Posts filed under 'Reverse Auctions'
May 8th, 2008
Sean Delaney - Iasta UK
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.
Entry Filed under: Global Supply Issues/Risk, Optimization, Reverse Auctions, Sourcing News, Supply Management Best Practices, e-Sourcing Marketplace
March 13th, 2008
David Bush - Iasta
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.
Entry Filed under: General, Global Supply Issues/Risk, Reverse Auctions, Supply Management Best Practices
February 18th, 2008
Michael Lamoureux
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.
Entry Filed under: Optimization, Reverse Auctions, Supply Management Best Practices
January 28th, 2008
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
January 24th, 2008
David Bush - Iasta
Charles Dominick had a good story about purchasing a new vehicle, which reminded me that I was going to blog about my own process of buying a new car. Last month, we decided to go through the same assessment in my own purchasing department which includes me starring as CPO, Director and Buyer. The process was handled differently but the results came in pretty good!
To begin, I have to agree with Charles that some of the biggest houses in Indy (just like Pittsburgh) are owned by the car dealers, so all the crying poor should never be believed. Next, his method involved sitting at the table and hashing out the details in negotiation format. Of course, there is no way I was about to do that when I live and breathe the sourcing efficiency model.
Phase I of my process was to soundedly prepare by evaluating the Honda and Toyota options that we were interested in and develop my own specification of EXACTLY what was going to be purchased with absolutely NO margin for alteration. Once it was decided the options that were going to be on the vehicle (from both manufacturers), I did my research on publicly available data to know all the model numbers and option packages. This information would be used to make sure my vendor knew that I knew what I was talking about. Phase II was to begin after Christmas and before New Years, I needed to take advantage of what I knew about my suppliers - they have end of year and end of quarter goals/quotas which effects their incentives and cash back from the manufacturers. Also, unknown to many people, is that dealerships that move higher numbers of vehicles usually get preferential allotments of new, hot models. So, they need to push these cars off the lot, some will be high margin, some not. I planned to occupy the “not” category.
Phase II was ready to go the day after Christmas, when the dealers reopened. I had prepared faxes which clearly stated the model and options I wanted, with no exceptions. I faxed this one page letter to every dealer in Indiana, both Honda and Toyota. Although, I felt the Toyota was slightly better, I was not willing to pay for it. I had condensed this decision into a 6 day window to be sure that I took advantage of my beneficial timing.
I learned quickly, from my supplier feedback, that the Toyota’s were in very short supply, but there was a inventory glut on Honda’s of the competitive model. This quickly changed my strategy to the Honda model, which was now the focus. Based on my fax comunique, I got about 40% response rate and started learning where the price floors were because some suppliers had more incentive to sell vehicles than others, so they came in with aggressive pricing early.
Knowing now what I would buy and having a short list of vendors (and most importantly, knowing where to begin negotiation) I began the process of speaking with my preferred suppliers. Once I made sure that every one understood the specs and we were all talking about equivilent vehicles, I added in a new component of a 7 year extended warranty, which I also knew the pricing floors because of quotes from other dealers. (This is a commodity, they are all selling the same thing and some dealers will mark up the warranty heavily when the invoice price gets too low). Barring some additional gorey details, I made my final decision based on an Indy dealer over a Fort Wayne dealer because I valued my time (2hr drive one way) over the $100 lower cost.
In the end, I got our new vehicle at over 30% off MSRP and an estimated 15% off what I think would have been possible, if I had not all the information clearly presented to me. If you have not figured this out, what I did was a manual reverse auction with all the necessary planning upfront which provided me all the leverage throughout the process. I definitely came through the process as a very informed buyer and, consequently, was able to contract the lowest possible cost that my vendor was willing to provide but still benefit from the deal.
My only regret? I wish I had done this with the Iasta SmartSource software. I feared that my compressed time frame and unknown sophistication of the supply base, might lead to decreased participation and bids. In hindsight, I do not think this would have been a problem, as most dealers were very prepared for online communication and likely would have placed their bids online for each lot that I constructed (base price, taxes, warranty, documentation fees, etc). The additional benefit would have been real time feedback where they could have seen their rank. I think their curiosity would have lead to bid adjustment over the multi-day period.
Man, that would have been awesome. In retrospect, I might have had a chance to make history as being the first consumer to ever purchase a car in an online reverse auction. But alas, I will need to just take the thousands of dollars I saved and be happy with the 4 star resort vacation we are taking in February.
Entry Filed under: General, Reverse Auctions
January 16th, 2008
David Bush - Iasta
SCDigest ran a commentary recently which spelled out five recommendations for improving your results for eSourcing.
