Making assumptions is easy.

We are always learning from our mistakes. When buying products or services, we can make errors based on our assumptions. My recent error was caused through not being thorough in the market research for a new office.

The assumption made was that as the new office is closer to the city, communications was a given; therefore the letting real estate agent was not questioned about the availability of telecommunications. Only after the lease was signed and the ISP contacted to transfer the service between locations did the challenges commence. The ISP said they were unable to provide an ADSL2 Internet connection at the new address. Nor could the largest telco in the country, or the number two telco; nor the many resellers of the major telcos. The reason given was insufficient communication ports at the area exchange!

Calls to colleagues that know about the telecommunications market provided a possible reason for the lack of ports. The federal government in Australia is currently installing a national fast broadband network, so the telcos are minimising their capital expenditure for current technologies. The experience is also happening in new industrial estates – a colleague said that his new distribution centre had no communication links, requiring an arrangement with the adjacent business.

The solution to my communications problem has been to contract with a smaller telco that wants to gain market share and is willing to invest in infrastructure. But going through the whole process of being initially rejected, talking with colleagues, contacting the new provider and getting connected has taken weeks rather than the planned few days for a simple transfer.This story illustrates the importance of knowing your supply markets, whether local or global, because availability and costs can change within a short period of time.

Build knowledge of your supply markets

The risk of assumptions being made is potentially increased when employing specialist buyers; for example, using qualified and experienced IT people to buy IT equipment, software and services. Because the buyer assumes (and the employer also assumes) they know all about the IT business, the ‘silly and dumb’ questions are not asked of providers and problems can easily arise.

Rather than using specialists to know the supply market for particular items, another approach  is to build a Supply Market Intelligence (SMI) database. It should be focussed on macroeconomic data at region and country level, plus specific industries; research about identified suppliers should be a part of a buyer’s job.

The SMI database can be as basic or sophisticated as your business requires, but it has shown to provide a good return on the investment. Examples I have experienced are:

• understanding the global physical market for lead and reasons for movements in the futures price on the London Metals Exchange (LME);
• identifying viable alternate shipping routes to overcome delays out of China in the pre-Christmas stock build period;
• building knowledge of global R&D developments in long-life food packaging

All the information gathered was publicly available, but to identify and structure it required diligent detective work. For this reason, SMI is a task best led by a specialist (librarians can be good), with those who engage across the wider business community (such as the procurement group and sales force) contributing supply market information. Larger MNC businesses are likely to have each commodity group staffed with their own SMI function, together with a cross-group information sharing capability.

Information within your SMI database

The globalisation of business is the driver for your business to have SMI. Examples of supply limiting factors that your business should be aware of are:

• natural and man made disasters and their potential affects on supply chains;
• trade influencing actions undertaken by governments;
• volatility of financial markets and exchange rates on contracts and supplier viability;
• mergers and acquisitions across borders;
• raw material availability and
• potential changes in global final product demand that may affect material and component availability

Depending on your business, SMI can be undertaken with a long or short term view; it can be ongoing or project based and will rely on both quantitative and qualitative information. Information is gathered and analysed through desk and field research; the latter including visits to exhibitions, conferences and suppliers. The value of information comes from the quality of its source, so government statistics in developed countries can be ranked high, Internet based data is very variable in quality and data provided by a ‘friend’ over lunch is likely to be even less reliable (but should not be ignored).

The output from SMI is to assist buyers in successfully doing their job, so it must be structured to achieve that objective. For every person involved in a SMI development to understand the objective, a briefing document (preferably one page) is required. This must identify:

• how SMI will benefit the organisation;
• indication of the range of information types required (but not a definitive list);
• the type of access to internal information, external databases, specialist research firms, universities and public databases;
• the weighting methodology for classifying accuracy of information

Establishing an SMI process in your business does not automatically reduce procurement risks, but it will provide buyers with  current information to assist their understanding in negotiations and hopefully result in them asking the dumb questions of suppliers that elicits the surprising responses.