IMPLEMENTATION OF DEBIASING STRATEGIES IN PURCHASING

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IMPLEMENTATION OF DEBIASING STRATEGIES

IN PURCHASING

MSc Technology & Operations Management

University of Groningen, Faculty of Economics and Business

January 26, 2014

Writer: Christiaan van Veen Supervisor: dr. W.M.C. van Wezel

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ABSTRACT

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ACKNOWLEDGMENT

I would like to thank Dr. W.M.C. van Wezel for being my supervisor during the writing of this thesis.

I would also like to thank V. de Beus, J. ‘t Hooft, T. Raayman, and T. Wiersum for arranging the appointments with the purchasing managers. And of course the purchasing managers themselves are kindly thanked.

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INTRODUCTION

The growing importance of supply chain management has drawn the attention to the meaningful strategic function of purchasing activities within organizations.

The importance of strategic purchasing is revealed when considering the value of purchased materials, components, and systems. In many firms these account for 50-80% of the total cost of goods sold (Dubois, A. & Pedersen, A., (2002)). If the organization manages to lower these costs by tactical acquisitions it will have a significantly and direct effect on the total cost of the firm. In its turn this will have an immediately impact on the potential profit. The bottom line of the company is increased by the same percentage the purchase costs are decreased. Therefore purchasing decisions can have a great impact on the performance of a company and is an important field to study.

One of the most important steps in making the purchasing decisions is the supplier selection. In this important activity purchasing managers select the best suppliers in which cost, quality, and delivery should be considered (Ghodsypour, 2001). Therefore, this research will focus on the supplier selection decisions.

Purchasing activities are part of the supply chain network. Supply chain network design is one of the most important strategic and tactical decision problems in organizations. Crucial steps involve determining the size and optimal number of suppliers, location, and plants and distributors to be used in the network. Designing the supply chain network is a complex decision process (Biswas and Narahari, 2004). Important decision areas in supply chain management are considered to be purchasing, manufacturing and logistics. Especially purchasing is one of the most important and strategic decision areas in the supply management field. Since the interrelationship between buying and supplying companies are growing external suppliers now have a large influence on a company’s success or failure (Karpak et al., 2001).

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The added value of behavioural operations is found in the fact that almost all fields studied within operations management contain people. Especially the purchasing field is one that cannot ignore the involvement of people and its effect on the performance of decisions. There are managers making decisions, suppliers making components for the focal company, employees working in and improving processes, and customers buying products. It is very tempting to treat people mechanistically. People tend to think that managers make the best choices for their companies, suppliers provide the best quality components possible, employees diligently providing their best input and customers buying the product if the price is below an individual threshold (Croson, 2013). Therefore it is interesting to study the behavioural and cognitive aspects in the purchasing field.

In the purchasing field some efforts already have been taken to investigate the influence of behavioural aspects on the decision process. One of these aspects is the negative effect of biases on the supplier selection decision. This paper will further elaborate on the reduction of these biases and the implications in practice. The following research questions will be addressed:

1. Do buying organizations support their supplier selection decision with debiasing strategies?

2. What debiasing strategies are used and what is the motivation of using them? 3. How are debiasing strategies implemented in practice?

4. Do purchasing managers experience any implementation difficulties regarding to debiasing strategies?

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I. THEORETICAL FRAMEWORK

1. Purchasing

In order to get a profound understanding of the purchasing field a clear definition is required. To facilitate the interpretation of the purchasing definition, the general purchasing process is described first. The phases of a general purchasing process are shown in figure 1 (van Weele, 2010). The purchasing function consists of two main parts: Tactical purchasing, and operational purchasing (the order function). Tactical purchasing concerns the activities on the short term. It focuses more on the day-to-day challenges that come with purchasing activities. The particular phases start with specifying the needs from the internal customer. The internal customer or buying firm makes the choice of the new product or service to be supplied. The next phase concerns identifying, selecting and contracting the suppliers. The negotiation process with the involved suppliers is commenced, with the goal to choose one of them. Subsequently, the contract is prepared and confirmed. Afterwards the elected supplier starts the production.

Figure 1. The purchasing process (Van Weele, 2010)

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Strategic purchasing is about adjusting and controlling buying processes, practices and behaviours so that the organization reaping the most benefits from it. Strategic purchasing is not an event but a process (Monczka et al. 2008; Heijboer, 2003; Ray D, 2009)

According to Lysons (1996), the purchasing function has the most substantial impact on increasing profitability through cost cutting. This means that the added value of purchasing in the strategic processes of the organization concerns particularly costs. Managing and reducing these costs will directly affect profitability.

However, according to Bozarth & Handfield (2006) the key objectives of the purchasing function in the firm are not limited to reducing costs, but include especially the identification, selection and qualification of suppliers of services and goods. These actions are typically followed by efforts to manage the continuous relationships between buyers and suppliers. This perspective implies that the long-term relationships with suppliers have significant impact on the added value for the company. This added value is created by the high quality of the output that emerges from the long-term relationships and effective collaboration between buyer and supplier.

Chen et al. (2004) argues that organizations with high quality outputs can enjoy sustainable competitive advantages. These competitive advantages are accomplished in three ways:

• Maintaining good relationships with a limited amount of suppliers.

• Ensuring open communication with all the partners within the supply chain.

• In order to achieve mutual gains from the relationships, develop this relationship strategically and therefore base it on the long term.

Hence, supplier relationships and long term focus determine the competitive advantages of the company. In other words strategic purchasing and supply chain management increases financial performance of the organization (Chen et al., 2004). In this paper the term purchasing will mainly refer to strategic purchasing as this covers the most important aspects of the purchasing process and allows for a top down research.

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2. Supplier Selection Decision

Purchasing plays a key role in connecting external suppliers and internal organizational customers. This conjunction is the cradle of creating and delivering value to external customers (Novack and Simco, 1991). This implies that establishing the connection between buyer and supplier is a crucial step in the purchasing process. Indeed there is found growing support from literature that there is the need for a firm to work closely with its supply partners in order to optimize its business processes. “A key step in the formation of any supply chain is that of supply partner selection” (Mikhailov, 2002).

