#DPW: The Medieval History of AI in Procurement & Combinatorial Decision Making

Following up on a DPW discussion with Matteo Stefani regarding the historical theory of artificially intelligent decisionmaking, I said that I would post a quote from one of my favorite early essays on AI, penned in 1967 by the Italian writer Italo Calvino:


"Shannon, Weiner, von Neumann, and Turing have radically altered our image of our mental processes. In the place of the ever-changing cloud that we carried in our heads until the other day, the condensing and dispersal of which we attempted to understand by describing impalpable psychological states and shadowy landscapes of the soul – in the place of all this we now feel the rapid passage of signals on the intricate circuits that connect the relays, the diodes, the transistors with which our skulls are crammed. [...] One of the most arduous intellectual efforts of the Middle Ages has only now become entirely real: I refer to the Catalan monk Raymond Lully and his ars combinatoria. The process going on today is the triumph of dis-continuity, divisibility, and combination over all that is flux, or a series of minute nuances following one upon the other. [...] What Romantic terminology called genius or talent or inspiration or intuition is nothing other than finding the right road empirically, following one's nose, taking short cuts, whereas the machine would follow a systematic and conscientious route while being extremely rapid and multiple at the same time." (Italo Calvino, Cybernetics & Ghosts, 1967)

Bid Ops Webinar: The Power of Real Time Collaboration in Purchasing

Join us as Bid Ops Head of Product, Ben Leiken, discusses the impact increased collaboration has on strategic sourcing teams. This webinar dives into how the enterprise space has adapted to the need for collaboration in real time, and how you benefit with better vendor relationships as a result.

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Could More Vendor Participation Improve Procurement Operations? The Answer May Surprise You

Edmund Zagorin, Ken Desowitz, Brent Maas, James McGraw

The relationship between vendor participation and value creation

As procurement leaders, we tend to favor facts and data over personal opinion as reasons to make award decisions. Like hiring the best candidate for an open position, awarding a contract to the best vendors is a balancing act, factoring in requirements that are often in tension with each other.

Experienced hiring managers often use the term “best fit” when describing what makes a candidate the right hire. This means the candidate has the desired level of experience (but isn’t overqualified), will be satisfied with the offered salary (but may desire room to grow), and can execute against the job responsibilities with competency and experience.

Similarly, procurement leaders know that awarding a contract to a vendor is an exercise in Goldilocks’ porridge-tasting: not too hot, not too cold; just right. Sounds complicated? That’s because our brains aren’t built for it. Humans are great at optimizing (e.g. for a single evaluation criteria) because keeping score on one criteria is pretty uncontroversial. If we are only comparing options on price, then it’s simple to see which option saves the most money.

 
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It’s not always the cheapest vendor (although savings are desirable). It’s not always the vendor with the most experience (although experience is desirable). It’s not always the vendor with the most certifications, the best equipment or the most references. It’s the vendor that, given the budget, the timeline, the technical specifications, is simply the best vendor for this contract.


Unfortunately, in the real world where “you get what you pay for” procurement teams may need to make sure that the vendor is truly responsive before looking to either a lowest price or even best value comparison. In other words, we must *first* ask ourselves: does a vendor truly qualify as responsive? Making sure that this questions gets answered can help us avoid the much bigger (and longer-lasting) operational headache of sub-optimal vendor performance.


If we’re really managing our teams towards this idea of “best fit” for a lowest responsive vendor, then it is super important to track metrics that align with improving our award optionality, both on price, qualification and performance. What are some metrics that we can track that will help with this?

1.     Median Competitiveness

Competitiveness is a simple metric to track, and it’s  a great way to highlight the value that your procurement team is adding through the “responsive vendor” qualification process. Simply take the total number of vendors responding to your opportunities as the denominator and the total number of vendors awarded as the numerator. For example, if over a six month period your team had 42 vendors responding to 12 contract opportunities (each of which was awarded to a single vendor), then the median competitiveness of your bids is 3.5 vendors responding per opportunity.  Based on Bid Ops analysis, if your median competitiveness is above 3, your team is doing a great job engaging your vendor community and getting better deals for your stakeholders.

