E-Auctions in Sourcing
e-Auctions in Sourcing:
The Strategic Sourcing Equilizer
The Evolution of the E-Auction
Auctions have been around for centuries. People with goods wanted an efficient way to sell those goods to people who wanted those goods. For many people, the memory of an auction involves a fast-tongued auctioneer belting out numbers to a loosely organized crowd. Historically, the highest level of technology used for an auction involved plugging a microphone into a wall.
Then someone realized that the Internet could be more than a paperless catalog. The Internet could be used to expand the universe of potential buyers for any one item. It could be used by buyers to compare goods more efficiently and accurately. Anyone could enjoy an auction from a comfortable seat unencumbered by time or location.
The online auction proved to be a great application of technology for those wishing to sell products. Traditionally, the auction represented the seller and involved one seller to many buyers. Auctions helped drive up prices for the seller
But what about those people wishing to buy goods and services? Fortunately, technology worked equally well for buyers, especially buyers working on behalf of a professional organization. Now auctions could be used to represent the buyer and help drive prices down.
Over the years, various auction formats were devised and executed, including the most well-known format, the reverse auction. Rather than having one seller with many buyers, a reverse auction involved one buyer with many sellers. Sellers placed decreasing bids on a set of goods or services and followed the same set of rules.
Format Variations of Online Auctions
Before the reverse auction is reviewed in detail, this paper is going to overview some standard variations of the standard reverse auction that exist to demonstrate that multiple options exist and that not all vendor products on the market are created equal. This is not meant to be an exhaustive list of the variations that have been devised by some of the leading providers of auction technology, but a list of the major options that one is likely to encounter.
Sealed Bid Auction
In a sealed bid reverse auction, sellers have a few days (and possibly weeks) to submit one best and final bid. Bidders never have any knowledge of what the other sellers are bidding. This is dramatically different from a standard reverse auction, where each bidder knows exactly how he compares to other bidders; they have a shorter time frame to place a quote, and can reduce their price as often as they want within the time limitations, unless the parameters stipulate that only a single, “best and final offer” be submitted.
Reserve Price Reverse Auction
In a reserve price reverse auction, the buyer establishes a “reserve price”, the maximum amount the buyer will pay for the good or service. It can also be called a “qualification price”. If the bidding does not reach the “reserve price”, the buyer is not obligated to award the business based on the results of the auction. Once the reserve price is met, the buyer is obligated to award the business to a participating supplier.
With forward auctions, bids increase in value rather than decrease in value. There are situations where this type of auction format would be appropriate. An example would be when the Sourcing Team wants to sell or liquidate assets.
Fixed Price Auction
The buyer establishes a buyout price at which the buyer can simply buy the item being auctioned and end the auction. Variations support a minimum bid that will be accepted and bidders will be prevented from going below this bid. The first bidder(s) to reach this bid win(s) the auction.
In a Japanese reverse auction, after every bid, each seller must signal their willingness to remain in the auction at the current price. The auction is over when only one seller remains, or when only a pre-set number of sellers remain (when the buyer has indicated the need to source from a minimum number of sellers).
In a Brazilian auction, the buyer establishes the price she is willing to pay for the lot and the sellers bid on how many units they are willing to provide at that price. The auction continues until a seller makes a bid that no other seller is willing to top.
In a Vickrey reverse auction, a variant of a sealed bid auction, suppliers submit bids without receiving any feedback regarding they bid’s competitive ranking. The item is then awarded to the successful bidder at the second lowest bid. For example, if bidder A bids $10 and bidder B bids $12, then bidder A wins the auction but receives the award at B’s bid of $12.
English auctions are probably the most common type of auction format. Users bid the highest price they are willing to pay for an item and bidding activity stops when the auction duration is complete. The item is sold to the highest bidder at their bid price. Conversely, sellers bid the lowest price they are willing to sell an item for and bidding activity stops when the auction duration is complete. The item is bought from the lowest bidder at their bid price.
English auctions also allow the buyer/seller to specify a reserve price below which the item will not be sold.
The buyer solicits bids for a Lot consisting of multiple units of the same item. Each seller can bid on part of the Lot at a fixed price (per unit). When the auction is over, the buyer pays the highest successful bid price. For example, if a buyer wanted to buy 10 units, and buyer A offered to provide 5 units @ $75, buyer B offered to provide 3 units @ $80, buyer C offered to provide 6 units @ $90, and buyer D offered to provide all 10 units @ 95, then the buyer would buy 5 units from buyer A, 3 units from buyer B, and 2 units from buyer C at a cost of $90 each for a total of $900.
Similar to the Dutch auction, the buyer solicits bids for a Lot consisting of multiple units of the same item. Each seller can bid on part of the Lot at a fixed price (per unit). When the auction is over, the buyer takes the lowest priced bids, in ascending order, until a full Lot is reached. For example, if a buyer wanted to buy 10 units, and buyer A again offered to provide 5 units @ $75, buyer B offered to provide 3 units @ $80, buyer C offered to provide 6 units @ $90, and buyer D offered to provide all 10 units @ 95, then the buyer would buy 5 units from buyer A (at $375), 3 units from buyer B (at $240), and 2 units from buyer C (at $180) for a total cost of $795.
Benefits of online auctions – Sourcing Teams
Online reverse auctions come with a number of built-in benefits. These benefits formed the basis of online reverse auction success in the past, and will continue to play a strong role in online auction success in the future.