According to Ho et al. (2010) today’s purchasing department is aiming at maintaining long-term partnerships with suppliers, and use fewer but reliable suppliers. Hence, choosing the right suppliers will depend on a wide range of both quantitative and qualitative factors. It is no longer limited to scanning a series of price lists. In fact, Narasimhan & Talluri (2009) state that supplier selection decisions have become more and more important. The reason for this is that the suppliers are playing an increasingly larger strategic role. Just like Chen et al. (2004) highlighted the supplier’s role is partly shaping the buying firm’s competitive position.

Purchasing managers must value each supplier’s competences and gauge the possible risks in order to determine the best choice (Treleven & Schweikhart, 1988; Tomlin, 2006). One of the most important decision problems in organizations is concerning the supply chain design. Especially regarding the decisions determining the location, size and optimal number of suppliers, and distributors to be used in the supply chain network. However, supply chain network design is a complex decision process, due to numerous reasons (Biswas and Narahari, 2004): large scale nature of supply chain networks; hierarchical structure of decisions; randomness of various inputs and operations; dynamic nature of interactions among supply chain elements (Constantino, 2009).

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Many researchers used this perspective to understand how managers in the supply management field could make the right decisions and temper risk-related purchasing decisions (Chopra & Sodhi, 2004; McCutcheon & Stuart, 2000).

However, the cognitive and behavioral aspects of these decisions have long been neglected. Evans (2010) argues that one of those cognitive aspects concerns intuition. Psychological literatures on reasoning and decision-making have blamed intuition for a range of cognitive biases. In order to avoid biases, there is found proof that indicates that intervention with effortful reasoning is needed for many abstract and complex problems like supplier selection decisions in purchasing. This is especially the case when these problems are not easily linked to previous experience. Still the effect of biases in purchasing decisions remains underexposed in literature (Kull, 2014). Therefore this research will provide more insight into biases that influence purchasing practitioners.

3. Biases

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Carter (2007) made a clear overview of the decision biases and the effects on judgment.

Decision bias category Effect on judgment

Availability cognition § Over-optimistic/-pessimistic evaluation § Disregard of relevant alternatives Base Rate § Over-optimistic/-pessimistic evaluation

§ Erroneous evaluation of event probabilities or outcomes

Presentation § Disregard of relevant alternatives § Over-optimistic/-pessimistic evaluation § Erroneous evaluation of event

probabilities or outcomes Control illusion § Erroneous evaluation of event

probabilities or outcomes

§ Over-optimistic/-pessimistic evaluation § Disregard of alternatives

Output evaluation § Over-optimistic/-pessimistic evaluation § Erroneous evaluation of event

Commitment § Over-optimistic/-pessimistic evaluation § Disregard of relevant alternatives Confirmatory § Disregard of relevant alternatives

§ Over-optimistic/-pessimistic evaluation § Erroneous evaluation of event

Persistence § Disregard of relevant alternatives § Over-optimistic/-pessimistic evaluation Reference Point § Over-optimistic/-pessimistic evaluation

§ Erroneous evaluation of event probabilities or outcomes

Table 1: Decision biases (Carter, 2007) Availability Cognition

The availability cognition bias consists of the tendency of the decision maker to judge information, which is more easily remembered as being more probable. In many decision situations familiar information is considered more relevant and important than unfamiliar information.

Base Rate

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personal experience of another manager in judging a supplier instead of more reliable but indistinct data about the historical performance of a supplier.

Presentation

With the presentation bias, the mixture, mode, order, or scale within a presentation manipulates the perceived value of data. Therefore systemic errors in judgement may occur. An important effect within the presentation bias is the framing effect. The framing effect concerns differences in choices of human beings when rationally identical choices are differently framed or perceived. For example: A 25 per cent discount on a €5 item may be perceived significantly greater than the same €1,25 off promotion.

Control Illusion

Humans are generally poor at perceiving randomness. Random events can be mistaken as an essential characteristic of a process, giving a decision maker an unjustified feeling of control. This control bias can lead to unrealistic confidence in the judgement.

A sequence of non-representative samples or random events thus can cause a control illusion.

Output Evaluation

The decision maker may experience the output evaluation bias because he is incapable to recall the details, which led to a certain outcome. This can cause an inaccurate reconstruction of causal relations between occurrences. For instance, failure is often wrongly associated with poor luck and success with the skills of the decision maker.

Commitment

The decision maker suffers the commitment bias when there is the inappropriate tendency to follow a previous unsatisfactory course of action. The decision maker will erroneously continue an undertaking once a decision has been made. Research has shown that managers tend to consistently adhere to the commitment that was made earlier even if they are confronted with the facts suggesting that the commitment is a bad choice.

Confirmatory

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opposite opinions and judgements for instance in the supplier selection process. Hence dissenting the final supplier selection decision is an important strategy to overcome this confirmatory bias. See also chapter 4.

Persistence

The persistence bias occurs when the decision maker chooses an alternative simply because it has been chosen in the past. The decision maker limits the search for new options. New information is not taken into consideration. In some occasions persistence is a good thing and can be useful. This is especially the case for simple decisions where the results are not important. However, it can be counterproductive and impractical for important decisions.

Reference Point

A common simplification in human judgement patterns is to begin with a reference point and then to adjust opinions or evaluations (Tversky and Kahneman, 1974). Evaluations and adjustments from an initial position are usually inadequate. Researchers have shown that the amount of adjustment from this initial position is often insufficient (Slovic et al., 1977).

In general the biases or perspectives of purchasing managers can reflect their inner structure of values and norms. These values and norms directly affect how one classifies information, examines problems, and make decisions. There was a negative influence of biases on the decision making process in purchasing and supplier selection. Biases can lead to negative effects like neglecting good alternatives for a supplier selection decision. Managers often tend to accept a satisficing rather than optimal solution. Therefore this paper focuses on efforts or strategies that can reduce biases.

