Mars Wins the Shipping Game

Opportunity knocked In 1990, Mars appointed Mansell, an applied chemist, to Consolidated European Logistics Services, an internal organization tasked with bringing pace, power, and focus to Mars's logistics buying. Having worked with Hohner before on a crop-forecasting project, Mansell asked if game theory could be applied to logistics. Hohner's reply: "Let's find out."

Over the course of the 1990s, Mars gained a reputation as a logistics pioneer. "When other companies started asking to buy our software, I smelled a business opportunity," says Mansell, who convinced Mars that it could, by creating Freight Traders, offer the service to other companies via the Internet. IBM beat four rivals in a game-theory tender (of course) to build the high-powered site that can handle 3,000 to 5,000 offers in a typical 20-minute blitz.

Freight Traders employs just 10 staffers, but with more than 1,000 carriers and almost 200 shippers active in its tenders and auctions, the company is already making money by charging shippers a fee. Now Freight Traders is plunging into deep-sea freight. And by 2004, Mansell expects to introduce collaborative buying, which will allow shippers to pool their needs, giving carriers fuller loads on certain routes. John Nash -- who received a Nobel Prize in 1994 -- waited 40 years for his achievements in game theory to be recognized. Mansell and Freight Traders won't need to be so patient.

Sidebar: Playing Games

Game theory -- the painstaking analysis of bargaining, bidding, and negotiation -- has finally escaped Economics 101 and the classroom and is beginning to make its mark in political science, military science, evolutionary biology, sports, and, now, the competitive world of business.

Governments used game theory in auctions for third-generation mobile licenses to wring out the highest possible price from the telecom companies. The result? The companies ended up paying roughly $100 billion. Game theory is also a favorite weapon of antitrust lawyers to support the case for the breakup of dominant competitors or the imposition of penalties.

In sports, game theory informs Major League Baseball salary negotiations. Soccer authorities have also used game theory to make the game more exciting by introducing sudden death, or golden goals.

In insurance, such companies as Risk Management Solutions are using game theory to analyze the risk of future terrorist attacks by modeling the likely response of terrorist groups to stepped-up security and counter-intelligence efforts.

"Game theory is more than A Beautiful Mind. Now it's really a business application," says game theorist Gail Hohner, who divides her workweek between Freight Traders and Mars's Catalyst business-research group. "Yet I'm often disappointed when I go to game-theory conferences and I'm the only businessperson there." In other words, for most of business, it's still zero-sum.