I interviewed David Rajakovich who discussed Procurement Innovation: Combining Data Analysis and the Wisdom of the Crowds.
I understand you have been working on an innovative way of conducting opportunity analysis, how could prediction markets be used to enhance opportunity analysis?
- The idea behind using prediction markets in opportunity analysis is the same one that prompted the United States Department of Defense to consider establishing a prediction market for the next terrorist attack – they only abandoned the idea because of misguided public outrage. If you think about it, it is very difficult for a small group of experts to know about a widely decentralized terrorist network. However, the masses, aided by the profit motive, will be much more likely to be in a position to identify the greatest threats.
- The better your information source is, the more you would be likely to wager on the outcome. In your supply chain, there may be unacceptable working conditions, unethical practices, huge opportunities, or huge risks that those at the top of the supply chain hierarchy simply can’t be aware of. Prediction markets will bring that knowledge to light.
How can commodity buyers best limit their risk?
- Companies are often in the position of doing spot buying when it comes to commodities. That is actually quite a dangerous position to be in…commodity prices fluctuate wildly, which means that your organization’s margin will fluctuate significantly as well. Instead of being in the commodity speculation business, food companies and others should be in the food production business. That means building a model to explain commodity cost drivers. Having worked a great deal with statistics, I understand that commodity models should be kept as simple as possible to focus on the key drivers.
- My approach is to then use prediction markets to get a range estimate of where those drivers will be over the next 3, 6, and 12 months. If you have a good forecast for your demand – again, we can do this through prediction markets - then you are almost completely out of the commodity speculation business and back in the food, construction or engineering business.
There is a trend toward using 'Big Data' in procurement, what are your thoughts on how data could be used?
- Many companies have spent a significant amount of money on spend analysis and business intelligence tools. I believe it is fair to say that companies, in many cases, can get more out of the data that is available to them. Iasta, for instance, has an excellent tool that provides spend analytics in just about any way that want to slice and dice the data.
- The key is understanding how you want to use the data. If you are doing opportunity analysis, what are the corporate objectives that you are working towards? Is it cost reduction? Reduction of risk? Improving new product development? Etc. It is only then that you can use the data to find out what you need.
- You also will want to test the assumptions behind the data. Some analytics tools will provide you an estimate minimum savings and estimated maximum savings…find out what is behind that, and make sure you are comfortable with it. It might not hurt to invest in third party market research to get a more objective view of the level of savings that are possible.
- The keys is thinking about data, and getting people to think creatively about how to use it.
- Data can be about analysis the market – for example, there are seasonal items so we can detect trends in the data about when to buy. We can connect this analysis to data from finance about the cost of capital to make decisions about whether to hold inventory, or we can see that there is enough of a problem to go deep into improving supply chain efficiency.
- We could also detect trends to understand what is causing problems – for example, spend on replacement valves always increases after a certain cleaning process is undertaken. That discovery could be the impetus for a change in the process. The beauty of data is that when it is used well, it can uncover significant opportunities. I think the gap right now is that we need people who understand data and statistics or to bring in people that understand those things to make it work.
How can we take advantage of the wisdom of the crowd in terms of procurement strategy?
Procurement departments generally are not getting larger, especially in Europe at the moment. I spoke to one category manager at a major food and beverage company yesterday that told me that experienced personnel are being replaced by younger, cheaper personnel. So, we need all the resource that we can find to solve problems. And, this may be heresy to experienced procurement people or experienced business people generally, but innovative solutions generally come from people that think differently than the people who thought about the problem previously. That is why innovative companies – Procter & Gamble is one – are using crowdsourcing to solve even scientific problems. Chemists are solving physics and biology problems, so why can’t production or marketing solve procurement problems or vice versa? I believe there is a great deal that we can do in terms of using collective wisdom to solve problems and make better business decisions.
About David Rajakovich
CEO and Founder