Consultancy Future Purchasing completed late last year the largest category management survey of its kind ever attempted (as far as we know). With more than 300 respondents from a range of sectors and countries, the results provide much fascinating material to help understand just what differentiates the best exponents of “CatMan” from the pack. And if you have any interest in the topic, as a category manager or a procurement leader looking to improve performance, or indeed as a less mature organization in the field, we are confident you will get something useful out of our upcoming webinar next Tuesday, March 14, at 11 a.m. EST.
We've featured aspects of Daniel Kahneman's brilliant book, Thinking Fast and Slow, over a number of articles looking at his concepts such as Priming and Anchoring, and in particular what they (and other ideas he and others in the field have developed) mean for procurement professionals.
Kahneman won the Nobel Prize for Economics, with his collaborator Amos Tverksy — not bad going for two psychologists. And the work that led to the prize was largely around the area of risk, which is what we will look at today.
He and Tversky showed that the assumptions economists made about human behaviour — that we acted rationally in hard economic terms — could be proved false. That meant many of the standard economic models and theories were also flawed, which rather upset many in the economics community!
Kahneman called the strange beings who behaved in this perfectly rationally manner "econs" as opposed to "humans," who behaved — well, like humans do. And his work on risk shows exactly why the assumptions of rationality doesn't hold up. Our decisions aren’t rational — but driven by factors like the “endowment effect,” risk-aversion, and regret.
There is obviously a huge amount of detail that we could look at here — an entire Nobel Prize's worth, we might say. But we will just focus on a few key conclusions and a handful of implications for procurement. As before, we strongly recommend you read the book if this interests you (and, really, it should).
So let’s get into three key Kahneman findings.
In our previous piece looking at Daniel Kahneman's brilliant book, Thinking Fast and Slow, and its implications for procurement thinking and practice, we looked at the concept of Priming.
Granted, Kahneman published the book in late 2011, but is still immensely valuable for procurement practitioners to keep on their bedside tables today — and here's why.
One of the central premises of Kahneman's book is how our brains look for the easy route at all times, what he calls "System 1" thinking. If we can draw a conclusion, make a decision, or find a belief without actually going through a time-consuming and exhausting process of really thinking, we will. That is not our conscious decision — our brains are wired that way. "System 2" thinking, which is more logical, analytical and difficult, is something our brains avoid if they can.
So Priming is the phenomenon whereby something we've seen or heard recently influences our next thoughts. If I ask you to name an animal, and you've just walked past an advert for the zoo illustrated with an elephant, you are more likely to say "elephant." And remarkably, this is true even if you don't recall seeing the advert. Our sub-conscious is quite capable of priming our future thoughts.
In this Plus brief, we will consider what is in effect a particular sort of priming, with an obvious implication for procurement and negotiation behaviour specifically. Anchoring is the tendency for us to fix our thoughts around a particular number, point, or fact rather than thinking logically and independently about a decision.
In Kahnemann's words, "it occurs when people consider a particular value for an unknown quantity before estimating that quantity." The estimates then stay close to the number considered. And this is one of the most tested and robust results in experimental psychology; it is an absolutely proven phenomenon.
In a somewhat frightening example quoted in his book, German judges were asked to throw a dice before being asked what sentence they would give for a particular crime. The dice came up with either the number 3 or 9. When the dice said 9, the average "sentence" was 8 months. When it said 3, the average was 5 months!
Anchoring and Procurement Negotiation
The implication for procurement is very clear in the negotiation arena. Whatever number gets anchored in your brain is in danger of becoming the starting point and indeed the expectation for the negotiation. You may work up or down from there, but it is difficult not to mentally accept that as an anchor for the discussion.
Let's get into some tangible examples.
As we leap into the great unknown of 2017, this is our final review of the stocks portfolio we put together for 2016. It featured 21 firms with an interest in procurement and a quote on a major stock market, mainly London or New York. The final month of the year was actually not very dramatic for our firms generally, but it was more so for the wider markets. At the end of November, our overall portfolio was just ahead of the London FTSE All Share Index for the year to date and just behind the Dow Jones. But in December, while our portfolio rose by just 1% or so, London jumped by no less than 5% and New York by 4%, meaning at year-end we trailed those wider indices – although we were still a couple of percentage points ahead of the Dow Jones Global Index. Read on to find out the Biggest Winners and Biggest Losers — and tell us if you'd like us to keep doing these into 2017, would you?
