In a recent Friday Rant entitled “Reverse Auctions Have Become the Aero-Bars of Sourcing”, SpendMatters’ Jason Busch describes the all too frequent abuse of Reverse Auctions. He quotes David Clevenger, formerly of FreeMarkets, who notes that “the problem with reverse auctions may be the same as with any powerful weapon in the wrong hands”. A knife can be used for murder or for life-saving surgery.
I believe there are at least two factors that contribute to abuse. I recall Stephen Covey’s leadership example which describes the importance of both skill and integrity. A skilled surgeon lacking integrity might perform an unnecessary operation. (Think Michael Jackson’s repeated cosmetic surgeries.) An unskilled surgeon with integrity would botch the job. You need both skill and integrity!
Clevenger describes abuses such as pre and post bid negotiations and the inclusion of unqualified competitors to drive market behavior. I would add to the list Phantom Bids (i.e. no intention of moving business but merely driving the incumbent’s pricing down via a competitive exercise). Note that none of these tactics rely on Reverse Auctions. They can all be wielded with equal abuse using a paper sealed bid. These are issues of integrity that soil Sourcing’s reputation regardless of the medium. In this instance, Reverse Auctions merely automate an unethical practice.
Skill is a different issue. As a former eSourcing trainer, I was often frustrated at companies’ unwillingness to provide adequate training. There are a number of important differences with the eSourcing process and tactics. Our company always recommended both training and mentoring as buyers geared up. I must respectfully disagree with Jason regarding software vendor responsibility. We didn’t tell unskilled buyers to “go tear it up”! Conversely, we often argued strongly in favor of a thorough implementation process. Unfortunately there were far too many shortcuts with the ultimate outcome being, among other things, unintended supplier abuses.
Anyone employing Reverse Auctions must have both skill and integrity or there will be abuse. However, we shouldn’t blame the tool. Neither we nor suppliers should generalize that reverse auctions are bad. It is correct that Reverse Auctions in the hands of buyers who are unskilled or who lack integrity are bad.
However, not all sourcing professionals lack skill and/or integrity. I am not denying abuse. But I’m concerned that suppliers’ claims become another excuse to resist a legitimate tool that, when used properly, helps buyers achieve best value. Let’s not abandon a fair and effective tool because of the abuse of some.
We have been known to promote the usage of reverse auction in these parts. However, rarely have I had the opportunity to discuss the process from the first person. Recently, Iasta had the opportunity to manage and execute an e-auction from cradle to grave. Needless to say, we did not need much support, but it was pretty easy to get. The auction was managed directly by one of our IT Managers, who despite having never used SmartSource as a practitioner, was able to create a very good event with absolutely zero glitches.
This auction was run for a particularly large and expensive category of equipment that we needed in our ever growing IT infrastructure. I will not say who the OEM was or the specific hardware; however, I will say it is a widely used item by IT departments with any size and complexity to them.
As we would tell any client, we methodically went through our best practice steps and included only qualified vendors. This is critically important! Why? Because we told the 5 vendors bidding that this was winner take all! We were so confident in our process and understanding of the supply market (which included vendors RFx responses, references and documentation) that we were fully prepared to work with every one of them. The auction was the last thing to do. Thus price, was in fact, the only matter left for debate.
As a result, our prices which started at $375,000 per unit lot, were quickly pushed to an opening bid of $185,000 for the leading suppliers. After an hour of spirited bidding, the final two bidders were within .5% of each other and below $165,000 each. A whopping savings of 56% which included all freight, hardware and installation services. For a small company like Iasta, this is a huge amount of money and cost avoidance. I suspect that big ticket IT purchases are stalled right now and vendors are looking for any way possible to acquire new clients and potentially build long term relationships.
What should this do for you? For starters, every company needs to be looking at source-able categories. IT needs to be at the top of the list. This is just our example, we are seeing most of our clients crush current pricing in this area. Next, be sure you know how to actually run an auction. Going through the process correctly makes the difference between implementable results and possible high visibility chaos.
Finally, for those wondering about captured vs implemented savings – that would be measured at exactly 100%.
Add commentFebruary 9th, 2009Agatha Degasperi - Iasta Europe
Time and time again I hear people say that you can only really auction a commodity; something that is standard, simple – like a widget that doesn’t have too many service components. Well, if that’s the case then what have we been doing the past 10 years??
The European Leaders in Procurement magazine (Spring 2007 issue) had an article written by Bill Simpson (director of financial services managed accounts – Fujitsu Services) in which he addresses the topic of auctioning services (only from a sales perspective). This inspired me to help get the story straight. Can services be e-sourced?
