Game Theory in business negotiations Substituting verbal skills by a - PowerPoint PPT Presentation

Adriaan `t Gilde , Head of Corporate Purchasing Game Theory in business negotiations Substituting verbal skills by a methodical approach Presentation at ETH Zurich, 06.10.2017 06.10.2017

Game Theory @ Geberit About Geberit • Swiss company, founded in 1874 • European leader in sanitary industry • Listed on Zurich Stock Exchange (SMI ) • Turnover 2016: 2’809 Mio. CHF • EBIT (2016): 24,4% • Employees : 12’000 • Factories: 33, in 14 countries Geberit AquaClean shower toilet • Purchasing volume 2016: 1’400 Mio. CHF (direct & indirect spend ) 2 06.10.2017

Game Theory @ Geberit Experience with Game Theory • First auction applying Game Theory: 2007 • Total auctions/tenders with Game Theory: > 30 • Material Categories included: • Metal fittings from brass and bronze • Flexible hoses • Carbon steel and Aluminium coils • Cardboards • Pressing tools • Zinc diecasts • Injection moulding machines • Copper fittings (in China) • Building & Construction • 2 “monopolists” cracked 06.10.2017 3

Game Theory @ Geberit A simple excercise with Game Theory 06.10.2017 4

Game Theory @ Geberit Game Theory: a simple excercise, few parameters 100 EUR must be shared between me and you • I hold the money and will make you an offer between 0 CHF and 100 EUR • You can accept or decline the offer; there is NO negotiation! • If you decline, you get no money and I get also no money («loose – loose») • There is only one single transaction ! I offer you 5 EUR : what is your decision? • Would you accept or decline? • What are your arguments? • What is the most rational decision? 06.10.2017 5

Game Theory @ Geberit Overview of negotiation parameters NECESSARY INFORMATION FOR A NEGOTIATION NEGOTIATION FORMS RANK ORDERS DESIGN • Parallel negotiations • Rank order after orders • Sequential negotiations • Rank order after factors • Number of suppliers • Negotiations window • Strategical rank order • Number of share (Window of Opportunity) • Challenger vs. Etablished • Differences between prices • Collusion danger TAKE-IT-OR- …ELEMENTS CONCEALED ORDERS • Strategic significance  • Take-it-or-leave-it: TIOLI Market entry • Concealed first price orders  • Take-it-or-best-offer Capacities (First Price Sealed Bid)  • Take-it-or-auction Authoritative customers • Concealed second price orders • • Take-it-or-competition Future business (2nd Price Sealed Bid, “ Vickry ” ) • Share of the market of the suppliers HYBRID ELEMENTS • Technologies AUCTION TYPES • Raw material portion • English auction • “ Klemperer “ - Assignment • Raw material price trend • Dutch auction • Individual combinations of the • Price trend • Brazilian auction elements named here • … • Hong Kong auction 06.10.2017 6

Game Theory @ Geberit Why Game Theory? • Application of a methodology that integrates views of stakeholders • Wish to enlarge / leverage competition at Supply side • Intransparency about real manufacturing costs • Frustration about monopolistic behaviour 7 06.10.2017

Game Theory @ Geberit Creative frustration.............. 8 06.10.2017

Introduction to Negotiating with Game Theory Game Theory basics Formalised negotiation process: • Full embedding of Purchasing into the total project (e.g. construction of a factory) • Clearly defined plan of activities and assigned roles & responsibilities • Cross-functional requirements/criteria are integrated to get maximized value • ALL requirements/criteria must be assigned a monetary value • So no veto´s, but objective reasons and statements of preferences • This means commitment and discipline in the whole process • Design of tender rules as last step before award to a bidder • Final tender is “only” the execution of the defined rules, based on a detailed script 06.10.2017 9

Game Theory @ Geberit Case 1: Zinc Die Casted Parts SITUATION PRODUCTS (13) • Annual volume 4,14 Mio. EUR Die Casted Parts • 2 suppliers delivering over 10 years (~ 50% share each) • No significant savings in last years • Several potential challengers identified OBJECTIVES • Negotiation of a 3 to 5 years contract • Dual sourcing to be retained • ” Phase- out“ plan defined in case business lost by current supplier 06.10.2017 10

