Gambling on Suppliers

Posted by Andrew Bartolini on February 23rd, 2012
Stored in Articles, Process, Strategy

We’ve focused on supply risk in a few of our recent articles, including the last one entitled Supply Risk Roulette. As I began writing that last article, I was convinced that I had a good narrative (or hook) that would allow me to use roulette as an analogy for supply risk management. But in the process of writing the article, I started to see the counterargument of “why supply risk is not analogous roulette” but more similar to gambling in general. As such, I thought it would be interesting to look at the elements of supply risk in the context of gambling. After all, every supplier contract has some element of risk associated with it. This means that Chief Procurement Officers and their procurement teams are making an implicit bet on supplier performance (and supply risk as a subset) with every supplier relationship and every supplier contract. Here’s what I mean by “gambling on suppliers.”

  • Some bets have much better odds than others in paying off and, are therefore, better than others
  • Some bets have much lower risk than others and, are therefore better than others
  • The attractiveness of a bet depends on the profile of the gambler
  • Some bets appear to have better odds than they actually do
  • Smart players put themselves in a better position to win by understanding the rules of the game
  • There can be an element of luck in the results
  • There can be an element of uncertainty in the results
  • While most outcomes have probabilities (or a likelihood) of occurring, they lack full certainty
  • Reducing the uncertainty can be a path to improved results
  • Reducing the level of risk can be a path to improved results
  • Reducing the level of risk is not always a need or priority
  • Bets are often made with imperfect information
  • Odds change as events unfold – smart players have a plan to take full advantage of these shifts
  • Different games (supplier relationships) have completely different sets of rules
  • Different games (supplier relationships) have completely different types and levels of risk
  • Different games (supplier relationships) require different strategies

The intent here is not to oversimplify a very complex issue, but rather to note that all procurement organizations, whether they realize it or not,  are gambling on their suppliers. It is a game that they must play. With each supplier agreement, they are placing bets that the supplier will perform and not fail or falter. Many of these bets pose little risk, but they are bets nonetheless. Since the game is mandatory, understanding the rules and the odds around is common sense and one smart way to improve your payout.

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