Absolutely! As with any commodity the key considerations for deciding whether or not to auction a service are:
Is the spend interesting enough to attract vendors?
Can you define your requirements?
Is there sufficient competition in this market? We would be looking at a minimum of 3 here…
If you can say yes to these 3 questions, chances are very good that you can run a successful event. Where customers often run into trouble is with question 2 as they can’t really clearly define what their requirements are. When this happens, then naturally you run the risk of having quotes that are not comparable due to the discrepancy between the services that were actually quoted for. Needless to say, this will not make a successful auction.
Returning to Mr. Simpson’s article for just a moment, he makes a point about having the buying organization be upfront about their goals when auctioning a service. Is it going to be a partnership scenario where you expect innovation & continuous improvement plans, or is it going to be similar to what he calls a “commoditized service” where you will tell the vendor how the service is to be delivered? He argues that customers are losing out by trying to commoditize services (thereby making price the only important metric) by not letting suppliers define what would be the best value proposition for their organization. While I agree with his point, I would also add that this is not the case for all services. I think it’s critical for the buying organization to take control of their expenses by clearly defining what is needed, what is “nice to have” and what is a luxury. On the other hand, if you are unclear about the direction you are heading, you need input from potential suppliers, then consider different negotiation routes (RFP, Sealed Bids, etc…). On a final point, it is not just because you run an auction that suddenly the only metric is price. You can define that upfront by attributing the criteria for awarding business and defining which percentage will be based on price, which on the services proposal and consider adding live presentations as well. All of this can then be factored into a total cost assessment per vendor helping you determine who the best supplier is. Always think about what the impact will be to the organization and where the supplier can really add value.
There are many components to e-Auction success, including good strategies, best practices, and inscrutable ethics. However, this post is going to overview another set of good process that you can follow to make sure the auction runs smoothly, efficiently, and delivers on it’s expected benefits.
Define Requirements and Goals
As with every other step of the sourcing process, good requirements, along with clear goals, are key. Be sure to understand what the strategy is for lowering or controlling costs, for optimizing the supply base, and for process improvements.
Invite all Potential Suppliers to an Open RFI
Do not limit the organization’s supply base to current suppliers as sometimes the best process and cost savings can come from new suppliers with streamlined processes, innovative production technologies, and lower production costs.
Pre-Qualify Capable Suppliers
It is critical not to invite suppliers to an auction that are not capable of meeting the organization’s needs. This will only garner resentment from other suppliers and possibly cause significant production delays if it is only discovered after the award that the supplier cannot deliver.
Clearly Document All Requirements
Good documentation is the key to a successful sourcing project in general. With a global supply base, staffed by individuals of distinct cultures, each with their own internal understanding of what a (foreign) term or requirement could mean, there are really no common terms or definitions – but detailed documentation can avoid this problem and avert potentially costly misunderstandings.
Hold a Q&A Training Session
Don’t assume the auction tool is easy or natural for your supplier. Whereas your buyers have probably been trained on it, used it, and are accustomed to using it as part of the process, it might be a new tool, concept, or even business paradigm for one or more of your suppliers.
Monitor the Auction
It’s important to make sure that things run smoothly. If one or more suppliers fail to bid relatively promptly or the refresh rate is sluggish or non-existent, either the buying organization or one or more supplying organizations might be experiencing problems. A buyer should be ready to step in and offer help or remedy the situation at an instant.
Follow Through and Award Promptly
It’s important to be prepared to allocate awards and follow through on negotiations promptly and within the promised timeframe.
For more information on the e-Auction process, it’s benefits, and associated best practices, see the e-Auctions in Sourcing: The Strategic Sourcing Equalizer wiki-paper over on the e-Sourcing Wiki. In addition to more detailed information on a successful e-Auction process, it also overviews some of the internal and external pressures that the e-Auction process can address in addition to benefits, barriers to success, success strategies, ethics, and some foundations for next-generation auction solutions.
This post originally appeared on ESF on September 4th, 2007
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!
This post originally appeared on ESF on November 27th, 2007
Many people often wonder (especially eSourcing newbies) what the criteria are for a good reverse auction sourcing event. Since billions and billions of spend are negotiated through reverse auction technology every year, these rules have been developed and refined over time. Honestly, I do not even know the origin of this list or any of the changes it may have gone through over time. I suspect this was some of the original FreeMarkets marketing collateral that could fill an Olympic sized pool. I do know that I have seen it around enough to consider it public domain.