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4. Debiasing Strategies

A debiasing strategy can be defined as the approach and sets of actions aimed at reducing the undesirable influence of decision biases and as such to increase the rationality and effectiveness of decisions. Debiasing strategies are found in several different fields. Schweitser and Cachon (2000) presented debiasing support for decision making in the field of the well-known newsvendor problem1. The findings provide three approaches to improve inventory order decisions and reduce biases. The first is to separate the forecasting task from the inventory decision task. The second approach is to change managerial incentives. The third approach involves bias training and experience. In the behavioral finance field Bhandari et al. (2008) provides suggestions for debiasing investors. The research acknowledges that investment decisions are influenced by cognitive biases like framing, representativeness and ambiguity. Keren (1990) suggests a general debiasing framework including the following phases: identification of the existence and nature of the potential bias, consideration of ways and techniques to lower the impact of biases, and evaluation of the effectiveness of the selected technique. Also information presentation like feedback and graphs can help to support decision making without biases.

According to Fischhoff (1982) and Bazerman (1998) the decision maker is the primary source of the biased decision instead of the task itself. Just like Schweister and Cachon (2000) suggested, both concluded that implementing learning processes or training to increase the awareness of the threats of biases is apparently the most important strategy. Acquiring experience on how to deal with decision biases is the first step to increase rationality in decision-making. Steps in this bias learning process are clarification of the existence of decision biases, and explanation of the causes of the biases.

Also Babcock and Loewenstein (1997) discovered that informing people about the existence of a certain bias, improves the overall judgment quality.

So this research paper can already provide meaningful insights and can have a significant impact for purchasing managers in practice, as it will raise awareness among them.

However, only training and creating awareness is not enough. Mowen and Gaeth (1992) reckon awareness only as a first step in improving the decisions.

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newsvendor
model
is
a
mathematical
model
in
operations
management
and
applied
economics
used}

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Other strategies are needed to further improve supplier selection decisions in the purchasing field. Kaufmann et al. (2010) suggested a clear debiasing taxonomy and conceptualization for the supplier selection decision. This taxonomy of debiasing strategies forms the starting point of this research. Five categories of debiasing strategies for the supplier selection decision are derived from literature:

1. Decomposing supplier selection task; 2. Taking the supplier’s perspective;

3. Investigative reviewing of the supplier choice set; 4. Dissenting the final supplier selection decision; and 5. Creating general supplier selection bias awareness.

1. Decomposing supplier selection task

A key element in increasing the quality and rationality in decision-making is reducing the decision variables. Complexity of decision variables can cause stress among managers or purchasing practitioners. Decomposing the supplier selection tasks may reduce this tension. Recall that Schweitser and Cachon (2000) also suggested separating the forecasting task from the inventory decision task in the newsvendor model. In this example this step ensures that the manager can only focus on forecasting the optimal order quantity and let someone else (maybe a computer) do the actual execution of the order. Omitting this (separating) step can cause bias because of the complexity the forecasting task. The same approach could be applied to the supplier selection decision. Therefore clearly separating the sub phases.

Also Wu (2011) remarks that in the agile supply chain decision-making about partner selection is particularly challenging. Therefore under such dynamic conditions this cannot be solved effectively unless it is broken down into several sub-problems, which each can be addressed and solved individually. First determine the important criteria for the potential supplier. Subsequently, prior to the start of the information search weigh the criteria and the supplier selection process. Furthermore in order to avoid decision biases based on different framings of information the supplier information should be structured and made comparable (Kaufmann et al. 2010). A key question that arises when exploring the purchasing activities of managers is the following:

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2. Taking the supplier’s perspective

Evaluating the decision task from different perspectives can mitigate biases. Kahneman and Tversky (1982) suggest selecting a comparison group in order to execute corrective procedures for preliminary decisions. Purchasing managers can also put themselves in the shoes of the suppliers during the decision process. This will help the buyers to break deeply entrenched thought patterns. Taking the suppliers perspective will avoid excluding important elements of the supplier selection decision. This approach can help to successfully understand and see through the suppliers’ underlying sales approaches.

This is not only a basic negotiation tactic in order to close a better deal with the potential supplier, but the motivation lies with reconsidering the buyer’s own process and become aware of possible alternatives (Kaufmann et al. 2010). The key questions that arises when exploring the purchasing activities of managers are the following:

II. Do you discuss the decisions yet with another party?

III. Do you view the decisions from the perspective of the supplier? Can you explain this? (The corresponding interview questions are found in the interview reports in

Appendices A, B, C, D, E, F and G).

3. Investigative reviewing of the supplier choice set

In order to examine and consider all possible scenarios all potential supplier alternatives must be critically rethought. In this way there is the possibility to stop to think of the alternatives that otherwise would be overlooked. Colleagues or the purchaser himself can conduct this step before the final decision is made (Kaufmann et al. 2010). The key questions that arises when exploring the purchasing activities of managers are the following:

IV. What are the selection criteria of the suppliers?

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4. Dissenting the final supplier selection decision

This strategy focuses on having another party with a different opinion or judgment about a certain situation. This other party is called the devil’s advocate and argues against the position of the decision maker. Having one person systematically adopt a devil’s advocate role during supply management processes has the potential to make the supplier selection process more rational (Kaufmann et al. 2010). The objective is to reveal and uncover biases. The devil’s advocate has to be most preferably non-emotional (Schwenk & Cosier, 1980). A key question that arises when exploring the purchasing activities of managers is the following:

VI. Is there a party involved to the decision with a different opinion about the decision? (The corresponding interview questions are found in the interview reports in Appendices A, B, C, D, E, F and G).

5. Creating general supplier selection bias awareness

As previously mentioned by Fischhoff (1982), Bazerman (1998), and Babcock and Loewenstein (1997) raising the overall awareness of purchasing managers about biases can reduce the bias. This strategy focuses on the know-how of the decision maker. By understanding the underlying decision mechanisms it is expected that the buyer reduce its exposure to biases. Such an umbrella strategy complements, the other debiasing efforts, which are employed on a decision-by-decision basis (Kaufmann et al. 2010). The key questions that arises when exploring the purchasing activities of managers are the following:

VII. Can you explain what a bias is related to decision-making?

VI. What do you think are concrete measures you can take to prevent bias in decisions? (The corresponding interview questions are found in the interview reports in Appendices A, B, C, D, E, F and G).

