Reverse auction strategy

Like most of you, I received the latest copy of Inside Supply Management, which is the publication issued by ISM – unfortunately, ISM does not post most articles on line so you will need to read it in print or take my word for it. Anyway, I read an article written by Bryan Ashenbaum which focused on the stumbling blocks that reverse auction technology can produce.

Any article that is written to make better usage of, and promote best practices during the reverse auction process, is a good thing. However, I felt the column took a simplistic look at what can go wrong and how to avoid issues. Reverse auctions are like snowflakes, no two are exactly alike. The author made point of five potential issues which I agree with to varying degrees. In fairness, it is pretty short and he likely only had so many words available which limited the detail. To summarize and add my input:

Point 1: Supply managers must know the markets and have an understanding of where prices are going. Nothing is worse than prices going up or putting your supplier out of business.

ESF: These points are true but to offer a bit more – supply managers should always collect preliminary bids from the suppliers days before the bid! Why let surprises catch you off guard, if prices are up there could be a problem with the spec that needs to be fixed immediately or the market conditions have changed. On the latter, I have seen plenty of auctions that have had a cost increase but be considered a large success.

Point 2: RAs are singularly focused on price and should be focused on simple, non-critical items.

ESF: Not really much to agree with here. RAs work very well on complex and highly strategic items. Also, there are many ways to incorporate more than just price into a sourcing event with the use of e-RFx and sourcing optimization. The real key to running a successful auction has little to do with the item or service, it has to do completely with accurate specifications and a competitive supply base that can be considered equal.

Point 3: Careful prequalification is needed to have suppliers invited into an auction and many non price factors should be hammered out before the event.

ESF: Agree completely.

Point 4: Supplier resistance and relationships are too important to jeopardize in a one dimensional bidding event.

ESF: This is true and it would be foolish to act in a threatening manner towards strategic suppliers. I happen to think this point is a little timid though. Proper communication and qualified suppliers offer valid opportunities to utilize RAs. It is important to realize that even heavily deployed auction initiatives usually do not exceed 25% of spend, so most companies are not over using the technology.

Point 5: Clearly communicate the intentions of the bid, award process and all other pertinent information.

ESF: Agree completely.

Overall, the article gives some good basics about strategy for auctions but paint the picture in a somewhat bleak and foreboding light. There are enough incredibly successful auctions running through Iasta’s software that I tend to believe that the value is worth the effort. It is the job of both the technology provider and supply manager to make sure the process is using best practices and follows the same rigorous attention to detail that should be expected out of any bid – electronic or traditional.

6 Responses to Reverse auction strategy

  1. Thanks! I was hoping you would respond to the article…

  2. Thanks Jon, like I said, there are many ways to skin the cat and, my response cannot be considered comprehensive, but at least, gives a little more detail.

  3. Careful on point 2 David. You appear to equate RAs with electronic bidding events. All RAs are bidding events, but not vice versa, and you rightly do mention other types (e.g., multi-round RFx which can or can not use optimization-based scenario planning and bid evaluation/recommendation). Even if RAs are just used for ‘price discovery’ as part of a broader evaluation, in practice they also tend to imply pre-lotting and setting fixed requirements (or some type of algorithm calculating on a single bid parameter). Unfortunately, for larger market baskets, the pre-lotting methodology destroys value because either the basket is too big and suppliers opt out (or get in trouble) or the lots are too small and suppliers don’t know what business they’ll win (and also aren’t allowed to craft bids that leverage their particular operational advantages) – so they hold back. This is where opening up the market basket and allowing multi-round bidding with optimization-based bid analysis unlocks additional value.

  4. great technique, but on b2b for complex projects how does toyota or ibm tell the global mkrplce its looking to get systems in that fit is needs? its still a closed mkt accessible only 2 those who are know to the buyer – its a halfbake

  5. Hi Dave,

    Thanks for the overview of my article in the July ISM issue. You have mis-stated my point # 2 a bit – I use quite a bit of cautionary wording and in no way suggest that they should only be used for non-critical items. My suggestion was that an RA may not be appropriate for items whose sourcing process is complex, not that a “complex” item wouldn’t fit with a RA. The complexity refers to the sourcing process, not the item itself. In any event, thanks for reading and reviewing it!


  6. Hi Bryan,

    Thanks for the clarification, as I mentioned, I was disappointed that ISM was not publishing online versions. It is tough to make the translation and I know agree with you!

    If you have any deeper studies/white papers/analysis about RAs please contact me as I would be happy to post here on ESF.

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