Bundling for B2B Procurement Auctions: Current State and Best Practices

After a long hiatus I am finally posting some further results from our reverse auction and bundling research. In an earlier post, “Bundling for Reverse Auctions — what is it, and why is it important?”, I provided a definition of bundling and substantiated its importance. In this post today I would like to provide further insight into some of our research findings. In particular, I will summarize some of the most interesting insights gained in a study which was published in the International Journal of Integrated Supply Management (Schoenherr, T. and Mabert, V.A. (2006) ‘Bundling for B2B procurement auctions: current state and best practices’, Int. J. Integrated Supply Management, Vol. 2, No. 3, pp.189–213). This study relied on interviews with 30 case study companies, as well as a small exploratory survey. In our studies ‘bundling’ is defined as the aggregation of two or more products (SKUs) and / or services by the buyer into a bundle that is put up for bid to potential suppliers as part of a single RFQ.

Conditions impeding the use of bundling

Not every company practices bundling in reverse auctions, so in a first research question we tried to identify reasons that may impede the practice of bundling. The following explanations were provided, illustrating that bundling may not be beneficial or feasible in all instances:

  • Lack of resources (time and money)
  • No significance attributed to bundling
  • Low importance of purchasing
  • High perceived risk of single sourcing
  • Lack of bargaining power
  • Not much volume combinable in a bundle
  • Items belonging to different decision makers
  • Complex or highly engineered items
  • Specific customer requirements
  • Desire for flexibility
  • Fixed price schedules
  • Structure of the supply base
  • Legal constraints (especially in government purchasing)

Favorable characteristics of bundled items

If bundling is practiced, care must be taken to combine the right items together into a group. The following item characteristics were identified as contributing to the overall success of the bundle. If items possess these characteristics, then they are more likely to result in a successful outcome. Together with the specific characteristic we provide an illustrative example.

  • No or low degree of customization (Example: MRO supplies; custodial services)
  • Common input material(s) (Example: Steel tubing, forgings, castings and fittings)
  • Logical combination (Example: Production machinery with maintenance services)
  • Internal uniformity and cohesiveness (Example: Different domestic road transportation services)
  • Similar application (Example: Office products; packaging material)
  • Similar technical requirements and complexity (Example: Several simple sheet metal parts)
  • Similar production processes and/or capabilities (Example: Various molded plastic tubes for different purposes; travel services)
  • Standard, off-the-shelf (Example: Chemical cleaning supplies)
  • Low risk (Example: Stationary, printed forms, letterheads, envelopes)
  • Low dollar value (Example: Different sizes and types of fasteners; small machined parts)
  • Specifications common, known or easily obtainable (Example: Various travel services)

Bundling benefits and challenges

There are several benefits associated with bundling that primarily address spend level expansion and a decrease in transaction costs. The most frequently stated benefits included the following:

  • Increased leverage
  • Increased efficiency
  • Simplification of supply base
  • Increased supplier commitment
  • Simplicity for reverse auctions

However, there are also a number of challenges connected to bundling. For example, firms indicated that bundling items was often more labor-intensive and challenging than activities associated with purchasing the items in the bundle individually. This additional upfront work and effort consists of classifying items into groups that are as attractive to suppliers as possible, while at the same time fulfilling the objectives of the firm. In addition, the following challenges existed for many of the companies interviewed:

  • Bundling process
  • Change management
  • Limitation to large suppliers
  • Lack of resources
  • Unique material
  • Quality

Over the next few weeks I will be posting additional insights from this study, so keep coming back to the E-Sourcing Forum! Also, if you have any questions, comments, suggestions, opinions or ideas, please do not hesitate to contact me (tobias.schoenherr @ emich.edu).

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