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London: Local Secrets, True Confessions, and Auction Lessons

May 7th, 2006 · by Tim Minahan · 1 Comment · best practices, sourcing

Arrival in London brought both the good, the bad, and some hard lessons.  

First, the good. My party opted for rock-star lodging (Riverbank Park Plaza, a Asian-Latino-fusion themed hotel situated on the Thames across from the Tower of London, that exuded a hipness factor far beyond the aggregate hip quotient of my entire party); true local cuisine (fish and chips at Master’s Super Fish, an off-the-beaten path favorite of London cabbies); and one of the city’s most happening pubs (O’Neils; a dozen taps, sawdust floors, and wall-to-wall working types, ranging from off-duty special forces to young London financeers.)

Now the bad. I was wrong. Well, sort of. My benchmarks of e-sourcing uses always pointed to a ”law of diminishing returns” in which the total percentage of potential savings for a specific commodity would naturally dimish each subsequent time it was auctioned. This “law” seemed to be even more immutable in the face of tightening supply market dynamics.

However, a meeting with Jessica Dunlop, head of “e-supply chain” initiatives at ITT Industries’ in the UK, revealed the flaw in this logic. During three subsequent auctions for machined parts, ITT was able drive double-digit cost reductions above and beyond what was achieved in each previous auction. “We thought we would never be able to repeat the savings,” said Dunlop. ”But the lessons we learned with each event, helped us achieve better savings with each new auction.” ITT’s lessons’ learned, include:

  • Lotting makes all the difference: “We realized we don’t have to bundle all our business into a single auction to get the best price,” said Dunlop. “The vendors will identify what meets their capabilities and provide the best price.” It is important to note that, regardless of the lot structure, ITT does not typically require vendors to bid on all items.
  • Four is the magic number: In its first reverse auction for machined parts, ITT included only three vendors. Dunlop said this number didn’t provide sufficient competition to encourage aggressive bidding.
  • Better trained suppliers, make more competitive offers: Dunlop also said that, early on, many suppliers were confused about the auction approach, bidding aggressively to be the lowest price, even though ITT had said it would award the business on multiple factors to get the lowest total cost. ”One vendor bid away all his margin, which is not a sustainable or preferable business for him or us,” said Dunlop. ITT has since placed a strong emphasis on educating suppliers on the selection criteria and award strategy to ensure competitive (and sustainable) bids.
  • Clearly define the rules of engagement — before the auction begins: In one auction, a winning supplier later tried to place conditions on its offered pricing after the event closed. To guard against such post-event bartering, ITT now uses prerequiste gateways and knockout questions to ensure that suppliers agree to all conditions prior to the auction and to avoid any surprises or disputes after award. 
  • Beware of sour grapes: After its second auction, ITT noticed that one supplier that was well out of the running kept placing bids to trigger extension periods and force other more qualified and competitive vendors to continue to bid down their price. ITT eventually closed out the auction and later revoked this disgruntled vendor’s auction privlidges. Dunlop advises constant monitoring of auction events to discourage such antics.
  • Spending time with losers, can create great winners: ITT discovered telling vendors why they did not win the business can provide much-needed motivation (and insight) for self improvement. “We’ve had vendors go out and buy new machinery or do joint-ventures in Asia and come back much more competitive and win our business,” said Dunlop.
  • Involve Asian vendors, whenever possible: ITT has also tracked a correlation between bidding activity and the participation of Asian suppliers, particularly those from China. “Involving Asian vendors in an auction can help force local vendors to be more aggressive competitive.”
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1 response so far ↓

  • 1 Supply Excellence » A Holiday Sourcing Tale // Dec 29, 2006 at 10:58 am

    [...] Industry reports find that e-sourcing yields an average of 14.2% cost savings above and beyond traditional sourcing methods. And users report savings even on their most frequently sourced and well managed categories. Finally, as noted here in previous posts, there is ample evidence that e-sourcing can be applied to complex business services, such as print, advertising, legal, temp labor, and consulting. [...]

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