Perspectives on Various Issues of Interest

US federal government contracting for disaster management

 

 

In a recently published article, my co-author and I focus on the issue of contracting by US federal agencies in response to disasters. Specifically, we investigate the choice of procurement contract type (cost reimbursement vs. fixed price) by US federal agencies during disaster management operations. The research relies on 47,560 contracts issued by the US federal government in response to 14 major disasters between 2005 and 2016. While earthquakes represent the majority of disasters in our dataset (10 out of 14 disasters), we also consider other disasters (such as earthquakes, tornado, and oil spill) for which federal agencies procure products and services for relief operations. The dataset includes events that mainly affected the US; however, two events outside this geographical scope were included (Haiti earthquake in 2010 and Pacific earthquake in 2011) because they represented a significant expenditure by US Federal Government agencies. We build on agency theory to investigate the choice of the contract type made by federal agencies at the different stages of a relief operation. This research provides empirical evidence of the key factors underpinning the choice of contract in the context of disaster management, namely the amount of spend per contract and the type of acquisition (product or service), and reveals the moderating role of the stage of the relief operation.

Our finding shows that in disaster-relief operations, as spend increases, the likelihood of choosing cost reimbursement also increases. Our results indicate that government agencies tend to be more guarded in this respect by preferring cost reimbursement deals as the contract value increases. Our findings show that service contracts are more likely to be cost reimbursement. We found no significance in the direct relationship between stage of disaster (preparation, response, and recovery) and contract choice, when the response stage was operationalized as 100 days after a disaster strikes. However, the relationship was positive and significant for 200-day model. Interestingly, we expected more cost-reimbursement contracts in the Response stage. Similar logic would lead us to expect that more cost-reimbursement contracts relative to fixed-price contracts during all disaster stages relative to “normal times.” However, a report by the Government Accountability Office (GAO, 2017) reveals that the split of contract types for all government contracts across all agencies between 2011 and 2015 was 63% fixed-price; 37% cost-reimbursement. This contrasts with our dataset in that fixed-price is much more prevalent during disaster contracting, accounting for 92% of all contracts, notably driven by Hurricane Katrina contracts. It appears that the preference for fixed-price arrangements is emphasized during disasters, particularly during the response stage. One explanation may be that fixed-price contracts might be quicker to construct (and much easier to monitor) than cost-reimbursement contracts; give the hectic nature of disasters, this may dominate. This is in line with prior arguments about the ease of execution of fixed-price contracts. This also helps explain that as we expand the response-stage window to 200 days, that is, we include more contracts that are not subject to time pressure, the relationship between stage and contract choice becomes significant.

The split-sample analysis of the Katrina/non-Katrina contracts revealed that in the non-Katrina sample there is a higher likelihood of using cost-reimbursement contracts during the response stage than in the preparation and recovery stages. However, the finding was opposite and significant for the Katrina only sample. Katrina is the first and most severe event in our dataset, and the response effort was heavily criticized for handing out large contracts without competition. These criticisms resulted in an investigation by the White House and a legislation reform with extensive revisions to emergency response provisions (Post-Katrina Emergency Management Reform Act of 2006, 2006). While these recommendations and legislation do not specifically refer to fixed-price contracts, they stipulate changes to staffing, organization structure, and contract competition. In 2015, 10 years after Katrina, the GAO reported (GAO-15-783, 2015) on the changes to emergency response provisions triggered by Hurricane Katrina reported a tripling in the number of contract officers and the establishment of the Disaster Acquisition Response Team (DART) and a new rule that prevents contracting officers from issuing non-compete contracts exceeding 150 days without proper authorization. These changes to staffing, legislation, and procedures are likely to have affected contract officers' behavior post-Katrina, particularly regarding the award of service contracts, which tend to extend over time.

Interestingly, while we hypothesized that larger contracts during the response stage would lead to more cost-reimbursement contracts, the opposite was true in the whole sample. The result is driven by extremely large contracts. To explore this further, we inspected the largest contracts during the response stage, specifically those over $75 million, which is the threshold at which the senior procurement executive of the agency is required to approve the contract according to FAR 6.304. We found 39 contracts, of which 31 (79.5%) are fixed-price and eight (20.5%) are cost-reimbursement. However, this split is not homogenous across government departments. Of the eight cost-reimbursement contracts in this sub-set, seven were issued by one Agency, FEMA; the agency tasked with “helping people before, during and after disasters.” Of these seven contracts, five relate to architectural/ construction services and appear to be associated with providing accommodation for people in the aftermath of a disaster, in line with FEMA's mission. The remaining two are technical assistance contracts.

In our sample, as expected, FEMA has the largest number of contracts 13,742 (29% of all contracts), because of its mission. Even though FEMA has a larger proportion of the extremely large cost-reimbursement contracts, they predominantly award fixed-price contracts during the response stage due to the speed of awarding and monitoring them. It seems that FEMA follows a dual strategy, relying on fixed-price contracts for speed, and also using extremely large cost-reimbursement contracts for major projects. While practitioners have long recognized the benefits of fixed-price contracts in terms of speed, this is not broadly recognized in the extant literature.

We ran a sub-sample analysis for the two major agencies: FEMA and the Department of the Army, which represent over 43% of all contracts in the dataset. This analysis indicates that the findings regarding FEMA are significant and align with the results in our main model results. Even the outcome pertaining to the disaster response stage exhibits a higher likelihood of using cost-reimbursement contracts during the response stage than in the preparation and recovery stages. Conversely, in the case of the Army, we find that in disaster-relief operations, the amount of spend associated with a contract increases the likelihood of using cost-reimbursement contracts over fixed-price contracts. We also find that in disaster-relief operations, the Department of Army was more likely to consider cost reimbursement contracts for procuring services than for procuring products. In the case of the Department of Army  we couldn't find evidence of higher likelihood of using cost-reimbursement contracts during the response stage than in the preparation and recovery stages. Neither did we find evidence of higher use of cost reimbursement contracts during the response stage (as compared to other stages) to be related to (a) the amount of spend and (b) the procurement of services as compared to products. 

This indicates that while both government departments issue many contracts during a disaster, only FEMA appears to be under pressure during the response stage. This outcome corresponds to FEMA's primary mission of addressing urgent needs in the immediate aftermath of a disaster. An alternative explanation is that because agencies might have already negotiated per-unit costs with selected suppliers for services commonly needed during emergencies, such as medical care, provision of meals, and so forth, pre-positioned contracts could thus help mitigate opportunistic behavior. Policy guidelines under FAR make pre-established arrangements available to government officials, and researchers have reported on their effectiveness. For example, in 2019, the Army Corp of Engineers established a $999 million advance joint venture agreement with six contractors to provide time sensitive disaster support to repair critical infrastructure such as roads, bridges, and electric distribution systems.

