The pattern goes as follows:
- The company orders and stocks less than would be needed. Your customers go to your competitor.
- A competitor using data-driven ordering benefits from their own surplus and orders even more next time.
- Customers rarely have to go to another company than one that uses data-driven ordering.
Put briefly, competitors with a reliable system of purchasing in place benefit from demand in a way that companies where human bias is present cannot really embrace.
Previously purchasing managers were found not to be influenced by how much competitors were ordering, according to the afore-mentioned article on the INSEAD business school website. Even if they saw their competitor using a sophisticated ordering model that led to increased profit, they didn’t take any action. Since any excessive demand is satisfied by the more sophisticated company, the manager of the biased company sees even less reason to order more. In effect, the sophisticated ordering company is always one step ahead.
Beware of purchasing biases
Having enough in stock is not connected to sellers of perishable inventory only. Often we are forced to rely on historical data which may not be repeated in the future. In many cases, we just don’t know what demand or prices will be the following year. For manufacturers, anticipating sales is also difficult.
Base purchasing on sound management science
Purchasing managers routinely underorder. They tend to adjust orders blindly, based on past demand. Managers relying on their judgment allow their psychological biases to prevail. As a result, the money remains in customers' pockets. Profits could be increased, but it is not happening. When making decisions in an uncertain environment, we should stick to more rigorous methods and not rely on intuition.
-jk-