Integrating game-theory in the supplier selection process for complex itemsan action research program to develop a systematic process for practical application

Resumen

There has been a growing interest in the industry and academia around the application of game-theory to enhance the impact of supplier selection processes and increase competition among suppliers. Game-theory has been considered one of the best suited theories to tackle negotiations and utilising its jargon, the supplier selection process will be considered a game, i.e. a situation in which players have conflicting interests and its theory copes with the study of multi-person decision problems. In fact, game-theory suggests reasonable solutions for classes of games and examines their properties: i.e., that it may be used for explanation, prediction, or prescription of games in various circumstances. These studies however have been mainly descriptive and the knowledge about design characteristics, application and impact of these supplier selection models is still limited. Our aim is to contribute to this debate by presenting the empirical application of a systematic process to design and execute game-theory based supplier selection processes, especially for technically complex items. Our research purpose is to support a buyer so as to be able to design and execute a supplier selection process in which: there is a big number of qualified supplier (players) that compete in a predefined manner (order), in order to win a pre-established award (payoff). Then, it will possible to influence the potential decisions from suppliers (strategies or choices) by the buyer’s interest. In other words, game-theory could consequently help buyers to create more competition, which may contribute to balance the outcome of imperfect markets. We have worked on industrial case studies with strong focus on complex items and have utilised the following elements from game-theory in supplier selection processes: (a) game-trees and backward-induction principle from the bargaining theory, and (b) two-phase game with a reverse auction and a subsequent consecutive negotiation of take-it-or-leave-it. In these cases, we have not only described the supplier selection processes (what has been done), but also the hows and whys of our decisions. Specially interesting has been also the research on how product engineering methods and tools can increase the performance of the game-theory for the supplier selection processes. Our findings suggest that application of game-theory can enhance the chance to have better performance from the supplier selection process by: (1) providing a better prediction of the negotiation outcome, (2) prescribing, in consequence, the best fitting game, and (3) increasing competition among suppliers. Also, observations from our industrial cases confirm that product engineering methods and tools can be crucial to apply effectively game-theory.