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

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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

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DR STEPHAN KNAPEK TWS PARTNERS

Zurich, January 25th, 2017

APPLYING GAME THEORY IN PROCUREMENT: A TRUE GAME CHANGER

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TWS PARTNERS

– Our Business

Projects addressed more than €150bn More than 50 game theory and industrial economics experts Founded in 2001 as a spin off from industry and research Over 2.000 projects already implemented

Unique expertise: we bring game theory to life for businesses

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OUR CLIENTS ARE MARKET LEADERS AND HIDDEN CHAMPIONS WHO WANT TO BE AT THE CUTTING EDGE

Automotive and Transport High-Tech and Telecommunications Pharmaceutical and Chemical Consumer goods and others

WE WORK WITH THEM TO UNLOCK THE TRUE POTENTIAL OF GAME THEORY WHICH THEN CREATES A SUSTAINABLE COMPETITIVE ADVANTAGE

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TWS PARTNERS

– Core competences

Negotiation design Market design Cross- functional integration

Game theory helps Procurement on different levels

Process &

rganisation

Process &

rganisation

Negotiation design Cross- functional integration TODAY

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MONA LISA AUCTION

Everyone knows Da Vinci’s famous painting, the Mona Lisa How would you bid for ‘Mona Lisa’

in different auction formats?

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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?

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

MONA LISA AUCTION

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MAIN TAKEAWAYS

Prepare thoroughly the internal commitment for all possible

utcomes of a negotiation

Tailor the negotiation design to the circumstances at hand Translate the internal commitment to clear boundary conditions to increase Purchasing’s bargaining leverage Communicate the rules transparently and clearly and emphasise the suppliers & process determine who wins – not the negotiator

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USE OF COST TO THE BUSINESS INSTEAD OF QUALITATIVE MEASURES

TRAFFIC LIGHT CATEGORISATION

82/100

QUALITATIVE SCORING NOT ENSURING A TRUE LIKE-FOR-LIKE MONETARY EVALUATION

CHF

COMMON UNIT OF MEASURE

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TRUE TOTAL-VALUE-OF-OWNERSHIP

Turns the cross-functional assessment into a true Total-Value-of-Ownership

QUOTED PRICE INDUSTRY TRACK RECORD UNKNOWN SUPPLIER REDUCED MAINTAIN- ANCE ACCESS TO INNOVATION OBJECTIVE VALUE

+CHF +CHF

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Monetising all

Benefits
Costs
Preferences
Risks
Strategic considerations…

ACHIEVING OBJECTIVITY

Supplier A

…neutralises preferences

Supplier B Methodology exposes ‘hidden agendas’ and prevents ‘vetoing of options’

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MAIN TAKEAWAYS

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

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BRINGING IT TO LIFE…

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