An electronic reverse auction with multiple, qualified bidders can be used to flush out the true market price of the auctioned items. Furthermore, this information can be used as the basis for real-time benchmarks for future sourcing projects. Auctions spark healthy competition, which can help all participants understand the true market value and identify areas where they need improvement. A buyer benefits by knowing true – often lower – costs. Suppliers benefit by knowing the market rate so they can review their own business or pricing model.
Decreased Error Rate
Since the sellers enter their own bids, there is less chance of human error during bid transcription and importation into a common bid file. The ability to run preliminary price rounds and the ease of online editing all serve to help catch mistakes and clarify requirements before the auction commences.
Simplified Apples-to-Apples Comparisons
Since all the submitted bids are in a common format contained within a single tool, the buyer can more easily make an easy apples-to-apples comparison, even with Dutch, Yankee, or other reverse auction variants.
Increased Buying Reach
Unlike traditional auctions that limit a buyer to the suppliers who can converge to a common location and time, electronic reverse auctions give a buyer access to a global supply base, including suppliers in low cost countries.
Unifying Force for Process Improvement
An electronic auction is one of the cornerstones of an efficient, executable, strategic sourcing process. It enables Sourcing Teams to streamline purchasing processes by creating standard formats for purchasing across any spend category. Electronic reverse auctions simplify bid collection, bid comparison and centralize relevant data in a central location for easy query and display. This reduces cycle time, decreases the chance for human error, and provides a solid foundation for award analysis and optimization.
Auctions encourage high cost producers to increase their emphasis on the identification and elimination of process waste, an effort that sometimes leads to revolutionary improvements and significant cost reductions in the long term.
Cycle Time Reductions
Online auctions can be coordinated in a manner of days and conducted in an hour – shaving weeks from the traditional offline process. Furthermore, auctions force key players to focus and make decisions in a timely manner. They also accelerate awards, and this benefits all participants who want to grow sales faster.
More Time for High Value Activities
The drastic reduction in data collection efforts and cycle time leave more time for high value activities such as spend analysis, strategy selection, and award optimization.
Direct Cost Reductions
Successful reverse auctions immediately reduce the cost of acquisition (that would otherwise be paid) for each item successfully auctioned.
Benefits of online auctions – Suppliers
There are also benefits for suppliers who participate in online auctions. There are numerous success stories discussing how supplier organizations grew their business globally through their participation in online auctions.
Less time to complete
Since this process helps the buyers be more efficient, the suppliers will receive more information, receive it faster, and benefit from a quicker award decision.
More benefit from having more upfront planning
Suppliers can be confident that the award process has been more thoroughly thought through and the chance of contract being awarded is very high.
Auction lets suppliers know where they stand more quickly with immediate feedback
Although suppliers may not like the price compression result of an auction, they cannot argue against the reality that they are getting real time pricing and market position information. They have the ability to make adjustments, if they choose.
Transparency of process
There will be far fewer unknowns at the conclusion of the process from the supplier perspective. If other best practices are adhered to, they should be very aware of what was important in the award decision and also will know how competitive their pricing was, relative to other suppliers.
Better communication / more completeness
One of the more frustrating things for suppliers is trying to compete for business where they can sense the lack of preparation and can foresee the failure of the project. Better communication and data accuracy builds more confidence in the buyer goal and stronger participation.
Lower cost of sales
The costs associated with the sales cycle to obtain new customers and retain existing customers can be quite high. By participating in online events, suppliers can streamline processes and reduce cost associated with finding and responding to RFPs.
Barriers to Success
Electronic reverse auctions are not without their risks. Before undertaking a reverse auction, each of the following risk possibilities should be reviewed and any perceived risks appropriately dealt with before the auction begins. This will help to insure a smooth and successful auction event.
Keep in mind that many of the barriers to success are also barriers for traditional, manual sourcing processes. By leveraging technology, Sourcing Teams can over come these barriers more quickly and effectively.
Internal Barriers and Success Enablers
Internal Barrier: Intent
Any sourcing project, whether online or offline, requires all participants to enter with pure intentions. This is especially true for online projects due to the speed of information transmission.
- Intend to award business
- Intend to seriously consider awarding business to a non-incumbent supplier
- Award business only to one [or more] of the suppliers participating in the sourcing project
- Respect non-disclosure agreements
- Accurately represent themselves and their capabilities
- Submit valid bids
- Stand by their submitted bids
- Respect non-disclosure agreements
Conducting an auction to test or research the market or to threaten renegotiation with an incumbent supplier is not a good candidate for success. Similarly, if a supplier’s intention is to gather competitive pricing, the auction is less likely to be successful. An unethical auction process will create distrust across the supply base and will be discovered eventually.
Success Enabler: Standardized procedures and communication
The key to overcoming this barrier is communication, standardization and consistent application of ethical best practices. Make sure that everyone involved in the sourcing process – buyers, stakeholders and suppliers – is aware of the processes, that everyone uses the same standardized sourcing agreements and that everyone has received, read, and signed off on the code of ethics. A supplier code of ethics is also recommended and often signed as part of the bidder agreement.
Internal Barrier: Stakeholder politics and policies
To be successful, all stakeholders should be committed to the auction process. Otherwise, an auction project may end prematurely and possibly lead to animosity among all parties. Be aware that many stakeholders have “emotional” attachments to incumbent suppliers and to informal or formal “partnership” agreements. Many stakeholders generally dislike e-Auctions, most likely due to misconceptions or previous failures. Additionally, no one likes to be labeled as callous and many people feel that auctions and head-to-head competition are mean-spirited, especially to long-standing suppliers who have delivered high quality goods and services over time.
