Businesses who aren’t paying attention to how they can learn and exploit the insights generated by behavioural economists, should expect to fall behind to those that do.
BE insights focus on decisions we make under uncertainty i.e., most of the time. When we shop for example, there are so many different products available, that it’s impossible to objectively know the cost of each item. So we approximate, we look for cues, perhaps looking at the other shops selling Asparagus Water, before determining the cheek of Whole Foods for selling it at all, let alone at $6 a bottle.
Recommended Retail Price (RRP) was created to serve us in these moments. It provides an arbitrary anchor that we use to determine if we’re getting a good deal and create the perception that you’re getting a fair and good value. The curious thing about anchoring is that, even when the anchor is overinflated or irrelevant, it still serves a purpose and sets a benchmark. In a negotiation, the side that lays down their anchor first is effectively saying to the other side “this is my RRP” and thus creating a perception that this is fair value (assuming the supplier carries some credibility in the first place).
These biases also apply to professional buyers, who often fail to make the best decisions when sourcing product range where they are torn between speed to market, specification accuracy and getting the right price. Sourcing teams need to be aware of the differences between buying fast (shopping) and buying slow (procurement) and being an expert is no guarantee of immunity to seemingly irrelevant nudges presented along the way.
Often referred to as “professional shopping” the main upside of this approach is speed and flexibility. Decisions can be made quickly regarding specification, price, volumes and shipments using good rules of thumb (heuristics), rules that have been developed by the individual through years of experience.
Fast-fashion retailers for example, need the newest fashion ready in stock the previous day and stand to generate huge revenues by being first to market. However, decisions based on the intuition of buyers may be vulnerable to biases including anchoring and softer aspects including supplier relationship, trust and fear of confrontation. It is down to the buyer to weigh up the risks in order to determine the most profitable approach.
At the other end of the spectrum from shopping is procurement. Procurement, tends not to suffer from bias to the same degree because it takes the analysis and decision making out of the human mind and puts it into a rigorous and objective process, often getting decisions down to a single number. If shopping is an art, then procurement is a science; analytical, repeatable and data driven. As many can attest, when this process is done properly, businesses can make truly eye-watering savings.
The downside is that, much like every science, it takes time, resources and expertise to do well. If you’re sourcing products or services that you’ll be purchasing every year for the next 3 years, then it’s almost always an investment worth making. If it’s FMCG on the other hand, then the whole procurement process could be fatally slow.
The idea that you should pick either shopping or procurement is, thankfully, a false one – the Procurement – Shopping spectrum has a middle ground.
There are methods and tools that can be quickly leveraged which bring objectivity to shopping without slowing you down, for example; negotiation templates, should-cost estimates and score-cards. By themselves, these might not be enough to get you to the cost/quality combination, that a thorough procurement process would, but it will get you a better outcome than what you might have achieved otherwise.
As well adding some artillery to your shopping arsenal, there are ways of adapting and speeding up the traditional procurement processes to make them faster, cheaper, more repeatable and less resource intensive. Technology, as ever, is the enabler of this change and procurement organisations, including 4C, are constantly developing their tools and technology offering to drive a more efficient and insightful process.
Both shopping and procurement have their place in the sourcing world. The key to successful sourcing is being aware of the risks and opportunities of both, and planning your approach accordingly. Shoppers should use the tools available to drive accurate insight, and procurement should incorporate the knowledge gained from experience if companies want to be more efficient, save time and money, and provide customers with great products.
The real genius lies not in being dogmatic, but in taking a step back and knowing when to buy fast, when to buy slow and when to just buy.
If you’d like to discuss more about how 4C can help your business transform the way you buy and source your products, please reach out to Milan.Panchmatia@4cassociates.com.