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

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

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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,

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Game Theory in business negotiations

Substituting verbal skills by a methodical approach

Presentation at ETH Zurich, 06.10.2017

Adriaan `t Gilde, Head of Corporate Purchasing

06.10.2017

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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
  • Purchasing volume 2016: 1’400 Mio. CHF

(direct & indirect spend)

Game Theory @ Geberit

06.10.2017 2

Geberit AquaClean shower toilet

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Experience with Game Theory

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  • 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

Game Theory @ Geberit

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A simple excercise with Game Theory

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Game Theory @ Geberit

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Game Theory: a simple excercise, few parameters

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Game Theory @ Geberit

  • 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 !
  • Would you accept or decline?
  • What are your arguments?
  • What is the most rational decision?

100 EUR must be shared between me and you

I offer you 5 EUR: what is your decision?

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NECESSARY INFORMATION FOR A NEGOTIATION DESIGN

  • Number of suppliers
  • Number of share
  • Challenger vs. Etablished
  • Differences between prices
  • Collusion danger
  • Strategic significance

 Market entry  Capacities  Authoritative customers

  • Future business
  • Share of the market of the

suppliers

  • Technologies
  • Raw material portion
  • Raw material price trend
  • Price trend
  • …

RANK ORDERS

  • Rank order after orders
  • Rank order after factors
  • Strategical rank order

CONCEALED ORDERS

  • Concealed first price orders

(First Price Sealed Bid)

  • Concealed second price orders

(2nd Price Sealed Bid, “Vickry”)

HYBRID ELEMENTS

  • “Klemperer“ - Assignment
  • Individual combinations of the

elements named here

TAKE-IT-OR-…ELEMENTS

  • Take-it-or-leave-it: TIOLI
  • Take-it-or-best-offer
  • Take-it-or-auction
  • Take-it-or-competition

AUCTION TYPES

  • English auction
  • Dutch auction
  • Brazilian auction
  • Hong Kong auction

NEGOTIATION FORMS

  • Parallel negotiations
  • Sequential negotiations
  • Negotiations window

(Window of Opportunity)

Overview of negotiation parameters

06.10.2017 6 Game Theory @ Geberit

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Why Game Theory?

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  • 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

Game Theory @ Geberit

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Creative frustration..............

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Game Theory @ Geberit

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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

Game Theory basics

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Introduction to Negotiating with Game Theory

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Case 1: Zinc Die Casted Parts

PRODUCTS (13)

Die Casted Parts

SITUATION

  • Annual volume 4,14 Mio. EUR
  • 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

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Game Theory @ Geberit

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The negotiation process consisted of 3 phases

Phase II: Awarding Large Share Phase III: Awarding Small Share Phase I: Challenger Qualification Current suppliers & challengers: 1) Auction on large share 2) Exclusive offer of additional business Losing suppliers of phase II: Sequential negotiations with increasing prices Both shares won by existing suppliers Price reductions of 45% on added value (~ 17% on total) NEGOTIATION OUTCOME

1 2

Price Time Qualification price Price Time

#1 #2

1st offer 2nd

  • ffer
#1 #2

3rd offer

#1 #2

Challengers only: 1) Preselection & audit 2) English Auction to qualify best challenger Zinc die casted parts

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Game Theory @ Geberit

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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

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Game Theory @ Geberit

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Value creation by Game Theory requires a disciplined process with early involvement

Technical negotations Define contracting model Select architect Define technical specs Contract negotiations Select bidders & request initial bid Bidder evaluation Tender & Award Start building activity

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Game Theory @ Geberit

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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

Construction Project Ukraine

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Game Theory @ Geberit

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Overview of Tender process

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Phase 1 Contract Agreement

  • 14. + 15. November,

Kiew

  • Signing of Compliance

Commitment

  • Agreement on content of

Construction Contract

  • Agreement on (handling of)

interpretation of technical specifications

  • At the end of this Phase,

each Bidder will be informed about his participation in Phase 2

Phase 2 Qualification Price

  • At the end of Phase 1 each

Bidder receives a Qualification Price sheet

  • All Bidders that accept the

Qualification Price will participate in Phase 3

  • At least 4 bidders will be in

last round (ranking based on debit/credit total „value“)

  • Bidders will be informed

about participation in Phase 3 between 19:00 – 19:30

Phase 3 Reverse Dutch Auction

  • In Phase 3 Geberit will make

Bidders a counter offer, based on ranking after Phase 2

  • The first Bidder accepting

the counter offer wins the tender

  • No more negotiations!
  • The Construction Contract to

be signed by both parties

  • 15. November until

18:00, per Email / Tel.

  • 16. November

09:00, Kiew

7 meetings, 90 min. each Bye-bye to «losers»

06.10.2017

Construction Project Ukraine

Evaluation matrix

Game Theory @ Geberit

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Some numbers Number of invited constructors 7

Construction Project Ukraine

Range of first quotes (TUAH) 47‘500 - 57‘800 Range of bonus - penalties (TUAH) 0 - 10‘000 Number of invited bidders for Phase 3 4 Best quoted value after Phase 2 (TUAH) 51‘800 First counter offer by Geberit (TUAH) - accepted- 48‘000

Game Theory @ Geberit

Difference to 2nd best 12%

Preferred and best constructor as winner Price reduction of 9,7% NEGOTIATION OUTCOME

1 2

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Lessons learned

06.10.2017

  • 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

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Game Theory @ Geberit

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Q & A

Game Theory @ Geberit

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