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How game theory can help procurement lead

Information SystemsData & Technology
Procurement leading

In today’s marketplace, companies are striving to reduce costs and increase their competitive advantage. The use of ’game theory’ could open up that advantage but to do so procurement chiefs need to consider a few different things.

 

Stand united

 

The sourcing process tends to be fairly cross-functional by its nature, yet many companies have internal divisions. These divisions can lead to lengthy and inefficient (internal) negotiations, often resulting in suboptimal outcomes for the whole organisation. In addition, it can mean that procurement has to negotiate on two fronts – with internal stakeholders and suppliers. This not only wastes resources but also pushes the function into a confused position.

 

This has to change. Procurement must be the lead function in all sourcing processes. The only way to achieve this is to unite all internal stakeholders behind one sourcing process. Applying game theory can help the function to stop being led and actually lead.

 

Optimise the sourcing process

 

A typical procurement process sees a sourcing decision made after discussions and negotiations with suppliers. This is very often inefficient and unsatisfactory for all parties involved.

 

Procurement is automatically pushed into a weaker position if all they are doing is collecting offers from suppliers before the actual sourcing decision is made by another body.

 

By using game theory, the whole sourcing process can be redesigned and optimised for a much more satisfactory and aligned outcome. All the steps are the same, but the order is rearranged so that before negotiating with suppliers, procurement and all other internal stakeholders decide and align the commercial and noncommercial elements that will drive the awarding decision, and their monetary impact on the company’s bottom line. This way, every argument and stakeholder concern is broken down to the same denominator, and everyone stands united.

 

Committed negotiation

 

Using a bonus/penalty evaluation and holistic perspective internally, it becomes easier to compare suppliers. Cross-functional alignment is achieved by having commitment from all stakeholders prior to negotiations with suppliers. Procurement is then able to conduct supplier negotiations more easily, with the power to make independent decisions safe in the knowledge that every preference of internal stakeholders is known and represented.

 

Suppliers and stakeholders are led while procurement takes the lead

 

This shift in process and mindset will allow procurement to take the leading role and move them from a passive, reactive function to a proactive, strategic, value-driving function.

 

The game theory optimised process also sees market competition increased, as all suppliers are now equally comparable, and even self-created monopolies can be removed. Sharing sourcing criteria will incentivise suppliers to optimise their quotations both commercially and non-commercially and stronger relationships will be forged, providing robust partnerships that offer tailored solutions specific to a company’s needs.

 

Through the correct application of game theory, procurement can become an empowered strategic leader and value driving force, uniting all functions and achieving impactful results throughout the organisation.

 

To read more from Dr. Sebastian Moritz on game theory and its applications for procurement click here and here.

 

This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.

Guest Blog
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