The Point by Buyers Meeting Point
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Book Review: The POD Model
Buyers and suppliers, they make the commercial world go round.
- The POD Model, p. 1
The POD Model: The mutually-beneficial model for buyers and suppliers which enables an increase in profit through commercial collaboration by Michael Robertson strives to do something that we need a whole lot more of in procurement. It provides a framework for combining our philosophical objectives as collaborators and innovators with the inescapable need to measure our results.
Robertson looks at the messy reality of buyer supplier relations and breaks them down to a few major issues: cost, risk, flexibility, and incentives for mutual gain. He then looks to find a way to factor those into contracts in such a way that no one party benefits at the cost or loss of the other.
Like so many other components of procurement today, contracts – and more specifically pricing models – have not kept up with the times. We lock in fixed prices for years based on demand estimates that don’t have a much of a chance of being accurate. Continuing in this way bakes inefficiencies into the deal for suppliers, and since they understandably have no desire to conduct business at a loss, they inflate prices accordingly.
This should not be taken to mean that suppliers are taking advantage of procurement – but they have to factor risk into each arrangement just as they do with their other operational overhead. Supplier intent also brings us to another important topic covered in the book: if a supplier can make a contract cost less for the buyer, will they speak up? Obviously buyers would want to have access to this information, but suppliers have to have a reason to come forward with it – and if they are already trying to cover their costs in a volatile demand environment, they have no incentive to do so.
The POD Model is expressed in a formula that seeks to quantify the gap between what procurement thinks will happen during the contract and what actually does. It ensures that reduced demand leads to some financial benefit to the supplier. This drives risk out of the contract (ideally leading to lower prices) and provides the supplier with the incentive they need to come forward with opportunities for procurement to proactively reduce internal demand, or ‘negative deviation’ as it is labeled in the book.
Part of why this is all laid out in a formula – rather than being enacted through contract amendments – is that Robertson recognizes that contract activity represents a cost to buyers and suppliers. The costs, and additional effort, create yet another barrier to modifying contracts during their lifecycle to more accurately reflect commercial needs.
In keeping with the realistic spirit of the book, Robertson also recognizes the importance of time in comparison to relative risk. The majority (if not all) of negotiations take place before the contract is finalized, but the risk is all realized during the term of that contract – in many cases after procurement has disengaged from the category or project. When demand and costs are poorly aligned, and the supplier is left to bear the brunt of the risk alone, procurement is inadvertently creating a situation where the incumbent supplier will inflate their prices in advance of a contract renewal.
The POD Model was written to be easy to read, and it is. The only recommendation I would make is to jump ahead and read Chapter 9 first. It contains both the definition of the POD Model and the accompanying formula. You’ll still want to read it again after going back to get the lead up in the opening 8 chapters (which are all a realistic length) but it will provide a few details that you’ll be on the lookout for up to that point otherwise.