Bundling for Reverse Auctions — what is it, and why is it important?
|Bundling for Reverse Auctions — what is it, and why is it important?
by Tobias Schoenherr
November 5, 2005
This post is the first in a series of postings that discuss the issue of bundling or lotting in B2B Reverse Auctions. Insights reported are the results of a large-scale study that I conducted for my dissertation at Indiana University. In the process of this study, in-depth interviews were held with over 30 companies utilizing reverse auctions. To confirm results and test hypotheses, an extensive survey was successfully administered, leading to many valuable conclusions, insights, and current best practices.
Bundling within an RFQ. One of the more important components of the request for quote (RFQ) process is the determination of the appropriate order lot (bundle) that a vendor will evaluate and quote upon. The RFQ order lot may consist of a single stock keeping unit (SKU), but will more often be comprised of a set or bundle of different items that is attractive to one or more potential bidders. The composition of a bundle determines the set of products / services to be delivered by a vendor and the value of the transaction. The way a bundle is configured can also influence purchasing performance and the competitive interest between buyers and suppliers, especially in an online setting.
Bundling defined. Within the context of B2B procurement, bundling is defined as the aggregation of two or more products (SKUs) and / or services by the buyer into a bundle that is put up for bid to potential suppliers as part of a single RFQ. In a very constrained setting, a single overall price needs to be quoted on the RFQ (a per-SKU price table may be required in addition), and all items in the RFQ need to be bid on. Deviations from the RFQ, for example in terms of content, conditions or specifications, are not allowed. However, more flexible forms of bundling are also possible; for example, instances in which suppliers are merely encouraged to bid on all items in a bundle.
The lack of research into Bundling for Sourcing. While bundling has received some academic attention on the sell-side of the supply chain, hardly any research on the buy-side has investigated bundling approaches and associated issues. Moreover, while purchasing managers and buyers have performed bundling (a.k.a., aggregating, lotting and combining) for centuries, little systematic discussion or evaluation has taken place concerning how to make this important decision, and what variables may come into play. This is surprising, since bundling can be an important element in the general procurement process, particularly in online bidding events, generating a more competitive environment and purchase price reductions.
The importance of Bundling for Reverse Auctions. While bundling is often done in offline purchase negotiations, its criticality is heightened in reverse auctions due to their usual short duration and constrained environment. In contrast, in an offline setting there is much more flexibility present, and RFQs can easily be modified, even once they have been sent out, to accommodate issues previously neglected or not considered. This decreased significance may be the reason why bundling has received so little attention in purchasing research in the past. For online bidding events, however, all potential concerns must be addressed beforehand due to the inability to change the bundle during these auctions. As such, bundle configuration is a crucial element for success in these; bundles that are not set up right may not lead to the desired result. Despite this significance, no published research was found that provides a systematic investigation in bundling for B2B online procurement auctions. It was therefore the goal of my dissertation to fill this gap. Results and insights will be reported in the weeks to come.As with this and all my future posts, I would greatly appreciate any comments, concerns, suggestions, or questions that you may have.