Game theory can be about playing the game... or changing the game

posted by Sponsored by TWS Partners
3 November 2021

This piece of content is sponsored by TWS Partners.

In recent years game theory has become an ever more popular tool for companies to analyse interaction between decision makers in complex situations.

Recent research by game theory specialists TWS Partners and CIPS found more procurement professionals know what game theory is – up from 80% to 93% in a recent survey. Yet, when asked how many actually used it in business, the number was about 50%.

The results were revealed at an exclusive event for procurement leaders, hosted in London by Supply Management Insider and TWS Partners. The session, called ‘Game theory meets digitalisation’ explored the many benefits of game theory and how it can be harnessed in the digital world.

Play the game or change it

Dr Sebastian Moritz of TWS opened the event by discussing how game theory has proven to be a powerful tool in procurement areas such ast tenders, contract negotiations, incentive schemes and designing markets. But, with the sheer complexity of many modern procurement situations, even rudimentary game theory application can lead to hugely differential results.

Using the example of two forms of auction to sell a painting, Moritz demonstrated how slight changes to the auction format can lead to completely different results. Referring to his example, Moritz said: “Apart from the auction format, we haven't changed anything in the example, and the resulting prices differ significantly. If we reverse this argument, it means that you are leaving money on the table if you choose a suboptimal auction format.”  

Strategic options

“In simple situations, recommendations can be easily derived”, Moritz continued, or strategic procurement it’s a different matter, and one where ‘pen and paper’ processes are stretched to their limit.” 

This is where there is a need for a digital solution to make assessing the potential options more effective, allowing a greater number of options to be considered more quickly.

Abhinay Muthoo, professor of economics at Warwick University, said that companies had to look to an approach combining technology and game theory to deliver real value, and here computer science and AI would prove invaluable. 

“Game theory is the master and AI is the servant,” he said.

One company that is already embracing digitalisation is Siemens. Head of business development Jonas Hohlweck explained how the business was embracing technology to drive improvements in procurement and to help it reach its environmental targets. 

Its Siemens Green project is an answer to the growing demand for information on the carbon footprint of businesses from government and investors.

Interrogating the supply chain

While businesses can look at their own processes, the reality is that 90% of the emissions are to be found in the supply chain, said Hohlweck. 

“Being greener becomes a competitive advantage,” he said. “We talk to companies across industries and they all feel threatened by the need for more sustainable products.”

It is a chance for procurement to shine by producing more sustainable products.

The challenges are that the granular data required from suppliers to demonstrate carbon footprints is time consuming and costly to gather. Collecting information on one part involves an average of 95 emails. 

Siemens wanted to communicate with less effort but still trust the data. A technology solution enabled suppliers to lodge independently verified data on a system but only the information that is really required is disclosed to the company. 

At the corporate level, it makes carbon footprint matter and suppliers improve.

Smart data instead of big data

According to Moritz, companies are still in the early stages of digitalisation where they are automating manual processes. He explained how organisations can optimise their processes and decisions by not only collecting data, but the ‘right’ data to allow them to learn from the past and better anticipate the future.

Although research showed that only half of companies were using game theory, a panel discussion at the event revealed a hunger to find out more, and also a feeling that its tenets were slipping under the radar and influencing procurement.

Moritz said that adoption level increases as company turnover goes into the billions because the potential gains are so large and larger organisations have the resources to invest into game-theoretically enabled digital solutions .

He suggested that when introducing game theory into an organisation, that it should look at game theory as a tool for what can be learned and improved rather than using it as an exercise in criticising how the organisation had previously operated.

Make complexity your friend

To show that game theory isn’t all theory without purpose, Mirza Cardaklija, senior project manager at TWS ran through a case study of a company looking to undertake its biggest ever capital expenditure project, using a game-theoretically enhanced digital tools.

Where previously stakeholders in the organisation were keen to limit the number of active participation of suppliers and bids in a tender due to the complexity of managing the process, with a digital solution this was not a limiting factor. 

“If you can deal with complexity then it can be procurement’s friend,” he said. “You can turn complexity into a competitive edge.”

Finding the best solution in a complex tender situation can be like “finding a grain of sugar on a cake”, he said. Yet, using TWS’s digital tools to order bids, it can be achieved and the company could assess options almost instantaneously that would have taken weeks to do manually.

By setting up a combinatorial multi-unit auction, TWS was able to keep more players in the game, monitor their bids and provide feedback to enable the client to get the best possible outcome. 

In doing so, not only did TWS find the grain of sugar in helping the organisation achieve an optimum outcome, it also saved millions in costs.

With money like that on the table, game theory is clearly not child’s play.

This piece of content is sponsored by TWS Partners. 

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