Type I and Type II Errors in Strategic Sourcing

There is a great picture illustrating the meaning of Type I and Type II errors in statistics.

The illustration of Type I errors, often summarized as a “false positive,” shows a doctor telling an old man that he is pregnant.

Type II errors, or “false negatives,” are depicted in the next panel as a doctor telling an obviously pregnant woman that she is not pregnant.

Strategic sourcing systems have their own version of this problem.

Consider the supplier who is looking for government business. To the extent that she hasn’t already shaped the RFP to suit her unique product set (disadvantaging and discouraging all other suppliers from bidding), she hunts and pecks through fifty different websites looking for an RFP for which she might be a relevant respondent.

These are word clouds, really. They are lists of RFPs, often in tabular form, presenting the title and a short abstract or description of the project.

The RFPs aren’t sorted by type. They are often a jumble of things. RFPs for food services might precede RFPs for trucks and follow RFPs for IT services.

She must read each of the titles and (possibly) the abstracts to determine which ones to download and read.

Keep in mind that she is likely a senior manager with experience of what her firm will be interested in pursuing and what they will want to ignore, using up valuable time that could be spent on something more productive.

Which is where the Type I and Type II errors come into play.

There are three possibilities. In the best case, she downloads a document and the statement of work is in the sweet spot of her product offering.

But she could also download a document, thinking it was well suited for her company, only to spend an hour reading the statement of work and concluding that it was a “false positive.”

Or she could fail to download a document, assessing it incorrectly as irrelevant based on its title and description, committing a “false negative” error.

There are services that help avoid the hunting and pecking, of course. They send our supplier an email whenever a government buyer like a city or a state for which her company is established as a vendor-of-record posts an RFP that appears to meet some of the criteria.

Often, however, these criteria are so broad as to be meaningless. In any event, she cannot outsource her judgment to services that have disappointed her in the past with their own high-level versions of Type I and Type II errors.

Of course, if she were selling to corporations who send their RFPs out typically by email, she would have to be on their radar as a vendor-of-record in order to get the look. Such services would be even less relevant.

So, what can be done?

At EdgeworthBox, we have taken key features from the financial markets to change the RFP business process while still maintaining compliance. This includes a clearinghouse for administration that acts as a central repository for vendor registration information. Suppliers register with EdgeworthBox once and they are deemed to be qualified to do business with any buyer on the platform. If a buyer has questions about an individual supplier’s qualifications, then EdgeworthBox handles the initial inquiry, only contacting the supplier with requests for information that supersede those we require. But, we also learn about what the supplier thinks of as relevant and irrelevant opportunities, alerting them immediately to the RFPs posted on the site in which they are most likely to be interested and putting them on the radar of corporates with related private bid solicitations.

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