How to Get Your Supply Chain Math Right the First Time
I guess everyone by now has heard about the USA being downgraded to a AA rating by Standard & Poor’s, but did you know that S&P made a $2 trillion dollar math error when reporting their downgrade to the Treasury Department?
Specifically, S&P projected the gross domestic product instead of projected inflation to calculate what the U.S. government spending and total U.S. Debt would be for the next 10 years. Quite embarrassing wouldn’t you agree, but these kinds of math errors aren’t unusual in the fast paced business environment we are all working and living in.
I’m sure you could cite a few examples of math errors in your own supply chain operations that you too were embarrassed over and then never wanted to see them happen again. So how do you get your math right the first time?
Mathematician, Thomas R. Nicely says “The best method of preventing (errors) is to have two or more independent procedures for determining or checking the same result.” We do this in our analytics work every day. For example, when we receive a download of purchasing history for one year from our clients and then calculate their total spend, we also check what our client’s accounting department has reported to us for this same number. If they don’t match we go back to the source to find out why.
Another way is to run the numbers (we call this a draft report) by the party that you are doing the work for to see if they agree with your assumptions, calculations and results before you publish your final report. This is how S&P uncovered their $2 trillion dollar error. They ran their numbers by the Treasury Department and the Congressional Budget Office, before releasing them publically, and then adjusted downward the USA’s projected future budget shortfalls once the error was caught.
Lastly, we have found that fact-checking for the “reasonableness’ of your numbers works as well. It’s been our policy for years that if one of our analysts discovers a savings for our clients of 50% or more on any SKU they throw it out or consider it an outlier. This is because we have found that it isn’t realistic or credible in most situations to present our clients with a number that is unlikely to save them money.
When all is said and done, everyone makes math, spreadsheet and calculation mistakes; however it should be as infrequent as possible. Only by having more than one fact-check, submitting draft reports and inspecting your numbers for reasonableness can you reduce your math errors to the lowest number possible. When all else fails and you do make a math error, make sure it never happens again.
Filed Under: savingsblog • Supply Chain