Our robustness checks reveal that results regarding the amount of spend during the response stage for the two largest sub-samples regarding the type of competition, “Not Competed” and “Full and Open Competition,” (which together represent about 47% of all the contracts in the dataset) are significant and negative, in line with our main model results. These two competition categories, which are at opposite ends of the spectrum (from no competition to full and open competition), indicate that the negative interactions between the stage of the disaster and the amount remains under vastly different types of competitive environment. Finally, our results regarding the interaction between the service variable and disaster stage, show that services contracted during the response stage are more likely to use cost-reimbursement contracts than those awarded during other disaster stages, in line with agency theory predictions and our logic presented there.

Source: Mena, C., & Nair, A. (2024). US federal government contracting for disaster management. Journal of Operations Management, 70(4), 523-547.

Strengthening the Personal Protective Equipment Supply Chain

The vulnerabilities of global supply chains were exposed by the COVID-19 pandemic. In this post I first consider the geopolitical landscape and disruptions in PPE supplies by reflecting on the conditions before the pandemic until the time when countries started to take steps toward managing the crisis. Next, I discuss prevailing contextual conditions, future demand and supply trends, and directions for risk management through government interventions, public-private partnerships and organizational best practices.

It is instructive to start from pre-COVID time to understand the distribution of various PPE products and global demand. Before COVID-19, the global PPE market was worth roughly $60 billion. PPE products are destined for numerous different economic sectors such as healthcare, mining and construction. According to an April 2020 analysis by the Asian Development Bank, the healthcare sector PPE market alone was estimated at $2.5 billion in 2018 as shown below where the revenue is in $ millions.

As for 2020, the United States (US) was a major manufacturer, accounting for 20 % of the global production of every category apart from gloves.

Source: Mordor Intelligence (updated in November 2020 ), Statista research department, COVID-19 PPE demand and supply perspectives, Industry experts interviews (November 2020)

Despite being a major PPE producer, the US relied heavily on imports to meet local demand.

Source: ITC Trade Map

The global trade network in 2018 shows high geographic and regional concentration in the PPE supply chain. There are three regional clusters: Asia, Europe, and the US. Among countries making these products, China (PRC) clearly plays a central role in the trade network (except for gloves where countries such as Malaysia, Thailand, Indonesia are dominant due to abundance of rubber).

Source: ADB calculations using data from United Nations. Commodity Trade Database.

In fact, PPE concentration in Asia has intensified in the past decade or so.

Source: Asian Development Bank (2020)

To counter the supply shortage of PPE during pandemic, several nations had instituted export restrictions. The efficacy of these measures could be debated since they also could have resulted in less optimal investments in new capacity (since manufacturers would take the restricted market into consideration when taking capacity decisions), high burden on public finances (since governments had to provide greater fiscal inducement to encourage domestic manufacturers to increase capacity aimed at the restricted market), and loss of cooperation as well as potential retaliation by nations.

Source: International Trade Center website (in November 2020)

Source: Global trade alert                                                                                   Source: : Committee for the Coordination of Statistical Activities (2020)

Considering product shipments from China to US, once China was able to control its own pandemic, supply chains for garments, visors, thermometers, gloves, simple masks and N-95 masks linking China to the US adapted very well. The need for gloves in the US market was served by other countries such as Malaysia, Thailand, and Indonesia, since the plastic gloves from China are relatively less in demand in the US. Technological sophistication of ventilators made in China also were not compatible with the US needs, which reduced the adaptive ability of this supply chain.

Source: Dallas, M. P., Horner, R., & Li, L. (2021). The mutual constraints of states and global value chains during COVID-19:The case of personal protective equipment. World Development, 139, 105324.

There was indeed a component of luck in that the pandemic in China had eased as it spread to the west. Future pandemics may not reflect such a temporal dynamic. Additionally, the phenomenal increase in the exports of simple masks and N-95 masks could have been a result of mislabeling and customhouse chaos during the pandemic.

The PPE supply chain is faced with several bottlenecks as shown in the following illustrative example.

Medical supplies were delayed due to shipping challenges. Demand for shipping and transportation services had increased significantly, but the labor available to provide these services had reduced. The backlogs and congestion produced significantly delays, uncertainty and cost increases.

To respond to the crisis, several countries boosted their domestic production base. In the US, the Defense Production Act was activated to mobilize domestic industrial base. The EU accelerated joint procurement procedure with 26 member states to ensure supply of medical equipment across Europe. Structural funds were directed to the supply of medical equipment. In India, financial incentives were provided for the production of critical supplies. Digital platform was developed to identify and fill the shortage of critical supplies. Japan provided subsidies for the production of face masks. State-owned firms in China were repurposed to supply medical materials. Loans and subsidies were provided to firms producing critical supplies.

In a survey, over half of respondents expected a significant or somewhat decreased presence of supply chain components in China, while 75 percent expected a significant or moderate increase in the United States. Similar expectations emerged for the European Union, the UK, Canada, Australia, and New Zealand, for which half of respondents expect an increase in components.

Source: Atlantic Council

44 percent and 53 percent of respondents cited inadequate planning for both near and long-term disruptions as the top vulnerability in their supply chains, respectively. In addition, over 40 percent of respondents listed geographic or regional concentrations as well as bottlenecks and single point dependencies as core vulnerabilities.

Source: Atlantic Council

Over 60 percent of respondents foresee more prioritization of contingency planning and crisis modelling in response to the pandemic’s disruptions. In addition to planning, they ranked location diversification of their supply chains as a top priority, followed by relocating them within the borders of the primary country of operation.

This focus on re- or onshoring due to the growing concern about foreign dependencies and increasing demand for self-sufficiency resulted in several new manufacturing sites being established for the production of PPE products.

Source: Health Industry Distributors Association

Going forward, PPE spending is forecasted to nearly triple by 2027. Demand for N95 respirators will continue to grow more than 5% per year through 2024. Increased demand and limited manufacturing capacity combined to create a predicted 37% shortfall in nitrile gloves in 2021. Raw material shortage used in making isolation gowns will continue to impact prices.

 

The US PPE market is expected to group 12.5% a year through 2024, with 80% of sales in four highly fragmented product segments.

 

Increased focus on workplace safety, product usage to encourage end-user adoption, growth in industries that are heavy PPE users, and shift to online sales will act as tailwind in this market. On the other hand, competition from private labels and low-cost producers as well as uncertain raw material availability will act as headwinds. Some of the price-sensitive segments will witness disruptions while others will need to differentiate in this market.

Government can play an important in strengthening the PPE supply chain by means of reforms to domestic and international trade rules and agreements. It can take necessary diplomatic, economic, security, trade policy, informational, and other actions. Frequent supply chain review and reforms to make supply chain analyses and actions more effective could help. Government can also help in fostering innovation, developing world-class American manufacturing base and ensuring adequate stockpiles in the future.

Public-private partnership can help with coordinating various aspects within the PPE supply chain. These include establishing policies, incentives, and focused federal procurement guidelines; guiding input, development timelines, and product portfolios; initiating combined exercises and planning efforts; incentivizing emergency essential businesses’ use of federal purchasing vehicles; and enabling vertical and lateral supply chain distribution activities. The partnership can help with managing pricing by assessing and maximizing the value and efficacy of federal investments in latent manufacturing capacity. Increased supply chain visibility and data sharing as well as cost-efficient maintenance of inventories could be part of public-private initiatives. Finally, these partnerships can help maintain a specified level of pandemic preparedness and formalize pandemic preparedness as a condition for participation in federal programs.

