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Nudge Theory Applications in Procurement

Nudge Theory Applications In Procurement

Nudge Theory

Nudge theory, developed by Richard Thaler and Cass Sunstein, subtly guides individuals towards better decisions without restricting their choices. It leverages behavioral science to predict behavior by altering the environment or context in which decisions are made.

It logically derives from the Prospect Theory we discussed earlier. 

Nudges are small interventions or environmental changes that steer people towards desired behaviors without restricting their freedom of choice. 

Main attributes of nudges

Freedom to Opt-Out: Individuals can easily opt out of the nudge or choose an alternative. Nudges are non-coercive and maintain freedom of choice.

Simplicity: Nudges should be simple and easy to understand. Complexity can lead to confusion and reduce the effectiveness of the nudge.

Transparency: The intent behind the nudge should be clear, ensuring that individuals are aware of the influence without feeling manipulated

Alignment with Human Behavior: Nudges leverage natural human nature and cognitive biases, such as the tendency to follow default options or the influence of social norms.

Cost-Effectiveness: Implementing nudges should be low-cost compared to other interventions, making them an efficient way to influence behavior.

Ethical Consideration: Nudges should aim to benefit the individual or society and not exploit cognitive biases for harmful purposes.

Feedback and Adaptability: Effective nudges often include feedback mechanisms, allowing for adjustment based on how individuals respond to the nudge.

These attributes ensure that nudges respect individual autonomy while effectively guiding behavior in beneficial ways.

Some applications of Nudge Theory in procurement

Nudges can make Procurement processes and governance less disturbing for end-users and contribute to value creation. 

Requestor Portal

Let's imagine ourselves as our end-users. They don't understand or appreciate procurement governance; they must buy stuff as soon as possible with minimal involvement. 

When engineers or salespeople start raising PRs, writing RFP requirements, or chasing payments to help out their suppliers, they'd better do something job-related and generate revenues or design new products.

Arguably, the most disturbing for them is to travel the Schwarzwald of multiple procurement scenarios and options. What if we established a Requestor Portal, carefully guiding them through buying channels and providing self-service opportunities. 

Procurement KPIs

We report savings, cycle time improvement, and inventory turnover. Yet, the procurement contribution to the company's performance isn't always clear.

When I worked in aviation, I loved to monitor one corporate metric—CASK (cost of available seat kilometers). Other than profits (if any), I looked at CASK and load factor to ensure that our aircrafts were filled with passengers whose cost of flying was improving. While we couldn't influence the load factor, we surely affected the CASK.

Let's define some meaningful corporate KPIs that would nudge procurement to make their contributions clear and tangible. Would you care about your savings in times of increasing CASK, or would you ask yourself what I am doing that is useful for my company?

Standardization and harmonization

I sincerely admire this example from IAG. Not only did procurement play a role in the airline group's survival, but standardization nudged companies for further synergies, which are hard to achieve simply by management decree. 

What other uncommon examples of Nudge Theory Applications can you think about?

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This post first appeared on The Good Spending, please read the originial post: here

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Nudge Theory Applications in Procurement