GAME THEORY IS A GAME CHANGER FOR PROCUREMENT
WHITE PAPER
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 1
The role of Procurement within an organisation and how it is perceived must change. In many organisations Procurement is still seen as a service provider, liaising with internal departments following their internal processes. An alternative and innovative approach is needed to enable Procurement to deal with the challenges of today’s world. The answer can be found in game theory.
In today’s global economy, in-house production within most
industries is decreasing and in some instances constitutes
less than 30%, leading to more complex and integrated
supply chains. Organisations are increasingly reliant on their
suppliers to provide them with solutions and innovations in
most areas of the business, such as manufacturing,
engineering and product creation.
Procurement can have a substantial impact on driving
company value as the procured goods and services defi ne
two thirds or even more of a company’s costs. It is therefore
imperative that Procurement has a more strategic and
entrepreneurial mindset to ensure that the business remains
cost competitive, innovates, generates substantial value,
builds effective supplier relationships and ultimately
strengthens the company’s competitive advantage.
THE WORLD IS DRAMATICALLY CHANGING
Although game theory has been recognised as a ground
breaking field of research, not many organisations have
harvested its true potential. The insights from game theory,
as well as neighbouring fields such as industrial economics
and contract theory can be effectively applied to many
areas of a business. Yet, game theory has not been widely
adopted to date.
TWS Partners, a company that has a team of more than
50 experts specialising in game theory and industrial
economics, was founded in 2001 as a spin-off from industry
and research. The team has worked with many market
leaders across multiple industries to transform
organisations and increase cross-functional collaboration,
creating momentum and achieving significant bottom line
results – all initiated by Procurement.
The momentum that is generated and the application of
game theory throughout the entire organisation, sees TWS
Partners initiate and drive a silent revolution. TWS Partners
facilitate this change and drive a new perspective of
Procurement from an internal reactive service provider
through to a proactive and highly strategic role, without
major disruption to the culture of an organisation.
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 2
CHANGING THE VIEW OF PROCUREMENT THROUGH GAME THEORY – THE SILENT REVOLUTION
The conventional approach would rely on completely
restructuring the organisation with off-the-shelf measures,
aiming to maximise final cost savings. Whilst this can be
effective, the restructure can be disruptive to the culture of
an organisation and less sustainable than a bespoke
solution.
In order to maximise the true potential of the Procurement
function, a different approach and a change in perspective is
needed. A sustainably successful Procurement organisation
must be seen and regarded as agile and entrepreneurial.
Game theory can be a game changer to achieve this. It is a
scientific tool to analyse interactions between decision-
makers in complex situations. Game theory can therefore be
used to deliberately shape and influence the outcome of
interactions, such as negotiations, between multiple parties
to the advantage of one of the involved ‘players’.
SO, HOW CAN THIS BE ACHIEVED?
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 3
Negotiation Excellence and Commitment
Cross Functionalities
Advanced Strategy and Market Design
Process and Organisation
GAME THEORY HELPS PROCUREMENT AT EVERY DEVELOPMENT STEP
TWS Partners’ approach utilises a unique methodology
derived from Nobel Prize winning research in the areas of
game theory, industrial economics and contract theory. As
specialists in large, complex sourcing projects and
negotiations, TWS Partners team up with a company to
transform Procurement and cross-functional collaboration
on different levels, thereby improving bottom-line results
and positioning Procurement as a value-driving factor
throughout the organisation.
“IF YOU WANT TO BUILD A SHIP, DON‘T DRUM UP THE MEN TO GATHER WOOD, DIVIDE THE WORK AND GIVE ORDERS. INSTEAD, TEACH THEM TO YEARN FOR THE VAST AND ENDLESS SEA” ANTOINE DE SAINT-EXUPERY
UNIQUE APPROACH
By moving away from the traditional art
of negotiation and applying economic
thinking, game theory principles,
rule-based negotiations and commitment,
TWS Partners systematically achieve above
average results for their clients. They use their cutting-edge
expertise to develop tailor-made ‘awarding designs’ and
leverage the power of commitment in negotiations to drive
those results. With TWS Partners’ expertise, Nobel Prize
winning research and science become accessible to clients
and broadly applicable.
Negotiation Excellence and
Commitment
Currently, organisations and their
pro cesses do not enable Procurement to
work effectively with their cross-functional
partners to drive results. Too often,
Procurement has to follow the preferences of
internal stakeholders and justify their supplier selections
if not in line with stakeholders’ views. Very often
stakeholders use their position to ‘veto’ suppliers rather
than state a preference and objective reasons for it. This
limits competition and ultimately the value Procurement can
drive in negotiations with suppliers. Cross-functional
collaboration must evolve, but more importantly with this
evolution Procurement has the chance to lead cross-
functional supplier selections instead of being led by others.