Organizations need to recognize that supply chain disruptions are becoming more frequent and severe.

Source: McKinsey Global Institute, 2020

Supply chain pressure is only increasing in recent times as reflected below:

Source: Michigan State University's Supply Chain Pressure Index 

Source: New York Fed's Global Supply Chain Pressure Index

Supply-chain leaders believe that the issues by the pandemic will transform supply chains. 73% of respondents in a McKinsey survey indicated that they encountered problems in supplier footprint, 75% faced issues in production and distribution footprints, 85% struggled with insufficient digital technologies, and 48% experienced delays in planning decisions.

Organizations need to understand the bottlenecks along the PPE value chain due to increasing manufacturing capacity. For respirators, supply pressure arises mainly from shortages of melt-blown non woven, a critical ingredient. Supply pressure in for medical masks also arises mainly from shortages of melt-blown non-woven. And for gloves, supply pressure is driven both by nitrile shortages and limited specialist manufacturing capacity

 

Source: COVID-19 PPE demand and supply perspectives, Industry experts interviews (November 2020)

Consumers and non-healthcare workers will drive surgical mask demand in 2021 before dropping by ~ 40 % p.a. in 2021-25. A significant shift in the weight of global PPE demand will move towards Asia.

Source: Source: Mordor Intelligence (updated in November 2020 ), EPI model, WHO assumptions

According to a McKinsey surveys of global Supply Chain leaders, 93% expect to increase resilience across the supply chain, 90% plan to increase digital supply chain talent across supply chains, and 54% expect changes in supply chain planning after COVID-19. As for measures for resilience, 53% plan to consider dual sourcing, 47% plan to increase inventory of critical supplies, 40% are considering near-shoring and increasing their supply base, and 38% plan to regionalize their supply chains. To improve digital supply chain talent, 70% are planning to resell their supply chain labor force and 55% are considering acquiring new talent from the labor market. For supply chain planning 60% are considering implementing advanced analytics, 58% will consider centralizing supply chain planning, and 50% are going to retail faster sales and operations planning cycle. 11% of the respondents indicated facing budget challenges associated with transforming their supply chains.

Given the importance of resilience among supply chain leaders it is important to consider both resistance and recovery capabilities. Resistance capabilities help avoid and contain disruptions. Recovery capabilities enable stabilization and return to normalcy. Companies need to consider not only risk factors (impact and probability of disruptions), but also uncertainties (known, unknowns and unknown, unknowns) associated with disruptions.

Investment strategies need to be considered to manage disruptions effectively. These investments strategies can be categorized as those related to discovery, information, supply chain design, buffers, operating flexibility, security, and preparedness. Discovery related investment strategies would require investing in the ability to identify potential problems in the supply chain as close to the event occurrence as possible. The types of investments include information technology/information sharing, early warning by supply chain partners, forecasting, demand sensing, monitoring of performance in the supply chain. Investment strategies in information call for improving the quantity, speed, and quality of information flow within the supply chain. These could be facilitated by improved information technology, effective communication, and visibility. Supply chain design investment strategies involve designing and implementing supply chains that can be configured and reconfigured quickly in response to changes within the supply chain. Supply base management and supply base reconfiguration can help in this regard. For buffer related investment strategies organizations need to create excess cushions in the form of inventory, capacity and lead times by considering human resource capacity, human resource capabilities/experience, inventory, operating flexibility, and redundancy. With investments in operating flexibility organizations can create a system that can change either the flow or product specifications in response to supply chain problems. Alternatives for transportation and variable bills of material are examples of such investments. Investment in security can help protect the system from supply chain shocks by creating firewalls, quarantine protocols, and development of strengthened supply chains. Finally, preparedness related investment strategies require designing contingency plans for dealing with potential supply chain shocks and carrying out drills using these plans so that various groups would know what they must do and what their specific responsibilities are. This can be facilitated by investing in planning for contingencies, training/rehearsing, risk assessment and insurance.

Different investment strategies contribute towards different stages of resilience. Avoidance stage is best handled by investment strategies in discovery, information, security and preparedness. Containment can be managed by investments in supply chain design, buffers, operating flexibility, security, and preparedness. Investments in supply chain design, buffers, operating flexibility, and preparedness can also help with stabilization. Finally, the return stage is best managed by investments in operating flexibility and preparedness.

Organizations need to realize that there are several modes of reshoring as shown below. Firms can relocate manufacturing activities performed by wholly-owned offshore facilities to wholly-owned onshore facilities (in-house restoring); can relocate manufacturing activities performed by wholly-owned offshore facilities back to onshore suppliers (restoring for outsourcing); can relocate manufacturing activities performed by offshore suppliers to wholly-owned onshore facilities (reshoring for in-sourcing); and can relocate manufacturing activities performed by offshore suppliers back to onshore suppliers (outsourced reshoring). 

Source: Gray et al. (2013)

To be successful, new entrants will need to achieve scale and secure raw materials and specialist machinery. The will also need to acquire technical expertise and quickly build brand strength.

Source: COVID-19 PPE demand and supply perspectives, Industry experts interviews (Nov. 2020)

Organizations need to consider a range of supply (shift away from sole-source contracts), data aggregation and predictive modeling capabilities, understand the price-points for competitiveness, manage quality of products, have built-in redundancies, invest in innovation & reusables, create transparency in their supply chains, and foster talent. 

Quality penalties and continuity of health care

In a study my co-authors and I examine whether quality penalties aimed at reducing readmissions improve continuity of health care. We investigate if the quality penalty policy impacts continuity of care for services that were targeted by the policy through what we refer to as primary spillover effects. We also investigate the secondary spillover effects of the quality penalty policy on continuity of care for related ailments that were not targeted by the policy. The findings of this study show that externalities from quality penalties for readmission not only benefit continuity of care for the regulated ailments, but also allow health care organizations to adapt their existing routines and unlock continuity of care improvements for related, but non-targeted ailments. The finding that continuity of care does not diminish for unrelated services assuages concerns that hospitals respond strategically by neglecting or redirecting resources away from unrelated services. We provide novel insights as to how organizations respond to regulation by actively re-configuring their care patterns and coordinating service provision with attendant spillover effects on a variety of patients. Processual mechanisms such as the source of patient admissions and length of stay, and structural mechanisms such as system size and investments in continuity of care facilitate the spillover effects. 

Source: Ananthakrishnan, R., Deore, A., Nair, A. Virtuous Spillover Effects of Quality Penalties on the Continuity of Health Care. Working paper.

