Friday, December 30, 2011

Thoughts on Economic Distortion

In transportation I have heard shippers say they do not want to negotiate too "hard" with carriers because they want to treat them as "partners".  I have always wondered what that meant.  What does "negotiating hard" mean and what does being a "partner" mean are key questions for both the buyer and seller of transportation services?

I submit they mean the same thing and tend to be emotional statements.  What I prefer is to work with transportation providers as an extended supply chain.  After all, unless one side is trying to get unfair or undo leverage on the other side we should be working together as a single entity for the common good of the ultimate customer.

What this means is there cannot be economic distortion in the discussions.  Economic distortion exists when one side has information pertinent to the discussion the other side does not have - some call this information asymmetry.  When economic distortion exists there is bound to be an outcome which is weighted to one side or the other in terms of value.  When that occurs the sub-optimum solution is obtained and it will ultimately lead to mistrust and a dissolution of the relationship.

I go from the premise that eventually all information will become known and will be available to both sides.  As soon as one side realizes they were disadvantaged by the other side not disclosing pertinent information the disadvantaged side tries to fight back and so begins the war of distrust and trying to "one up" the other side.

So my warning to the buyers is do not think you are somehow out maneuvering the transportation provider.  Ultimately, the real situation will be discovered and when it is you will be hit back and hard.  You may get a short term gain but at a long term price. To the suppliers / logistics providers: If you are thinking you have a long term sustainable business model by taking advantage of your customers by not disclosing proper information (costs, operational efficiencies etc) you are kidding yourself.  Sooner or later what you thought was secret will become known and when the customer realizes they have had the wool pulled over their eyes, they will dump you.

In the end, American business could save a lot of time, money and extraneous resources if this little dance did not need to be played out every time an arrangement needed to be made between buyer and seller.

This may not be a 10X idea but it certainly is a 10X program if properly implemented.  If a company and its suppliers really took this to heart I believe both sides would see dramatic improvement in productivity and efficiency thus driving the 10X change that we seek.  Lots of people talk about this, few if any actually do it.

Assume all relevant information will become available and save a lot of time by trying to take advantage of short term economic distortions.

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