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Using game theory to drive savings and value

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Using game theory in procurement strategy

Most procurement professionals (94%) believe game theory can optimise tender and sourcing decisions, yet only 9% are using it, according to research by consultancy firm TWS Partners.

 

Game theory is the scientific modelling of interactions between different parties in competitive situations. Based on a mathematical theory of rational behaviour in conflict situations, each party chooses their actions in view of what the other party might think and do, as a means of trying to maximise their respective outcomes.

 

It is a branch of economics that has won several Nobel Prizes and, while 80% of procurement professionals have come across game theory, it is rarely put into practice.

 

Applying game theory to procurement

 

Game theory is most often applied to help find the best strategy in things like negotiations. It can also be used to structure interactions and influence the behaviour of suppliers.

 

It is a theory which can be applied to a whole host of situations in procurement from optimising tenders and sourcing decisions, developing incentive schemes, annual price negotiations through to outsourcing projects.

 

While it may not yet have taken hold, it looks set to grow with the research suggesting 63% of procurement professionals believe their organisation will use game theory in the near future.

 

When it is implemented correctly, it can bring a number of benefits to procurement and the organisation as a whole, including:

 

Savings

 

The correct application of game theory can open up new opportunities around cost savings and value generation, as well as boost return on investment. However, to realise these benefits, there is a need for teams to embrace and embed the theory within their processes.

 

Process improvements

 

Game theory can help build a more structured sourcing process and increase fairness and transparency in the supplier selection process. It allows procurement to leverage commitment in negotiations and facilitate cross-functional collaboration across an organisation.

 

Changed perceptions

 

If a procurement team can deliver such opportunities there will be a change in perception of the function from within the business as well as outside of it. That will build trust and open up new opportunities to collaborate and deliver more savings and greater value.

 

 

To understand more about game theory you can read TWS Partners’ whitepaper Procurement Redefined and The power of game theory is in your hands

 

Dr Sebastian Moritz is director of TWS Partners, a market leader in the application of game theory and market design in business

 

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.

Dr Sebastian Moritz
Posted by Dr Sebastian Moritz