November 2016 will not go down in history for anything to do with business, procurement or share prices. The election of Donald Trump certainly seemed to be a seismic event, although we will have to wait and see. Perhaps the biggest shock of all will be if he turns out to be an OK sort of president – not too bad, not brilliant either. Given that one camp has absurdly high expectations of him (“draining the D.C. swamp”) whilst another believes he will lead the world to Armageddon, wouldn’t that be the real surprise?
Only two weeks to go until our webinar with riskmethods. The supply chain risk management provider’s software identifies risk along global supply chains, assesses the risk impact and defines appropriate and focused measures for risk prevention or crisis mitigation. The firm is the perfect partner for our upcoming webinar, titled “Keep your enterprise out of the rough: How Titleist built transparency and increased resilience into their supply chain.”
It was a dark month for our share portfolio of 20 companies that have an interest in the procurement solutions market. Last month, we were commenting that it was several percentage points ahead of the general stock market performance for the year to date, but that changed in October. Markets were pretty flat through October, but our portfolio lost no less than 6% of its value, to end October less than 5% up year to date, still marginally ahead of the Dow Jones and global indexes but behind the U.K. index performance for 2016.
* As for that headline, Google it if you aren’t British and over 40. It's time for news about our portfolio of stocks from publicly quoted companies who are all or partly focused on procurement solutions and services. We have 20 firms represented in our portfolio, from huge to small, and we report on overall portfolio performance every month, picking out a few firms to focus on more closely. September was — well, how can we put this gently — a somewhat boring month, at least if you look at the headline stock prices at both individual company level and overall for the portfolio. BUT if we look more carefully, we can find some points of interest, including two high-profile CEO departures. So what did the behind-the-scenes goings-on look like?
Did you have a good summer? Weather good, we trust? Too hot in some parts of the world, while in the U.K. – actually, it wasn’t too bad after a cool start. And now we’re writing this on a beautiful early September day, as the kids get their books and uniforms out ready for back to school this coming week. Yes, you might have guessed from the chat. August’s stock market movements of our portfolio of procurement-related companies did not give us the most exciting range of topics to cover. The weather is probably more interesting. It was a month where generally markets seemed to take a breather after a year so far in which there have certainly been plenty of events for them to think about, from the rise of Trump to the U.K.’s Brexit vote. However, the overall performance of our procurement stock portfolio was very good overall, up some 6% on the month, and it now stands some 10% above the beginning of the year level. That means for the first time this year it has moved clear of the overall market performance. U.K. markets are up 7% on the year, U.S. 6% and the global index about 5%, so procurement-related stocks are now ahead of that.
After the events of June, with Brexit dominating the headlines, stock markets actually did pretty well in July. The Dow Global index was up 4% on the month and is now positive for the year, as are U.K. and U.S. markets. The month was also a good one for our portfolio of 20 firms that have an interest in procurement services and solutions. The portfolio was up almost 5% on the month, driven by some of the giants of the industry, as we’ll see. It is now 4.8% up year-to-date, slightly better than the global stock market index but still underperforming the general U.K. and U.S. indexes by still a percentage point or so.
We are in the middle of a great period for procurement and supply chain books, with several very impressive examples being published over the last two years or so. (We’ve linked to our overview of some of those at the end of this article). Now, there is another impressive publication to add to the list. "Legal Blacksmith – How to Avoid and Defend Supply Chain Disputes" has a different perspective to any book we have seen previously in our sector.
Pretty much every consulting firm has its own process and tool-kit, too. Whether it’s seven steps, nine steps or 17 sub-processes, there is plenty of advice from those who will tell you how to implement CatMan successfully. But there is less in the way of hard, evidence-driven thinking and research that can bring objectivity to the questions around how organizations can succeed with CatMan. That's why the Future Purchasing Category Management survey is so valuable.