Success Enabler: Stakeholder education and participation
In order to get all stakeholders to participate and accept the auction, the Sourcing Team may need to spend time educating the stakeholder community on how e-Auctions improve organizational efficiency and cost-effectiveness as well as individual job responsibilities. Additionally, they should be kept informed throughout the entire process so they do not feel things are happening without their knowledge. It is also important to insist on all communication happening through one centralized location (such as an online forum) to ensure “preferred” vendors are not privy to information other did not receive. This also assists in removing some of the challenges around “emotional attachments” to incumbent suppliers.
Internal Barrier: Hidden Costs
The supply and utilization dynamics must be well understood before an item is put up to bid on an auction. If there would be a significant cost for switching suppliers, or if utilization costs vary across the supply base due to differences in quality, then these costs must be considered before an item is put up for bid. Also, a commitment to supplier diversification or minority suppliers might add cost above and beyond the lowest cost award without these commitments and these costs also need to be understood.
Success Enabler: Uncover true costs
The key to getting past this barrier is active stakeholder participation to understand the true costs of using current or new suppliers and senior management commitments to diversification or minority suppliers and other commitments that might increase cost. Many organizations conduct internal RFIs to root out key issues and costs. Some companies go directly to the incumbent supplier because the supplier has the current specifications, prices and volumes.
Internal Barriers: Technology
Online reverse auctions use sophisticated software platforms that utilize the convenience of the World Wide Web. Though these platforms are stable and have been thoroughly tested, there is always a chance that during the event the platform could fail, access to the Internet is disrupted causing one or more suppliers to lose connectivity or the suppliers’ own computers could fail.
Success Enabler: Redundancy plans (supported by process and technology)
To minimize the potential adverse effects resulting from disrupted systems, choose a platform that is capable of detecting if supplier(s) lose connectivity. If all suppliers lose connectivity, make sure there is a backup plan. Additionally, build in redundancy for accepting supplier bids via proxy bidding processes. A proxy bidding process should be developed in advance and proxy bidders trained and on call. Many e-Sourcing vendors can also provide this service.
External Barriers and Enablers
External Barriers: Supplier confusion
The suppliers might not understand the purpose of the auction, the rules of the auction or how to use the auction tool. Any misunderstanding could lead to a market failure. If suppliers mistake a standard reverse auction for a single sealed bid auction, they might enter a final bid up front, which is not as aggressive as they could bid, and not bid again thinking the other suppliers will be following the same strategy. And if they do not know how to use the tool, they might end up not participating at all.
Success Enabler: Supplier training
Avoid this barrier by providing all suppliers with a detailed overview of the process to be followed up front (communicated both verbally and online), online education and refresher classes for new and existing suppliers and making sure the suppliers have a forum to ask questions, get answers, and review available information at all times. Before suppliers are invited to an auction, develop a supplier training plan and schedule. Assess the educational method that will be most beneficial taking into account the complexity of your auction: online help files, online training demos, one-on-one live training, or live web meeting training. This plan can be developed internally. Many Sourcing Teams leverage supplier training services provided by their e-Sourcing vendor.
External Barrier: Buyer credibility
If the buyer has run events in the past and has not followed through on award and contract negotiations quickly, the buyer may have lost credibility in the marketplace.
Success Enabler: Standardized buyer rules
In this case, the buyer will have to accept and admit to their previous mistakes up front, communicate their new process and code of ethics and convey to the suppliers the changes they have made to ensure that they can live up to their commitments. Communication is a key element. Ensure that throughout the tender process suppliers are notified via e-mail or phone about the next steps. This is particularly important after the completion of an auction. Suppliers should know how long it will take you to make an award decision, when a decision has been made and whether or not they have been awarded business. It is best to be prepared with concrete evidence as to why they were not awarded business, especially if they finished first. Finally, if there are going to be any delays in any of the above points, be sure vendors are kept in the loop.
External Barrier: Perception and distrust
The supply base might not perceive the auction positively or in the manner the buyer intended. The buyer might be introducing the auction to provide a basis for a fair competition but the supply base might perceive it as a tactic solely to drive down prices to unreasonable levels. If suppliers think the only goal is to squeeze out margins from the incumbent supplier, new suppliers will not be inclined to bid. This can create distrust among the incumbent suppliers and the other suppliers who feel that they are not being invited to participate in a serious auction.
Success enabler: Open communication and consistently run ethical sourcing projects
Avoid this barrier by openly communicating with suppliers at all times, particularly with regards to the award criteria. Be very clear as to what will be the critical factors determining who will win the business, when possible what weight is given to each, and how it will be assessed. Only use the pre-established forums for communication, consistently and honestly follow up on any and all issues that arise, and stick to the code of ethics, which should be available to all suppliers at all times.
Furthermore, if the buyer doesn’t follow through on award and contract negotiations quickly, the buyer could lose credibility in the marketplace. It is very important that all auctions conducted by the Sourcing Team are managed in a consistent and ethical manner. News travels fast, especially when suppliers feel they have been treated unethically or unfairly.
