Panellists (L-R) Marcus Schreiber, Louise Reynolds, Christopher Decker and Mark Roberts
Panellists (L-R) Marcus Schreiber, Louise Reynolds, Christopher Decker and Mark Roberts

How game theory can turn procurement professionals into 'market designers'

posted by Sponsored by TWS Partners
24 October 2018

This piece of content is sponsored by TWS Partners.

More than nine in 10 procurement professionals (93%) believe game theory can provide an advantage in negotiations, according to a recent CIPS and TWS Partners survey.

The results were revealed at an exclusive event for procurement leaders, hosted in London by Supply Management Insider and TWS Partners.

TWS Partners director Sebastian Moritz said it was interesting then that only 40% of the people surveyed were actually applying game theory in their own organisations, but he was encouraged by the fact that application of the theory is increasing, with this figure up 9% from 2017.

Game theory is a tool to shape procurement strategies

Game theory is the scientific modelling of interactions between different parties each pursuing their own interests. In procurement, the design of tendering processes and negotiations are the most prominent examples. The methodology enables procurement departments to thrive as entrepreneurial value drivers capable of significantly reducing costs, increasing overall company performance and value, and competitive advantage.

TWS Partners founder and CEO Marcus Schreiber described game theory “as a way of changing the landscape to your advantage”. Procurement professionals are becoming “market designers” who actively shape their supply markets to their advantage, he said.

Schreiber used the Spanish conquest of the Aztec empire, led by Hernán Cortés, as one of the first examples of game theory at work. “Cortés arrived at the Mexican coast to conquer the land for its gold and other riches. He was up against the Aztec empire with only a few hundred Spanish soldiers.

“His men had the advantage of armour and horses, but because they were so outnumbered they would only have a chance if they were keenly motivated. So what did he do? He burned his own ships.”

“I’m not sure how this would work in the modern corporate world. As a consultant, if I were to suggest to a client that destroying several million pounds worth of assets would provide a huge strategic advantage, I’m pretty sure it would not be welcomed. 

“But what Cortes did with this strategic move was he changed the game. It was a way of communicating to his own people that there is only one way: you win or you die. And to the Aztecs: we aren’t going anywhere. He was thinking from the very end and coming up with a decision that helped ensure victory. He changed the strategic landscape, by making a very strategic and counter-intuitive move.”     

Schreiber said that game theory techniques makes procurement more of a strategic partner. Advanced strategic thinking brought by game theory allows procurement to influence and shape the markets companies operate in. It ensures that procurement becomes the driver of a working competitive landscape rather than accepting the “rules of the game” set by other players in the market. 

This also allows procurement to foster and leverage competition between suppliers and thus drives better results for the whole organisation in all dimensions – commercial and non-commercial. Using such an approach, procurement can incentivise suppliers to deliver a company’s strategy. For example, getting suppliers to invest more into R&D and innovation, to deliver better quality, more reliable supply chains and market leading commercial terms.

Game theory is a success story across academia and business

In the panel discussion, Christopher Decker, research fellow for the University of Oxford, described game theory as “one of the great success stories of economics... and particularly over the past 20 years”.

“Game theory gives you the ability to understand and predict what will happen in situations of interdependency... it gives you the tools to work it through in a formalised way. That’s what people tend to see as its biggest advantages, that it formalises these intuitions,” said Decker. 

Mark Roberts, continuous improvement director at the Government Commercial Function, described the adoption of game theory as akin to a “Matrix moment”.   

“It’s great opportunity for us as a profession to open our eyes and have a wider understanding of the possibilities,” he said.

Global purchasing director of Jaguar Land Rover (JLR) Louise Reynolds said much of the automotive firm’s recent success can be attributed to the methodology. She said the application of game theory had contributed to “millions” in savings.

At JLR, purchasing has been brought into the centre of the decision-making process, with other departments encouraged to give their input. “The great thing about the evolution of game theory in our organisation is that now our internal stakeholders get disappointed if we are not applying it – because they want to know their opinions are being baked into the negotiation design. And this allows us to make sure we’re making the right total cost decision for our company.” 

TWS have been close partners with JLR since it was bought by TATA Motors in 2008.

“We are now initiating advanced training for staff members so we can deploy experienced practitioners throughout our teams,” said Reynolds. “I believe it’s fundamental that all my buyers should be trained practitioners in game theory.”   

This piece of content is sponsored by TWS Partners. 

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