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29 May 2021

Bad Buying

Tag(s): Politics & Economics, Business
At the beginning of my career, I was taught professionally how to sell, and have continued to use those skills ever since. But I was never taught professionally how to buy. Indeed, I suspect that few people are and yet buying is just as important as selling. Over the years I must have been responsible for spending billions of pounds on products, ingredients, components, packaging, advertising and other marketing services, many other forms of services like professional advice and consultancy, licenses to use technology, distribution services, labour, computers and software licenses, furniture, stationery, the list is almost endless.  In some cases, there were professional managers of procurement but even here there can be problems because procurement should be a shared responsibility, not a delegated one.

I recently read a fascinating book on this subject, Bad Buying by Peter Smith.[i] Peter has over 35 years’ experience in procurement and supply chain as manager, procurement director, consultant, analyst and writer. Peter is the Managing Director of Procurement Excellence Ltd, a leading specialist consulting firm. He is recognised as one of the U.K.’s leading experts in public and private sector procurement performance improvement. Peter has an MA in Mathematics from Cambridge University where he is now a Fellow. The subtitle of his book is “How organisations waste billions through failures, frauds and f*ck-ups.”

The first part of the book deals with failure and he gives numerous examples of where companies and governments go wrong. He emphasises the need to get the Specification right. Too many buyers seem to be focused on price when what really matters is having the right product. You need to understand the market and there will be occasions when people seem to bring you something that is too good to be true and indeed is therefore certainly not true. He covers the importance of choosing suppliers but not getting too dependent on one. Maintaining a competitive position in your supply chain is vital. 

He gives a bad buying award to Schlitz beer. In the 1970s Schlitz was still number two in the United States, having been the largest producer of beer for much of the first half of the 20th century. But they adapted the recipe in order to save cost and gradually drinkers became uneasy about this change and competitors wasted no time in drawing attention to it. One of their processes involved using silicon gel and as the US Food and Drug Administration was going to force firms to list all product ingredients on the packaging, they decided to find an alternative stabiliser. But this even changed the appearance of the product and eventually the issue became public, and Schlitz had to organise a secret recall of some 10 million bottles of beer.

Smith explains how to negotiate and how to understand the way incentives work both for good and bad. He tries to understand how governments get it so wrong. He asks why do politicians, senior executives and government officials sometimes buy in ways that can appear to be wasteful, logical or plain stupid, to the outside observer at least? He suggests there are three major drivers for the failures: corruption, arrogance and impatience. He finds particular fault in EU projects. A 2014 report by the European Court of Auditors claimed that 20 EU financed airports in Estonia, Greece, Italy, Poland and Spain misspent large sums of EU taxpayers’ money for more than a decade. The auditors looked at eight airports in Spain, five in Italy, three in Greece and two each in Estonia and Poland. Between 2000 and 2013 some €666 million from the European regional development and cohesion funds were spent on these facilities, with most of the money going on building terminals and runways in airports forecast to attract new passengers. But the projected growth rates rarely came to pass, and no less than €129 million of the money was spent on ‘entirely useless’ projects.

Smith argues you should trust no one (at least not suppliers). You need to learn how to cope with change, citing the extraordinary delays in Crossrail and now HS2. He gives a bad buying award to Brandenburg airport.  Flughafen Berlin Brandenburg Holding GmbH (FBB) was set up in 1991, with the aim of building what was planned to be Germany’s third largest airport. It would reflect the growth of Berlin after the Wall coming down, the status of the city as the capital of reunified Germany. A private consortium would own and operate the airport. A competition was held but the decision was challenged successfully by the bidder who lost the tendering process. The two bidders then combined with a consolidated bid, but the state authorities decided that the airport should not be privately run after all. The two consortia were eventually paid off with €50 million each for their efforts. After almost 15 years of planning, construction began in 2006. During construction it became clear that the €2.8 billion budget wasn’t going to be enough – it was already up to €4.3 billion by 2012. In 2010 there was a ceremony to celebrate the supposed completion of construction work.

