Tag Archive for: Markets

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Why is the USA Running Out of Baby Formula Milk?

Quite a few stories of procurement and supply chain failure we hear (and quite a few of those included in my Bad Buying book) have at least an element of humour about them. KFC running out of chicken wasn’t very funny for the senior management there, and the customer who phoned the police to complain that he couldn’t get his fried chicken obviously took it seriously.  But for most of us, we probably had a chuckle. Government failings are annoying when it is taxpayers’ hard earned money being wasted; but it is rare to see a case of supply chain failure that actually has the potential to cost the lives of babies.

But that is the situation in the USA, where shortages of formula milk for infants is threatening the health or even the survival of very young children. But why is this happening, in one of the wealthiest, most technically advanced nations in the world, where capitalism has over the decades brought a high standard of living (in global terms) and abundant supply of almost everything and anything to its people?

It is a complicated situation, and I’m only giving an overview here. The shortages appear to be driven to a considerable extent by manufacturing plant shut-downs, driven in part by quality issues identified by the US Food and Drug Administration (FDA). FDA (food and drugs administration).  As Sky News reported, “Abbott Laboratories was forced to shut its site in Sturgis, Michigan and recall a number of its powdered formula products after four babies who had been given formula developed bacterial infections”.  No firm link has been proven but the Michigan factory has been closed for weeks.

Even when the factory re-opens, it will take 8 – 10 weeks to get product back on the shelves, the company says. And once shortages emerge, panic buying inevitably exacerbates the situation, and there may be a bit of a baby boom going on in the US too. The U.S. government also has pretty rigid trade policies, making most formula imported from Europe illegal to buy in the United States. Tariffs act as another deterrent.  Maybe that is genuinely for health reasons; or maybe it is at least in part a nice bit of protectionism to suit the manufacturers.

But from a procurement point of view, this market concentration and the inflexibility of government-funded schemes for lower income people have contributed to the problem. Two companies – Abbott and Reckitt Benckiser – dominate the industry with about 80% national market share.  Nestlé, which sells under its Gerber brand, controls another 10%.

Part of the reason for these firms’ success is that they are the only makers approved by the US government to provide baby formula through the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC, which supports low-income families. It appears that most States, who fund these schemes, have negotiated deals with just one provider.

The Guardian reports; “ Nearly half of baby formula in the US is bought under the Wic program, aimed at helping low-income women, infants and children. States give exclusive contract rights for this formula to one company under a bidding process. Abbott provides formula to about half of the babies receiving Wic benefits. When these products disappeared, families were left scrambling to find alternatives”.

This has driven what has proved to be an unhealthy level of market concentration, as it also seems that production is also pretty concentrated within firms in terms of the number of production plants. Now procurement can’t always control market dynamics; but could government as well as buyers (in retail chains for instance) have done more to encourage new suppliers and a more competitive market?

So the old principle of consolidation, aggregation and leverage that procurement has lived by for decades has been driving behaviour here. But once shortages kick-in, recipients of the WIC benefit have been unable to find the approved supplier’s product, leaving them in a desperate state – and an example of the unintended consequences of what must have seemed like a sensible procurement strategy. The U.S. House of Representatives has now passed bills to try and address the shortage. One would waive certain requirements that limit brands and quantities of formula recipients of the special supplemental nutrition for women, infants, and children can purchase, according to CBS News.

Again, supply chain and procurement risk and resilience has not been considered as it should have been here, with cost driving the decisions. We’ve seen over the years so many examples where procurement behaviour has driven dependence on a few suppliers – or even just one (there’s an interesting example featuring VW cars in the book, for instance). It rarely ends well. So next time someone says, “we should rationalise our supply base and dramatically reduce the number of suppliers”, do remember that strategy can have benefits, but also caries risks. Be aware of that and develop the strategy accordingly.

Back to the highly concerning baby milk story. I’m sure more will emerge, and if you want a fuller explanation, I can recommend Kelly Barner’s excellent podcast here, in which she goes into more detail in terms of what has been going on.

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CMA Report on Social Care for Children Highlights Market and Procurement Issues

Life goes on despite the temptation to doomscroll Twitter and Facebook all day for the latest news on Russian atrocities.  But there hasn’t really been much else to cheer, and some news that should have generated more attention in normal times passed almost unremarked.