2.    Median Newcomers

Many procurement teams face a problem that we call “the usual suspects”. This means that even for bids with more than 3 vendors responding, it’s the same vendors every time. While you may think, “well that’s not so bad, they all know how to do business with entities like us”, the problem is that these vendors are so comfortable with their marketplace that they are not truly motivated to compete. Vendors that run into the same 3 or 4 competitors for every one of your contract opportunities will often not be motivated to give your stakeholders truly great value. For some categories, “the usual suspects” are fine (and for certain speciality categories there may only be “the usual suspects”). However, at scale the lack of new blood in your vendor portfolio can put an unfortunate ceiling on the amount of value that your procurement team can create through running competitive processes. Thus, it’s important to measure the net number of vendors that submit bids for your contract opportunities, regardless of whether or not they are awarded. This is a simple ratio between net new submissions and the total number of bids submitted. For example, if 7 new vendors submitted bids out of a total 42 bids, then your Median Newcomers would be .16 (e.g. 1/6).

3.     Median No Bidders

The idea of tracking the number of bidders versus the number of bidders that “No Bid” isn’t new, but done at scale it can provide useful insights for increasing both Median Competitiveness and Median Responsive Bidders. Using Bid Ops internal analytics, we have a ranking for a vendor’s most common “No Bid” justifications:

1.     Not enough time to submit a bid

2.     Specifications written in a manner that they cannot meet (or believe is disadvantageous)

3.     Person whose job it is to respond to public sector solicitations is OOO

4.     Vendor registration process is too difficult or complex to access the relevant documents

By tracking and ranking these reasons internally, your team will have data to communicate to stakeholders the value of getting a bid out on the street earlier and leaving it open for longer. Your procurement team will be able to communicate with confidence the value of issuing an addenda to make a solicitation more competitive. Measuring median responsive bidders can be challenging because of the lack of collecting “No Bid” justifications, however the ratio is simple: “No Bids”/actual bids. For example, if you had 42 bid submissions and received 10 “No Bid” reports then your Median Responsive Bidders would be .238 (e.g. 10/42).

Now here’s what’s mind-blowing: success for this metric is actually getting this number above 1 (e.g. having some indication of why a qualified vendor didn’t bid is a good thing). Why is this? Because they represent part of the competitive landscape for your contract opportunities, and with slight changes in process they could participate in the future. The fact that they were sufficiently aware of your opportunity to indicate why they “No Bid” in principle means that they could participate in the future. Awesome public procurement teams will work to increase their market footprint year over year, and having 1.25-1.5 Median No Bidders is the perfect roadmap to make this possible.


Going beyond the “usual suspects”

Getting serious about increasing vendor participation isn’t easy. It means thinking beyond your typical Contractor Fair, Reverse Trade Show or Local Vendor Event. It means being strategic about making markets for your contract opportunities beyond “the usual suspects.”

Fundamentally, it means creating and running next-level discovery, engagement and qualification processes – and doing all this without creating more work for your team. Culturally, being smart about vendor engagement *only* works if it involves your team doing *less* busywork, getting *fewer* distracting vendor emails and getting real-time data to measure success. Solving this problem – increasing productivity in running a bid – is exactly why we created Bid Ops. 

 
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Bid Ops public sector teams easily deploy automated vendor engagement campaigns, get forecasts on vendor responsiveness and can see analytics associated with their opportunities at scale, including measuring Median Competitiveness, Newcomers and No Bids. Curious?

Sign up to see if you qualify for our Private Beta at bidops.com/privatebeta

Bid Ops Webinar: How Behavioral Insights Are Transforming Raw Materials Procurement

In our most recent webinar we take a dive into how behavioral insights generate leverage for buyers to built successful relationship and negotiate better with their vendors. Click play below to watch the full webinar.

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5 Ways Your Private Equity Firm's Procurement Playbook Can Benefit From Negotiation AI

 
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Last month I attended the Industrial Exchange conference in Miami, a new gathering organized by Jon Cooper for PE firms that own mid-market industrial companies and technology providers. To date, Bid Ops customer base has focused on large enterprises, and I was curious to learn more about how operating partners at PE firms with mid-market assets approach savings.

PE firms generally have “playbooks” that contain systematic business operating strategies that they execute on in order to make the companies they buy more valuable.

Top PE operating partners often have “procurement” or “supply chain” playbooks, and several of the IndEx talks were around pursuing value creation through procurement optimization and strategic sourcing. We reached out to Jon Cooper for a comment on this trend and he shared this insight: “"As shared service offerings become more comprehensive, PE-owned companies and their operators are more likely to use procurement playbooks and related supply chain improvement strategies to reduce cost and scale benefits across newly acquired businesses."