The 7Cs Category Cheat Sheet
Contractually available
Clearly definable requirements
Competitive supply base
Commercially attractive spend to bidders
Compressible margin
Complete data set
Commitment to process
These are all very good points to address in your decision process. #2 and #3 are probably the most important to understand and account for, as I have stated before. I strongly feel that #5 (Compressible margin) is an admirable but not required goal. Achieving price transparency in rising market conditions is just as successful as getting 14% on your office supplies event. At one point or another, you will be required to focus on these 7 concepts and the amount of savings which is captured and implemented will be directly correlated to the adherence of these rules.
This post was originally appeared on ESF on April 25, 2007.
How many bidders do you need for an electronic auction? There are a variety of “expert” opinions on this question. Is it three, four, five? I have heard all of these recommendations. The correct answer is: at least two. But the actual number depends.
I have experienced circumstances where two bidders were plenty. It was a sellers’ market. There was significant over capacity, and the two bidders were hungry. They fought for the business in a bidding war, and the auction delivered significant savings. Conversely, I have heard of events where there were three, four or five bidders with little competition. It was a sellers’ market with limited available capacity. The bidders were satisfied with their market share and unmotivated to bid aggressively. In this situation, an auction might deliver little, if any, savings and sometimes even result in a premium!
A competitive market assessment is the key to determining the “right” number of bidders. This is best achieved by first doing an RFP where you collect preliminary pricing. (I always tell the prospective bidders to submit feasibility level pricing. However, I also state that I reserve the right to award based on these bids. That keeps the proposals serious.) The RFP responses allow the buyer to assess the degree of competition for all items in a sourcing event. You may have three potential bidders, but if the incumbent is low bidder at your current price and the other two aren’t even in the ball park, you will be hard pressed to achieve a savings. I encountered this situation while coaching an event for injection molded parts. After the RFP, we determined there was insufficient competition among the three potential bidders to proceed with an auction. Instead, we identified additional sources and collected preliminary pricing from them. Although this delayed our award by a few weeks, we ended up with a successful auction delivering a 10% savings. It was well worth the wait!
There is no magic number. You need at least two bidders and, most importantly, you need a number that will provide sufficient competition given current market conditions. This will vary from commodity to commodity and from year to year. The buyer should always assess the current market conditions and verify that there is sufficient competition before proceeding with an auction.
Last week, I was interested to listen to a quick interview of East Coast academics discussing reverse auction theory/technology to solve the credit crisis by procurement of toxic mortgages. Spend Matters has been involved in this topic for a couple weeks, as Jason Busch and Sam Kinney have had discussions with the Treasury Dept about strategies utilizing reverse auction technology to save the world. Sam is a founder of Freemarkets and has a fascinating blog named, Up the Economy, which I recommend. His writings have helped me understand some issues that, I admit, did not all sink in. As an accomplished economist, his opinions have carried weight with the Federal government.
However, listen to the NPR interview for yourself. It is a little fluffy, but the theorists bring up some challenging issues with the concept of auctioning this paper. It actually sounds pretty formidable to overcome despite the best intentions. I will be curious to see if some of these challenges are effectively addressed.
Nothing spurs on emotional debate in sourcing, more than reverse auctions. According to CAPS, they represent less than 5% of managed spend, but you would not realize that by the blood pressure changes they cause (for buyers and suppliers), who argue their effectiveness. Even being in the industry, one of the hardest questions to answer is:
How do I know the value of a reverse auction?
This question is also known as:
What is the extra cost reduction that a reverse auction brings? or,
How do I know I would not have achieved that reduction on my own?
All of these are valid questions and can be very difficult to effectively prove the value of the auction process. The connection between traditional negotiation and auction impact is always fuzzy for a very simple reason: you cannot source the same thing in two different ways, simultaneously.
In order to truly know what the auction does to a project, one needs “controls”. The first needs to be the traditional sourcing process with an RFP and negotiation, then the other control must be the reverse auction. These processes typically cannot be done together, without the suppliers knowing. Therefore, when I saw a client crossing these streams, I was watching closely. Due to some unique circumstances, we actually had the ability to see both controls in action for a real benchmark.
To begin, I would highly recommend against this practice (another reason it is difficult to assess auction value in a vacuum, as it is not best practice). In this case, the VP of Procurement had hand picked this item for auction with Iasta over a year ago. In the normal course of business, a mid-level buyer had gone out to market with a formal RFP and finished negotiations with the vendors with some award recommendations. At this point, the VP decided he still wanted to test the reverse auction, despite the internal communication problem. After some smoothing over with disgruntled suppliers, the auction process started and submitted final bids were used as preliminary bids in the auction.
Company: F500 organization with no recent auction history
Spend: ~$1,400,000
Suppliers: Very large global companies, mixed with some mid-sized vertically focused companies. 5 suppliers total, all of which completely qualified for the business.