The Competition and Markets Authority (CMA) published a report last week on the provision of children’s social care (fostering and children’s homes) to UK local councils.  The CMA looks at issues from an economic point of view rather than as procurement experts, but their worrying findings in this case clearly indicate some major procurement (and market) issues.

The final report “found there is a shortage of appropriate places in children’s homes and with foster carers, meaning that some children are not getting the right care from their placement. Some children are also being placed too far away from where they previously lived or in placements that require them to be separated from their siblings. This shortage also means that high prices are often being paid by local authorities, who are responsible for placing children in appropriate settings, with these costs picked up by taxpayers”.

The CMA also commented on the risk of providers going bust – and yet in some parts of the market, providers are making what we might call “excess profits”, with margins of 20%.

“For the children’s homes providers in our cross-GB data set we have seen steady operating profit margins averaging 22.6% from 2016-20, with average prices increasing from £2,977 to £3,830 per week over the period, an average annual increase of 3.5%, after accounting for inflation”.

As an example of the sort of supplier that plays in this market (accepting of course that not all are of this nature), the Guardian recently featured a report about Robert McGuinness, who was paid £1.5m by two local authorities between 2015 and 2020. He owned a “community interest company” (CIC) which provided vocational training to children from 14-16, excluded from mainstream schools.

“The owner of a children’s home in Bolton shut down for “serious and widespread failures” spent thousands intended for educating marginalised children on drinking, foreign trips and his pub business, the Guardian can reveal”.

He siphoned money out of the CIC through a “director’s loan”  to invest in another of his businesses (running a bar).  The bar has since gone bankrupt and the liquidator says “there is currently no prospect” of the CIC settling the £100,000 loan repaid.  He also drives a Lamborghini – just the sort of public-spirited person you’d want to see running sensitive social services for youngsters.

The market failure evident in this sector has a number of causes. One ironically arises from the attempts to regulate the market. Even though that is well-meaning and certainly necessary to some extent, it creates more barriers to entry. Well-functioning markets see new entrants coming in and competing all the time, and also firms can exit the market relatively easily. Buyers can also switch suppliers easily in well-functioning markets; not the case here given the nature of the services.   

There are other barriers to entry in this case, such as the need for capital investment.  Over the past 20 years or so, the amount of public sector provision of such services has disappeared, replaced by private provision. One reason has been the need for investment in council-owned facilities. Rather than finding the money for that, as central government grants to local government have declined, councils have increasingly closed down their own facilities such as children’s homes and care homes  and bought those services from private providers.

That has weakened competition further. Then we can see a failure of procurement and contract management too. Do buyers know what margins are being made by their providers?  And how well are providers managed? I suspect because the users of the service are kids, there isn’t a lot of connection between the providers, the users and the commissioners (and budget holders) for the services.  Councils have seen headcount reduced in areas such as contract management too as income was squeezed.  The report on the gov.uk website agrees that something needs to be done.

“The CMA’s analysis finds that the main reason for this is the fragmented system by which services are commissioned, which means that local authorities are not able to leverage their role as the purchasers of placements or to plan properly for the future”.

To address these issues, the CMA recommends that the UK Government, Scottish and Welsh Governments, “create or develop national and regional organisations that could support local authorities with their responsibilities in this sector. These would improve commissioning by carrying out and publishing national and regional analysis and providing local authorities and collective bodies with guidance and by supporting them to meet more placement needs in their local area”.

I am no lover of aggregation of spend and centralisation of public sector procurement.  But this does seem like an area where a national “category strategy” and some serious procurement talent needs to be brought to bear.  

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How Free (and Perfect) are Your Supply Markets?

There was a cri de coeur from Matthew Parris in  today’s Times newspaper (behind the paywall). He was concerned about the British public’s expectations that the government could sort out all and any of our problems. As he put it;

“Even we lucky British will sometimes encounter shortages and gluts. Is it now the government’s business to smooth them out for us? Increasingly, that is the assumption”.

We’ve seen in recent weeks issues with supply of food to supermarkets (although I can’t say I have noticed much of a problem), stories that Nando’s were short of chicken, then we’ve had genuine shortages of carbon dioxide and a petrol “crisis” caused mainly by politicians telling us there wasn’t a crisis. Parris sees this expectation that the government should solve every problem as a slide leftwards politically. He is a believer in the free market, which is why he originally became a Conservative supporter and MP, and thinks the government should stand back more often.

