful people strongly advocate the power of mental models. This is NOT a vendor selection checklist (albeit Atul Gawande teaches us how to really create a proper/ empowering checklist), but rather a model of how the vendor selection process should proceed, keeping within your circle of competence, how the vendor makes money, how you achieve benefits and the associated effort involved. Have you defined the set of mental models to guide your vendor/partner selection?
Lesson #3: Confirmation Bias Anyone?
Daniel Kahneman won the Nobel Prize for his outstanding (obviously) work on the psychology of judgment and decision-making. A gross oversimplification of his insight was the inevitable confirmation bias inour decision-making. Some quick lessons:
• Don’t “hear” things unsaid. Science proves that most of us tend to want to trust the other party. Can you rise above your harassed and perplexed mind and find what’s real and true?
• Do you spend as much time trying to prove yourself right as proving yourself wrong?What underlying bias is evident in your decision-making? Don’t be blind… just pause and think about it because it’s ALWAYS there (e.g., “of course they can do this, they have 500 customers already”, “they are used by our largest competitor, so it must be viable”)
Be the philosopher Plato envisioned, constantly questioning in search of knowledge, truth, and reality. Don’t simply hope for the best and blindly follow others.Often unpleasant, but the grit involved (doing the unpleasant when necessary) will greatly enhance your odds.
Lessons #4: Manage Expectations and Let the Effort Fit the Value/Need
There’s a simple explanation for one’s happiness, or unhappiness as the case may be: what’s the gap between what you believe you deserve and what you actually have (re-read Lesson #1)? Further, there are generally only three reasons we’re upset with one another (i.e., our vendor):
1. Unethical behavior –rare, but it does happen (1%?)
2. Incompetence – also rare, but more common than #1 (10%?)
3. Mismanaged expectations – happiness gap from above, generally from confirmation bias (Lesson #3), genuine misunderstandings, and vendor hype (~90%)
In closing, two suggestions. First, describe your decision-to-be-made in terms of its importance/consequences and whether it’s reversible or not (figure at right from Farnam Street).Since time is your precious commodity, where do you need to focus, and where can you delegate (the associated podcast is quite insightful)?
Next, are we selecting a vendor or a partner? Vendor selection and management are typically towards the lower left whereas partner selection is typically in the upper right. If you’re truly selecting a “partner” remember that it’s like a marriage – upkeep costs often exceed the cost of acquisition.
Great value can be achieved leveraging the classic vendor selection and management process. However, the reasons these relationships fail have more to do with foundational critical decision-making, undefined mental models, mis-allocating effort to the consequences/reversibility involved and failing to consciously check biases with a dispassionate focus on the truth.