 

The Role of Social Media in Linking Corporate Social Irresponsibility with Abnormal Returns

Interest in the topic of corporate social irresponsibility (CSI) has burgeoned in recent years. CSI covers organizational activities that have an adverse impact on investors, employees, customers, suppliers, or the local communities. This set of organizations and individuals represent the stakeholders of a firm whose expectations of a certain behavioral standard are not met when firms cause harm through their actions and do not take steps to rectify the situation. Information about firm actions that may have compromised sustainability objectives can have a multifaceted outcome. Given that negative news receives more attention and deliberation, CSI can not only shape the sentiments of customers and media but also affect firm performance from the reaction of customers and stakeholders. At the same time, as stakeholders may be more focused on other performance measures such as cost and quality, instances of CSI may also end up receiving low to moderate attention, thereby reducing their negative effects. If this is indeed the case, firms can misbehave on the sustainability front with little consequences. As such, undertaking further research investigation is important to discern the impact of CSI on sentiment formation and financial outcome. Drawing on stakeholder theory and attribution theory, in this study we investigate the association of firms’ environmentally irresponsible actions with social media sentiments and abnormal stock returns.

In our research we examine how corporations’ environmental impact influences social media sentiment and firm value. To address this important question, we analyze a large-scale dataset collected from five sources (Trucost, Infegy Atlas, Center for Research in Security Prices, COMPUSTAT, and Harris Interactive). We find that environmental impact results in less favorable social media sentiment toward the firm. Natural resource usage and land, water, and air pollution have the most profound effect on social media sentiment of the various types of environmental impacts. However, brand equity helps insulate the negative effect of environmental impact and simultaneously strengthens the positive relationship between social media sentiment and the firm’s long-term abnormal returns; by contrast, market competition weakens this relationship. The results further show that social media sentiment mediates the link between environmental impact and firm value.

The research findings provide useful implications to aid firms in managing their environmental impact so as to avoid negative social media response and, in turn, enhance firm value. Ultimately, this study calls for the careful management of investments in activities detrimental to the environment, because consequent negative comments on social media can negatively affect firm value. Furthermore, firms lacking brand equity and facing intense market competition need to be especially vigilant with their activities that can be construed as socially irresponsible.

Source: Nair, A., Nguyen, H. Environmental Impact, Social Media, and Abnormal Returns: The Moderating Role of Brand Equity and Competition. Working paper.

Federal Government Contracting for Disaster Management

About 500 disasters occur every year, affecting more than 200 million people and killing around 75,000. Moreover, the number and severity of disasters are increasing.  To cope with these challenges, governments spend vast amounts of money in acquiring products and services. For example, the US Federal government spent over $20 billion for supplies needed for Hurricane Katrina, and so far, it has committed over $245 billion in acquisitions related to the Covid-19 pandemic.

During disaster relief operations, procurement can be a complex and uncertain activity, and there is ample reporting of failures.  A report by the US Senate Committee on Homeland Security and Governmental Affairs examined contracts awarded by Federal Emergency Management Agency (FEMA) during the response to the 2017 hurricane season.  The report reveals major shortcomings, such as the failure to adequately use pre-positioned contracts, the award of contracts without adequate vetting, inadequacies of the bidding process, and failures of suppliers to deliver.  

While disaster relief operations have similarities with commercial operations, there are notable differences concerning speed of response, uncertainty of supply and demand, and stakeholder’s goals.  These differences call for unique capabilities in terms of logistics – to ensure timely delivery – and procurement – to ensure efficient and effective contracting.  Despite the importance of both logistics and procurement in this context, research has tended to focus on logistical challenges. Much less attention has been placed on procurement, with some notable exceptions.  A review of the disaster management literature shows that out of 268 papers, only nine dealt with procurement, emphasizing the paucity of research into procurement in disaster relief. In the public administration literature, researchers have also noted that emergency procurement has been neglected and that more research is needed.  To frame our research, we take a multidisciplinary perspective drawing from the fields of operations management, disaster management, and public administration.

This research focuses on procurement during relief operations by investigating the use of contracts by US federal agencies during national emergencies.  The research focuses on the choice of contract type, which is an established dilemma in procurement.  Different contract types offer buyers and sellers a different balance of risks and rewards, and debate continues about their effectiveness under varying circumstances.  Thus, it is important to investigate the factors that influence the choice by federal agencies between cost-reimbursement contracts and fixed-price contracts as disaster relief operations unfold. 

Three key stages characterize disaster relief operations: preparation, response, and recovery. Each stage presents vastly different operational conditions. The response stage, in the immediate aftermath of a disaster, is particularly distinctive due to increased uncertainty, market disequilibrium, pronounced information asymmetries, and extreme time pressure; differences that increase the government’s risk exposure. For instance, the CARES Act, launched in response to the Covid-19 Pandemic, immediately attracted the attention of unscrupulous suppliers. Despite the differences across disaster stages, the dearth of research spanning across all stages has thus far prevented the evaluation of the factors influencing contracting practices. This study addresses this research gap by investigating how the type of acquisition and the amount of spend affect the choice of contract type. Furthermore, we examine how the disaster stage moderates these relationships, with a particular focus on the response stage, which presents the most extreme conditions.

Drawing from agency theory and the theory of regulatory capture, we investigate the choice of contract type in a setting that combines high uncertainty (which creates information asymmetries, adverse selection, moral hazard, and opportunism), and the need for speed and flexibility (which exacerbates problems of bounded rationality, supplier availability, and adverse selection).  Agency theory brings an economic perspective to the choice of contract type dilemma, as it seeks to determine the most efficient contract, given conditions of goal conflict, opportunism, information asymmetry, bounded rationality, risk aversion, and self-interest.  The theory of regulatory capture brings a public-private relationship perspective, arguing that private organizations can advance their interests by gaining influence over government agencies, often at the expense of the public interest.  It has been noted that in the aftermath of disasters, it is not uncommon to find corrupt suppliers exploiting the situation. 

The research relies on data made available by the US government, including all contracts deployed by federal agencies to support disaster-relief operations between 2005 and 2016, including 47,560 contracts across 14 disasters.  We evaluate the role of two key factors underpinning the choice of contract type during disasters, namely the type of acquisition and the amount of spend.

Our results indicate a positive association between contract spend and the likelihood of choosing a cost-reimbursement contract, which has significant implications for policymakers and practitioners because it indicates a higher risk exposure for government agencies in larger contracts.  Spend thresholds stipulated within FAR are intended to mitigate this type of risk, but since these thresholds are relaxed during disasters, government agencies become more exposed by accepting risk for the sake of expediency. However, federal agencies continue to have a fiduciary responsibility, which falls into the hands of contracting officers. Thus, both capacity (i.e., availability) and capability (i.e., knowledge and skills) of contracting officers are central to effective disaster response.  This emphasizes the importance of human resource aspects of public procurement. 

For contracting officers, the positive relationship between contract spend and cost-reimbursement contracts emphasizes the importance of contracting efforts in advance of a disaster, when they have more time to evaluate suppliers and negotiate contracts.  Pre-arrangements could thus help mitigate opportunistic behavior. Policy guidelines under FAR make pre-established arrangements available to government officials, and researchers have reported on their effectiveness. For example, in 2019, the Army Corp of Engineers established a $999 million advance joint venture agreement with six contractors to provide time-sensitive disaster support to repair critical infrastructure such as roads, bridges, electric distribution systems.