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4.1. Conceptual model

The literature describes different strategies that mitigate the influence of decision bias on the supplier selection decision. In the following conceptual model (figure 2) these debiasing strategies are displayed and their interrelatedness is specified. It is assumed that the debiasing strategies will reduce the negative effect of the decision bias on the “optimal” rational supplier selection decision. In this model it is assumed that this “optimal” supplier selection decision is known and can be identified and evaluated. Hereby acknowledging that in most supplier selection cases it is not clear what the optimal supplier selection decision is and that the optimal selection is negotiable even after the decision is taken. This model will be used to address and categorize the debiasing strategies that are (possibly) implemented by purchasing managers.

Debiasing strategies

Decision biases “Optimal” rational supplier selection decison Creating general supplier selection bias awareness Dissenting the final supplier selection decision Taking the supplier’s perspective Decomposing supplier selection task Investigative

reviewing of the supplier choice

set

-‐

Figure 2: Conceptual Model of debiasing strategies

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II. METHODOLOGY

5. Design

In today’s highly competitive environment, enterprises need to take advantage of any opportunity to improve their performance. In order to improve the decision making rationality of the purchasing management and debias the decision making process this research will try to create this opportunity to improve by examining what strategies are used in the purchasing department to do so. The objective is to find out if the organizations have sufficient knowledge about debiasing strategies, and if they use them to support their decision making process, in particular the supplier selection decisions. In order to get a structured overview the focus will be only on the five debiasing strategies highlighted in the conceptual model. Secondly, it will be investigated which strategies are being used and how they implement the debiasing strategies in their daily business. Presumably there might be some resistance among the purchasing managers to truly implement these debiasing strategies (Kaufman et al., 2009; Kaufman et al., 2010). Therefore if this is the case, a next step will be finding out why there is resistance. The results will be compared with the current debiasing strategies in the existing literature, to identify possible gaps.

In order to find the answers to the research questions the following steps should be taken: 1. Identify at least five purchasing managers or practitioners involved in supplier selection at

medium-sized or large companies. In this research seven purchasing managers are found that are willing to cooperate.

2. Identify what information is needed from the purchasing managers. Prepare the questionnaires.

3. Conduct one or more in-depth discussions and interviews with the seven purchasing practitioners to find out if they use a certain decision support structure when making supplier selection decisions. A key step is to start the interviews exploratory and then deepen into the debiasing strategies that are (possibly) used. This is to prevent sending the involved respondent in a certain direction, and to really find out if the purchasing managers themselves are aware of biases and debiasing strategies.

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current theory by providing new insights in the implementation of debiasing strategies by purchasing managers in the supplier selection decision.

6. Data Collection: In-‐depth interviews

The in-depth interviews are a qualitative research technique that involves conducting intensive individual interviews with a small number of respondents to explore their perspectives on debiasing strategies in supplier selection decisions. According to Guion (2011) in-depth interviews are useful when you want detailed information about a person’s thoughts and behaviors or want to explore new issues in depth. Therefore in this research in-depth interviews are considered sufficient to examine the thoughts and behavior of the purchasing managers. In order to ensure consistency between interviews and increase the reliability of the findings an interview protocol will be created following the guidance of

Guion (2011).

III. RESULTS

The complete interview reports are shown in the appendices A, B, C, D, E, F and G (conducted in Dutch). Here the most noteworthy outcomes per purchasing manager are discussed. All question numbers listed below correspond with the unique question numbers in the interview reports shown in the appendices. In table 1 all results are summarized.

7.1 Purchasing manager 1

During the interview of purchasing manager 1 (Appendix A) there were several indicators that pointed to the implementation of the following debiasing strategy: decomposing the supplier selection task. In question 2 the purchasing manager makes the distinction between two subsections in the purchasing process. First there is the section concerning the selection of a new supplier. Second there is the section concerning the existing suppliers. This suggests that the supplier selection task is at least decomposed in two sections in order to make the decisions more clear. These single components could be assed separately and thereby a higher level of clarity per component is attained.

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In question 17 the purchasing manager describes the stage gate process where two stages mark the existence of decomposition. The first gate concerns the R&D department where the product of the supplier is tested in a laboratory. The second gate is a pilot paper machine. These two result in an insight in supplier performance.

Finally, in question 33 again the purchasing manager explicitly explains that there are three smaller steps in the big supplier selection decision. First, a mini audit is conducted, secondly Internet research, R&D, and matching the mill.

These four reasons thus argue for indications of the application of the debiasing strategy: decomposing supplier selection task. Indications for applying this debiasing strategy: Yes. Furthermore, during the interview there were several indicators that pointed to the implementation of the debiasing strategy: investigative reviewing of the supplier choice set. In question 5, 12, and 13 different technical aspects of the supplier are closely reviewed and tested. The purchasing department makes the trade off between the technical and commercial aspects.

In question 14, the purchasing manager stresses that a new supplier first serves one mill. This first supply period can be seen as a first comprehensive test of the new supplier.

In question 17, all different supplier alternatives are critical explored in two separate stages. First, the R&D tests the product from the new supplier. Secondly, there is a test on a small scale.

In question 22, the purchasing manager recalls that there are three important selection criteria and that crossfunctional teams carefully judge the suppliers on these criteria.

These points thus argue for indications of the application of the debiasing strategy: investigative reviewing of the supplier choice set. Indications for applying this debiasing

strategy: Yes

During the interview there were several indicators that pointed to the implementation of the debiasing strategy: dissenting the final supplier selection decision.

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concluded that the debiasing strategy dissenting the final supplier selection decision is applied.

In question 15, the purchasing manger emphasizes that involving young people in the team is essential to keep the purchasing process “fresh and fit”. This can be interpreted as finding a way to preserve a critical look at the decision processes. This critical look is possible due to the transparent and open business environment. These remarks are also a strong indication for the use of this corresponding debiasing strategy.