TWS Partners use a unique and comprehensive approach
which establishes an alternative framework for cross-
functional collaboration. It enables trade-offs between
conflicting objectives in an organisation and ultimately
becomes a way to get to an aligned and holistic view,
putting Procurement at the centre of the decision-making
process.
This is achieved by monetising preferences of stakeholders,
converting stated preferences into a single unit of
measurement – the monetary impact on the bottom line.
This allows you to weigh and trade partly conflicting
objectives across involved departments. Consequently, a
system is created in which all aspects of the sourcing
decision are taken into consideration, hence driving
true value.
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 4
Procurement frequently hits boundaries
and roadblocks to competition that are set
upstream in the process. This leaves
limited or no leverage at the point of
sourcing, and subsequently little chance to address
internal cost challenges in negotiations with suppliers. In
order to influence the position and supplier market place,
Procurement needs to ‘shift to the left’ in the process.
This means that Procurement must be involved much earlier
in the strategy setting process, as opposed to just a few
weeks before sourcing. In addition, it must adopt a much
more strategic and proactive role months ahead of the
actual sourcing decision. This not only enables costs to be
influenced to a greater extent, but also incentivises
alternative solutions to be sought as well as upcoming
technologies and innovations in the market. Moving from a
reactive position to a proactive one that aims to create,
shape and leverage the markets for companies’ demands is
key. Moving away from being informed to being influential
and impactful is the objective. Procurement must become a
market designer, creating true market places that extract
competitive market prices and supplier innovations.
Having experienced the potential and power
of this unique approach, successful
organisations strive for even more by asking
themselves how to ensure that each sourcing
decision can benefit from the approach and methodology.
This change can be achieved by embedding the key
principles of the methodology firmly into the processes and
heart of the organisation. It also revolutionises the way in
which cross-functional partners collaborate and installs
commitment and discipline into the sourcing process, which
ensures high-quality preparation and better options at the
point of sourcing, ultimately leading to better results.
Cross Functionalities
Advanced Strategy and
Market Design
Process and Organisation
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 5
TWS PARTNERS’ APPROACH CONCLUSIVELY CREATES A CHANGE OF PERSPECTIVE AND TRANSFORMS PROCUREMENT FROM A SERVICE PROVIDER INTO A VALUE DRIVER. THIS CHANGE OF PERSPECTIVE HAS BEEN SEEN IN MANY COMPANIES ACROSS AN ARRAY OF INDUSTRIES.
Within the Automotive industry, it is common that
components are not finally specified at the point of sourcing
a supplier, which can lead to a substantial change in
specification once a supplier has been nominated.
Traditionally, from a service provider perspective,
Procurement would tender on the currently available
specification and then manage any change with their chosen
supplier after sourcing. This invariably leads to a
negotiation with a de facto monopolist, as well as
additional costs and workload for all parties involved.
Yet, in order to change the perspective from that of a
service provider to a value driver, it is important to look at
what we are really buying. Is it the component specified or
are we really buying the capacity of a factory with specific
manufacturing capabilities and technologies?
This change in view immediately elevates Procurement into
a more strategic position. The approach to sourcing is re-
evaluated and moves away from negotiation on prices of
goods to negotiation on capacity and cost model structures.
This in turn affords better negotiations and therefore better
value-for-money decisions are made.
A CHANGE OF PERSPECTIVE – WHAT DOES IT MEAN?
Automotive OEMCHANGE OF PERSPECTIVE:SUPPLY CHAIN Value driver
What should be theperformance of the factory? Start of process
-6 months
Service Provider
Buy the components at a fixed price!
The following examples have been chosen to illustrate the
change of perspective. Having implemented more than
2,000 projects across a wide range of industries and
categories, it goes without saying that many other cases
could have been chosen to demonstrate the change.
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 6
Suppliers need to be able to provide companies operating in
the Consumer Goods industry with large portfolios of high-
volume plastic components – all of different shapes and
sizes. However, as consumer preferences and the market
are continually evolving, the design of these components
and their specific requirements vary considerably across
different projects and over time. Future volumes are very
often not reliably predictable, and are sometimes even
unknown. This typically leads Procurement to conduct a vast
number of supplier negotiations each year, whilst under time
pressure and equipped with very limited bargaining power.
By being proactive as opposed to reactive, Procurement
should con sider how to bundle future volumes and demands
that are not even known and specified today.
Bundling all these future demands into a single negotiation
and leverage point using parameterised cost models, not
only increases the appetite of suppliers, the level of
competition and ultimately the buyer’s bargaining power,
but also the level of commitment the buyer can give to
suppliers. This enables Procurement to adopt a more
strategic, value driven position.
