Complexity and Price Volatility in Procurement
We’ve written previously about the conceptual difference between complexity and complication.
“To say that a process is complex is the not the same thing as saying it is complicated.”
For example, we can imagine the developer of a large mixed-use residential and commercial construction project. These undertakings can have upwards of twenty-five levels between the prime contractor and the smallest supplier on the site. At the lowest level, imagine a two-man HVAC company providing additional swing capacity.
It is complicated in that there are many moving pieces.
It is complex in that it is a system.
The multi-dimensional interaction of these moving pieces can lead to emergent consequences. If one of the pieces fails to deliver, then there can be a real problem in terms of quality, timing, or cost.
These projects are best thought of as complex adaptive systems.
It should be easy to see that a company is a complex adaptive system, too.
Its success depends on employees doing their jobs, suppliers fulfilling promises, and customers demanding what the company sells. This is a dynamic process.
Seen in this context, supply chains are better described as supply ecosystems.
To really blow one’s mind, now recognize that each firm exists in a latticework of other firms. The supply ecosystem for an individual company is part of a broader, economywide tapestry.
Applying mechanical rules to complex adaptive systems makes no sense. Yet, as we wrote previously, this is precisely what current business processes do.
“Procurement in the contemporary context is both complicated and complex. Most companies have evolved complicated bureaucracies around procurement, requiring systems to implement the rules, with administrative organizations to enforce them.”
The FT discusses an additional layer of complexity: the existence of middlemen. These are powerful nodes in the ecosystem that may consolidate functions or appear to simplify its management.
They make two interesting points, both of which the Pandemic disruption appears to confirm.
First, the lack of transparency and the difficulty in analyzing these supply ecosystems has perverse consequences. Buyers seem to outsource responsibility to the layers in their system, ostensibly to the middlemen. But really, it’s an evasion of responsibility.
“Middlemen make it possible for us to ‘buy goods made on the other side of the world, build a diversified investment portfolio, order groceries from the comfort of our couch,’ she writes. But this connective power is ‘undermining accountability’ by creating so much separation between buyers and sellers that it’s impossible to tally the real cost of convenience and low prices.”
When everyone is responsible, no one is responsible.
Are there real savings? Or are buyers just assuming hidden risks?
A more nuanced second point in the FT article is that the opacity embedded in these supplier ecosystems is a potential source of market failure.
Not everyone has the same picture.
“… information asymmetries make it difficult for market participants to have a shared understanding of what’s being bought and sold (another thing that [Adam] Smith believed was a pre-requisite for well-functioning markets).”
Market failure leads to an inefficient distribution of resources. Efficiency is the principal justification for procurement bureaucracy, even as it has evolved to create the conditions for its own failure.
The result now is the real economy equivalent of financial volatility: price volatility, with growing swings between fears of inflation and of deflationary spirals.
Welcome to the 21st Century.
We built EdgeworthBox to be a set of tools, data, and community that help B2B buyers and B2B suppliers. It’s built as a way to deal with the supplier ecosystem as it is. Buyers get to buy the right solution, from the right supplier, at the right price. Suppliers see a shorter sales cycle, lower transactions costs, and superior customer fits. You can see more in this short video.