In question 19, the purchasing manger describes again the meeting with the purchasing team, R&D, and the mill management team. The manager refers to these representatives of the three different departments as the “Golden Triangle”. This again underlines the importance of the crossfunctional teams. In line with the remarks of question 9 these multidisciplinary meetings will foster the environment where people with different views can argue against the position of the decision maker.

In question 22, the interviewee notes that someone from the factory or an environmental specialist often participates in visiting the supplier. In this way business blindness is prevented. This can be interpreted as a clue for a strong focus on multidisciplinary decisions. Another clue is found in question 23; the manager states that three-quarters of the business trips are made within a cross-functional team. This again reveals a business environment where there is enough space to discuss and dissent the supplier selection decision.

These points thus argue for indications of the application of the debiasing strategy: dissenting the final supplier selection decision. Indications for applying this debiasing strategy: Yes During the interview there were found few indicators that pointed to the implementation of the debiasing strategy, taking the supplier’s perspective.

In question 24 the manager explains that supplier perspective is only implemented by taking into account the continuity of the supplier. However he also stresses that it is really difficult to put themselves in the shoes of the supplier because he does not know the financial position and possible troubles of the supplier. He even explicitly asks for a methodology in order to realize this strategy.

Therefore this argues that the application of the debiasing strategy, taking the supplier’s perspective, is still missing in this organization. Indications for applying this debiasing

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During the interview there were several indicators that pointed to the implementation of the debiasing strategy: creating general supplier selection bias awareness.

In question 28, the purchasing manager shows that he has the knowledge of the meaning of bias. Furthermore in question 29, the manager shows that there is awareness of the measures taken against possible biased decisions. He highlights the importance of crossfunctional teams and job rotation to mitigate biases in decisions.

Also in question 32, it becomes clear that people who want to make decisions totally on their own are not successful in the organization and sometimes are fired because this increases the risk of biased decision making.

These points thus argue for indications of the application of the debiasing strategy: creating general supplier selection bias awareness. Indications for applying this debiasing strategy:

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7.2 Purchasing manager 2

During the interview of purchasing manager 2 (Appendix B) there was an indicator that pointed to the implementation of the debiasing strategy: decomposing the supplier selection task.

In question 65, the purchasing manager explains that when there is a lot of information to absorb concerning the selection of suppliers she will approach this personal with the responsible salesperson and step by step.

Although this is the only indicator of the debiasing strategy, because the manager emphasizes this explicitly by herself, this argues for an indication of the application of the debiasing strategy: decomposing supplier selection task. Indication for applying this debiasing

strategy: Yes.

In the interview there were several indicators that pointed to the implementation of the debiasing strategy: investigative reviewing of the supplier choice set.

In question 39, 40 and 42 it becomes clear that the purchasing manager orientates once every two years for new suppliers in addition to the current supplier. This is especially the case for expensive items. The supplier is selected primarily on price.

In question 47, the supplier choice set is determined based on received leaflets. It seems that these folders form the basis of the supplier information. The frequency of reviewing this choice set is dependent on the frequency of the arriving folders. Though this not seems a very proactive way to gather information, for this particular dental office it is a practical way to draw the attention to alternative suppliers concerning the effort and time spend.

In question 57, the manager explains that when a new supplier is needed the dentists will orientate first. Next, there is a consultation with colleagues to discuss their experiences with a certain supplier concerning quality and service before a supplier is selected.

Even though the indications in itself are not very strong, the combination of all still suggest there is some effort put into the investigative reviewing of the supplier choice set.

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During the interview there were not many indicators that pointed to the implementation of the debiasing strategy: dissenting the final supplier selection decision.

In question 49, the purchasing manager states that prices are not compared objectively. The price perception of items is based on her experience. So there is not much room to dissent with the purchasing manager.

In question 54, the manager gives an example of a meeting where a joint decision was made. This seems to suggest that there is possibly some input from those who have a different opinion about decisions. However, these meetings occur only three times a year.

In question 59 and 60, the purchasing manager says there is not much disagreement between her and her colleagues. Also parties with different opinions are not often involved.

Even though there is an indication of joint decision making during meetings. The reasons above do not show a structural way of dissenting the supplier selection decisions as disagreements almost not exist and price perception of purchased items is merely based on experience. These reasons thus argue against the application of the debiasing strategy: dissenting the final supplier selection decision. Indications for applying this debiasing

strategy: No.

In the interview there were not many indicators that pointed to the implementation of the debiasing strategy, taking the supplier’s perspective.

In question 58, the purchasing manager indicates that they listen to the arguments of the supplier. However, it is not clearly stated that before a decision is made, the manager puts herself into the shoes of the supplier. This answer thus argues against the application of the debiasing strategy: taking the supplier’s perspective. Indications for applying this debiasing

strategy: No.

During the interview there were not many indicators that pointed to the implementation of the debiasing strategy: creating general supplier selection bias awareness.

In question 66, 67 and 68, it becomes very clear that the purchasing manager is not really aware of the impact of her purchasing activities. What strikes the most is that the manager does not think she is adding much value to the profit of the dental practice. Furthermore the manager is confident that decisions based on feeling and experiences are the best. Because this is the opposite of what rational decisions without bias look like, it shows that there is not much bias awareness. These answers thus argue against the application of the debiasing strategy: creating general supplier selection bias awareness. Indications for applying this

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7.3 Purchasing manager 3

During the interview of purchasing manager 3 (Appendix C) there were two indicators that pointed to the implementation of the debiasing strategy: decomposing the supplier selection task.

In question 73, a detailed description of the purchasing process is given. What strikes is that there are four clear accountability moments that decompose the supplier selection decision. Before the Request For Information (RFI), after the RFI, after the Request For Proposal (RFP) and after the contract tender the tender board judges the decisions made. These milestones clearly mark the four different steps to be taken.

In question 86, the purchasing manager confirms that he decomposes the supplier selection decision.