Unlocking that opportunity comes down to discipline around creating a world-class procurement organization. As Blackstone’s Bradley Bogess noted in his main stage talk, the core difference between high performers and average players among the field of mid market industrial companies comes down a disciplined approach to strategic sourcing, especially e-sourcing. This discipline, Bogess suggested, reflects a fundamental practice of regularly seeking better commercial terms in the marketplace.

While there were many takeaways from IndEx, below I’ve summarized five strategies that can be enabling for world-class sourcing discipline, thereby unlocking new horizons of value:

1) It’s better to get savings from unexpected  contracts than from the “usual suspects”

Truly transformative savings outcomes will not happen over and over again with the same contracts unless there are massive changes in their market, period. Thus, try running a process on neglected spend, even if it’s an unlikely category. You may be surprised by the results.

2) Groom “wildcard” vendors to create competition from within your existing supply base

A “wildcard” vendor is a strategic supply partner that is growth-seeking. This is a vendor that wants to grow their account with you on revenue, and deliver better value with lower margins year over year. What makes this vendor a “wildcard”? They’ll continue to expand the range of categories that they serve. Therefore, vendor will want to bid on more of your asset’s categories and will have the functional effect of making the rest of your vendors more competitive. Having a “wildcard” vendor can improve more of your categories and give you leverage over other vendors.

3) More good sourcing processes are better than fewer perfect sourcing processes

Sourcing, like sales, is to some degree a function of a law of averages. If your organization only source once or twice a year, then you probably have to get lucky in order to win. In contrast, if you source 10-20 times a year, there is much greater likelihood of discovering transformative cost savings. Don’t make perfect the enemy of the good. It’s also likely that 1-2 events will account for the bulk of the value created, with a long tail of average or moderately successful processes (and a couple failures). But if you don’t start looking in the dirt then you’ll probably never find the real gold.

4) Manage Vendors, Not Categories

Operating partners and mid market executives should define the health and breadth of their sourcing challenge by the number of vendors, not categories. Categories can create a layer of abstraction that prevent effective negotiation, and if a vendor is supplying multiple categories then you have leverage to ask for discounts even if those categories are managed by different departments. Category silos in mid market companies can allow a vendor to upcharge on services to make up for discounts offered on goods or commodities, hiding costs to blunt the effects of your buying power. But money is money, and for strategic partners it is best to analyze the relationship holistically.

 
The best leverage ultimately comes from true optionality: comparing your vendor versus the market.
 

5) Take The Time To Measure Success & Prep Your Negotiation Execution

It is often said that the most prepared often win. This is more true in supply negotiations than elsewhere, and having a “source of truth” around what something should cost will be a tremendous asset in asking for savings. The best leverage ultimately comes from true optionality: comparing your vendor versus the market. However, should-cost modeling and a decision tree can set your team up for success in fact-based negotiations. One of the value of e-sourcing platforms for the past two decades is in their ability to set context for a negotiation and clearly communicate expectations regarding where the price will come in. Technology platforms may also help automate how teams measure success and ultimately execute against a well-defined savings target.

If you are operating a mid market industrial company and want to learn more about how AI can support improved outcomes in your vendor negotiations, please reach out to me at hello@bidops.com

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3 Steps For Building Strategic Vendor Relationships With A Growth Mentality

 
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1. Use A Checklist To Communicate Clear Expectations & Get Vendor Buy-In Up Front

When companies and buyers have to start managing supplier relationships and need to improve performance with unreliable vendors, this consumes a ton of time and resources. Rather than having to chase down the problem, having a strategic approach can pay off in the end. Before an agreement is signed, it is so important to discuss a forward focused approach and to ensure the competitive advantage of the vendor before the relationship progresses. Practically speaking, this may doing the following as part of an award process:

  • Defining task-level metrics

  • Defining the source of truth for Service Level Agreements (SLAs)

  • Defining key performance indicators

  • Defining relationship milestones

  • Defining red flags

  • Defining triggers for cure periods

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One great exercise to do with your vendor is to simply ask: “What are three indicators that this relationship is successful?” “What are three indicators that this relationship needs improvement?” “What are three red flags that should trigger a cure period?” “What are three things that I want my vendors to hold me accountable for?” Make accountability a two-way street and get buy-in from the vendor partner at the beginning of a relationship. Going through this exercise up-front will create clarity and accountability if and when there are any performance issues later. Answers to these questions should be documented in writing and reviewed as part of a Quarterly Business Review, ideally to track performance and create scalable scorecards.