Our finding that cost-reimbursement arrangements are more prevalent in services contracting, particularly during the response stage, appears to be generally beneficial to suppliers, as they assume less risk and can concentrate on delivering the expected outputs from the contract without particular concern for costs.  For the government, this represents an increased risk, and contracting offices must remain vigilant and act when suppliers fail to fulfill their duties.  Potential suppliers should be mindful that cost-reimbursement contracts can involve additional monitoring costs. For federal agencies, this stresses the importance of having quick and easy onboarding as well as monitoring processes for suppliers of services in disaster situations.  Furthermore, it is important that contracting officers maintain open communications channels with suppliers and use supplier forums to allow suppliers to provide feedback on the suitability of contract types and other aspects of relief operations.

The negative moderation of response stage as spend increases means that there is a preference for fixed-price contracts involving large monetary value during the response stage when compared to other stages.  This appears to be positive news for the government, as it allows prioritizing speed over the fear of opportunism when dealing with large contracts.  However, this result does not imply that contracting officers can let down their guard against opportunistic suppliers.  While fixed-price contracts might help mitigate some risks for government agencies, it is still possible for opportunistic suppliers to take advantage of disaster situations. Therefore, government agencies should continue to maintain transparency and fairness of the procurement process before, during, and after the award. Moreover, drawbacks associated with fixed-price contracts, such as limited flexibility, potentially poor quality, and the possibility of supplier opportunism, should be taken into consideration.  For example, in 2009, FEMA reached a $4 million settlement with a supplier who failed to deliver on a contract to build and operate a base camp for first responders during Hurricane Katrina.  It is also important to consider efforts during the preparation stage to maintain the supply base for categories involving large acquisitions to preserve competition among prospective suppliers.

Source: Mena, C., Nair, A. U.S. Federal Government Contracting for Disaster Management. Working paper.

Risk Management Infrastructure and Information Exchange for Managing Disruptions During Surgeries

 

In a research study we examine the impact of magnitude and likelihood of disruptions on surgical procedure performance. More importantly, we investigate the moderating role played by information exchange and risk management infrastructure in mitigating the negative effect of disruption on performance.

A nationwide multi-respondent survey was administered to operating room personnel to collect information on their experiences with disruptions experienced in surgeries. The survey data is analyzed to examine the relationship between operational disruptions and procedure performance. Additionally, the moderating roles of risk management infrastructure and information exchange on the relationship between disruptions and performance are investigated. The results obtained from the empirical analysis are validated using data from an ethnographic investigation of surgeries at a major hospital.

The results show that both the magnitude and the likelihood of a disruption adversely impacts procedure performance. Interestingly, we find that risk management infrastructure and information exchange play different roles in mitigating the effect of disruptions on performance. We find that while risk management infrastructure helps mitigate the effect of magnitude of service disruptions, information exchange helps reduce the effects of likelihood of disruptions. The findings lend strong support to our theoretical assertions. By means of the participant-observer data collected from over 100 surgeries as part of the ethnographic investigation, we validate our key findings. Our findings suggest that disruptions are common occurrences in surgical settings, but their performance impact may be lessened or altogether avoided with the proper information and risk management mechanisms in place.

This survey research extends our understanding of risk management by considering a context that is highly prone to disruptions. We adopt existing constructs pertaining to supply chain disruptions within this context and find new insights. The findings of our study show differential roles played by information exchange and risk management infrastructure in mitigating disruptions. This nuanced understanding provides directions for aligning efforts towards risk mitigation in surgical settings in a more focused way. This study supplements findings from survey data analysis with an examination of data collected by means of ethnographic investigation.

Our study provides insights to practitioners to lower the number of disruptions, thus improving quality and lowering costs. Managers in other industries that often work in IATs may find the results applicable to their context. Many organizations are looking to lower their risk of disruption, and this research can help them better understand how their organization may be responding to disruptions. From the controls, we learn that operating room (OR) location influences performance. Inpatient rooms are typically larger, and more comfortable for everyone present. Hospitals may explore investments in adopting more flexible outpatient rooms or different layouts, such that the space the equipment utilizes in the room is minimized. OR personnel should be made aware that the disruptions increase the length of episodes of care and in-turn impact performance. This knowledge may help guide healthcare workers actions to better ensure a smooth experience by thinking ahead and anticipating the needs of others in the room. Additionally, experience matter. Thus, educating those in the OR department concerning the behaviors that lower or increase the risk of disruptions in acute episodes of care, a hospital may experience lower costs and less waste while saving time. In turn, this could increase the quality of results and the satisfaction of patients and team members.

To begin, a hospital's OR department or risk management department may want to develop business continuity plans by exploring the Disruption in Surgery Index  and map their disruption items. This will begin to help one understand the consequences of an episode of care disruption and provide the means to focus on the most detrimental disruptions first. This exercise will allow resources to be used efficiently to begin mitigating and building resilience for future disruptions. This awareness could lead to policies that attempt to sequester an OR team so they are not interrupted by outsiders during an episode of care. These efforts, along with the suggestions in this research, should be part of a broader conversation around business continuity planning within the OR.

Hospitals and their OR departments should look to increase their levels of information exchange to help maintain a high level of procedure performance. This could be done through training, promoting psychological safety within teams, and building long-standing relationships to create stronger bonds among team members. Additionally, formalized information sharing processes could be introduced throughout a procedure, like the pre-procedure "time-out" discussion where a surgical team ensures one more time that the right patient is receiving the correct procedure on the proper part of their body. These formalized processes ensure that different members of the team are heard, thus increasing informational independence and information distribution. Furthermore, as mentioned in the previous section, awareness by personnel of when it is appropriate to communicate is critical. Through education and experience, healthcare personnel can learn to minimize discussions during routine work, so that disruption risk remains low. Alternatively, they should learn to increase communication during higher disruption risk moments in an episode of care.

Investments in risk management infrastructure will benefit hospitals struggling with high magnitude disruptions, such as COVID-19. Risk management infrastructure further creates a more open environment by offering information to team members that may help prevent a disruption. However, this infrastructure should not solely rely on technological solutions, as "technology overload" may occur. These early warning systems may stem from pre-defined processes such as the pre-procedure "time-out", hardware or software installed in the surgical suite that alerts personnel to a potential issue, or training that discusses methods of analyzing risks and managing them, possibly through what-if scenarios. As mentioned in the previous section, low-cost solutions that provide signals to others, such as notes on doors, can have positive impacts on procedure performance. Additionally, inside the surgical suite, a better design which builds risk management infrastructure into each element will help promote a disruption-free area. These design elements may include basic signage to alert others to important matters. It may also include audible alarms, fire suppression, air filtration systems, and tools adapted to reduce user fatigue and errors. In summary, efforts to promote information exchange and resilience through risk management infrastructure will yield positive procedural outcomes.