These two reasons thus argue for indications of the application of the debiasing strategy: decomposing supplier selection task. Indications for applying this debiasing strategy: Yes. During the interview there were several indicators that pointed to the implementation of the debiasing strategy: investigative reviewing of the supplier choice set.

In the detailed description of the purchasing process in question 73, some features come forward that denote the investigative reviewing of the supplier choice set. Key steps like the review of qualitative criteria of contractors, consulting others in the tender board, and the constructive reviewing of the decision criteria indicate the application of the debiasing strategy in question.

In question 75, clear predefined selection criteria indicate thorough consideration of the characteristics of various suppliers.

In question 80, the manager notes that it is always normal to work in a multidisciplinary team where a technical manager and a purchaser is present. This again fosters an environment where supplier selection steps can be judged and rethought over and over again by someone else. These reasons thus argue for the application of the debiasing strategy: investigative reviewing of the supplier choice set. Indications for applying this debiasing strategy: Yes In the interview there were several indicators that pointed to the implementation of the debiasing strategy: dissenting the final supplier selection decision.

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Furthermore, in question 81 the manager stresses that preferably in the preliminary phase already someone is involved with a different opinion.

These reasons thus argue for the application of the debiasing strategy: dissenting the final supplier selection decision. Indications for applying this debiasing strategy: Yes

During the interview there was one indicator that pointed to the implementation of the debiasing strategy: taking the supplier’s perspective.

In question 85, the purchasing manager unveils that it is good to know the strategic impact of this company in the view of the supplier. Thus one could argue that the suppliers’ perspective is taken into account in order to create more buying power for the organization.

This point thus argues for an indication of the application of the debiasing strategy: taking the supplier’s perspective. Indication for applying this debiasing strategy: Yes

In the interview there were several indicators that pointed to the implementation of the debiasing strategy: creating general supplier selection bias awareness.

In question 88, 89 and 90, the purchasing manager shows his knowledge about the notion of bias. He argues that in order to prove why certain decisions are made it is important to underpin every decision carefully and to be transparent to your internal customer, stakeholders, suppliers and management. He admits that skipping certain supplier assessment steps in the purchasing process creates bias. These remarks show that bias awareness is present and created in the organization. Indications for applying this debiasing strategy:

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7.4 Purchasing manager 4

During the interview of purchasing manager 4 (Appendix D) there were several indicators that pointed to the implementation of the debiasing strategy: decomposing the supplier selection task.

In question 97 and 98 a clear description is given of the purchasing process. The purchasing manager describes a number of smaller steps in the bigger purchasing process. For the long-term contract the manager follows the Strategic Sourcing Methodology. This methodology consists of several smaller steps; which include a profound analysis of the supplier, taking the supplier perspective, SWOT analysis and considering the possible threats and opportunities. In question 102 the supplier selection is also divided into several smaller stages. Specification, risk analysis approval process, RFQ, Vendor policy and negotiation. These steps indicate that the supplier selection task is not one big decision but several small ones. These two reasons thus argue for indications of the application of the debiasing strategy: decomposing supplier selection task. Indications for applying this debiasing strategy: Yes. During the interview there were several indicators that pointed to the implementation of the debiasing strategy: investigative reviewing of the supplier choice set.

In question 100, 102 and 103 key steps like the review of qualitative criteria, consulting others from the Quality Control department in the approval process, and the constructive reviewing of the decision criteria indicate the application of the debiasing strategy in

question. Indications for applying this debiasing strategy: Yes.

During the interview there were two indicators that pointed to the implementation of the debiasing strategy: dissenting the final supplier selection decision.

In question 103,104 the purchasing manager explains that the quality control department, the supply chain management, and the commercial management are involved in the decision-making. Thus all these parties can dissent the supplier selection decision.

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In the interview there were several indicators that pointed to the implementation of the debiasing strategy, taking the supplier’s perspective.

In question 98,99 the manager clearly describes two times that one of the important steps in the purchasing process is taking the supplier’s perspective. First he stresses this by saying: “ I figure out: how does the supplier sees me.” And than he adds that in de preparation phase of the negotiations taking on the role of the supplier is very important.

These points thus clearly argue for indications of the application of the debiasing strategy: taking the supplier’s perspective. Indications for applying this debiasing strategy: Yes. There were found several indicators during the interview that pointed to the implementation of the debiasing strategy: creating general supplier selection bias awareness.

In question 100,111 the purchasing manager explains that in order to prevent bias it is important to analyse the market and suppliers based on facts and scenarios.

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7.5 Purchasing manager 5

During the interview with purchasing manager 5 (Appendix E) there were several indicators that pointed to the implementation of the debiasing strategy: decomposing the supplier selection task.

In question 150, the purchasing manager explains that this is dependent on the amount of money that is spent. The more money it cost the more intermediate steps are necessary. These two reasons thus argue for indications of the application of the debiasing strategy: decomposing supplier selection task. Indications for applying this debiasing strategy: Yes. During the interview there were several indicators that pointed to the implementation of the debiasing strategy: investigative reviewing of the supplier choice set.

In question 117, the manager explains that to keep the current supplier sharp they ask two or three other suppliers for quotations. In this way the supplier choice is critically reviewed. Depending on the spent this step will be more elaborate. This thus argues for the application of the debiasing strategy: investigative reviewing of the supplier choice set. Indications for

applying this debiasing strategy: Yes

During the interview there were several indicators that pointed to the implementation of the debiasing strategy, dissenting the final supplier selection decision.

In question 119 and 136 the manager explains that the more money is spent the more people are involved who can dissent the supplier selection. Above 250000 euro the tender board is involved to ensure that all different opinions are heard.

These points thus argue for indications of the application of the debiasing strategy: dissenting the final supplier selection decision. Indications for applying this debiasing strategy: Yes During the interview there was an indicator that pointed to the implementation of the debiasing strategy: taking the supplier’s perspective.

In question 149, the purchasing manager confirms that this is absolutely the task of the purchasing department. Sometimes the manager really needs to defend the interests of the supplier against the interests of the internal customer.