Item: Highly spec’ed operational indirect
After the disjointed and bumpy early phases, we got the project stabilized and moving very efficiently. Like a typical reverse auction, activity was limited until the very end when the sparks started to fly. After about an hour of activity, the final results were in and our client was able to implement an additional 4.7% in savings.
This is about as close as you can come to really measuring the delta between the traditional and auction sourcing process. Of course, there are so many factors that play into these final results which might not translate to every type of project in a 1:1 fashion, but the benchmark is valid in a tough commodity.
As I mentioned, this is not a recommended process and can draw the ire of the suppliers, but we did the best that could be done to make it work well for them. However, I thought the results were fascinating, since it is so difficult to measure an auction in a straight line race with a traditional method. This event only represents one data point in the argument for auctions, but I think it is a powerful example of what this technology can do.
It has been a very long time since I wrote a summary of what is going on, over on the ESF sister site – eSourcingWiki. Since many are now taking long weekends, or full holiday right now, today is a good time to bring attention to what exactly is going on over there.
The wiki series are broken into 4 main categories: The Basics, The Technologies, The Methodologies, Global Sourcing Primers. Within each header category, there are numerous papers on various subjects. At last count, there were 32 (yes, 32!) series available.
**Corporate Social Responsibility – A Sustainable Solution
**Low Cost County Sourcing – A Blogger’s Perspective
**An Introduction Global Trade? – The Basics of Global Trade
**An e-Procurement Primer – 9 Steps to Procurement Success
**A Supply Chain Finance Primer – Financing Your Way to Success
**A Customs and Security Primer – Keeping the Global Supply Chain Secure
**A Free Trade Primer – Global Tax Relief
**A Regulatory Compliance Primer – Keeping it Legal
**Supply Risk Management – Mitigate Risks and Reap Rewards
**Supply Chain Fraud – The Biggest Risk to Your Supply Chain?
So, eSourcing Forum is sort of like a crowded sports bar with a million TVs and every game going…right next to no closing time, rowdy, Rush Street neighbor where glasses are being thrown and people are dancing on tables. However, ESW is like a quiet, locals only, coffee shop serving up some of the best java in town. Take some time this summer to look over the vast ocean of supply chain and spend management topics available on the site. In fact, if you like it enough, you can get behind the bar and start making some drinks, yourself.
Tomorrow we will highlight the newest wiki – Strategic Services Management
UK based Supply Management magazine, had a summary level article regarding suppliers attempting to disrupt the e-auction process. I think the title was a little misleading because, generally speaking, suppliers cannot disrupt a good auction with adequate competition. However, that statement is heavily loaded, and the article does point out some auction best practices that have been around since Tron, or so.
According to Huthwaite International, supplier disruption tactics include: refusing to participate, submitting bids outside the auction process or offering their lowest price at the start of the auction, limiting its effectiveness.
These are all accurate observations and some suppliers do attempt to sabotage an auction event. Many times this gets dangerously close to collusion. In some cases, supply bases decide not to participate in any auction activity – a calculated gamble, for sure. However, probably a decent one because their auction experiences have likely been very unfavorable and executed by sourcing teams that had no idea what they were doing before cocking the hammer.
I think the value that this article brings, is in the recognition of the basics, when it comes to reverse auctions. Give the suppliers enough time, quality specifications and EXTRA communication and you will discover most will take the opportunity to win easy business, even if the margins do compress.
Well I couldn’t resist this…especially since I was once one of these buyers. What is more interesting for me is that having crossed over to the “other side”, the negotiating styles used by the supermarket buyers (Tesco’s etc) certainly sounded very familiar.
When showing these tactics to Duncan Bullivant, the Chief executive of Henderson Risk Group, a seasoned hostage and kidnap negotiator, the article writes “even he was surprised”. Duncan then goes on to say ”not only do I recognise the phrases, I recognise all these tactics in every aspect of business I have done in the last few years.”
The tactics and behaviours during negotiations have evolved over the years from being more physical, to more psychological. For example, not long ago there was the story of one buyer, who used to attend meetings with a water pistol, and fire water, at the supplier, if the supplier didn’t meet his demands. Is this procurements’ equivalent to water boarding?
One strategy is called the “clock face” which involves 41 sequential steps as the buyer seeks to coax the best price out of the supplier. Tactics include threatening to de-list the supplier (which in reality could lead a supplier going out of business), threatening to go over their head to their bosses, play good guy and bad guy, deliberately misunderstanding something, and just when you think you may have made it, the final stage is the partnership stage. This is where suppliers may be deliberately left to feel the odd one out, before bringing them back into the fold.