External Barrier: Market conditions
Sometimes the market conditions might not be suitable for a reverse auction. Demand may currently exceed supply, prices might be unstable, and suppliers may not see participation as important. Be sure to Identify the Right Goods/Services before undertaking an auction and see the section on Success Strategies for more information. And sometimes conditions change in the midst of an auction project, thereby requiring a shift in strategy away from an auction.
Success enabler: Evaluate each commodity
Evaluate each auction right up to the day of the auction. Do not undertake an event without thorough market research, which can include consultation with commodity experts. Market conditions constantly change. A commodity successfully auctioned in the past may not be a good auction candidate due to external factors. A commodity that was unsuccessfully auctioned in the past may now be a good auction candidate due to changing factors.
As a review, project strategy is determined as part of spend analysis. A spend analysis initiative identifies commodities, components and categories where contracts are expiring and there are opportunities for cost savings / avoidance. There are two key factors that help determine the most appropriate strategy.
- Contract Status– evaluate spend based on:
- Contract status (available, unavailable)
- Commercial attractiveness (high, medium, low)
- Definable requirements (high, medium, low)
- Competitive supply base (high, medium, low)
- Savings opportunities (high, medium, low)
- Inherent risk (high, medium, low)
The final decision is made by the experienced Sourcing Professional based on their interpretation of the characteristics. The complexity of the sourcing process is then determined by the completeness of the requirements, the number of suppliers that have been qualified, expected competition in the supplier base, inherent risk in the sourcing effort, and projected savings or cost avoidance opportunities.
The following table, which uses a High-Medium-Low classification of relevant sourcing factors, can be used to determine whether conditions are likely ripe for an RFI, RFP, RFQ, sealed bid negotiation, or auction.
External Barrier: Unsustainable Bids
There is always the risk that a new supplier, overzealous to win new business, might place a bid so low that it is unsustainable in the long term. This could result in the supplier backing out or, even worse, accepting the bid and then going out of business. In many cases, the supplier misinterpreted the specifications and submitted a bid not representing the actual costs and requirements.
Success Enabler: Collect preliminary bids
To catch inconsistencies early in the process, most successful auctions include a preliminary bid phase. This step helps identify supplier bids that are dramatically over or under the market. To help minimize the threat of unsustainable bids, the Sourcing Professional can have a quick conversation with the supplier to make sure they understand the specifications and are quoting correctly.
Additionally, after the auction concludes, successful Sourcing Teams conduct a more thorough post-bid qualification step for new suppliers. This phase reviews, verifies and documents one to three participating suppliers and assesses whether they can support the bid and/or the business. Many teams require the potential supplier to produce test products so the Sourcing Team can assess its quality.
In the rare event that the awarded supplier cannot support their submitted bid, the Sourcing Team should have a backup plan in place. The plan should include:
- Awarding the business to the second place (or third, etc.) supplier
- Documenting poor feedback on the offending supplier and sharing information with the rest of the organization (often called a “Penalty Box”)
All steps should be clearly articulated in the RFQ document associated with the auction.
External Barrier: Collusion
If the supply base is small, there is always the possibility that suppliers might band together to maintain current price levels by refusing to participate or lower bids through an auction (even though this may be illegal). This has been documented in some construction categories and raw food products, among others.
Success Enabler: Broad supply base
Make sure there is an adequate pre-qualified supply base for a commodity before initiating an auction. It is also important to include non-incumbent suppliers (those eager to compete in order to win new business). Openly communicate with all suppliers at all time. Markets that are at risk for potential collusion include:
- Very small, global markets (1-3 potential suppliers) with small margins
- Government regulated industries
Ethics are a very important part of a successful auction, both on the part of the buyer and on the part of the supplier.
This section covers ethical rules that a buyer should always adhere to in order to achieve a successful auction. From the very beginning of the sourcing project, these rules should be outlined and communicated to the Sourcing Team and all suppliers.
- The Buyer will communicate and consistently adhere to the auction rules as outlined in the RFQ.
- The Buyer will hold all supplier information in confidence and shall not disclose it to third parties.
- The Buyer will only invite qualified suppliers. This also means no “rabbits.” A rabbit is a tactic used by a buyer masquerading as a supplier in an attempt to drive bidding activity and price reductions. This has also been referred to as “phantom bidding” in the past.
- The Buyer will communicate timely, accurate information regarding the business equally to all suppliers.
- The Buyer intends to award the business and will not use the auction as a price discovery mission.
- The Buyer will award the business based on quotes submitted in the auction.
- The Buyer will communicate the award decision within the timeframe specified in the RFQ.
This includes any changes or corrections to requirements, specifications and timelines. The initial RFQ posting and any changes should also provide suppliers adequate time for review.
Open and honest communication is one of the foundations of a successful auction. This dictates that each and every supplier have the same unrestricted access to all relevant event information.
The Buyer will award the business only to those suppliers submitting bids in the auction. Interested suppliers cannot sabotage the auction process by submitting bids via email, fax or post. To be considered, all bids must be submitted via the online auction.
In situations where a reserve price is established, and no submitted bids meet the reserve price, a Buyer can choose alternative solutions. However, the reserve price standard and process must be clearly communicated to the supply base up front.
The Buyer shall not participate in offline, after-the-auction negotiations. All bids must be submitted during the auction so that other suppliers are given the opportunity to respond.
In situations where a reserve price is established, and no submitted bids meet the reserve price, a Buyer can choose alternative solutions. However, the reserve price standard and process must be clearly communicated to the supply base up front.
