The Nobel Prize in Procurement

The 2012 winners of the Nobel Prize in Economics were recently announced by the Royal Swedish Academy of Sciences in Stockholm. Two U.S. economists, Alvin Roth and Lloyd Shapley, were given the award for finding practical applications for game theory and market-matching. The primary focus of their work is perfecting the matches between spouses, medical schools and applicants, and kidney donors and recipients. In most cases, their theories are applied in situations where cost is not a factor – sometimes because it is not applicable and other times because it is illegal.

As much as procurement professionals are often focused on comparing and negotiating costs, final award decisions are rarely focused on price alone. Ranking suppliers based on estimated volume and total cost can be done by anyone, but accurately incorporating subjective factors requires experience and insight into the high level priorities of the category and the organization.

The optimization scenarios that bring non-cost factors into the decision making process is where procurement really earns their keep. Sourcing solutions handle much of the scenario processing, but those scenarios are only as effective as the constraints and weighting built by procurement.

The work done by Roth and Shapley also applies to procurement in that we are tasked with match-making between our organization and qualified suppliers. We are regularly required to manage ‘scarce’ resources. Our resources (spend in this case) are not scarce in the sense that we are dealing with a shortage, but rather in that there is a limited amount of money that we can spend in a given year. Procurement uses their knowledge and negotiating leverage to allocate spend as effectively as possible.

Lastly, there is the role of what they call ‘courtship’ in match-making. One needs to be chosen as well as to choose for the match to be a success. As Roth explained, “You can’t just have what you want; you also have to do some courtship and there is courtship on both sides and we study the market place processes by which those types of courtship are resolved. ” Procurement organizations have lately started considering how they can present themselves as customers of choice, trading positive references and the promise of low-maintenance agreements for lower contracted cost and improved payment terms.

If there were a Nobel Prize awarded for ‘Procurement Sciences”, would you and your organization be candidates? How carefully do you study the opportunities at hand, looking for the best approach rather than just following a process diagram?

Roth and Shapley were by no means the expected winners of this year’s award. Their subject area has been recognized in recent years, and they are focused on the application of fundamentals rather than cutting edge theoretical development. They stand as an example of how important it is to get the basics right. The take-away from their selection is that any of us can apply what we know in a game-changing way. We can make a significant impact on the profitability of our organization with nothing more than the tools we already have and our own inquisitiveness.

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