As I mentioned in my last blog (My First few Weeks at Procurement People), I have been speaking with Procurement Leaders from a range of sectors all using different methods and techniques to aid their strategies for supplier management.
As a lover of psychology and behavioural science, one theory that was mentioned in discussions that has really excited me is Game Theory. I have conducted some further reading of blogs and journals online and have one example below that I would like to discuss with you now.
For those who don’t know what Game Theory is, it is a tool for analysing situations in which the decisions of multiple agents affect each other’s desired result which is known as “pay off” in the theory. The model that I feel helped me the most to understand this theory was the Prisoner Dilemma Matrix.
I feel the Prisoners’ Dilemma is easily relatable to the process of supplier management in regards to negotiating potential price changes with suppliers. It is a theory that allows the procurement professional to see early where the negotiation process can end, based upon a range of decisions from both parties. Obviously both the procurement professional and supplier will have a desired “pay off” and this model allows the professional to map out a list of potential outcomes, allowing them to create multiple strategies to ensure they can maintain control of the process.
From one conversation, a Procurement Director used the Prisoner Dilemma Matrix to reduce the cost of buying a component part that was essential to his products manufacture and he knew that to achieve this he might have to agree to an exclusive suppliers agreement. He stated that the process was made more challenging, as the supplier knew their importance to his company. So the model helped him strategize and ensure he always kept the possible final results in his mind
He stated that he achieved “pay off” for both parties, as he gained the reduction in costs for himself and the supplier gained a multi-year suppliers agreement guaranteeing them income for the duration of the contract that they wanted at a price point that benefited both parties.
I am acutely aware that negotiation skills and relationships are crucial to any process. So in my opinion, this theory will work best if you go into negotiations with an open mind and have the willingness to accept that two people should benefit or walk away from negotiations in a positive manner in some way.
So after reading this blog, how do you feel about Game Theory in procurement? Is the Prisoner Dilemma Matrix a model you would use personally? And what is your approach to supplier management?
By Ciaran Price – Consultant