To add an even greater level of professionalism to the auction process, many organizations develop and publish a forum to allow suppliers to resolve ethical disputes with their buyers. In many cases, the e-Sourcing software provider can help manage the dispute process.
This section covers ethical rules that suppliers must adhere to in order for them to truly benefit from an auction.
- The Supplier, by participating in any sourcing project constitutes acceptance of all referenced and required terms and conditions.
- The Supplier will hold all information of the Buying company in confidence and shall not disclose it to third parties.
- The Supplier will participate in an auction only if qualified to supply the specified goods and services.
- All bids submitted in an auction are legally valid quotes without qualification; therefore Suppliers should only submit bids they can support.
- The Supplier will communicate to the Buyer in a timely, accurate manner.
- The Supplier intends to provide goods and/or services and will not use the auction as a fact-finding project.
- The Supplier will only submit bids through the auction.
Do not try to recoup perceived losses post-auction by charging exorbitant fees for change orders. In addition to expecting that a supplier will maintain the same level of quality, buyers expect that the supplier will maintain the same ethics and fair price structures that they have in the past. Charging more might help a supplier’s profits in the short term, but when the contract ends, chances are the buyer will drop the supplier. Furthermore, if a supplier gains a reputation in the marketplace as being deceitful, the chances of that supplier being invited to other auctions will severely diminish.
Exceptions are made for honest, data entry errors. Any errors submitted during an auction should be immediately reported to the Buyer to prevent disruption of the auction. Many e-Sourcing software providers can support a process for managing auction-related errors. It is important that the e-Sourcing software can technically remove bids placed in error.
This includes any discrepancies or inaccuracies the supplier may find in the RFQ and timeline. The buying team should establish a process for handling this type of feedback. Additionally, the e-Sourcing software should have a technical ability to accept comments from the suppliers.
If the buyer thinks a supplier is participating solely to collect market intelligence, not only is it likely that the buyer will not award that supplier any business, but it is also likely that the supplier will not be invited to participate in future auctions. If a supplier gets a bad reputation by word of mouth, it could be a long time before that supplier is invited to another auction.
Interested suppliers cannot sabotage the auction process by submitting bids via email, fax, post or orally. To be considered, all bids must be submitted via the online auction.
In the rare event that a participating supplier behaves unethically, many organizations develop and publish a process regarding unethical supplier behavior. The plan should include:
- documenting the unethical supplier behavior
- a process the supplier can use to respond to the incident
- sharing information with the rest of the organization (often called a “Penalty Box”)
- if necessary, litigation.
Online Auction Technical Requirements
There is a great deal of functionality available in today’s online auction tools, so much that it can be overwhelming for the Sourcing Professional. The Sourcing Team should make sure that its e-Sourcing tool has some core, basic functionality. This core functionality helps improve sourcing efficiency through increased speed, improved accuracy and consistency, greater collaboration with stakeholders and suppliers, broader knowledge transfer and security.
Bid management controls
Sourcing Professionals need to have control during a live auction. Control helps them manage supplier and system problems that may arise. Important bid management controls include:
- pausing auctions
- resuming auctions
- canceling auctions
- erroneous bid removal
- proxy bidding
The presence of bid management controls affects speed, accuracy, consistency and security.
Configurable lot cascading and overtime
This functionality allows the Sourcing Team to structure the auction so that all interested suppliers can participate. Suppliers can focus on one or more lots since the ending times are different and dependent on the conclusion of earlier lots. Overtime allows bidding to continue beyond the scheduled lot closing time. Overtime enables all suppliers the opportunity to respond to the most recent bid. With overtime, suppliers do not need to time their best bids to beat the market. Sourcing Teams are secure knowing that they received the best bids.
The presence of configurable lot cascading and overtime affects speed, accuracy and consistency.
Configurable bid views and reports
To improve ease of use and access to information for the Sourcing Team, it is important that the user can see the bids as they come in and make adjustments to the graphical display when necessary. The ability to flexibly rank suppliers by lots or bundles of lots helps the Sourcing Team anticipate award scenarios. After an auction, it is important to be able to access bid results for analysis and documentation either via integrated reports or spreadsheets.
The presence of configurable bid views and reports affects speed, accuracy, consistency, collaboration and knowledge transfer.
Data import/export capability
To improve ease of use and access to information for the Sourcing Team, it is important that information can be easily imported into or exported from the auction tool.
The presence of data import/export capabilities affects speed, accuracy, consistency and security.
Integration helps streamline the entire sourcing process. A user should be able to effortlessly, with few key strokes, move between different sourcing tasks. Some key integration points include:
- communication tools – such as an online communication forum for asking and answering questions, email
- e-RFx – so a buyer does not need to create a separate, distinct project for an auction
- Optimization – so a buyer does not need to export auction data then import it into an optimization engine for data analysis and scenario building
The presence of integration point affects speed, accuracy, consistency, knowledge transfer and security.
Security and access controls
Security and access controls allow companies the ability to limit users to what they can see or do within an e-Sourcing tool. The controls reinforce operational procedures depending on security levels, organizational level or role level.
The presence of security and access controls affects speed, consistency and security.
