Are auctions recession proof?

January 28th, 2008 at 06:43am David Bush - Iasta

There is an economic storm brewing and its called a recession. I believe Zig Ziglar once stated that experts have predicted 36 out of the last 2 recessions. The problem is, that nobody actually knows if we are in a recession until the economy is already pulling out of it. To start, I think it is important to understand some macroeconomic definitions:

Recession: a decline in any country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.

Stagflation: a period with out-of-control price inflation combined with slow-to-no output growth, rising unemployment, and eventually a recession.

Depression: “a recession is when you lose your job; a depression is when I lose mine.” - Newspaper columnist Sidney J. Harris

In all seriousness, we look to be in the middle of a legitimate economic downturn which might, in retrospect, be a significant recession with a dash of inflation to make it really fun. I was discussing this issue with our COO, Jason Treida, who is of the opinion that this should be a very good time to really re-examine the reverse auction strategy and implementation. Basically, the theory goes that suppliers with less than full capacity production or deployment, will be very aggressive to gain/maintain business. In fact, many drop prices without provocation. This makes a lot of sense and the pressures being exerted on every company will force strong resulting pressure on many suppliers in the supply chain. However, it will only work consistently when applied to the proper supply markets which have those prior existing situations.

The global economy is much more complicated to distill into a basic maxim, however. So, I pinged Pierre Mitchell to bring a little class and panache to ESF, a nice change from the beer swilling alehouse that I call home. According to Pierre:

My POV is that it’s not a question that means much because the USD weakness and the rise of commodity prices does not lend itself to using RA’s for leveraged categories – a great strategy when riding deflationary markets – and unfortunately deflation is happening in the consumer markets but is being dampened by commodity prices from the back of the supply chain. Hopefully firms already have LTAs and other hedges in place – if not they need to find other things they bring suppliers than a checkbook. It is however a good opportunity to do better demand management and other broader cost reduction and innovation improvement efforts.

Excellent analysis, as usual. I just hope things do not get as bad as we are hearing the pundits prognosticate, or we may see the practice played out with live ammunition.

Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Reverse Auctions, Supply Management Best Practices, e-Sourcing Marketplace

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