TWS Managing Partner on how game theory is revolutionising procurement

TWS Managing Partner on how game theory is revolutionising procurement

We sat down with Dr Sebastian Moritz, an award-winning expert in game theory, to discuss how it is best applied to the procurement and supply chain industry.

Often described as the ‘science of strategy’, game theory is a growing term among procurement and supply chain professionals; indeed, a recent survey published by CIPS and TWS Partners revealed that 17% of respondents started applying game theory in the last year, while 23% already use the concept to improve supply chain resilience.

But what exactly is game theory, does it vary within and between sectors and who are the leading proponents right now? We began with the most popular definition of game theory.

In recent years, several Procurement Excellence Awards by CIPS have recognised work that leveraged game theory. Can you tell us about game theory?

Game theory is a Nobel Prize-winning methodology and models strategic interactions (called games) between parties (referred to as players), who each pursue their own interests.

The essence of game theory lies in strategic analysis and decision-making, where players choose their own actions and moves mindful of what other players may think and do. This anticipatory approach allows the party that adopts the methodology to optimise their strategic moves and decisions effectively.

Applications span areas such as international politics, personal life scenarios, and critical business decisions.

Does the definition of game theory change from company to company?

Early adopters typically focus on the prime applications of game theory in procurement such as multilateral tenders or bilateral negotiations. More advanced organisations go far beyond these use cases, and apply game theory to actively shape supply markets, design resilient supply chains, and incentivise suppliers to commit to carbon reductions.

How does game theory differ from other more traditional negotiation techniques?

Traditional techniques often rely on static analysis. For example, understanding the market, suppliers, differences in offered products, options, and alternatives. Game theory brings a more dynamic perspective. It focuses on analysing how the other side may react to certain steps in negotiations, which in turn is used to inform procurement's optimal approach in the first place.

The aforementioned survey published by CIPS and TWS showed that more procurement organisations are discovering and applying game theory. How widespread is its application?

Research showed that most professionals have heard about game theory before. This could be during their studies, when they went to the movies (watching Russell Crowe as the famous mathematician John Nash in A Beautiful Mind for example), or in the media when economists analysed the Brexit negotiations. However, less than half of those people who have heard about game theory use it in their day-to-day jobs. A striking gap.

What are some typical use cases for procurement managers?

The most common use case is the design of competitions or the structuring of negotiations. Counter-intuitively, the methodology is most powerful in challenging situations where market forces do not work because of limited supply options, dominant suppliers, self-created monopolies, or strong stakeholder preferences.

Game theory can help in those situations to reanimate competition and change market dynamics and behaviours of suppliers, thereby delivering significant value and commercial benefits. Other prominent use cases include the design of incentives that ensure suppliers do not game the procurement process but offer and commit to what the buyer is most interested in, such as performance, quality, carbon reduction, or ESG compliance.

Which organisations are at the forefront of using game theory?

In the UK, Jaguar Land Rover and Lloyds Banking Group are at the forefront, but progressive public sector organisations such as the NHS or National Highways also lead the way, even under the old public procurement regulations. Almost all of them have been recognised by CIPS with Procurement Excellence Awards for their innovative and groundbreaking work.

Can you describe some of the successes that have been achieved by those organisations?

Jaguar Land Rover was recognised for their innovative approach to sourcing a fast-changing high-tech component. A couple of years later, they also gained recognition for rethinking their sourcing approach for customer-facing services across Europe. In the public sector, the NHS was celebrated for its procurement helping to accelerate the elimination of Hepatitis C from England, set for 2025. Additionally, Lloyds Banking Group deserves a mention for their upskilling and people development programme, which is centred around game theory and won a CIPS award in 2022.

If an organisation wanted to test out game theory, where would they best begin?

CIPS provides a wealth of resources, but my recommendation is to talk to people who have successfully adopted the methodology. Their experience and insights are often invaluable and more helpful than studying the underlying theories on your own; game theory textbooks are often very formal and technical. For a deeper and more applied understanding, curious professionals can always approach experienced users.

When procurement and supply professionals are curious enough, then it's all about testing the waters. Almost all the organisations mentioned above have trailed the methodology first in pilots.

What are the biggest hurdles when introducing the methodology?

Winning over stakeholders is crucial. It’s a highly cross-functional methodology. Any strategic business decision involves multiple stakeholders who have their own targets, interests, and views. Game theory can only make a difference if stakeholders have the possibility to shape the solution together with the buyer.

And finally, give us one takeaway for any procurement professional reading this interview

Try it. 'It won’t work in my company' is no excuse if you look at what others have already achieved.

Download the survey published by CIPS and TWS Partners.