Foundations for Next Generation E-Auctions
As indicated in previous sections, e-auction tools must go above and beyond the capabilities of current auction tools if they are to continue to deliver sustainable value to the sourcing organizations that use them. For simple and basic commodities, a simple auction with core technology is sufficient. As organizations’ e-Sourcing capabilities evolve, they source more complex commodities with various variables that affect price. These more complex sourcing projects need to have auctions with more features to enable the Sourcing Team to identify the best award scenario. In fact, there are (at least) five major capabilities that next generation e-auctions must internally support if they are to enable sourcing organizations to continue to achieve and maintain savings targets through use of the technology. These capabilities are discussed in detail in the following sections.
True Cost Bidding Support
Today, most auctions only capture price per unit or landed cost (price per unit and freight) bids for the items or item lots under consideration. However, as outlined in detail in the wiki on Decision Optimization for strategic sourcing, this does not qualify as sufficient for strategic sourcing, especially for organizations that source according to the principles of Total Value Management.
The reality is that even with the simplest of products, there are fixed cost and variable costs and these costs often change with different levels of production. (For example, there are fixed costs to set up and start a production line and then variable costs for each production level depending on the amount of raw resources, energy, and manpower required.) Any attempt to collapse these costs into a single number is very likely to be inaccurate, especially since this could be forcing the supplier to bid high to cover their costs in the event they are only selected for a small part of the business.
Furthermore, since variable costs may decrease at higher production levels, the suppliers should be able to submit tiered volume-based bids that are indicative of their true costs, and the savings they can pass on, if they are awarded volumes that optimize their production costs.
Freight costs should be bid separately so that third party carriers can be invited and freight awarded during the same auction event using apples-to-apples comparisons. Furthermore, carriers should be able to bid (variable unit-based) rates for less the truckload shipments and full truckload (fixed) costs.
Finally, the auction should support bundling discounts. Every good purchaser knows that there are savings to be gained and value to be found by sourcing multiple items from the same supplier -- even more if the supplier is allowed to define its own optimal bundles. Thus, the auction should allow suppliers to define their own multi-item / multi-lot discounts and take those into account when determining optimal cost awards.
As indicated in the previous section, the auction tools should allow the definition of bundles from the supplier and freight carrier viewpoint as well as the buyer viewpoint. This will support flexible cost models that will allow the suppliers to accurately model their costs and quote their best price – every time. It will also assist in the location of efficiencies and economies of scale and identify opportunities for cost savings that may not have been feasible with previous generation e-sourcing tools.
Next generation auction tools should be capable of evaluating bids against more then just cost factors. They should be able to compare and rank bids on qualitative factors as well, using scores that come from (integrated) supplier scorecards. After all, strategic sourcing value is more than just the lowest cost of acquisition … it is the lowest cost of acquisition that meets organizational needs and allows the organization to offer the most value to its customers (Total Value Management). Lowest cost is not truly lowest cost if the quality is inferior and the reduced reliability results in a large number of costly customer returns or complaints.
If the auction is being used strategically as part of a larger sourcing process, then the organizer usually has one or more goals in mind, consistent with the overall supply chain strategy. The auction tool should be able to support the end goals of the user.
Two common goals are allocative efficiency and payoff maximization. Allocative efficiency is the maximization of the total award across all successful bidders. This is a common strategy used to mitigate supply chain risk. Payoff maximization is the maximization of the total award to a single participant. This is a common strategy in supply base rationalization.
Real-Time Decision Optimization
True cost bidding. Bundling. Overriding goals. Multi-attribute support. How can all of these capabilities be incorporated into a real time auction and still do apples-to-apples comparison across seemingly disparate bids from the supply base? Use decision optimization – in real time!
Decision optimization is designed to find the optimal award decision to a complex sourcing scenario. Built on complex mathematics, true strategic sourcing decision optimization is designed to handle flexible cost models with fixed and variable costs, tiered volume-based quotes, and discounts and a plethora of constraints to address capacity constraints, risk mitigation constraints, qualitative requirements, and business rules. With built in decision optimization, one can achieve apples-to-apples comparisons across seemingly disparate supplier bid structures that respect real world constraints.
Key Steps to Successful e-Auctions
Define Requirements and Goals
E-Auctions should be part of a well-defined sourcing process with clear requirements that should be communicated to, and accepted by, all relevant stakeholders and clear goals – which should extend beyond just lowering cost. What is the strategy for lowering costs and streamlining processes? Supply base consolidation or differentiation? Partnerships with key suppliers for process improvements? Identification and selection of generic products to reduce the costs contained in sourcing customized components from a select supplier? A major success factor of any sourcing process is good up-front planning.
Invite all Potential Suppliers to an Open RFI
Do not limit the organization’s supply base to the current set of suppliers … sometimes the best cost savings can come from new suppliers with streamlined processes, suppliers with innovative (production) technologies, or suppliers in low cost countries with lower overall production costs. Hold an open RFI before the auction to identify all suppliers who might be capable of meeting the organization’s needs.
Pre-Qualify Capable Suppliers
Once potential suppliers have been identified and initial RFI responses have been collected, the next step is to determine which suppliers are capable of meeting the organization’s needs. This is important because it is critical that suppliers are not included in the auction unless part of the business can be awarded to them. To minimize costs, prequalification may entail a multi-round RFx. Other methods include offsite or onsite meetings with new supplier candidates, or even facility tours. Be sure to verify that every supplier selected understands the requirements and could commit to the volumes that will be needed at the required delivery times and at the required level of quality and safety.
