e-Auctions bad for business ?!?

May 22nd, 2006 at 07:01am David Bush - Iasta

In a recent issue of Supply Chain Management: An International Journal, the author states in his article on “Executive decision-making traps and B2B online reverse auctions” that a recent study has demonstrated that the savings achieved using e-auctions is much less then that claimed by the companies that provide reverse auction services and that a common result is poor sourcing decisions, higher costs, and less cooperative supplier relationships. The author then claims that related studies have shown that the many benefits for buyers and sellers as claimed by the market makers are greatly overstated, if not false.

Now it is quite obvious that we at Iasta, along with just about every other major e-sourcing vendor, do not agree with these statements, but in fairness we will admit that a poorly implemented e-Auction, just like any poorly implemented sourcing or e-sourcing process, is not likely to produce good results.

So, how does one avoid a poorly implementing an e-Auction solution? The same way one would avoid poorly implementing any sourcing process – by following the basics and taking a total cost of ownership framework into account. Tracing back at least to Lisa M. Ellram’s (the Bebbling Professor of Business of the W.P. Carey School of Business at Arizona State University) seminal paper “A Framework for Total Cost of Ownership” in the International Journal of Logistics Management (Vol 4, No 2, pp 49-60) in 1993, the total cost of ownership concept should be a well understood and vital part of any serious sourcing process in today’s organizations.

What does this mean for an e-Auction process?

First, let’s review some of the fundamental TCO components. For every transaction, there are pre-transaction cost components, transaction cost components, and post-transaction cost components. Pre-transaction cost components relate to need identification, source qualification, and supplier education costs. Transaction components consist of price (per unit), order placement costs, delivery and transportation costs (and any associated tariffs and duties), billing or payment costs, inspection costs, return costs of defective items, and follow up costs. Post transaction components consist of incurred and utilization costs (such as storage and failure), customer goodwill and firm’s reputation, and any ongoing maintenance or repair costs.

This tells us the following:

(1) As with any good sourcing project, we should take the time to (pre)qualify our needs and sources. Including suppliers that can not meet our needs in the timeframes and at the quality levels we require can severely damage the auction – regardless of whether or not an inappropriate supplier wins a bid. If an inappropriate supplier wins you could miss targets or get stuck with inappropriate products, but, more importantly, even if the inappropriate supplier loses, you could be creating ill will and distrust among incumbent or more appropriate future suppliers by including them.

(2) Price per unit costs are not the only costs that need to be considered – you also need to take into account transportation and related costs (duties, tariffs, etc.) as well as any incurred costs.

Therefore, when you are conducting an e-Auction, you need to determine which transportation related and incurred costs differ between suppliers, on a per-unit basis, and add them to the supplier bids, or, in the case of transportation, allow the suppliers or 3PL vendors to bid on transportation costs.

(3) e-Auctions should be approached with the same level of care and seriousness that you would approach any other sourcing process, after all, goodwill and your reputation are on the line.

With respect to the claims that “the savings achieved using e-Auctions is much less then that claimed by the companies that provide reverse auction services” and that “the many benefits for buyers and sellers as claimed by the market makers are greatly overstated, if not false”, it should be clear that if you consider your total cost of ownership and undertake the e-Auction with the same level of seriousness and good faith that you would any other sourcing process, the savings and benefits you achieve will indeed be real. Iasta takes great pains to explain both the benefits and pitfalls of reverse auctions, as they are not panaceas for success, but rather, extremely useful tools when utilized in the proper environment and training.

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Entry Filed under: General, Supply Management Best Practices, e-Sourcing Marketplace