Finally, norms of information exchange and risk management infrastructure touch upon the strategies identified from eight HRO frameworks currently being used by healthcare entities. These strategies include developing leadership, data systems, implementing interventions, training and learning, and a safety culture. As healthcare leaders continue to work towards becoming HROs, they should focus on these two constructs to help get them there. Beyond healthcare, consulting firms experience similar challenges using interdisciplinary teams, which quickly form to achieve a task for a customer. They may benefit from enacting these strategies to ensure better outcomes for their customers. It cannot be understated how difficult it may be to change the norms of information exchange. This takes time. In contrast, the implementation of some risk management infrastructure may cost more upfront, but the benefits may occur more quickly.

Source: Dreyfus, D., Nair, A. Impact of Disruptions on Performance in Acute Episodes of Care: Moderating Role of Information Exchange and Risk Management Infrastructure. Working paper.

External auditors and certification bodies of ISO 9001

 

In a research study my co-authors and I seek to advance the knowledge on ISO 9001 implementation by examining two research issues. First, we investigate the relationship between external auditors, certification bodies, and the operational and market-oriented outcomes from the ISO 9001 certification. Second, we study the different roles played by external auditors and certification bodies in affecting the outcomes achieved from the quality of implementation of the standard. Using a dataset comprising of 537 firms from Australia and New Zealand that are ISO 9001 certified, our findings show that the quality of external auditors enhances operational outcomes as well as strengthens the relationship between ISO 9001 implementation and operational outcomes. This affirms the role of external auditors in the implementation of the standard. On the other hand, the reputation of certification bodies has a positive direct effect on market-oriented outcome, and its effect is strengthened by the quality of ISO 9001 implementation. The findings, therefore, show the contrasting roles between external auditors and certification bodies in enhancing different outcomes of ISO 9001 adoption in terms of operational and market-oriented ones.

There are a number of practical implications drawn from the findings. First, our study confirms once again that quality implementation is the key determinant of the operational outcomes of ISO 9001 adoption. At the same time, however, the findings also confirm the important role of external auditors in enhancing the effect of implementation on the operational outcome from ISO 9001 standard. This result is instructive in that it is the quality of auditors rather than the reputation of certification bodies that help firms in gaining the operational outcomes. For many firms, however, this finding could raise a practical problem: how to find good auditors? The answer to this question is not straightforward because, unlike certification bodies who have certain brand equity, auditors are employed by certification bodies and their quality is somewhat hidden from the customers and is only revealed after they are engaged after the ISO 9001 certification is over. Indeed, this problem is exacerbated by the fact that firms cannot simply resort to reputable certification bodies in order to find good auditors. The positive correlations between quality of auditors and reputable certification bodies only show a medium strength and, hence, this does not provide a strong assurance that reputable certification bodies will always send quality auditors. Therefore, while engaging reputable certification bodies is recommended, firms should request that they are served by experienced and quality external auditors whose characteristics are partly captured in this study. At the same time, however, the findings also infer that high quality auditors are not necessarily always employed by reputable certification bodies; they could also be part of less reputable certification bodies. In this regard, our findings also provide a ray of hope for firms who cannot afford to engage reputable certification bodies that normally charge higher costs than their counterparts. In particular, smaller firms with limited resources still have a chance to engage high quality auditors and to benefit from their services.

Our findings show that the reputation of certification bodies (rather than the quality of external auditors) helps firms improve their market-oriented outcome, including broadening their market scope and winning more customers. This finding suggests that customers still rely on “brand image” of reputable certification bodies. Customers perceive ISO 9001 certifications issued by reputable certification bodies to be of higher value than others. While this may be true to a certain extent, it is important to balance this notion with our finding, which shows that certification bodies do not have a direct positive effect on operational outcomes. Instead, firms ought to seek high quality ISO 9001 implementations that are then vetted by high quality auditors so as to obtain operational outcomes. The operational outcomes in turn exert a positive effect on market performance. This result therefore sends a strong message to firms that are trying to attain market-oriented outcomes solely from compliance to the standard’s requirements without internalizing the implementation process. More importantly, since it is operational outcomes that are mainly desired by customers (rather than the certification), simply signaling high quality ISO 9001 implementation by tapping into the reputation of certification bodies could be a misleading strategy to gain market-oriented outcome.

Source: Prajogo, D., Nair, A., Castka, P. 2022. The effects of external auditors and certification bodies on the operational and market oriented outcomes of ISO 9001 implementation. IEEE Transactions on Engineering Management. (Forthcoming).

Consignment Inventory Management for General and Physician Preference Medical Supplies

In healthcare, the largest cost after labor is represented by medical devices and materials. Recent estimates indicate that medical supplies will outpace labor as the largest expense for hospitals and health systems. The number and criticality of healthcare medical supplies can vary greatly, and factors such as physician involvement in supply selections adds complexity to the supply chain. In general, we can categorize hospital supplies as general medical supplies (GEN) and what are called physician preference (PP) items. Most items purchased by a hospital are typically GEN items, and include items such as syringes, gloves, or IV solutions to name a few. In contrast, PP items are supplies which physicians believe will have a signi􏰂cant impact on patient care or quality of life. Supplies such as orthopaedic implants and pacemakers are examples of PP items. Physician preference items are some of the most expensive items in hospitals. Studies have noted that PPIs can represent up to 61% of total cost of purchases.

In the case of GEN items, hospital purchasing groups can easily consolidate volume for these items to negotiate pricing from a particular vendor. In contrast, PP items are marketed directly to physicians who make the final purchasing regarding device and therefore vendor to adopt. As a result, it is common for hospitals to source the same PP from several different vendors in order to satisfy the preferences of the different physicians practicing in the hospital. This practice hinders the ability to consolidate volume in order to negotiate better pricing for PP items. Given the limited options purchasing groups have in order to reduce the cost burden of PP items, hospitals have increasingly looked for other ways to reduce the cost of carrying PP items in their facilities. One of the ways in which hospitals seek to reduce inventory cost of PP items is by the use of consignment agreements.

Under a consignment agreement the hospital physically stores inventory while the vendor keeps ownership of the inventory stored at the hospital. Once the inventory is used, the vendor receives payment for the units consumed, typically one or two months after product consumption. 

The use of consignment agreements allows hospitals to reduce inventory costs without sacrificing product availability and quality. Hospitals benefit from consignment agreements due to decreased capital tied up to inventory as well as delayed payment. As a result, under consignment hospitals do not carry any cost of capital, but still incur the cost of inventory storage as well as costs related to damaged, missing, and in some cases obsolete items.

Under consignment the vendor is typically responsible for delivering inventory to the hospital according to pre-specified order amounts set by hospital management. The vendor is typically also responsible to respond to any surges in demand in order to avoid product stockouts incurring any resulting costs. Since the vendor keeps ownership of the inventory while it is stored at the hospital, the vendor carries the cost of capital associated with holding inventory at the hospital warehouse. As a result, the vendor experiences an increase in inventory costs as well as a delay in payment making the use of consignment less attractive. The vendor will not agree to such agreement unless a profit sharing contract is in place. Typically vendors will be motivated to enter into a consignment agreement under one of two conditions, increased product per unit cost or increased purchase volume. By either increasing the unit cost or capturing a higher share of hospital demand, the vendor can increase its profits in order to mitigate the increased costs of having a product under consignment.