Clearly Document all Requirements
The key to a successful sourcing process in general, and an e-RFx/e-Auction in particular, is the clear documentation of all requirements. This applies both to items up for bid and the auction process and rules. Do not rely on verbal communications or assume commonly accepted definitions for common terms. With a global supply base, staffed by individuals part of distinct cultures, each with their own internal understanding of what a (foreign) term or requirement means, there really are no common terms or common definitions. Detailed documentation can avert misunderstanding by clearly spelling out what is, and is not, required – and prompt questions where additional information is required. If you leave room for assumptions, you create the potential for bidders overpricing or even under pricing.
Be sure to also clearly state success terms – especially if suppliers are being evaluated on more than just total cost of acquisition bids. If quality, reliability, on-time delivery, etc. are a factor, then that information should be made known and how it factors into total cost of ownership calculations from a total value management standpoint should be clearly defined.
Hold a Q&A Training Session
Do not assume that the auction tool is as easy or natural for suppliers to use as it is for users in the buying organization. Chances are that buyers have been trained on it, have already used it, and are accustomed to using technology as part of the sourcing process. This might not be the case for a supplier. Furthermore, what is natural to the designers of an e-Sourcing tool or a strategic sourcing group may not be natural for a global supply base that is not as accustomed to modern web-enabled software and the underlying sourcing processes they are built on. Hold a pre-auction training session that overviews the tools that will be used, answers any questions, and includes a mock auction that allows suppliers to test drive the tool and become comfortable with its use before the auction begins. This will help to ensure a smooth running auction.
Communicate! Communicate! Communicate!
This point cannot be stressed enough. Many feel that by utilizing an online sourcing tool, all communication only takes place electronically. The e-Sourcing tool should facilitate communication, not replace it. It is important to still maintain professional relationships with your bidders and stakeholders through one-on-one meetings or phone conversations. Before initiating any online sourcing initiative, suppliers should be notified about what they will be receiving and what to do with that information. This also gives you the opportunity to minimize any fears and preconceived notions they may have about online sourcing technologies. The Sourcing Team should also properly monitor suppliers’ progress on different tasks set out for them to do, and follow up with a phone call whenever they are not being responsive. This will ensure maximum understanding and participation from suppliers.
Appropriate times to reach out and talk with participating suppliers:
- before an invitation to participate in an auction, notifying them of the upcoming event
- after the invitation is sent, confirming the supplier received it and asking if they have any questions
- when there are dramatic changes to the RFQ including new deadlines, dates or specifications
- 24 hours prior to the auction to verify participation and answer any open questions
- during the auction if there are noticeable issues with a supplier (like not logging in, logging off too soon)
- after the auction to communicate the award decision
Monitor the Auction
Monitor the auction carefully to make sure bidding activity is running smoothly. If one or more suppliers fail to bid or the refresh rate is sluggish, either the Sourcing Team, or one (or more) suppliers might be experiencing problems. A buyer should be ready to intervene to solve the problem. If a supplier is not bidding, contact her and make sure she does not have any questions and is not having connection problems. If the refresh rate is slow, make sure the platform is operational and that suppliers are not having problems as well. If some suppliers lose connectivity, or the platform goes down, be prepared to immediately contact the suppliers through other means to let them know that something has happened and the auction is being postponed to the backup time and that they will immediately be contacted if problems persist or the auction needs to be further delayed.
The Sourcing Team should have a well documented process for dealing with issues during an auction. The Sourcing Team should be trained to handle issues like proxy bidding, technical problem resolution and supplier reluctance. Many e-Sourcing software providers can also provide this service. Many suppliers feel more comfortable having a neutral, third party manage the live auction than the buyer.
Whether the Sourcing Team or the e-Sourcing software provider handles live auction monitoring, the Sourcing Team should be prepared to accept and answer questions during the auction. Confusion is a foundation for failure. Be sure to reply to all participants when communicating information – there should be no favoritism in, or implied by, any action.
Follow Through and Award Promptly
In order to capitalize on auction success and maintain the trust and goodwill be prepared to allocate awards and follow through on negotiations promptly and within the timeframe promised in the pre-auction (e-RFx) communications that outlined the auction process.
Successfully handling Supplier Objections
Unless the supply base is extremely experienced with e-Sourcing, there will always be concerns and objections – especially from incumbent suppliers. Here are some common supplier objections that all Sourcing Teams must learn to address. As always, messages to the supply base should be consistent, diplomatic and respectful.