2. Your best vendors are true partners, not just sellers

Treating vendors like true partners will create layers of value. Build trust and loyalty. Make your vendors feel heard, appreciated and like they are a vital part of your business or organization. Fill them in on changes to your organization and listen to their concerns and recommendations. Numerous studies and surveys have shown companies who treat vendors as partners rather than operational necessities gain a real competitive advantage in the marketplace.

 
Make accountability a two-way street and get buy-in from the vendor partner at the beginning of a relationship.
 

3. Pay Your Vendors On Time. Prompt payment means less relationship management by your vendor reps, fewer emails, fewer awkward conversations and more time spent on planning for the future. Timely payment correlates with a warm fuzzy feeling about doing business with you. The easier your business is to work with, the more reliable your business will be. With consistent payment on time will come respect, and even prioritization. Remember, even with strategic partners you are still competing for your vendor rep’s mindshare, because they have other customers to serve. Timely payment is an easy and effective way to demonstrate appreciation. Remember, you may need to ask a favor of a vendor (“Please rush our next delivery!”) that you may not be able to tip them for. By building a history of timely payment, you are banking social capital that can be a source of strategic leverage in future contract negotiations.


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3 Misconceptions About AI In Procurement

 
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Being in the AI procurement business means that our team gets an inside view into how business leaders across the industry are thinking about implementing AI in their enterprise. Across the board, we see people caught between curiosity about what’s possible and caution against snake oil. Embedded within this crosscurrent of excitement and skepticism about AI, we hear the same misconceptions over and over again, many taken from the popular media. Here are the top three:

1.    AI is better at X business process than the best human. This is likely the misconception that we come across the most. It springs from the tendency to conflate AI circa 2019 with futurists’ popular science hypotheses about what a “strong” or “general” AI would be like (which does not yet exist (and which would, theoretically, replicates human intelligence). Let’s think about this in the context of autonomous driving. Do we believe that AI driving cars on the street today is better than the best race car driver? Heck no. However, if it’s better than the average driver and doesn’t need to eat, sleep, use the toilet (or get a paycheck) then there remains a pretty obvious business case around autonomous vehicles. The same holds true for business process AI.

2.    AI only makes sense after we get our company’s data in pristine condition. This one gets a lot of airtime on the Internet blogs, so I’d like to unpack carefully. While true that “garbage in, garbage out” can apply to some AI analysis of *incomplete* or *inaccurate* internal datasets, there are now a ton of great platforms that will help cleanse and format data that may have duplicates or be missing rows. I’d actually say that it’s reasonable to expect any leading provider of AI services to offer data cleansing, aggregation and re-structuring as an enabling service for whatever their core value prop is. If you’re contemplating a “data lake” strategy as your company’s endgame, I’d suggest checking out Tamr CEO Michael Stonebreaker’s excellent talk about why “data lakes” are just the beginning. Cleaning and integrating datasets can produce enormous value, but much of what AI can help with today is data labeling and pattern recognition to assist with that taxonomy. Ultimately, this is an iterative, nonlinear process rather than a “first clean data, second AI” process, and will run concurrently in most organizations that successfully implement these platforms.

 
Do we believe that AI driving cars on the street today is better than the best race car driver? Heck no.
 

3.    AI only works in specific domains, such as computer vision, image recognition, etc. While the state of the AI market itself remains a subject of controversy, there is no doubt that the advances in computer vision are certainly impressive (and will likely be responsible for disruptive innovation in manufacturing over the next decade). However, these are not the only places that AI applications can cause substantial improvements in process efficiency and outcome optimization. For example, many AI theorists point to the moment that Google’s DeepMind won at Go as a kind of “Sputnik moment” for renewed excitement about AI. Consider that this breakthrough moment occurred around a wave of so-called “gameificiation” where tasks in business, education and tradecraft professions are being recast as games with optimal pathways and rewards and punishments. How unreasonable is it to imagine that if AI can win a game as complex and nonlinear as Go, that AI might be able to win a game as simple as, say a price negotiation?

