Just when I thought information and discussion regarding reverse auctions had exited stage right, along comes Infosys with an incredible breakdown of reverse auction best practices. When I initially started reading it, I thought I would find a couple interesting stats about how companies use and benefit from auctions. The article certainly had that component, however, it went into far more detail about how to leverage strategy in the buyers best interest (eg, dramatically reduce supply disruption risk) and what practices typically result in poor results from reverse auctions. I think this is the type of article (in addition to the reverse auction documentation found on esourcingwiki) that every company using eSourcing should print, frame and read once a month.
For instance, the authors highlight principles which recommend a multi-pronged approach to eSourcing which closes the loop by using spend analysis technology to validate preliminary bids.
Some of the common issues that purchasers have are in determining the quantity to be auctioned and in validating the accuracy of the initial price offered in the RFQ by vendors. Since savings depends heavily on the initial bid price and the decrements, more often than not, there is a persisting doubt about whether the auction is starting off at the correct price. If the vendors offer a greatly enhanced price at the RFQ stage only, then the auction is beginning with lost savings. The buyers therefore need a check against this. Spend visibility offers this check. As the buyer examines the historical consumption pattern of the item, the historical purchase price, trends of volume consumption, and price pattern become apparent to the buyer. This knowledge proves invaluable while setting up the auction quantity and deciding on the opening bid of the auction. Spend visibility also acts as an input to the vendor assessment exercise by validating the credibility level of the vendor. If, in the past, a vendor has had persistent problems with product quality or with meeting timelines, then the purchaser will consider this when awarding the final contracts.
These are not simplistic recommendations and really force one to think about how they are executing auctions that may not have long lasting effects.
They also break down the four common reasons for supplier implementation/delivery failure. These are generally described as:
- Price: Initial bid prices are much less than what vendors quote in their RFQs.
- Volume: Auctioned quantity is more than what is required.
- Vendor: Supply is not delivered according to schedule and is deficient in quality.
- Time: Timing and frequency of the auction are suboptimal.
As I mentioned, this is one of the more comprehensive discussions on auction best practices I have seen in awhile. I highly recommend keeping it on file for periodic refresher courses.
Just last week, Infosys gave e-Sourcing Wiki permission to publish this paper in its entirety. It is available in the Supply Articles sections under the title Maximizing Potential Benefits in Reverse Auctions. Thank you to Infosys and Amitava and Hariharan for their contribution!