Tired? Well, I certainly was after reading it! Quite clearly those more sophisticated suppliers will prevail and there is already evidence of this. Furthermore, as the supply base consolidates, and they become equally sophisticated, an impasse will inevitably be reached. With raw material prices rising so rapidly, I think this may be the final tipping point in relations.
However, back to negotiation techniques used, I can’t help feel that there is a serious case for the automation of the negotiating process. How much more sophisticated can one get? I would argue that in the future, it is imperative to keep it simple. Capacity constraints, and the securing of scarce resources, are going to be the key sourcing variables.
Even in these very turbulent economic times, we are still seeing a large volume of reverse auctions being executed. However, now is a good time to remember the definition of cost avoidance, as explained on the eSourcingWiki and pulled from CAPS.
Cost avoidance is a cost reduction that results from a spend that is lower then the spend that would have otherwise been required if the cost avoidance exercise had not been undertaken.
This accounts for the situations where spend is higher due to higher demand but overall cost per unit is lower, where up-front investments reduce overall spend in one or more categories over a multi-year initiative, and where a process improvement or product replacement resulted in a lower operating cost or cost per unit compared to what the company would have spent had the company not improved the process or replaced the product.
Or to add to these guidelines, cost avoidance can potentially be measured and impacted when the market conditions are raising unit costs but the introduction of competitive bidding lowers the delta between your former pricing and the new escalated pricing.
Although the concept of an on-line reverse auction is not necessarily within the definition of cost avoidance, I have seen it work many times this year already. A recent example in packaging had suppliers with 20% increases across the board. However, the auction concluded with a 1-2% savings in some lots and no more than a 5% increase in the other lots.
As always, it is critical to enforce best practices and know your market and suppliers. This tactic is not a guaranteed outcome, but should not be summarily discounted either.
Industry week recently ran a good article by Chris Ferrell of Tompkins Associates on Best Practices in Freight Bidding that had a number of good suggesstions. The article offered up the following 12 best practices:
Obtain commitment from executive management.
This is always a good idea, no matter what project you are undertaking.
Benchmark current freight costs. Also, separate out fuel surcharges from basic freight spend.
This is critical. After all, how can you do better if you don’t even know how well you’re doing now?
Include new transportation providers in the bid process and allow carriers to bid on different markets.
This should be obvious, but I’m afraid it isn’t. If you always have the same carriers bidding on the same lanes, they’re going to figure this out eventually and keep their rates in sync to maximize their profit, which is akin to minimizing your savings.
Standardize bid formats to ensure apples-to-apples comparisons.
This should be a no-brainer.
Have a minimum of one year’s worth of clean historical data.
Not sure I understand this one. You should have good projections of what your freight requirements are going to be, by market and lane, for the next year and these should be based off of solid demand projections that use at least a year’s worth of good, clean, data and preferably two or three years!
Look for opportunities to decrease cost by changing transportation modes.
Never assume your current transportation network and strategy is optimal. For instance, just because ocean looks cheaper, doesn’t mean it is. Consider laptops. Their value depreciates weekly. If you can make them light enough, and pack them tight enough, air freight will be more profitable.
Use a multi-round bid process.
You should definitely use a multi-round RFX, to qualify potential award recipients, but not necessarily a multi-round bid. Depending on the market conditions, the number of potential carriers, your needs, and how clearly you can specify those needs up front, a well-defined auction that takes into account all costs and factors, appropriately weighted, might be your best bet.
Encourage carriers to take a more holistic look at your freight.
Good carriers will know their networks and how to optimize them much better than you will know yours. It’s their job. They might be able to come up with alternative bundles, modes, or schedules that could save you a significant amount of money.
Leverage volume through a relatively small group of core carriers.
This is a basic tenet of sourcing, period. Just make sure that you split demand through a small group, and not a single carrier – because this would introduce a significant risk into your supply chain.
Bid freight on a regular, predetermined basis.
Like any other bid, it shouldn’t be done ad-hoc. It should be by major sourcing project or at regular intervals.
Put as much effort into implementation plans as you do the bid.
Remember that negotiated savings are just that – negotiated savings. To realize them, you need to be ready to do what it takes.
Track carrier performance against commitments and utilize feedback loops.
You should not only track performance, but verify invoices using m-way matching and analyze historical performance using spend analysis to find overpayments and secure the credits or refunds before the contract expires.
Although the doctor is an expert in transportation network modeling, and well versed in freight, there are other bloggers out there who are experts in freight bids and freight auctions, a few of whom run projects on a (very) regular basis. He knows at least a few of them check this blog from time to time. Maybe they’ll chime in with a few tips of their own.
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.
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