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The purchasing manager showed a clear understanding of the notion of bias. He realized that the more careful steps were taken in the purchasing process the more bias was prevented. The amount of debias steps taken were dependent on the amount of money spent.

In question 154, the manager explains that a multi perspective approach is the most effective to prevent bias. It really helps to raise awareness of the different perspectives and biases among the different parties like the internal customer.

This argues for an indication of the application of the debiasing strategy: creating general supplier selection bias awareness. Indications for applying this debiasing strategy: Yes.

7.6 Purchasing manager 6

During the interview with purchasing manager 6 (Appendix F) there was an indicator that pointed to the implementation of the debiasing strategy: decomposing the supplier selection task.

In question 160, the purchasing manager describes the purchasing process. In this description one could discover a number of small steps. First, a list of requirements is prepared with instructions and the assessment process. Secondly, the tender is published and then suppliers can react and are reviewed by the assessment team. These separated steps suggest that there is some decomposed structure in order to lead the supplier selection in the right direction. These two reasons thus argue for indications of the application of the debiasing strategy: decomposing supplier selection task. Indications for applying this debiasing strategy: Yes. During the interview there were several indicators that pointed to the implementation of the debiasing strategy: investigative reviewing of the supplier choice set.

In question 165 and 166, the manager explains that 90% of the supplier selections will be carried out according to the European tender protocol. This implies an extensive selection process where all relevant suppliers must be able to enrol the tender. The selection criteria are determined thoroughly by a team. These criteria are almost always “knockout criteria”. So the supplier meets the requirement or not.

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In question 168, the purchasing manager describes her role in the review process of the suppliers. She stresses that she acts as a process supervisor in the multidisciplinary team. This will ensure that everybody in the team can express his or her opinion correctly.

In question 171 and 173, the manager confirms that the decisions are approached from different perspectives in a multidisciplinary team. This indicates that the debiasing strategy, dissenting the final supplier selection, is enough facilitated. Indications for applying this

debiasing strategy: Yes

In the interview there were several indicators that pointed to the implementation of the debiasing strategy: taking the supplier’s perspective.

In question 183, the manager confirms that it is important to view the decisions from the perspective of the supplier. The selection criteria are set up keeping in mind that the supplier is able to distinguish oneself from the other suppliers. This implies that the purchasing team must thoroughly think through the interests and capabilities of the supplier.

This point thus clearly argues for indications of the application of the debiasing strategy: taking the supplier’s perspective. Indications for applying this debiasing strategy: Yes. During the interview there were several indicators that pointed to the implementation of the debiasing strategy: creating general supplier selection bias awareness.

In question 192, the purchasing manager emphasizes that she is actively creating bias awareness in the team. The manager considers this as her explicit task to secure the awareness of bias in the team. This argues for an indication of the application of the debiasing strategy: creating general supplier selection bias awareness. Indications for applying this debiasing

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7.7 Purchasing manager 7

In the interview with purchasing manager 7 (Appendix G) there were several indicators that pointed to the implementation of the debiasing strategy: decomposing the supplier selection task.

In question 201, the purchasing manager describes the purchasing process. In the description clear decomposed steps emerge. The first step is assessing the needs of the internal customer as early as possible. Other steps are the internal order and the project strategy.

In question 203, it becomes clear that the European tender process automatically leads to a number of intermediate steps.

These two reasons thus argue for indications of the application of the debiasing strategy: decomposing supplier selection task. Indications for applying this debiasing strategy: Yes. During the interview there were several indicators that pointed to the implementation of the debiasing strategy: investigative reviewing of the supplier choice set.

In question 203, the manager reveals that the European tender process implies an extensive selection process where all relevant suppliers must be able to enrol the tender.

In question 207, the purchasing manager stresses that he carefully has to justify his choices concerning the supplier selection. This argues for the application of the debiasing strategy: investigative reviewing of the supplier choice set. Indications for applying this debiasing

strategy: Yes.

In question 206, the manager emphasized that he never makes a decision alone. Different parties are always involved.

In question 208, the manager again confirms that parties with different opinions are already involved in the decision-making process. This indicates that the debiasing strategy, dissenting the final supplier selection, is enough facilitated. Indications for applying this debiasing

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During the interview there were several indicators that pointed to the implementation of the debiasing strategy: taking the supplier’s perspective.

In both question 212 and 213 the purchasing manager explains that the company tries to make an estimation of what kind of customer they are in the view of the supplier. He confirms that taking the supplier’s perspective is an important element in the supplier selection process. This point thus argues for indications of the application of the debiasing strategy: taking the supplier’s perspective. Indications for applying this debiasing strategy: Yes.

In question 207, the purchasing manager is aware of the fact that bias is not possible and not desirable in the organization. He always needs to take full accountability of his decisions. Therefore his motivations need to be transparent and based on facts.

In question 217 and 219 the purchasing manager also explains that the European tender process makes the steps taken for the supplier selection more transparent. And it forces the company to stay sharp and fresh. This argues for an indication of the application of the debiasing strategy: creating general supplier selection bias awareness. Indications for

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7.8 Overview

All the indications for the application of the debiasing strategies are clearly displayed in this overview (table 1). Debiasing Strategy Purchasing manager 1 Indications for applying debiasing strategy: Purchasing manager 2 Indications for applying debiasing strategy: Purchasing manager 3 Indications for applying debiasing strategy: Purchasing manager 4 Indications for applying debiasing strategy: Purchasing manager 5 Indications for applying debiasing strategy: Purchasing Manager 6 Indications for applying debiasing strategy: Purchasing Manager 7 Indications for applying debiasing strategy: 1. Decomposing supplier selection task

Yes Yes Yes Yes Yes Yes Yes

2.

Taking the supplier’s perspective

No No Yes Yes Yes Yes Yes

3.

