Per Angusta Blog
9 June 2016
How Many Decimals of π Does Procurement Really Need?
It was Pi day on 3/14 (yes … that means March 14, you know how Americans have a habit of switching around the days and months when they write a date). On that day, NASA’s Jet Propulsion Laboratory wrote an article on their blog page about the precision of Pi they use in their calculations. We know a few billion decimals of Pi, and given the stakes are high at NASA, you would assume they use it with an insane level of precision. But it turns out they only use 15 decimals!
Consider this: the most distant spacecraft from Earth (Voyager 1) is 20.1 billion kilometres away. The circumference of the corresponding circle is over 120 billion kilometers. But with 15 decimals of Pi, you are off by a mere 1.5 inches. Not bad. So while you’d expect this kind of calculation to be “exact”, you realise that from this perspective “good enough” also works. Sometimes I feel that we don’t take that step back in Procurement, to set the compass and orientate ourselves in the right way. There are many places where more precision could benefit us: spend analysis, RFPs, savings tracking. And there are some where we don’t need even the 15 decimals of Pi! So let’s try to see how we could apply this to Procurement.
Precision in spend analysis
This category is probably the hardest one to map, because two opposite constraints need to coexist. First your numbers need to be exact (or at least as exact as in your financial system). Beyond the need for precision, it is a matter of trust. If you are missing 100 invoices out of 1 million, how can you be sure that these invoices are not “the tree masking the forest” – they might be worth millions of dollars?
If you are not 100% confident that your numbers reflect the reality (or, once again, the reality of your source of truth) then you cannot rely on these numbers. So here, you should probably accept very little compromise. But when it comes to analysing the figures you really need to take that step back. When a category is worth millions or tens of millions of Euros, spending a couple of million with a given supplier doesn’t seem that significant – so you don’t have to be so picky.
Precision in RFPs
Procurement people have an analytical mindset and we try to distill everything. While it matters to pay attention to 2, sometimes 4 decimal places when you buy raw materials or parts by the thousand, you probably shouldn’t bother too much in some fields, like professional services for example.
Is it relevant to challenge the number of hours or even days when you’re negotiating the implementation of an ERP in thousands of man days? No. First because it will be a drop in the ocean, and because you’re actually buying people and a service. The important thing to remember here is that estimates are hard, even harder if you don’t have proper data. So don’t spend too much time splitting hairs on estimates that will be, at best, brittle … and for which NO ONE has a clue whether they will unfold as planned (or not). You’d better build a solid relationship with the supplier so that dealing with variances and decimals will be done on a constructive basis.
Precision in tracking savings
This final example is without doubt the most emotive one (and the one closest to my heart): savings tracking. We’ve seen examples of clients who’ve tried to track savings on things like car fleets, trying to model precisely how cars will be purchased depending on factors such as hiring forecasts, seasonality and the age of the driver, and then making adjustments every month to take into account all the variations to that model.
The point, I understand, is to give an accurate view of the savings. But who cares if you’ve saved 100,000 Euros or 104,324 Euros on car fleet? This is not your job! This is called CONTROLLING and belongs to FINANCE not PROCUREMENT. Please don’t fall for that misconception. Your job is to get the best possible deal for the company. Savings are a measurement of one aspect of your job. An important one, but still, your job is not to count beans. And if someone puts that onus on you, don’t accept it. Your job is to build a common understanding with your stakeholders of what is a cost reduction or avoidance, put it in a playbook and use it as a reference guide, not some rigid, holy scripture.
The need for precision is highly contextual
The performance of Procurement is not measured by the precision of a thousand Euros, or at best, by a hundred thousand Euros, but by your ability to manage risk, become a customer of choice, and generate value for your organisation. As with many things in our field, we really have to understand our suppliers and cut our cloth accordingly. When you’re discussing the unit price of a bolt, a cent or a tenth of a cent is probably relevant. Anything under half a million is most likely not relevant for a CFO. In every instance, your responsibility is to be able to show that you master your craft and can move from the 10,000-feet view to the right level of detail. And the right level is the one that is appropriate to the situation, not the one that makes you trip up – don’t fall for that!