APPLYING GAME THEORY IN PROCUREMENT: A TRUE GAME CHANGER DR STEPHAN - PowerPoint PPT Presentation

APPLYING GAME THEORY IN PROCUREMENT: A TRUE GAME CHANGER DR STEPHAN KNAPEK TWS PARTNERS Zurich, January 25th, 2017

TWS PARTNERS – Our Business Founded in 2001 More than 50 game theory as a spin off from industry and industrial economics and research experts Over 2.000 projects Projects addressed more than €150bn already implemented Unique expertise: we bring game theory to life for businesses

OUR CLIENTS ARE MARKET LEADERS AND HIDDEN CHAMPIONS WHO WANT TO BE AT THE CUTTING EDGE Automotive High-Tech Pharmaceutical Consumer goods and Transport and Telecommunications and Chemical and others WE WORK WITH THEM TO UNLOCK THE TRUE POTENTIAL OF GAME THEORY WHICH THEN CREATES A SUSTAINABLE COMPETITIVE ADVANTAGE

TWS PARTNERS – Core competences Game theory helps Procurement on different levels Process & Process & organisation organisation Market design Cross- Cross- functional functional Negotiation Negotiation integration integration design design TODAY

MONA LISA AUCTION Everyone knows Da Vinci’s famous How would you bid for ‘Mona Lisa’ painting, the Mona Lisa - in different auction formats?

MONA LISA AUCTION Setting • You try to buy ‘Mona Lisa’ as a proxy, your client would spend up to CHF 100m • His only rule: you can spend all the money, but don’t come back without the painting • You do not know what the other bidders’ walkaway positions are, but let’s assume the auctioneer assumes asymmetric valuations  How should the auctioneer structure the negotiation and why?

MONA LISA AUCTION Faced with the risk of “losing” millions, In this case, a classical English Auction will end at the second highest a risk-averse bidder would accept a valuation, e.g. at CHF 50m price way above CHF 50m Seemingly insignificant changes in the negotiation design can make all of the difference

MAIN TAKEAWAYS 1 Prepare thoroughly the internal commitment for all possible outcomes of a negotiation 2 Tailor the negotiation design to the circumstances at hand 3 Translate the internal commitment to clear boundary conditions to increase Purchasing’s bargaining leverage 4 Communicate the rules transparently and clearly and emphasise the suppliers & process determine who wins – not the negotiator

USE OF COST TO THE BUSINESS INSTEAD OF QUALITATIVE MEASURES QUALITATIVE TRAFFIC LIGHT MONETARY EVALUATION SCORING CATEGORISATION 82/100 CHF NOT ENSURING A TRUE LIKE-FOR-LIKE COMMON UNIT OF MEASURE

TRUE TOTAL-VALUE-OF-OWNERSHIP +CHF - CHF UNKNOWN +CHF REDUCED SUPPLIER MAINTAIN- - CHF ANCE INDUSTRY TRACK ACCESS TO RECORD INNOVATION QUOTED OBJECTIVE PRICE VALUE Turns the cross-functional assessment into a true Total-Value-of-Ownership

ACHIEVING OBJECTIVITY …neutralises preferences Monetising all • Benefits • Costs • Preferences • Risks Supplier A Supplier B • Strategic considerations… Methodology exposes ‘hidden agendas’ and prevents ‘vetoing of options’

MAIN TAKEAWAYS 1 Put Procurement at the centre of the decision making process 2 Integrates subjectivity & preferences into the evaluation process – all arguments are turned into their real costs 3 Grant buyers the authority to commit within agreed parameters 4 Allow closed loop linking supplier performance back into it

BRINGING IT TO LIFE… Now let’s look at how this works in practice… ….a joint case study with