Investigative reviewing of the supplier choice set

Yes Yes Yes Yes Yes Yes Yes

4. Dissenting the final supplier selection decision

Yes No Yes Yes Yes Yes Yes

5. Creating general supplier selection bias awareness

Yes No Yes Yes Yes Yes Yes

Table 1: Implementation of debiasing strategies overview

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8. Conclusion and Discussion

The objective of this paper was to find evidence of the implementation of strategies that mitigate the effect of biases in the purchasing field. In order to achieve this a theoretical research and seven in-depth interviews were conducted. In this research the taxonomy of debiasing strategies of Kaufmann et al. (2010) is used to categorize the debiasing activities of the purchasing managers into five different strategies.

The results show that five out of seven purchasing managers showed clear indications of implementing all the five debiasing strategies in their work. Further it can be noticed that multidisciplinary teams were widely used among all multinational companies in order to reduce bias. It must be also noticed that purchasing manager 3 and 4 were both purchasing managers in a large multinational company. Both of them responsible for purchasing highly strategic and expensive items or services. Hence it can be expected that these organizations have put much more effort in building a clear structure for rational decision-making and debiasing activities.

Also for purchasing managers 5, 6 and 7 there were strong indications that they implemented the debiasing strategies. It must be noticed that purchasing managers 5, 6 and 7 were both manager of the same state owned company. However they were all responsible for various items or services in different parts of the business. What is striking is that because this

company was state owned, the purchasing process was strictly bound to the European law for tender processes. This has a big effect on the extensiveness of the purchasing process and it showed clear indications of debiasing strategies being incorporated in all different parts of the organisation. However a clear question that was raised from all the managers involved with this European tender law was how to include the experiences with a current supplier in a tender process without creating an biased situation for new suppliers.

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Also purchasing manager 2 lacked the strategy: taking the supplier’s perspective. In this case the price of the items bought was all that counted. Also there was not a structural way of dissenting the final supplier selection decision. According to the purchasing manager everybody in the company had more or less the same opinion about the decisions taken. Furthermore there was not put much effort into creating bias awareness. It must be noticed that this was a purchasing manager of a dental practice. Therefore this company was relatively small compared to the other companies in this research. This raises the question how differences in strategic impact of purchased items, value and company size can be translated into the implementation of debiasing strategies. This issue was also raised in the other companies. It turned out that almost all put much more effort in debiasing the decisions concerning expensive and strategically important products than for the less valuable products. This may sound logical, however it must be noticed that many less valuable products can also have a huge impact on the bottom line of the company. Hence it may be profitable to also consider debiasing the decisions concerning these items.

Therefore future research should be done in order to customize all the different debiasing strategies for the different levels of strategic impact and cost of the purchased items.

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APPENDIX A: UITWERKINGEN INTERVIEW #1

(Conducted in Dutch)

(1) Hoe ziet het inkoop proces eruit ? Er zijn drie verschillende inkoop processen:

1. Energie en investeringen

2. Indirecte materialen: Dit zijn de technische spullen die in het magazijn liggen en mensen die worden ingehuurd.

3. Directe materialen: Grondstoffen. Dit is het domein van de inkoop manager. In dit interview zal het alleen gaan over dit grondstoffen traject.

(2) Kunt u dit traject van de directe materialen en grondstoffen verder toelichten? Er wordt verder onderscheid gemaakt in 2 sub-trajecten:

1. Het traject voor een nieuwe leverancier of nieuw product:

In het traject van de nieuwe leverancier start het inkoop proces bij de afdeling Research & Development (R&D). R&D heeft een helikopter view over het gehele proces en hebben het overzicht over alle units.

2. Het traject voor een bestaande leverancier of bestaand product:

In het traject van de bestaande leveranciers gaan de inkoopbeslissingen over het veranderen van de relatieve positie van deze leverancier. Wanneer de leverancier al aan een bepaalde unit levert, gaat de inkoopbeslissing over het uitbreiden naar een andere unit. De leverancier heeft hier dus al een bepaalde performance laten zien waarop beoordeeld kan worden.

(3) Wie bepaalt de leverancier?

Er vinden gesprekken plaats met de Procurement afdeling, de R&D afdeling en de technicus van de fabriek. Samen gaan deze partijen bekijken wat voor product het is en hoe het product past in de portfolio.

Nieuwe leveranciers zijn er niet vaak. Er wordt vaak met bekende producenten, gewerkt. (4) Stel u doet al lang zaken met een leverancier: kijkt u dan nog wel eens om u heen in de markt naar andere?

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(5) Naar welke criteria kijkt u bij de leverancier?

De audit van de potentiele nieuwe leverancier is gefocust op technische aspecten. De kwaliteitssystemen, logistieke systemen en back-up scenario’s worden bekeken en getoetst. Commerciële stuk is geïsoleerd van de onderhandeling.

Het is een hele technische en logistieke audit. Er wordt bijvoorbeeld gekeken naar

specificaties en de hoeveelheid voorraden. In deze audit is de inkoop manager deelnemer in een team.

(6) Zijn dat hele harde eisen?

Er is een harde kant en een zachte kant.

Harde kant: De pure specificaties, de eisen in een bepaalde bandbreedte. Zachte kant: Verschillende logistieke routes en de afweging kosten en snelheid.

(7) Stel er zijn twee leveranciers gelijk qua specificaties: wat is dan de doorslaggevende factor?

De commercie, dus de prijs. Bij een strategisch belangrijke grondstof wil je niet afhankelijk zijn van 1 leverancier. Dan wil je minimaal twee leveranciers hebben. In dat geval maak je de duurdere leverancier kleiner en de goedkopere groter.

We hebben in principe de volgende policy: Voor elke positie die we hebben qua grondstof zijn er twee leveranciers. Het Liefst leveren ze ook al daadwerkelijk, maar anders een leverancier die een “Approved Quality” heeft. Dus die een product hebben die al eens op de machine gelopen heeft. Dus er is altijd een leverancier voor plan B om bij problemen de productie op te kunnen vangen.

(8) In hoeverre staat het proces vast?

Er is een standaard proces, maar er wordt heel flexibel mee omgegaan. Afhankelijk van de situatie moet men snel reageren of niet.

IMPLEMENTATION OF DEBIASING STRATEGIES IN PURCHASING