Procurement problem? Call in the experts – or ask the crowd!

We’re pleased to have a guest post from David Rajakovich of Positive Purchasing, who we've  mentioned recently (e.g. here) a few times in the context of their education and training services.

If you want to know how the future will look, commission some analysis and expect closely-argued forecasting based on scientific research. That’s the accepted wisdom.

But there’s another way worth considering. Gather together as many as possible in your organisation and beyond – everyone from the receptionists to your suppliers to the senior managers – and ask them what they think. The results, according to the latest thinking, could prove surprisingly accurate.

This is the theory of “prediction markets”, developed by American guru James Surowiecki in his book The Wisdom of Crowds. It says collective wisdom is more likely to prove accurate than expert analysis.

“Groups do not need to be dominated by exceptionally intelligent people in order to be smart,” he wrote. “Even if most of the people within a group are not especially well-informed or rational, it can still reach a collectively wise decision”.

The approach goes way back to the early 20th century when British scientist Francis Galton collected up the entries in a “guess the cow’s weight” competition at a country fair - and was startled to find that the average figure came to just one pound above the correct answer.

So what? Well, for procurement people the prediction markets approach could mean, for example, forecasting demand in the market place so that you can adjust production and the volume of bought-in goods and services accordingly – with the obvious benefits in terms of inventory and capacity.

The approach has been used by several companies. It seems that an internal prediction market at Hewlett-Packard predicted printer sales more accurately than traditional processes, and a similar market designed by a large engineering firm correctly predicted that there was very little chance the company would complete a software project on time. Best Buy used it to accurately predict gift card sales leading up to the Christmas shopping season.

Predictions like these, clearly, can be worth millions to a company, and an approach that promises greater accuracy must be worth pursuing.

The good news is that setting up a prediction market need not be an elaborate exercise. It can be done online or with good old-fashioned pencil and paper. The important thing is to make sure you have as many people as possible involved and that they come from a diverse range of roles in terms of seniority and geography. It’s also important that participants are not conditioned or prompted in any way  -  by you or by each other. The essence of crowd wisdom is that each individual makes up their own mind what they think on their own.

A useful spin-off benefit is that it’s the kind of management exercise that can be used to involve people in their organisation – asked to give their assessment of some vital issue for the company, they are sure to feel a sense of pride and ownership of the outcomes.

So prediction markets could be the coming thing. Who knows – better ask the crowd what they think!

David Rajakovich is Vice President of Online Operations at Positive Purchasing

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