Game Theory @ Geberit Zinc die casted parts The negotiation process consisted of 3 phases Phase I: Phase II: Phase III: Challenger Qualification Awarding Large Share Awarding Small Share Price Price Qualification #1 #2 price 3rd offer #1 #2 2nd offer #1 #2 Time Time 1st offer Challengers only: Current suppliers & Losing suppliers of phase II: challengers : 1) Preselection & audit Sequential negotiations with 1) Auction on large share increasing prices 2) English Auction to qualify best challenger 2) Exclusive offer of additional business Both shares won by existing suppliers 1 NEGOTIATION OUTCOME Price reductions of 45% on added value (~ 17% on total) 2 06.10.2017 11

Game Theory @ Geberit Case 2: construction project in Ukraine THE PROJECT • Building a new hall for assembly, packing, warehousing and delivery • Builder-owner: Geberit Group • Contracted volume: 2 Mio. CHF • Number of bidders invited: 9 • Number of bidders after risk screening: 7 THE TENDER PROCESS • Split responsibilities between Local and Corporate Purchasing • Lead in the hands of Corporate • High sensitivity for Compliance • Internal and external Ukrainian lawyers involved • Tender done in business hotel in Kiew 12 06.10.2017

Game Theory @ Geberit Value creation by Game Theory requires a disciplined process with early involvement Define contracting model 1 Select architect Define technical specs Select bidders & 2 request initial bid 3 Technical negotations 4 Contract negotiations Bidder evaluation 5 6 Tender & Award 7 Start building activity 06.10.2017 13

Game Theory @ Geberit Construction Project Ukraine Conditions for participation in tender Bidder must: • Sign the Compliance Agreement • Pre-sign the Construction Contract (without the amount in UAH and Works Terms) • Accept the rules of the tender, that Geberit will communicate beforehand • If winner of the Tender, sign the Construction Contract immediately after the tender • Confirm to understand and fully accept the Technical Specifications (version of dd.mm.2016), as discussed in technical meetings of dd.mm.2016 • Refrain from any reopening of technical or commercial negotiations after the tender 14 06.10.2017

Game Theory @ Geberit Construction Project Ukraine Overview of Tender process 16. November 14. + 15. November, 15. November until 09:00, Kiew Kiew 18:00, per Email / Tel. Phase 1 Phase 2 Phase 3 Contract Agreement Qualification Price Reverse Dutch Auction • Signing of Compliance • At the end of Phase 1 each • In Phase 3 Geberit will make Commitment Bidder receives a Bidders a counter offer , Qualification Price sheet based on ranking after Phase 2 • Agreement on content of • All Bidders that accept the Construction Contract • The first Bidder accepting Qualification Price will participate in Phase 3 the counter offer wins the • Agreement on (handling of) tender interpretation of technical • At least 4 bidders will be in specifications • No more negotiations! last round (ranking based on debit/credit total „ value “) • At the end of this Phase, • The Construction Contract to each Bidder will be informed • Bidders will be informed be signed by both parties about his participation in about participation in Phase Phase 2 3 between 19:00 – 19:30 7 meetings, 90 min. each Evaluation matrix Bye-bye to «losers» 15 06.10.2017

Game Theory @ Geberit Construction Project Ukraine Some numbers Number of invited constructors 7 47‘500 - 57‘800 Range of first quotes (TUAH) 0 - 10‘000 Range of bonus - penalties (TUAH) 51‘800 Best quoted value after Phase 2 (TUAH) Difference to 2nd best 12% Number of invited bidders for Phase 3 4 48‘000 First counter offer by Geberit (TUAH) - accepted- Preferred and best constructor as winner NEGOTIATION OUTCOME 1 Price reduction of 9,7% 2 06.10.2017 16

Game Theory @ Geberit Lessons learned • All internal stakeholders must be „in the boat “ • Do all homework before starting the final negotiation (technical specs, bidder evalutions, define variable parameters) • Pre-sign contract with all remaining bidders before final tender • Objectification by expressing „ feelings & beliefs “ in monetary value, enhancing Transparency (and avoiding emotional negotation styles) • Optimize competitive situation by keeping a number of 5-8 bidders in the race till final tender • Execute the designed tender process / rules with consequent discipline – and commitment 17 06.10.2017

Game Theory @ Geberit Q & A 18 06.10.2017