In Risk, Vendor Management on June 14, 2006 by hudgeon Tagged: Academic Research, Procurement
Peter Drucker on Managerial Courage:
Business enterprise is not a phenomenon of nature but one of society. In a social situation, however, events are not distributed according to the "normal distribution" of a natural universe (that is, they are not distributed according to the U-shaped Gaussian curve). In a social situation a very small number of events—10 percent to 20 percent at most—account for 90 percent of all results, whereas the great majority of events account for 10 percent or less of the results.This is true in the marketplace.
A handful of customers out of many thousands produce the bulk of the orders; a handful of products out of hundreds of items in the line produce the bulk of the volume; and so on. This is true of markets, end uses, and distributive channels. It is equally true of sales efforts: A few salesmen, out of several hundred, always produce two-thirds or more of all new business. It is true in the plant: A handful of production runs account for most of the tonnage. It is true of research: A few men in the laboratory produce all the important innovations, as a rule. . . .
[Managers need] … the courage to go through with logical decisions—despite all pleas to give this or that product another chance, and despite all such specious alibis as the accountant's "it absorbs overhead" or the sale's manager's "we need a full product line."
In Uncategorized on June 10, 2006 by hudgeon Tagged: Academic Research, Industry Research
In Risk on April 17, 2006 by hudgeon Tagged: Academic Research, Cost Analysis, Fairness, Outsourcing, Procurement, Quality Analysis, Vendor Management
An interesting study in the Journal of Empirical Research on Human Research Ethics confirms a growing body of work showing that people care more about procedural fairness than distributive fairness.
How does this apply to vendor management? It may mean that a buyer or vendor who is getting less than they expected won't react provided they perceive as fair and equitable the process for distributing the rewards. Thus, an outsourcing relationship can remain strong even when circumstances begin to favour one party provided the mechanism for redressing imbalance is perceived as fair.
I've prepared two diagrams below that attempt to capture this relationship. The first diagram shows an outsourcing contract with a high degree of procedural fairness (clear, reasonable processes defining when and how to make changes to the relationship). The curved line shows the fluctuation in the distributive fairness (equity of effort to reward) as time passes. When the line moves closer to the top of the box representing procedural fairness (buyer line) it indicates that the buyer is putting in more effort for less reward than they expected at the outset. Note that in the diagram below the curved line does not cross either horizontal line which indicates that despite the fluctuating equity neither party reacts to the fluctuations.
The second diagram shows a relationship with a low degree of procedural fairness. Note that the inequity in the relationship fluctuates to the same extent as in the first diagram but results in two reactions from the buyer and one reactions from the vendor (a reaction occurs where the inequity crosses the top or the bottom of the procedural fairness box). In this relationship, the reduction in procedural fairness has resulted in reactions that would not have occurred in the above relationship. Note that reactions to inequity can occur in many forms ranging from litigation to underservicing.
The lesson for contract drafters is to spend time on the processes you are implementing for dealing with change throughout the life of the contract.
Technorati Tags: outsourcing, vendor management
In Risk on April 8, 2006 by hudgeon Tagged: Academic Research, Connecting, Fairness, Outsourcing, Procurement, Vendor Management
Earlier today, I reviewed my posts and decided that I should have tag-lined my blog "Sh*t happens. Deal with it". I intended to write about all aspects of vendor management but I've found I've focused solely on the importance of building sufficient flexibility into contractual relationships to allow them to handle unforeseen events that occur throughout the life of the contract.
In summary, the Vendor Manager must establish clear aspirational goals for the supplier relationship. Once they have established the goals and tied remuneration to the goals, the environment is set for a flexible relationship that can change with the times. If the parties are focused on the aspirational goals, they are more likely to be flexible [1] [2] [3] and to demonstrate innovation.
Of course the trick is tying remuneration to the goals and establishing suitable change control procedures … more on that later.
Technorati Tags: outsourcing, vendor management
In Uncategorized on February 19, 2006 by hudgeon Tagged: Academic Research, Fairness
Gary Bolton and Alex Ockenfels prepared a paper entitled the Theory of ERC which postulates that a person’s contracting behaviour can be predicted if you know their level of financial gain and their propensity to deal fairly with others.
“In this paper, we describe a simple model we call ERC to denote the three important kinds of behavior the theory captures: equity, reciprocity and competition. We show that ERC is consistent with a wide variety of experimental observations gathered by many independent investigators. ERC is simple to apply – in part, because it is not a radical departure from standard modeling techniques. The major innovation is the premise that, along with the pecuniary payoff, individuals are motivated by a ‘relative’ payoff, a measure of how the pecuniary payoff compares to that of the other players. Different games present different sets of tradeoffs between pecuniary and relative gains. What ERC demonstrates – and the point we will stress – is that a simple model of how pecuniary and relative motives interact, organizes a large, and seemingly disparate group of experiments as one consistent pattern of behavior.”
In Uncategorized on February 19, 2006 by hudgeon Tagged: Academic Research, Fairness
