GAME THEORY IS A GAME CHANGER FOR PROCUREMENT Speaker Prese… · GAME THEORY IS A GAME CHANGER FOR...

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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 define 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

Transcript of GAME THEORY IS A GAME CHANGER FOR PROCUREMENT Speaker Prese… · GAME THEORY IS A GAME CHANGER FOR...

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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

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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.

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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?

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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

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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.

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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

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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.

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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!

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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

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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

[email protected]

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

[email protected]

t: +49 89 200040-19