“I believed in the free market, in Adam Smith’s Invisible Hand, and the quiet, patient but unstoppable power of price in regulating demand and stimulating supply. I believed that if you’re short of applicants for a job you raise the wage. I laughed at government attempts to control prices as a way of keeping down inflation. I knew you couldn’t buck the market”.

I also share his fondness for free markets. However, the problem is that very few markets are truly “free” in the theoretical sense and certainly few function perfectly. Indeed, that is something most procurement people understand from their own bitter experience. For instance, a perfect free market is open to new entrants, and indeed it is easy for existing players to withdraw. It is unregulated except perhaps for fundamental criminal laws (don’t poison people with your beer or sell cars with no brakes).

But for a number of reasons, it feels like fewer and fewer markets really are anywhere near perfect or free. Take the shortage of lorry drivers – something that is hitting the UK particularly badly, but is an issue elsewhere in Europe too. (It does appear however that Brexit is a contributing factor in the UK, according to the industry expert view).

In a truly free market, thousands of people would be rushing to change jobs to earn the £50K per year plus now on offer for driving trucks. But we insist that new drivers (not unreasonably, I should say) go through extensive testing. That is a time and cost related barrier to entry. We have restricted free movement of people into the UK post Brexit, closing another “free market” option.

In other areas, the government has attempted to create dynamic new markets, but it is not as easy as it seems. Take the domestic energy market. We have seen plenty of new market entrants, but with increasing regulation and price control from the government, it has moved far away from the vision of a truly free market. That whole market is now unwinding and collapsing with the increase in wholesale gas prices. (There is also what feels like an increasing tendency for con artists and scammers to get involved in these quasi-markets – maybe that is a topic for another day, but it feels like the UK is becoming steadily more susceptible to business-related fraud and corruption).

And during the pandemic, the government “interference” in how markets operate was even more extensive. The government stopped tests for new lorry drivers because of social distancing rules, for instance. We might understand why that was the case, but it has been a contributing factor towards the current shortage.

Indeed, coming back to Parris and his complaint, the government has “interfered” so much in our lives during the pandemic, I think increasingly people do feel that the government can and should sort out every problem.  Those in charge told us where we could go for a walk and who we could visit, so why not expect that they can guarantee my Nando’s will be available and make sure there are enough lorry drivers to go round? That might not be an appropriate view, but I suspect it is quite prevalent.

What does all this mean for procurement professionals? Aside from many now operating in fire-fighting mode, simply focusing on securing immediate supply into their own organisations, it points out the importance of truly understanding how your own key supply markets work. Are they genuinely free markets that respond quickly to changes in demand, with new entrants, innovation and dynamism? Or are they controlled or restricted in some way – by government or by other barriers to entry (it wasn’t regulation that led to Facebook’s domination of its market, for instance).  

The pandemic shock has highlighted vulnerabilities in supply chains and exposed markets that already had inherent issues and weaknesses. So to avoid “bad buying”, understanding how your key markets really operate must be a priority.

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Forecasting Prices Isn’t Easy – Who Predicted the UK Property Boom? (Not Me …)

Sadly, my mother passed away last month, aged 93.  A broken hip, covid and pneumonia all hastened the end, but “frailty due to old age” was probably a fair enough cause on her death certificate. So we have started the process of selling her property, a bungalow, in Sherburn, an ex-mining village near Durham. I met the valuer from the estate agent last week, and he talked about the market situation and what has happened over the last 18 months.

“When lockdown started last year, we had a team meeting”, he told me. “I said to my boss, this is going to be a disaster! No-one is going to want to move during a pandemic – prices are going to crash”.

Of course we all know that he was wrong, and my new friend was very thankful for what has actually happened.  He gave us a valuation some 15% higher than it would have been 18 months ago and is confident the property will sell quickly. (Just to make potential home buyers in most of the UK envious, we are still only talking £150K for a three bedroomed detached bungalow).

The point is that I don’t remember any experts predicting a property price boom in early 2020. Of course, the UK government helped with its reductions in stamp duty and now schemes to help first time buyers. But even so, there seems to have been a surge in people assessing their lives and homes. Many have reconsidered where they want to live, and the importance of having a garden for instance has gone shooting up the priority list. The valuer said that flats and apartments were not sharing in the bonanza in quite the same way, even larger examples, and he had clients who had been locked down in such properties who were desperate to get into something with even a small patch of land of their own.

