How do you know if the sources you are using to make key decisions are trustworthy? Even the most innovative technology or strategic initiative will be useless if based on false or misleading data. Kelly Barner and I share our insight on two interesting recent stories involving chicken benchmark pricing data that illustrate how damaging the use of false data can be. The post, with the introduction written by Kelly, appears on her blog, The Point. Here is the text:
Which came first – the chicken or the data?
I recently covered a fascinating story of present-day industry intrigue… centering around allegations by food distributors Sysco and USFoods that chicken producers (including Tyson and Perdue) have been colluding to raise the prices of chicken for a decade. This story has everything that makes supply chain an exciting place to work: razor thin margins, collusion, and federal intervention.
But an easily overlooked component of this case is that industry data sources were (allegedly) manipulated by the producers.
The Sysco and USFoods lawsuits accuse chicken producers of justifying increased prices by constraining supply (i.e. ensuring less available chickens) and inflating market rates through the manipulation of industry benchmarks. The Georgia Bench pricing system had to be shut down and replaced in 2017 because of questions about the reliability of their data.
Agri Stats (a subsidiary of Eli Lilly & Co.) is actually mentioned in the lawsuits because the subscription-based data they make available to chicken producers allows the producers to determine the breeding potential (i.e. production potential) of their competitors and change their own volume in response.
Since many of procurement’s efforts – and contracts for that matter – are heavily tied to industry data sources and benchmarks, Jeanette Jones (my Supply Market Intelligence for Procurement Professionals co-author) and I decided to offer our independent advice (written in parallel and without discussion) about how to apply a critical eye to industry data.
Keep in mind that you can always get our insight on industry data at ProcureSearch – a free, online resource based on our book.
Jeanette Jones’ Perspective: Finding a Trusted Source
Two chicken pricing benchmark providers have been mired in recent events that have highlighted, in a profound way, the critical need for using trusted, credible resources. It should be noted our focus here is on one aspect and that these stories are complex as there are many factors involved with determining truthful pricing benchmarks for not only poultry, but for all agriculture commodities.
Agri Stats (a subsidiary of Eli Lilly & Co) is connected with the Sysco and US Foods lawsuits because its data made available information about chicken production that provided competitive advantage to a select few. The Georgia Premium Poultry Price Index (GPPPI), which replaced Georgia Department of Agriculture’s (GDA) Georgia Dock chicken price index in January 2017, is in the news once again as it ceased to operate this past week due to a lack of available data. The GPPPI, in response to inflated price reporting concerns, considered evolving production techniques and buying practices in the poultry industry, and included changes that measure the aggregate change in the price of poultry sold on contract over three periods of time, in addition to reporting that indicates the weekly change in demand (GDA website).
In the past year, a number of valuable articles on how to detect misleading and false data have been published. One of the emerging strategies in detecting false information is to track the leading data claim directly to the primary source. In these two stories, the primary source appears to be about as credible as you can get: self-reported data by chicken producers. The challenge presented is how do you know if the primary data is being reported and presented correctly? The damage caused by the use of misleading information is felt by the businesses that rely on the data the most. This is hard to grasp if the provider of the primary data is considered a trusted source. This is especially so if you believe, like some, that the most valuable business commodity is trust.
The answer to the trust dilemma can be solved by the implementation of transparency measures by both the provider of the resource and the primary data provider (in this case self-reported chicken producers). The provider of the resource becomes 100% transparent about where the primary data originates and how it is being used. Getting back to GPPPI, an interesting aspect of the new index is its statement on verification: “All data provided will be subject to verification through a random review, done through a prescribed process that will confirm submitted prices and quantities with the buyers. All formulas and forms utilized in the calculation of the price indexes will be open source and available to all parties to allow for the opportunity for any individual or company to track their own price indexes in relation to the industry aggregate index. Company specific proprietary information will not be available to the public.” Regardless of what happens with GPPPI, the GDA is on the right track in regards to transparency of methodology and data origination, which is the direct path to regaining trust of past users.
Kelly Barner’s Perspective: Putting the Fox in Charge of the Hen House
In an age where real-time data is the difference between leading an industry and lagging it, procurement would be wise to understand the connections between the sources of data and the companies that profit or not based upon what it indicates. In this case, chicken producers provided data on the price per pound they earned during the current period. That data would then govern the prices paid to producers by distributors. 10 chicken producers constitute 80% of the market – so it doesn’t take a genius to figure out that they had an incentive to provide either good news or no news. And while not all of those 10 producers are based in Georgia (where the Georgia Dock pulls its data from), Georgia is the #1 producer of chicken in the U.S. The temptation was just too great to put a finger on the scale for their own benefit. Unfortunately, they grew too bold or too greedy and the Georgia Dock was ‘indefinitely suspended’ in 2016. The final death of the Georgia Dock was when, in response to concerns, the Georgia Department of Agriculture required producers to sign affidavits that their data was accurate. That quickly led to such a drop in data that the index had to be discontinued… draw your own conclusion.
The lesson for procurement in this is to consider which contracts you will use the data to govern, where the data comes from, and how much control or leverage those parties have over their costs, profit margins, and the data they provide.