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SRM
APPLYING GAME THEORY TO SRM This example of game theory – the study of strategic decision-making – can easily be applied to supplier relationship management. Despite SRM seeking to promote mutual benefit, many companies have found themselves faced with conflicting objectives which affect the decision-making process. With organisa- tions under extreme pressure to reduce cost, many have struggled to maintain the mutuality required for SRM outcomes to be of benefit to both organisations. Why is game theory relevant to SRM? Game theory captures succinctly the strategic dilemma faced by many organisations when considering their approach to SRM, from developing the business case to how they maintain the engagement and support of suppliers. The zero sum scenarios illustrate the risk to sustainable SRM value if a strategy to deliver mutual benefit is not developed. NO LONGER A ZERO SUM GAME Our research tells us that cost, or more accurately price reduction, where gains for the customer inevi- tably mean losses for the supplier is no longer the overriding focus of SRM. While cost does remain an important driver, it is now joined by other benefits such as risk management, innovation and customer of choice, that all have more potential to be of mutual benefit. Indeed, even cost reduction when addressed collaboratively and focusing on real cost will benefit both organisations. As understanding and attitudes to SRM mature, its focus will widen to a broader range of value to be derived from the relationship for both parties. The goal is for us to find ways in which both negotiators will more consistently play blue cards (win-win) instead of gambling on red. If we don’t, the zero sum scenario currently experienced in some relationships will be perpetuated. We need to ask ourselves a ques- tion. If we were a negotiator in this game and our opposite number consistently played the red card, how long would it be before we also started playing the red card? CREATING WIN-WIN The answer to fostering a win-win outcome may lie in the number of times the game is played. Now imagine the previous scenario, but with an added condition: the game will be played indefinitely. With this in mind,
the negotiators are expected to act differently – to maximise their long-term gain. Studies have shown that when played in this context, players are more likely to play a blue card in an early round, as a signal to the other that they are willing to cooperate. So even though they may lose out to begin with, they benefit in future. Similarly, SRM is not a single round game but involves the long-term commitment of both parties. Making it clear to suppliers from the start that they should expect a win-win scenario encourages posi- tive actions with a long-term focus. So shouldn’t companies consider ‘playing the blue card’? This brief concession may foster trust and induce a win-win outcome in future iterations of SRM. Examples of the ‘blue card’: › › Share your long term strategy › › Initiate an effective innovation process › › Commit to sharing the benefits of joint initiatives › › Share product and service roadmaps › › Review contract terms for mutuality, for example IP › › Create two way performance metrics › › Listen – conduct a voice of the supplier survey › › Act – respond to the voice of the supplier survey › › Develop a customer of choice strategy › › Conduct 360 degree relationship health checks and act on the results All of the above are examples of good intent and will be seen as ‘playing the blue card’. Mutuality or win-win in supplier relationships doesn’t necessarilymean equal shares or equal benefit. It simply means that both parties feel satisfied with the outcome. Our research indicates that levels of collaboration are improving and there are many other positive indica- tors that relationships are based more on trust and shared interests than previously. It is important that this momentum is maintained and that SRM is not perceived as a zero-sum game. Article by Wai-Leng Chon, Business Analyst at State of Flux. Call Wai on +44 (0)207 842 0600 or email her at wai-leng.chon@stateofflux.co.uk to learn more about how SRM can help you achieve win-win outcomes.
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