Reverse Auctions Can Increase Openness and Transparency
Companies have proven that e-auctions (reverse auctions) can generate double-digit savings year after year. While many suppliers love to hate reverse auctions, some privately admit that if the auctioning is done properly, the e-sourcing process creates a more visible, fair, open, and transparent (albeit more competitive) negotiation process. The key here is, of course, that the auction be conducted properly. This implies that companies will include all the selection criteria that are important to them. It also implies that the method that will be used to determine the winner of the auction is straightforward, clearly stated, and easily understood by all of the auction participants.
Broadening the Scope of What’s Auctionable
After initial successes, one company is significantly broadening the scope of what they put up for auction, by including things that might not normally be considered auctionable, such as travel services or insurance policies. This large diversified conglomerate with a centralized procurement organization has proven that when reverse auctions are done properly, almost everything is auctionable.
They have no disclaimers in their auctions — the winner gets the business, period. The secret to their success is in their groundwork: 1) due diligence in the pre-qualification of who gets to bid and 2) defining completely and exactly how they want to be served. They mandate that their supply chain managers sit down and specify the precise terms and conditions of the relationships they want to establish with their suppliers.
This company says that they haven’t found anything that can’t be auctioned, and insists that it’s a trap to think, “We can’t auction this because the relationship is strategic.” The result is ‘Comprehensive Auctioning.’ It is comprehensive in two ways: 1) a comprehensive range of services and items is put out for bid and 2) it requires comprehensive specification of requirements.
Sample Comprehensive Auctions
In some cases, there was initial resistance to using reverse auctions at this firm. A case in point is lumber wrap — the paper used to wrap their lumber. The company’s logo has to be positioned perfectly on the wrap. Buyers assumed that to maintain the required quality, they had to keep the existing trusted suppliers, whose relationships hadn’t been challenged for at least 20 years. They eventually agreed to put the contract up for bid, and developed comprehensive specifications for the quality, product performance, and delivery performance they needed. They awarded the contract to a firm in India that delivers the wrap to the buyer’s lumber mills. The results have been nearly perfect wrap at a much lower price.
Another example of successful auctioning at this firm is prescription eyeglasses for their industrial sites. They pulled together all the different types of prescriptions for eyeglasses in industrial settings and specified every detail — the cost of getting an eye exam, how long it takes to get the glasses, what information systems the supplier must integrate with, inventory reduction targets, cost improvement targets, electronic invoices required, and every other specific detail they considered important in their supplier relationship. They went from numerous contracts with local suppliers to a two-year contract with a single supplier, resulting in huge savings. To make Comprehensive Auctioning work for you, you have to anticipate and specify every important aspect of the relationship you are designing for open auction with your suppliers.
Managing Risk for Auctions of Critical Items
For items where performance is critical, such as the bearings, motors, and valves which run a production plant, people understandably resist switching from buying a product from a proven supplier to buying these critical items in an open auction. To address these concerns, one company created ‘trials’ — clauses in the auction which create a trial period of a few weeks or months. Suppliers know upfront exactly which criteria will be used to evaluate the performance of the equipment. If the winning product fails during the trials, then the buyer honors the second winner. Over the two years that they have been doing this, with 72 auctions to date, no trials have failed.
For Certain Categories, Comprehensive Auctions Are Worth the Extra Effort Required
Many companies have used e-auctions with success. But often they have limited their use to simpler, non-critical items, and in some cases alienated suppliers in the process. Through more comprehensive e-auctions, there are significant further gains to be had. But they must be done properly, taking the time and effort to comprehensively specify all the requirements that are important. The level of effort required means that you will focus on categories with the greatest savings potential. Being comprehensive in your specifications and criteria is appreciated by suppliers too.As one company put it, “You get all the benefits of e-auctions, without the suppliers feeling abused.”
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