“All models are wrong but some of them are useful”

This is my full article contribution as published in Procurement and Supply Australasia earlier this week.

There are times that we get so engrossed into the black and white way of thinking that we forget that life is far from having absolute truths.

George Box put this in a succinct way:

“Essentially, all models are wrong, but some are useful”.

                                              George E.P. Box (Statistician)

WHAT IS A MODEL?

A model is a particular way of interpreting the world. A great definition can be found here:

“A representation of a system that allows for investigation of the properties of the system and, in some cases, prediction of future outcomes”.

We have been using modelling since times immemorial as, it is our means of understanding the world. Models have always superseded older versions or worked alongside each other satisfying different targets.

e.g. Isaac Newton had conceived a very elegant model of understanding the cosmos which worked very well until it was superseded by Einstein’s (see here for details).

Well, it happens to the best of us.

PROCUREMENT AND GEORGE

George Box’s quote above is relevant to any discipline.

Specifically, in Procurement we have many models we are working with: RFP, RFQ,RFI, Krajlic, ROSNA, Pareto, ABC and the list goes on. But, there is not one of these though that can apply to all situations.

As an example consider this:

If the requirement is to simply get the best price e.g. for commoditized products in fragmented supplier markets, then a strong candidate to use as a model is an RFQ tender.

The RFQ model though is not working for e.g. high spend/high risk categories. That is where you would want the supplier to invest in the relationship and collaborate achieving innovative customer solutions as you are probably also targeting new product development.

Especially when in today’s world the battle is between Supply Chains and not organizations in isolation, strategic alliances are becoming key differentiators for organizational success. RFQs as well as other transactional Procurement techniques do not work for developing such relationships.

I know that we all have personal favourites.

Models that may have produced great successes in the past. So, deep inside we tend to give these models more credit than they deserve.

The important thing here is to recognize every model for what it truly is i.e. just one more tool in our toolbox to choose from and use.

Reading, discussing with colleagues, experimenting,continuously learning allows you to expand your toolbox enabling yourself and your organization to choose wisely the right model for your next procurement project.

So, when on your new procurement project remember dear old George and spend time in choosing the right model for your targeted outcome, because:

“All models are wrong but some of them are useful”.

[Image courtesy of fdecomite / flickr.com]