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Tis the season for good cheer. Unless, of course, you’re discussing reverse auction technologies.
Last week’s post previewing early findings from the latest Center for Advanced Purchasing Studies (CAPS) investigation into reverse auction usage rekindled the ongoing debate of the value of such negotiation approaches.
Consider this comment from one supply manager: “I have conducted two reverse auctions. [In] both cases, sales people left the company shortly after. Prices dropped significantly as did the commissions of the sales people. [In] both cases, the replacements were not as good as prior and we were [faced with] additional work for them [because] we were not a key account anymore. If service is important, be very careful.”
While I concur with the contributor’s final bit of advice — “be very careful” — I strongly detract from his other comments making reverse auctions the scapegoat for poor supplier vetting and performance. And I’m not alone.
As indicated in previous exposes on the e-sourcing strategies of companies like Sun Microsystems, ITT Industries, and others, reverse auctions can actually improve the overall integrity and discipline of the e-sourcing process.
As Dave Nelson, former CPO of Honda, Delphi Automotive, and John Deere (and one of the godfathers of modern supply management), once said, ““Buyers do not like e-sourcing because it makes them do their work and it keeps them honest.”
Indeed, when manged properly, reverse auctions require buyers to clearly define their specifications, rules for engagement, and award criteria at the outset of the process. Suppliers benefit by having constant visibility into how competitive they are in the negotiation. Suppliers also benefit by understanding which levers to pull to increase the competitiveness of their bid — whether it be price, delivery time, quality, or some other factor. And, when managed with integrity, suppliers are willing to bid more aggressively for the business because they have assurances of how the business will be awarded.
Yet, the market transparency and competitiveness of reverse auctions does not relinquish buyers from doing their homework on suppliers. In fact, because of the agreement to award business based on certain criteria, supply managers must be even more diligent in their vetting of supplier capabilities. Kurt Doelling, Sun’s Vice President of Supplier Management, puts it best: “You have to have very high integrity in auctions. Sun only invites suppliers to its reverse auction events that are approved and that have a legitimate chance of winning the business.”
As with all attributes of business, companies that thoroughly vet suppliers, clearly state their requirements and rules of engagement, and follow through on the promised award strategy see tremendous benefits — in terms of cost, performance, and supplier relationships — from reverse auctions. Those that fail to manage auctions with such diligence and integrity experience less than satisfactory results.
5 responses so far ↓
1 Jerry // Dec 11, 2007 at 9:59 am
The discipline required for a reverse auction is good, but if you pick only core qualified suppliers why pay for the auction service and software? Good negotiations can accomplish the same thing without the expense of paying for the reverse auction software and consultant (more cost savings).
I have done both and feel the hard feelings felt from reverse auctions is not good. Well planned negotiations and supplier relationships are worth more than the little more you may squeeze from an auction.
2 David // Dec 11, 2007 at 11:26 am
I must agree with the previous post. Take a look at your suppliers… a good hard look. MAKE your plant tours and visits! You’ll probably notice that your smaller suppliers have no idea or intentions of changing. They’ll say…”Lean What?” This can be a major source of pain in your supply chain.
Do yourself a favor and develop second source lists for everything, right down to the toilet tissue! Using reverse-auction software is a result of poor supplier management. It’s Ok to tell them where they stand. It’s also Ok to tell them what ballpark they have to be in to maintain the business. They will appreciate the honesty and you can avoid the additional cost of administration, tending and resolution of e-RFQ/RFP efforts. As a second benefit, more PO’s (A legal document) get placed which are non-threatening whereas a corporate lawyer may be. Do you want partners or “Vendors”? e-auctions will be bring you only the latter.
3 Bob Emiliani // Dec 21, 2007 at 9:55 am
Our extensive research confirms the view that reverse auctions are problematic for both buyers and sellers, and that its usage is limited to about 5% of spend and may have peaked.
Our research papers can be found at
http://www.technology.ccsu.edu/personnel/information/emiliani/ra_research.html
4 Supplier Perspectives on eAuctions « Where Next // Feb 15, 2008 at 8:41 am
[...] From the research we conducted, the biggest areas of concern around procurement’s behaviour are: 1. Lack of transparency on award criteria 80% of the time, the contract is not guaranteed to first place bidder, but procurement condition suppliers into believing they have to be the cheapest to win. 2. Invited suppliers are not equally qualified Sellers are starting to realise that procurement allow both low cost and high quality bidders in the same event and reduce bidding transparency (and the chance of being caught) by using a ‘Rank Only’ bidding format. 3. Auction specifications are ambiguous Over half of auctions analysed have ambiguous specifications that allow room for interpretation by competing suppliers, with huge implications for both the buying and selling organisation. 4. The reverse auction is rarely the end of the decision process. In our research involving 39 Fortune 500 selling organisations, unless procurement explicitly stated, ‘lowest bidder wins’, post auction negotiation always took place with incumbent. Indeed, the average time from auction to contract award is 7 ½ weeks. Critically, when further negotiation did occur; only one in ten incumbent suppliers were informed, pre-auction, that post-auction negotiation was going to happen! 5. Cost of participation Suppliers spend hundreds of man-hours planning and preparing for auctions and then are faced with further negotiations and discussions. No delegate discussed how this reduces their cost of sale. Finally, I remember the article you linked to by Tim Minahan http://www.supplyexcellence.com/blog/2007/12/10/reverse-auction-throwdown/ who stated, “When managed properly, reverse auctions require buyers to clearly define their specifications, rules for engagement, and award criteria at the outset of the process.” However, as we see from our research and conference insights, this clearly is not happening today. The full whitepaper will be published on 28 February and I can give you a link for downloads at this time [...]
5 Marty Barclay // Jun 4, 2008 at 10:29 am
The question isn’t whether, but when, and how to use reverse auctions. Reverse auctions promote free market competition, negotiation transparency, fair competition, and efficient negotiations. Reverse auctions, applied in the right situations, structured properly, and managed closely, eliminate vendors having to guess at where to price something. The fact that many buyers abuse the process is not an indictment of reverse auctions generally. Blanket statements that reverse auctions are bad are like saying that driving is bad because sometimes people get killed. On the issue of vendors versus partners, if the buying situation calls for a vendor-partner, then you should NOT be using a reverse auction in the bid. Another argument I’ve heard is “If reverse auctions are so good, why don’t suppliers want to use them on the “sell side”. In our case, I would LOVE the opportunity to bid in a reverse auction for reverse auction tools and services - as long as the specification was clear, the award criteria was clear, and the rules for engagement were stated and followed. Marty Barclay, COO, eDynaQuote.
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