It is not just property prices of course that have surprised most of us. Timber prices have risen sharply due to a triple hit of high demand, HGV driver shortages and climate crises, reports Supply Management.

“The Timber Trade Federation (TTF) said suppliers have faced a post-pandemic “surge in demand” for timber this year, leading to the average import price of softwood increasing by 50% between January and May – a situation which is expected to continue”.

This is another example of the power of markets to surprise us. Even the experts get it wrong – in fact, it sometimes seems that they get it wrong more than the non-experts! And that applies to the markets that we deal with as corporate procurement people too. No matter how much analysis you carry out, how many numbers you crunch, the variables that aren’t predictable can screw up the best-researched forecast.

That might be human behaviour, which largely explains the housing boom, or it could be the weather in the case of crops for instance, or political upheaval, or even a pandemic. The “unknown unknowns” or black swans can cause havoc with our plans, and even smaller issues can disturb specific markets.  In my book I quote the famous Rowntree Mackintosh cocoa market disaster, which cost the firm huge amounts of money when they got their forecasts wrong for that commodity’s forward prices.  

So we have to consider all the facts if we want to avoid market-related “bad buying”, and think hard about less obvious risks. In some cases, we can use advanced techniques such as hedging to protect against future cost increases, and mechanisms such as long-term contracts to guard against shortages (but of course getting locked in to long term contracts with unfavourable conditions is a risk in itself!)

Carrying out scenario analysis, which looks at various “what ifs”, is another approach that can be valuable. Certainly, considering a range of possible events and outcomes is better than simply working on the basis of a single prediction of the future.  But this is one of the most difficult challenges procurement faces and no one can pretend that it is easy to forecast what is coming next. Let’s face it, if it was, we would all have bought timber futures, a second property and a large stock of PPE back in 2019!  

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Six Days to Bad Buying Publication … Irish Printers, Easter Eggs and Contracting with Friends

Bad Buying: How Organisations Waste Billions through Failures, Frauds and F*ck-ups hits the virtual shops and bookshelves next Thursday the 8th (you can order it here) so in the next five days, I’ll take you briefly through the chapters of the book.  Literally thousands of people (well, one at least) asked to see the contents page so here it is, at the end of this article.

Chapter 1 looks at specifications. And I’m sorry to play to stereotypes (and my wonderful “boss” at Penguin is Irish) but my favourite story is the Irish government buying super high-tech digital printing equipment – only to find that the machinery was too big to fit into the Dublin parliament building where it was going to be housed. Take the roof off, that’s the answer… Which just goes to show, that while specifications for complex IT programmes or mega-construction projects can be a problem, sometimes the basics (like dimensions) can catch us out.

But we can also under-specify, trying to save money but in a manner that causes problems or doesn’t deliver real value. There is a theory for instance that the Titanic sank because of cheap iron rivets that weren’t up to the job. And one of my early successes as a young procurement manager was paying more than I could have got away with in order to get innovative Easter Egg packaging designs from my suppliers. Within a couple of years, those new products helped Mars go from having no presence in that market at all, to selling millions of eggs and being a market leader  – yes, it’s the famous Milky Way Rocket Carton!

In the book, we then move on to understanding the market and choosing suppliers. That takes us into dodgy social media practices, the Rowntrees historical cocoa market wipe-out, and the problems when you give contracts to your friends. I know, you would never do that… Anyway, more tomorrow, and here is the contents list.

PART 1:  FAILURE

1. Getting the Specification Right: Irish printers, Easter- egg rockets and Aussie train toilets

2. Understanding the Market: Cocoa beans, fake followers and rehabilitating offenders

3. Choosing Suppliers: Dodgy T-shirts, working with mates and banking fiascos

4. Don’t Get Too Dependent: Seat covers, hospital rip-offs and bigger isn’t always better

Bad Buying Award  – Schlitz Beer

5. How to Negotiate: Charlie Hurley, missile interceptors and consultants’ lunches

6. Understanding Incentives: Cultivating coca, Dutch traffic jams and Birmingham call centres

7. How Not to Be Stupid (particularly if you’re a politician): Misplaced airports, imaginary ferries and Indian offsets

Bad Buying Award  – NHS National IT Programme (NPfIT)