The truth is that AI in the workplace will inevitably be caught between the overpromises of visionary optimists and the bitterness of skeptics who see the rise of AI thought leadership as snake oil. Our approach to these hot and cold reactions is simple: what are your savings goals, and would they become more achievable if your team could negotiate with twice as many counter-parties over the next year? What about 10x many counter-parties? If having a procurement team that could work 10x tempo is an exciting proposition, then there’s probably a low-commitment way to run an experiment in your own organization and see the value for yourself.

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Bid Ops Interviews Brian Gunia

 
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This week we interviewed Brian Gunia, Associate Professor at the Johns Hopkins Carey Business School and author of the recently-released The Bartering Mindset: A Mostly Forgotten Framework for Mastering Your Next Negotiation.

Could you tell us a bit about your background?

I’m an Associate Professor at the Johns Hopkins Carey Business School. I study three ways that people commonly jeopardize their careers: by acting unethically, negotiating ineffectively, and sleeping insufficiently. Instead of focusing on self-defeating choices themselves, though, I focus on simple, theoretically-motivated steps that individuals can take to act more ethically, negotiate more effectively, and sleep longer or better. I teach a variety of negotiation and organizational behavior courses. Before my academic career, I worked as a consultant at Deloitte. 

Why are you passionate about this topic? What excites you about it? What fascinates you?

I’m passionate about negotiation, in particular, because it’s an area in which people can readily improve their own lives. Most of us negotiate every day, multiple times a day—with family members, coworkers, and yes, vendors. By changing our behavior in a few simple ways, most of us can lead significantly happier and more prosperous lives.

What is one thing you think most people don’t realize about negotiations? What are some common misconceptions?
The biggest thing people don’t realize about negotiations is that they’re everywhere, all the time. When someone says “negotiation,” most people think of buying a car, asking for a higher salary, or sitting across the boardroom table from a business partner. They don’t think of discussions with a spouse about restaurants, discussions with a bank about fees, or discussions with a coworker who hasn’t been pulling their weight. Anytime we depend on somebody else to achieve our own goals, we can negotiate. By associating negotiation with a few limited contexts, however, we severely limit our ability to reap the benefits of negotiation.

The second-biggest misconception about negotiation is that it’s all about figuring out how you can beat someone else. That’s far from the full story. Negotiation is about solving a problem in a way that benefits multiple parties at the same time. Sure, you’ll eventually have to nail down the price. But most people assign that aspect of negotiation far too much emphasis, often completely ignoring the many other (and potentially more important) aspects of the deal that can benefit everyone at the same time (or at least help one party more than they hurt the other).

What do you think is the safest bet for ‘state of the art’ for effective negotiations five or ten years from now?
The safest bet is that the misperceptions in the previous question are not going to disappear anytime soon. So we, as committed and aspiring negotiators, need to help ourselves and others see the negotiations all around us. And we need to be vigilant in treating negotiations as opportunities to find unexpected value, not just opportunities to crush our counterparts.

You seem to be looking at three inter-related practices: unethical behavior, ineffective negotiation or sleep deprivation. Have you noticed any deep connection between these three topics that might escape the untrained eye?
I think the deepest connection is that most people think these issues are not going to threaten their own careers or personal lives—until they do. In other words, most people think they will never fall prey to unethical temptations, already know how to negotiate, and can deal with sustained sleep problems. But then they find themselves unwittingly slipping into a scandal, inexplicably failing at the bargaining table, or letting their sleep problems severely damage their work. Don’t let it be you!

Our audience for this blog is predominantly procurement professionals who must negotiate optimal commercial terms with vendors. How can some of your best practices that are applicable to a salary or professional negotiation provide insight for this use case?
The key word is “terms.” Fixating on one price with one counterpart is sure to produce an impasse or, best case, a deal that nobody finds satisfactory. Treating negotiations with vendors as opportunities to trade several of your priorities for several of theirs is likely to produce some much more creative (even exciting) deals, especially over the long-term. 

What’s some advice that you can give to people who might be interested in generally improving their negotiation skills?
I would honestly suggest reading my book, The Bartering Mindset, which offers a new and different way of thinking about negotiations. Briefly, we often negotiate badly because we treat negotiations like monetary transactions (adopt a “monetary mindset”): We think of ourselves as locked in a battle with one party over one issue, on which the other party wants the opposite. The book teaches you to treat negotiations like bartering trades instead (adopt a “bartering mindset”). In other words, it teaches you to see negotiations as opportunities to make a series of mutually-beneficial trades with multiple partners. The latter is not only much more beneficial. It’s much more fun!

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