While consignment agreements can provide significant benefits to the hospital, not all products can be managed using consignment. Consignment agreements need to be carefully negotiated such that both partners may obtain financial benefits. Items under consignment need to be carefully monitored to capture usage that triggers payments to the vendor. Lack of proper oversight of consignment stock in hospitals may result in higher rates of product shrinkage and obsolescence. In some cases vendors do not offer the option to use consignment or the added complexity doesn't justify the use of consignment for a particular item. As a result, hospital management is typically interested in using consignment agreements for items that represent a significant amount of spending. Items that fall into this category are typically PP items or high volume GEN items. %PP items tend to be expensive items with relatively low demand volume and high demand fluctuations. In contrast GEN items tend to be more generic, less expensive, required in higher amounts and exhibit less variability in demand as compared to PP items.

In a study we collaborated with a large teaching and research hospital located in the midwestern United States. The hospital is a level 2 trauma center with over 600 beds and an average annual spending of over $17 million dollars in medical supplies. We obtained detailed monthly spending data for the top 3000 items purchased for a span of six years. Hospital management was interested in understanding the relative cost of managing inventories of GEN and PP items in-house as compared to the consignment option offered by vendors. Furthermore, guidance on the type of item that could benefit the most from the use of a consignment agreement was of interest. We present mathematical models that capture the comparative cost of using in-house and consignment inventory for GEN and PP items. To understand the implications of different consignment agreements, we consider the cases when the vendor charges higher per unit price as well as when the vendor expects higher purchase volume. Based on information provided by hospital personnel as well as current literature we study the financial effect of disregarding the increased complexity of managing consignment stock that may result in unforeseen inventory costs, and analyze its impact on GEN and PP items.

We find that although hospitals will enter into a consignment agreement mostly for financial reasons, disregarding a potential increase in inventory costs will affect GEN and PP items differently. Furthermore, the effect of increased inventory costs will affect GEN and PP items in different ways depending on the type of contract used, price increase or volume increase. This allows us to gain insights into the type of consignment contract that is most beneficial to the hospital depending on whether GEN or PP items are considered. We validate our findings using hospital data and provide practical insights for hospital management to aid in the selection of medical supplies that should be managed under consignment to maximize financial benefits.

Implications:

CS agreements are used by hospitals seeking to reduce the cost of keeping and managing medical supplies. The use of CS is typically seen as a way to reduce overall inventory costs for items such as high-cost physician preferred items or high-volume general medical supplies. The use of CS can bring financial benefits when its overall impact is properly understood and accounted for. On the contrary, when hospital management disregards the potential impact of the use of CS on factors such as obsolescence, lost or damaged goods, as well as maintenance costs, savings may not be perceived. Empirical data obtained for this study corroborates the fact that contrary to what hospital management may expect, hospitals may not experience a decrease in overall inventory costs as a result of the use of consignment particularly for PP items. Hospitals manage a wide range of products, which necessitate a careful consideration of inventory management policies based on their underlying characteristics. Contrary to the expectation that CS will result in lower expenses for PP items than if these items are maintained in inventory, the results from the analyses of empirical data suggest that healthcare organizations are not obtaining cost savings for PP items maintained as CS. On the other hand, GEN items benefit from the use of consignment based inventory policies. These preliminary findings formed the basis for a closer examination of the underlying mechanisms at work.

Extant literature in healthcare has indicated that PP items hold the greatest potential for savings in hospitals by involving physicians and surgeons in standardization and utilization management decisions such that they take into consideration the cost of the supplies along with their experience with the product, quality of the item, and their relationship with manufacturer representative. We agree with this direction but also recognize some of the structural issues that limit the ability of supply chain managers to get physicians and surgeons on board with regards to product standardization and utilization management. Many of these reasons, such as whether the physician/surgeon is an employee of the hospital system, are beyond the control of supply chain managers in a healthcare organization. Our study focuses on aspects that are within the purview of healthcare supply chain managers and offer directions to strengthen their ability to structure favorable CS agreements with vendors for PP and GEN items.

The mathematical models developed and analyzed in this paper capture typical CS contract conditions, increased per-unit price and increased purchase volume. Using our models we study the effect of increased shrinkage rates on overall inventory costs as a result of the use of consignment. We show that each type of contract, increased per-unit price or increased purchase volume, will affect overall inventory costs differently depending on whether general medical supplies or physician preferred items are stored. In the absence of data to determine the impact of the use of consignment on shrinkage and maintenance costs, we prove that independent of the inventory policy used, an increased volume contract can lessen the negative effects of an unforeseen increase in consignment costs.

Our theoretical results highlight the implications of disregarding additional shrinkage and maintenance inventory costs associated with CS and show that the implications will differ based on the underlying demand pattern of the product under consideration. The lack of information pertaining to higher inventory shrinkage and maintenance levels can still enable hospitals to gain the advantages commonly attributed to the consignment agreement for GEN items. However, ignoring these costs for PP items can result in unfavorable contract conditions that could result in higher costs. Since hospitals typically do not have a good understanding of these hidden costs associated with consignment agreements, we assert that hospitals might be encountering higher costs for PP items that are being managed as CS therefore reducing the financial benefit they could obtain from CS. Future studies that consider data from multiple hospital systems could build on this preliminary insight.

Our results also point to conditions when supply chain managers might enter into a CS contractual agreement that involves unfavorable demand allocation. For products characterized by high variability and high per unit cost, the demand allocations under CS contractual agreements tend to be unfavorable and can therefore result in higher costs. PP items typically have high variability and high per unit cost, which necessitate greater care in determining appropriate demand allocations when a hospital is consolidating across multiple items and negotiation contracts with vendors. Demand allocations can also be unfavorable for products that have high variability and high demand, irrespective of their cost. Once again, these are also more likely to be PP items but some GEN items can also have these characteristics. Future empirical studies that classify healthcare supplies in terms of their average demand, variability of demand and per unit cost could shed further light into our theoretical prediction.

Our study has few limitations that are worth noting. The empirical data was obtained from one hospital; hence, we do not claim the generalizability of the empirical findings. Additional research is needed, however, our empirical results coupled with the analytical models provide a good foundation for future research studies to build on. The analytical models are constrained in terms of its focus on only hospital's decisions. Future studies should consider a game-theoretic framework to obtain equilibrium conditions for the hospital and the vendor when they are engaged in negotiations for CS contracts for PP items and GEN items. Finally, in our analytical model we assume that a hospital will be able to allocate demand between two vendors such that they can increase their purchase volume from the vendor with lower per unit cost. Future studies can account for potential objection for this reallocation by physicians/surgeons by considering an additional cost parameter.

Source: Rosales, C., Nair, A., Pal, S. "Managing General and Physician Preference Medical Supplies with In-stock versus Consignment-Stock Inventory Policies: An Empirically-Grounded Analytical Investigation. Working paper.