8. Trust No One (at least not suppliers): Lulu the dog, French concert halls and US Navy ships

9. Coping with Change: Technology disasters, fried- chicken shortages and Crossrail delays

10. What’s the Risk?: The wrong fish, Japanese earthquakes and running bears

Bad Buying Award – Berlin Brandenburg (not yet an) Airport

11. The Joys of Contract Management: Bollards, Xmas parties and big IT overspends

PART 2: FRAUD & CORRUPTION

12. The Fundamentals of Fraud: Power stations, hotel bills and the greyhound-racing mafia

13. Who Am I Really Buying From?: Marine hoses, Indian brewers and the ’Ndrangheta

14. Fixing the Supplier Selection: Canadian politics, working with Mum and painting the NHS

Bad Buying Award – Fat Leonard and the US Navy

15. What Am I Really Buying?: Bomb detection, Frenchified kiwi fruit and spaceship resilience

16. Spending Someone Else’s Money: Florida dogs, owl jars and sex lairs

17. What Am I Paying For?: Pricey potatoes, horse semen and shops in Wolverhampton

18. Politics and Fraud: Ski-jumping, bribing dictators and Austrian promises

Bad Buying Award – Petrobas and Odebrecht

19. Preventing Fraud: Collusion, checking and commitments

PART 3: HOW TO AVOID THE F** K-UPS

20. Ten Principles for Good Buying

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The Chris Grayling Probation Services Farewell Tour Rumbles On ….

The Guardian newspaper reported yesterday: “Ministers are considering renationalising the entire probation service in England and Wales, the Guardian understands, in the latest twist in a long-running saga to unwind Chris Grayling’s disastrous changes to the sector”.

You may not be surprised by that, or shocked to learn that the probation services outsourcing is a case study in my forthcoming book, Bad Buying – How Organisations Waste Billions Through Failures, Frauds and F**k-ups.

The analysis sits in a chapter that looks at failures caused by the buyer failing to understand a market or markets. Or, as in this case, having a foolish belief that entirely new markets can be created by sheer willpower – and throwing some government cash at the private sector, of course.

A bit of history first. The UK government decided in 2013 to outsource much of its probation services work, despite warnings from the well-respected Institute of Government that it would be “highly problematic”. The work included the management and rehabilitation of offenders, combining an element of punishment, such as monitoring the conditions of prisoners’ release, with the desire to reduce re-offending and help the offender make a useful contribution to society.

The UK Ministry of Justice, then under the command of minister Chris Grayling (who, you may also not be surprised to learn, crops up several times in my book), created 21 Community Rehabilitation Companies (CRCs) to manage offenders who posed low or medium risk. In February 2015, the CRCs were transferred to eight, mainly private sector, suppliers working under contracts that were to run to 2021-22.

But the implementation was rushed, there was little of the innovation that was promised from suppliers and 19 of the 21 companies ultimately involved failed to meet targets for reducing the frequency of re-offending. In July 2018, the Ministry announced it would terminate its contracts with CRCs 14 months early, in December 2020.

Suppliers didn’t do well either. The National Audit Office estimated cumulative losses of £294M for the firms if contracts continued to the end date, and Working Links, one of the providers, collapsed into administration in February 2019.  Finally, David Gaulke, by now the Minister in charge, announced in May 2019 that the contracts would not be offered to private firms.

Most probation services were in effect re-nationalised after one of the highest profile UK public sector buying failuresin recent years. At that point, some minor services such as the provision of unpaid work and accredited programmes were to be offered up to the private and voluntary sectors. But that now appears to have been abandoned too.

There were clearly many problems here, but fundamental is the issue of an entirely new “market” being created, without real understanding upfront of what the work involved, what capabilities would be needed by the winning firms, how the right commercial models would be constituted or how competition could be maintained and stimulated. 

“If you build it, he will come”, the tagline from the legendary film Field of Dreams, seems to be how some governments think when it comes to creating markets. And generally, some entities will emerge from the undergrowth, bidding to carry out pretty much whatever government asks them to  – drawn by the potential rewards, of course. But this does not create vibrant, sustainable, successful markets in itself.

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