Can Game Theory be a Game Changer in Procurement Practices?

When it comes to any kind of negotiation, there is always the dread of stress and anxiety, particularly in business scenarios where emotions are tied to the last bench.

As often noticed, both buyers and suppliers are trying best to secure their own goals instead of how both should look at how best to win together. Certainly a difficult negotiation, right?

Two level headed parties meeting at a common ground and deciding on something that is mutually beneficial to both, may seem too ideal. But for procurement, there has to be a solution and hence the “Game Theory”.

Within a very competitive environment, the Game theory is the study of conflict and cooperation. One can call it science of building a suitable strategy that reduces conflicts and makes way for synergies to work in tandem to the benefit of the parties involved in a negotiation.

Mathematicians John von Neumann and John Nash, along with economist Oskar Morgenstern were the key pioneers of the Game Theory.

Although Game Theory found large applications in political science and economics, but it is also known to have made many successful negotiations within procurement.

Below listed are three tips for informed application of game theory to negotiations within procurement:

1. Assessment of Supplier Rational:

If you are wondering how Game theory can help provide better clarity to negotiations and eventually help procurement achieve desired savings without actually disappointing the supplier, the answer is here.

The structure of the theory encourages procurement to understand the the rational behind a supplier’s decision.

• Once the rational is figured, the buyer-side works backwards to come up with a solution that makes both parties win the deal together.
• This assessment of a supplier’s mentality is helpful in making future negotiations and sustainable buyer-supplier relationship.

2. Acknowledge Theory Limitations:

The level of negotiation is not constant. It is not one-size-fits-all.

Although the intent of a Game theory is to have both parties win and not alienate one from the interest of the other, parties should still be concerned and be strategic about accepting an outcome.

• No outcome should be accepted if that’s detrimental to one’s business. One can argue that how come an outcome be “detrimental” if it is only possible when both parties are considerate of each other’s success.
• Well, if an outcome is seen to have no immediate reaction but beneficial at large for bot the parties, it can always have a delayed effect.

To ensure this, talking heads should be mindful of the limitation of the Game theory.

3. Address Risk & Uncertainty:

While being mindful about the application of the Game theory, it is not enough to guarantee that places it has been applied to are immune to all elements of risk and uncertainty.

To ensure this aspect of immunity, procurement must conduct as much research possible, should request for as much information from the market that can help in better negotiation with all concerned stakeholders, including suppliers.

Game theory holds substantial value for both business and its function/s. If applied with the above three prerequisites in mind, Game theory as an innovative approach has real big impact on procurement which not only delivers in results but also in the re-branding of procurement function within an organization. By now we can see, or you will agree to the fact that how Game theory has the potential of shaping and influencing interactions in negotiations.

• In fact its promise on ROI is a big deal for procurement to demonstrate its value within a wider organizational structure.

So what are you contemplating on? We started on the premise of evaluating the Game theory as a possible game changer within procurement.

Given our discussion on how it has to be approached and exceptions to consider, do you think the Game theory is poised to make a difference?