|I am not comfortable with this technology.||We understand that you may be uncomfortable about using this technology. You will be training on the technology prior to bidding in the event and you are welcome to participate in as many training sessions as you wish. Additionally, there is a help file available and online demos for you to follow at your own pace.|
|What if something goes wrong during the event?||The e-Sourcing software has been thoroughly tested are rarely has issues. In the rare occasion that something happens during the event, we have back-up procedures in place to make sure that your price is included. This may include proxy bidding support for your team.|
|My company does not do business this way.||We recognize that some supplier organizations may be worried about participating on an online event. However, moving forward, our company has decided that this is the way we will source goods and services. We have chosen to use this process to ensure we are getting fair market pricing and quality services from all our suppliers. This will help make the negotiation process more efficient and standardized. If you want to be considered for this opportunity as well as future opportunities, your bid will only be accepted if submitted through this online forum.|
|How do I know this is fair and you are not just inviting any supplier to participate just to drive down prices?||It would not make sense for our company to invite suppliers with a history of poor performance and quality just to get cheap pricing. All suppliers invited to participate have gone through a level of pre-screening and pre-qualification. You will be bidding only against suppliers who are equally qualified and who we would seriously consider awarding business.|
|I’ve been successfully working with you for years; I see no advantage for our participation. Doesn’t our relationship carry any value?||Our company has decided to source business through this online e-Sourcing tool. We have chosen to use this process to ensure we are getting fair market pricing and quality services from all our suppliers. This will help make the negotiation process more efficient and standardized for both of us. We do value our relationship which is why you are being included in this opportunity. We are consolidating spend and giving you an opportunity to expand your business with our company.|
|It is clear you only care about price and not quality.||We are looking at the total cost that the supplier can provide us. The auction is just one element of the negotiation process. We take into account the quality and service of each supplier prior to making an award decision. Furthermore, the lowest priced supplier is not necessarily awarded the business.|
|How legal are these quotes?||As with any other negotiation process, these quotes are legally binding. Suppliers who do not honor their online bid will be excluded from future events.|
|Can’t I just submit my prices to you offline?||Our company has decided to source business through this online e-Sourcing tool. Only suppliers submitting bids into the online event will be considered for the business. If you want to be considered for this opportunity, your bid will only be taken into account if it is submitted via this forum.|
|I am ready to give you a sizeable discount if you do not proceed with the online event.||Our company has decided to source business through this online e-Sourcing tool. We have chosen to use this process to ensure we are getting fair market pricing and quality services from all our suppliers. This will help make the negotiation process more efficient and standardized. If you want to be considered for this opportunity as well as future opportunities, your bid will only be accepted if submitted through this online forum.|
|How much will this cost me?||There is not cost to the supplier. (this is applicable only in those situations where it is cost-free to the supplier)|
A Selected Bibliography
(The) 12 Days of X-emplification: Day 1 - RFx & e-Auction by Michael Lamoureux, December 13, 2007
(The) 6 Days of X-asperation: Day 2 - Question to Ask Your e-RFX and e-Auction Vendor by Michael Lamoureux, February 4, 2008
(The) 7Cs Cheat Sheet by David Bush, April 25, 2007
Advancing the Strategic Sourcing Process through Online Reverse Auctions by Perfect Commerce
Applications of Flexible Pricing in Business-to-Business Electronic Commerce by M. Bichler, J. Kalagnanam, K. Katircioglu, A. J. King, R.D. Lawrence, H.S. Lee, G.Y. Lin, & Y.Lu, November 2001
Auction Award Best Practices by Agatha Degasperi, August 20, 2007
Auctions by Michael Lamoureux, June 14, 2006
Brunswick Corporation's e-Auction Best Practices by Michael Lamoureux, July 5, 2007
Bundling for Reverse Auctions - What Is It, and Why Is It Important? by Tobias Schoenherr, November 2, 2005
Decision Support Systems for Electronic Sourcing and Contracting by Martin Bichler, 2003
e-Auctions Bad for Business?!? by David Bush, May 22, 2006
Electronic Sourcing with Multi-Attribute Auctions by Stefan Strecker & Stefan Seifert, 2004
Ethics in Sourcing by David Bush, August 14, 2006
Enabling Assisted Strategic Negotiations in Actual World Procurement Scenarios by J. A. Rodriguez-Aguilar, A. Reyes-Moro, M. Lopez-Sanchez, & J. Cerquides, 2006
Final Thoughts: The Blowback of Reverse Auctions by Andrew Reese, Oct 2004
How To ... Quantify and realize the benefits from e-Auctions by UK local e-gov National Project
Online Reverse Auction Ethics - Part I by Agatha Degasperi, January 25, 2006
Online Reverse Auction Ethics - Part II by Agatha Degasperi, February 27, 2006
Q&A with Tony Poshek - Auction Strategies for Suppliers, Part 1, by Lisa Reisman & Tony Poshek, April 5, 2006
Q&A with Tony Poshek - Auction Strategies for Suppliers, Part 2, by Lisa Reisman & Tony Poshek, April 6, 2006
(The) Reverse Auction: A Strategic Perspective by George Coundouriotis & Norbert Ore, 2003
Reverse Auction Sourcing Engine by Pratima R. Kayiti, M.Sc. Thesis, 2002
(The) Role of Reverse Auctions in Strategic Sourcing by Stewart Beall, Craig Carter, Phillip Carter, Thomas Germer, Sandy Jap, Lutz Kaufmann, Debbie Maciejewski, Robert Monczka, & Ken Peterson 2003
Reverse Auction Basics by Jason Treida, April 17, 2006
Reverse Auction Preparation by David Bush, February 23, 2007
Reverse Auction Selection Criteria 101 by David Bush, November 16, 2006
Reverse Auction Strategy by David Bush, July 25, 2006
Reverse Auction: Will it Change the Way Sourcing is Done? by H. K. Sehgal, January 2003
Reverse Auctions Go Mainstream by David Bush, June 1, 2007
Software Frameworks for Advanced Procurement Auction Markets by Martin Bichler & Jayant Kalagnanarn, December 2006
the doctor Goes Mental on Auctions by Michael Lamoureux, December 3, 2007
Two stage reverse auctions by David Bush, January 29, 2007
Using the Reverse Auction Procurement Method to Save Millions by the California Performance Review
Who says you can only auction widgets??? by Agatha Degasperi, July 12, 2007
Michael Lamoureux, PhD of Sourcing Innovation
David Bush - Iasta
Melissa Beuc - Iasta
Agatha Degasperi - Iasta