Consumer Goods
CHANGE OF PERSPECTIVE:LEAD TIME AND BUNDLING
In the fast moving world of telecommunication, technologies
are ever-changing and R&D departments require specific, in
some instances even bespoke components, some of which
can only be delivered by one single supplier. Facing such a
monopoly means that any competitive leverage is non-
existent and it is common place for these suppliers to be
selected for an entire lifecycle with limited bargaining
power for the buyer once the decision is made.
Shifting from a service provider to a value driver allows
Procurement to take a more entrepreneurial view. Rather
than looking at the technical specification, the requirements
need to be turned into functional specifications and
requirements, enabling multiple suppliers to offer different
technical solutions and thereby create a true market place
for the demand at hand.
Supplier in Telecom
CHANGE OF PERSPECTIVE:DESIGN TO COMPETITION
Value driverHow can we create competition by moving to functionalspecification?
Start of process-8 months
Service Provider
Provide me with the component that meets my technical specification!
Value driverHow to leverage competition and create win-win situations by bundling future demands that are unknown today?
Start of process-5 months
Service Provider
Negotiate the price of the components for this specific project!
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 7
In projects, TWS Partners systematically beats existing
benchmarks and drives substantial bottom line results Yes,
there is an immediate return on investment and direct
impact on a company’s P&L, but this approach also ensures
that commitment and the key principles are embedded into all
sourcing projects ensuring a sustainable development of the
organisations and a systematic upskilling of the Procurement
team. It enables Procurement to evolve into a real value driver,
impacting on business success and leaving behind its tra-
ditional singular focus on cost. This greatly increases the trust
placed in Procurement’s capabilities, which in turn allows them
to substantially shape future strategies and make the change
from being reactive to proactive. Procurement can now
anticipate and address any roadblocks for competition much
earlier in the process and help to shape future markets.
Applying the methodology and embedding the principles
throughout a business transforms Procurement from being a
service provider to a facilitator of complex cross-functional
sourcing initiatives. It empowers organisations and
develops them step by step to explore their full potential.
Some of the most advanced organisation who have adopted
TWS Partners’ methodology, have embedded the key principles
into their business processes with the help of TWS. This has
allowed them to address each single sourcing activity and reap
considerable benefits, driving value across the whole business.
A transformation supported by TWS also ensures a systematic
upskilling and training of professionals working in Procurement
allowing them to engage on a completely new level with their
cross-functional partners and suppliers.
With each success building momentum and driving the
change throughout the entire company, this ‘inside out’
process sees businesses learning and evolving on a project
by project basis. Organisations become aware of this
cultural shift and theintegral role that Procurement is
playing. Not only will it see dramatic results in company
performance and efficiencies, it will also strengthen and
safeguard the future role of Procurement as a source of
sustainable competitive advantage.
To start revolutionising your own business, TWS Partners has
developed the TWS Agility Check.
The Agility Check is tailor made to your bespoke needs, and
comprises two elements to assess your company’s
performance. The Agility Benchmark examines your company
against other agile organisations to unearth true potential and,
through Agility Pilots, it assesses your current performance on
a small number of current supplier negotiations, quickly
identifying areas for improvement, resulting in immediate
improvements to your company’s performance.
The findings from the Agility Check provide a roadmap of how
to unlock short, mid and long-term potential and provide a
blueprint for process improvements which can be a key driver
for a future agile Procurement team.
THIS INNOVATIVE APPROACH OF APPLYING GAME THEORETICAL THINKING TO ALL ASPECTS OF PROCUREMENT HAS A BIG IMPACT – BOTH IN TERMS OF RESULTS AND WITH REGARDS TO THE PERCEPTION OF THE PROCUREMENT FUNCTION WITHIN AN ORGANISATION.
REVOLUTIONARY BENEFITS
The Silent Revolution has begun
Revolutionise your business
WHITE PAPER: GAME THEORY IS A GAME CHANGER FOR PROCUREMENT 8
The team of more than 50 experts supports the
implementation of game theory, contract theory and
industrial ecomonics methods for blue chip organisations
and small and medium sized companies.
TWS Partners has already successfully implemented over
2,000 sourcing projects with an accumulated spend of more
than €150 billion, widely embedding the methodology into
their clients’ organisation and processes.
Working with market leading organisations within the
Automotive and Transportation, High-Tech and
Telecommunications, Pharmaceutical, Chemical and
Consumer Goods industries, TWS Partners is the only
company whose business model is founded on applying
game theory to improve the performance of Procurement
departments and entire businesses.
ABOUT TWS PARTNERSFOUNDED IN 2001, TWS PARTNERS IS THE MARKET LEADER FOR THE APPLICATION OF GAME THEORY IN BUSINESS.
Dr. Sebastian Moritz
Principal
TWS Partners
t: +49 89 200040-37
For more information about how TWS Partners can support
your approach to Procurement, please contact:
Dr. Stephan Knapek
Partner
TWS Partners
t: +49 89 200040-19