Implementing emerging technologies in Sourcing

In a recently concluded project my collaborators and I draw from previous studies conducted by Center for Applied Purchasing Studies (CAPS), relevant academic and trade journals, as well as case interview data from relevant organizations to investigate use cases and practical applications of implementation of emerging technologies in supply management. Emerging technologies such as Artificial Intelligence (AI), Robotic Process Automation (RPA), Internet of Things (IoT) and Blockchain are increasingly being deployed in organizations to execute and facilitate supply chain and procurement activities. Yet knowledge is still lacking with respect to the effectiveness of these technologies.  Our study provides insights into the justification, use cases, implementation process, barriers to implementation, critical success factors for implementation, and overall assessment of the effectiveness of Blockchain, Internet of things, Descriptive, Predictive and Prescriptive Analytics, Robotic Process Automation, Contract Analytics, Procure-to-Pay, Spend Analytics, Optical Character Recognition and Radio Frequency Identification technology.

As new technologies continue to emerge in supply chains and in procurement in particular, the adoption and implementation of such technologies will continue to evolve. Our conversations with several procurement leaders help in shaping our perspectives on the future of supply technologies. Overall, we believe that procurement professionals will need to have a clear business case preceding an organization’s technology choice. Niche technologies ranging from spend visibility, track and trace and spend analytics are more likely to solve many of the problems in sourcing as compared to an end-to-end solution. Technology can act as enablers but it is important to first identify the problem, identify potential solutions and upgrade the skill set needed to onboard a specific technological solution.  

Companies are leveraging emergent technology very cautiously. There are a few companies that have clients who embrace the technologies significantly but a large majority are just sort of dipping their toes in the water.The primary reason is that many organizations have been burned by these technology implementations. Oftentimes a technology which looks great on PowerPoint does not turn out to be as promising when delivered. After a lot of expenditure, business cases were made to realize the true value of the technology. Given the budget constraints, many companies are now implementing technologies more cleverly by working around some of the limitations.

There is a lack of clarity as to which technologies should be classified as ‘emerging technologies’ in procurement. One way to think about a technology as ‘emerging’ is to consider the founding or relaunching year of a technology. Around 2014 there were some structural changes to older technologies in terms of API driven methodologies and analytics based tools. Big data was 2014 technology. However, over time, technologies have gotten smarter due to some industry influence and disruptors.  These emerging technologies are in their evolutionary phase and are becoming more prescriptive with a specific focus on a particular sourcing problem. Technologies delivering true value to an organization are typically aimed at doing a particular set of activities and not at doing everything. Managers want very deep solutions in areas such as spend analysis, risk, sustainability supplier relationship, and, hence, technology needs to be best suited to deal with certain situations and has to bring precision to the required solutions.  For example, a sourcing tool that is right for a high volume low complexity environment may not be appropriate for a low volume high complexity environment. A completely different tool might be needed. Similarly, sourcing tools in the manufacturing context could differ substantially from technologies used in the services context.

Emerging technologies in the risk management domain will need to consider lessons learned in the COVID-19 pandemic.  Technologies will need to account for event based risk, cyber risk, financial risk, sustainability risk, etc. The emerging technologies should bring in better insights for risk management. Similarly, technologies dealing with sustainability or relationship management will need to cover additional nuances that organizations will be facing in the sourcing domain. Notwithstanding the need for new models for risk management, sustainability, relationship management etc., before implementation it is still important that organizations have a goal of how to fix the most basic things. The emerging technologies must help organizations in spend visibility, payment centralization, governance mechanisms, and contract analytics and tied to these are some good supplier information management systems. This should get the company doing a basic level of sourcing. Implementation of any emerging technology has to happen in parallel to the basic buildup of functions because if the organization waits to build on the stages they may fall behind exponentially and lose the competitive edge. An organization should find the top three critical points and go ahead using emergent technology to fix them in parallel. The business case for implementing technologies needs to be precise and should unravel the critical need of increasing sourcing velocity. Then the organization should use technology to address the need. The savings the company incurs should be used to fund the next steps.

Although technology implementation needs to be planned by considering specific technologies, it is important to note that as technology usage evolves in an organization these technologies start to get highly coupled with each other. A forward looking implementation plan that considers the coupling and integration between technologies would serve organizations well when decision makers may want to change course. While a long term technology roadmap is effective in planning for technology implementation, such roadmaps should have a certain degree of flexibility to incorporate changing business conditions and requirements.

Source: Goke, A., Nair, A. 2021. Compelling Applications of Emerging Technologies in Supply Management. CAPS Report. (Research assistants: Sukrit Pal, Ashok Gopalakrishnan)

The Effects of External Auditors and Certification Bodies on the Operational and Market-Oriented Outcomes of ISO 9001 Implementation

There are a number of practical implications drawn from the findings of our study. First, our study confirms once again that quality implementation is the key determinant of the operational outcomes of ISO 9001 adoption. At the same time, however, the findings also confirm the important role of external auditors in enhancing the effect of implementation on the operational outcome from ISO 9001 standard. This result is instructive in that it is the quality of auditors rather than the reputation of certification bodies that help firms in gaining the operational outcomes. For many firms, however, this finding could raise a practical problem: how to find good auditors? The answer to this question is not straightforward because, unlike certification bodies who have certain brand equity, auditors are employed by certification bodies and their quality is somewhat hidden from the customers and is only revealed after they are engaged after the ISO 9001 certification is over. Indeed, this problem is exacerbated by the fact that firms cannot simply resort to reputable certification bodies in order to find good auditors. The positive correlations between quality of auditors and reputable certification bodies only show a medium strength and, hence, this does not provide a strong assurance that reputable certification bodies will always send quality auditors. Therefore, while engaging reputable certification bodies is recommended, firms should request that they are served by experienced and quality external auditors whose characteristics are partly captured in this study. At the same time, however, the findings also infer that high quality auditors are not necessarily always employed by reputable certification bodies; they could also be part of less reputable certification bodies. In this regard, our findings also provide a ray of hope for firms who cannot afford to engage reputable certification bodies that normally charge higher costs than their counterparts. In particular, smaller firms with limited resources still have a chance to engage high quality auditors and to benefit from their services.

Our findings show that the reputation of certification bodies (rather than the quality of external auditors) helps firms improve their market-oriented outcome, including broadening their market scope and winning more customers. This finding suggests that customers still rely on “brand image” of reputable certification bodies. Customers perceive ISO 9001 certifications issued by reputable certification bodies to be of higher value than others. While this may be true to a certain extent, it is important to balance this notion with our finding, which shows that certification bodies do not have a direct positive effect on operational outcomes. Instead, firms ought to seek high quality ISO 9001 implementations that are then vetted by high quality auditors so as to obtain operational outcomes. The operational outcomes in turn exert a positive effect on market performance. This result therefore sends a strong message to firms that are trying to attain market-oriented outcomes solely from compliance to the standard’s requirements without internalizing the implementation process. More importantly, since it is operational outcomes that are mainly desired by customers (rather than the certification), simply signaling high quality ISO 9001 implementation by tapping into the reputation of certification bodies could be a misleading strategy to gain market-oriented outcome.