Supply Excellence — Reverse Auctions: The Secret to Sun’s Success

Reverse Auctions: The Secret to Sun’s Success

September 14th, 2007 · by Tim Minahan · No Comments · best practices, sourcing

In my days as an analyst, I was always amused by the shock-jocks of the supply chain profession (you know who you are) who loved making controversial headline grabbing statements. Among their favorites: “If you can spec it, you can auction it.”

While, even today, I’d be hard pressed to find a company that uses reverse auctions for all its spend, there is a lot of truth in that statement. Having exhausted the low-hanging fruit, a growing number of e-sourcing veterans are applying reverse auction tactics to everything from full manufacturing assemblies to professional services. Sun Microsystems is one of the most aggressive and innovative users of online reverse auctions or, what they call, “DBEs (Dynamic Bidding Events).”

I have profiled some of Sun’s unique e-sourcing practices here. However, in the latest issue of Purchasing magazine, my old cohort Executive Editor Jim Carbone, penned a new expose on Sun’s latest reverse auction approaches with electronic manufacturing service (EMS) providers.

According to the article, Sun’s direct materials organization — known internally as Worldwide Operations — now reverse auctions about $2.7 billion of spend each year. The server giant uses these dynamic bidding approaches to award EMS providers everything from printed circuit board assemblies to entire systems, including servers and mass storage units.

I won’t share all the details of the article here. (Instead, I encourage you to read it yourself at Purchasing.com.) However, I will summarize what might best be described as The Seven Habits of Sun’s Highly Successful Reverse Auctions:

It ain’t all about price: “Price is important, but it is only one of the pieces that we look at,” Ken Leinweber, strategic sourcing manager, procurement and operations strategy for Sun’s Worldwide Ops group said in the article. Sun ensures that its reverse auctions are based on total cost of ownership, including factors such as availability, technical support, and quality.
Integrity is key: “You have to have very high integrity in auctions,” said Kurt Doelling, Sun’s Vice President of Supplier Management. Sun only invites suppliers to its reverse auction events that are approved and that have a legitimate chance of winning the business.
Share the wealth: Sun uses most reverse auctions to determine the share of its business each EMS partner will get. “Suppliers cannot have their share go from $200 million to zero and maintain the same level of resources for us. If they do well with auctions, they can bring [their share of Sun's business] up.” If not, their share decreases, but they do not lose the entire business. This allows Sun to hedge risks and maintain key EMS relationships, while still achieving its cost savings goals.
Three is the magic number: Like other e-sourcing users profiled here, Sun invites at least three suppliers to bid in reverse auctions in order to maintain a competitive bidding environment. Whenever possible, Sun tries to keep the number around three bidders so each suppliers is assured some business.
Use fewer suppliers: Even though it logged nearly $14 billion in revenues last year, Sun is smaller than competing OEMs, like HP and IBM.
Source for your suppliers: However, Sun is taking a page from its larger rivals — particularly HP — by looking for opportunities to team up with its EMS partners to use reverse auctions for sub-tier components.
Do it yourself: Like many OEMs in all industries, Sun constantly performs build-versus-buy analysis to determine whether its better to outsource certain processes — such as assembly work — or perform it in house. For example, the company elected to insource post-manufacturing services, such as software loading and testing, after it determined it had a dramatically lower labor rate than outside suppliers.