But a whole other range of problems emerged. The fire protection system was faulty, there were no ticket counters, and the escalators didn’t work. The opening was planned for May 2012 but then FBB postponed again, citing technical difficulties, primarily concerning the fire-safety and smoke-exhaust systems. March 2013 was the new opening date – but not for long. In September 2012 that was adjusted to October 2013. That came and went as did the CEO and the chairman of the supervisory board. In January 2014 the likely opening date was moved to 2016 at the earliest. In 2015 Imtech, one of the most important construction companies on-site, filed for bankruptcy. In April 2016 the press spokesman was fired after giving a too honest interview. He said that billions of euros had been wasted and ‘only someone dependent on medication will give you any firm guarantees for this airport.’ In December 2016, the boss hinted at a possible opening in 2018. But by then the best guess was late 2020 with a total cost now estimated at more than €7 billion.

The reasons for the problems are many and varied. One issue is that the delays have gone on for so long that some of the initial equipment and technology put in place during the construction is already obsolete, before a single passenger has gone through the airport. There has been incompetence, corruption and bribery and sheer stupidity by the authorities who felt they were capable of managing the procurement in the programme without external support.

Part two of the book covers fraud and corruption in more detail with many examples, particularly in the public sector. Smith gives a bad buying award to the U.S. Navy. The vast sums of money spent by United States military have over the years attracted many cases of corruption. Singapore-based Glenn Defense Marine Asia (GDMA) carried out a range of tasks for ships visiting ports in the Pacific, including arranging for pilots and tugs; customs and catering; dock security; taxes; and food, fuel and supplies. GDMA was one of the largest such firms in the Western Pacific with hundreds of U.S. Navy contracts, and indeed contracts with other nations too. The Malaysian owner pf GDMA, Leonard Francis, was known as ‘Fat Leonard’ to his friends as he stands 6½ feet tall and weighs in at 330lb. He pleaded guilty in 2015 to fraud charges, admitting bribing U.S. Navy officers over many years with (among other things) cash, prostitutes, Cuban cigars and Kobe beef. His scheme went on for at least a decade involving tens of millions of dollars in bribes to win hundreds of millions in business from the Navy - business for which GDMA overcharged across a range of services. The corruption was amazingly long lasting, widespread and arguably endemic. GDMA would routinely undercut its rivals in bidding processes to win the contracts, but then submit fake or inflated invoices. These were presumably paid either without real checking of the detail or via approvals from those on the inside of the scam. Francis’s evidence led initially to half a dozen naval officers being charged with associated charges, and the three rear admirals involved were then allowed to retire.  There were apparently no fewer than 27 investigations into the firm over the years but those considering the matter were never able to gather enough evidence to take action.

The third and final part of the book covers how to avoid the fu*k-ups and outlines 10 principles for good buying.
  1. Your suppliers contribute to the creation of competitive advantage and the achievement of organisational goals.
  2. For everything you buy, consider how that item or spend category contributes towards strategic goals, and conduct your buying appropriately. 
  3. Good data allows you to understand what you’re buying and is central to good performance.
  4. Define clear and differentiated processes for buying, enabled by technology and balancing ease-of-use with control and rigour.
  5. Put clear buying policies in place, communicate, ensure understanding and take action where staff don’t respect the policy.
  6. Define what you want carefully (the specification) and always seek value and innovation from suppliers.
  7. Understand your key suppliers.
  8. Competition (and the threat of competition) are always good.
  9. The job isn’t done when the contract is agreed.
  10. Everyone who plays a role in the buying process must be appropriately knowledgeable and skilled, to get the most out of your suppliers.
In summary, you must focus on people, the success of any organisation comes down largely to that in the end, and improvement almost always requires people to change their behaviour.  And as people increasingly rely on machines then buying will get worse because it is by talking to people that you will really find out what is going on.

[i] Bad buying Peter Smith Penguin Random House UK 2020

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