Supply chains have become increasingly complex in recent years, and companies rely on flexibility and product innovation of their suppliers. While we are seeing a shift in thinking due to the experiences of the pandemic years and the Ukraine war, a shift will not happen overnight. Procurement managers must continue to manage long delivery times, raw material shortages and increasing ESG requirements.
To manage the complexity of the procurement process, I find game theory a helpful and very exciting approach. It moves procurement from a tactical role to a highly strategic one. It enables procurement professionals to actively influence and shape markets in which companies operate. They become the driver of a functioning competition landscape, instead of accepting the “rules of the game” of the other market participants. For example, procurement can encourage and drive competition between suppliers, incentivize them to implement their own business strategy, or motivate them to invest more in R&D and innovation to deliver better quality, more reliable supply chains, and market-leading business conditions. The result: better outcomes for the entire company across all dimensions.
Game theory is one of the most popular optimization techniques to support decision making. It has come to occupy a special place in business and management because in the marketplace, companies make a series of decisions that resemble game moves. The theory describes situations in which participants consciously make different decisions that lead to a solution that can change their position. Most often, this involves conflict situations. However, situations can also arise in which the interests of the players are compatible, but it is difficult for them to determine the course of action. The game theory tries to describe „quasi”, who will win and who will lose in different situations.
Game theory is frequently applied in procurement – consciously or unconsciously. The most common examples are the design of tender procedures and negotiations. It significantly improves the outcomes of all procurement decision-making scenarios, including complex cross-functional procurement activities, annual price negotiations, make-or-buy decisions, or outsourcing projects.
Important basics for putting game theory into practice include the following considerations:
- Think carefully about whether your concern is appropriate for the use of game theory and will truly benefit you. Do you want to save costs? Perfect! If the issue is very complex, it often makes more sense to use a different strategy.
- If you want to “play the game,” think carefully about your goals when planning: An innovative solution, low cost, or the option with the least risk? Of course, if all parties agree to accept the decision of the process as binding, you are also bound by the outcome.
- Your goal is to reach a long-term agreement with one of your suppliers. Therefore, make sure that you establish a good foundation for this relationship during the negotiation process. All stakeholders involved need to understand how the process works, what its purpose is, and how it ties into the overall procurement process.
- And now it gets really game-changing: On the one hand, it is important to offer transparency to the negotiating partner:s during the process in order to provide incentives. On the other hand, a balance must be struck to maintain competition as much as possible. So don’t get ahead of yourself by revealing internal constraints or the desired outcome, for example.
- Lack of flexibility in negotiations is a common mistake. Since game theory is new territory for many, allow sufficient time. At one point or another in the process, there may be a need for greater discussion.
Do you have questions about game theory or are you thinking about starting one of your projects with it? I will be happy to accompany you: CONTACT