- Prioritize The Trinity Of Reliability, Quality And Price
Very true, eSourcing does not change what you would normally do when going through a sourcing exercise, it just enhances it. If you sense the loss of a critical milestones, recalibrate and get it right.
- Use e-Sourcing Strategically
SCD claims here that not all projects are suited for eSourcing. This is a classic trap and not true. It is true that not all things should be reverse auctioned, but teams should get used to using other tools like RFx and optimization for specialized opportunities. Additionally, the sourcing team should be capturing the spend information to maintain quality reporting in the management dashboards.
- Provide Clearly Defined And Relevant Specifications
Again, to point one, have good specs whether you are on or offline line and issuing a bid. Otherwise, you should just “re-order” and not “source”.
- Focus On The Quality, Not The Quantity Of The Supplier Pool
Here is a good point and where your sourcing organization needs to get serious about using RFx technology to the fullest of its capabilities.
- Encourage Suppliers To Participate In Shaping Negotiating Terms
Using collaborative bidding tools like multi-round RFx or optimization allow a much more interactive bidding experience and where suppliers stay engaged and productive for the entirety of the project.
Don’t forget the most important one!
Utilize your eSourcing vendor for high quality support and guidance in eSourcing best practices. In all likelihood, they have already been there and done that, with regards to the problems that you are staring down.
Entry Filed under: General, Optimization, Reverse Auctions, Supply Management Best Practices, Technology, e-RFx
January 10th, 2008
David Bush - Iasta
Supply and Demand Chain Exec has a fantastic article on eSourcing process integration, which is written by Andy Sealock of Pace Harmon. If you can get past the incredibly unfriendly user obstruction for printing and viewing the article on 7 different pages, you will be able to really get a ton of great information. In fact, I would say that this is the best and most comprehensive content I have read about eSourcing project management.
This comes off my recent post, The Per Event Paradigm, where I tried to dissuade companies from under committing to the eSourcing process. This article validates that principle with many examples of best practices for setting up the proper eSourcing frame work and foundation. I will not steal too much of the thunder from the article, but Andy does say, “a common pitfall is to squander that investment by not executing properly on the associated process integration, and therefore never realize the value projected in the business case used to justify the tool.” Well put.
Some of the key principles that are highlighted include:
- Establish Uniform Data Definitions and Provide Training
- Build Data Collection Requirements with the End Result in Mind
- Data Attributes To Capture for Project Management (including project status levels)
The final page also goes into best practices for eRFx and reverse auctions, which are always good to refresh and understand. One of the comments he makes is:
Companies can better leverage e-sourcing tool auto-scoring capabilities for vendor proposals by structuring as many requirements as possible in the form of binary (yes/no) answers, or requiring the vendor to enter a specific value, or choose from a list of multiple-choice responses. This improves evaluation process efficiency as the assignment of weights to these requirements can be built into the tool ahead of time. The tool will then apply the appropriate weights to vendor proposal responses and auto-score them without manual intervention.
I do agree with this principle, but am not sure the practice can be enforced consistently. It is like telling people that an auction should be awarded to the lowest bidder because all other factors have been normalized. This is true, but very difficult to accomplish in tight time frames and other unknowns.
The article ends brilliantly:
Process integration considerations for a successful e-sourcing tool rollout may seem like a substantial amount of work (and it is), but in reality it is a small investment relative to the payoff received in the form of enhanced efficiency and effectiveness from the sourcing process. With significant dollars and time on the line, it is vital that the enterprise plans ahead and allocates sufficient priority and resources to process integration when making a decision to implement an e-sourcing tool.
Entry Filed under: Functionality, General, Project Management, Reverse Auctions, Supply Management Best Practices, Technology, e-RFx
December 19th, 2007
David Bush - Iasta
The Doctor, who runs Sourcing Innovation blog, is never short on heavy hitting analysis. I particularly like when he takes on topics in eSourcing (big surprise). Last week, he had an in depth breakdown of the core functionality that most think of for eSourcing -eRFx/eAuctions. Additionally, you will notice his theme of the 12 days of X-emplification and there are others days which have great information on topics such as spend analysis and contract management.
From his prologue, Michael sets up the series with, “This year, in the spirit of giving, and in the spirit of Questions to Ask your Optimization Vendor, the doctor exposes the elephants in the room (Part II), and the doctor goes mental (on Auctions and on Optimization), I’m going to give you twelve posts on twelve different sourcing and procurement technologies and services that expound upon the questions you should be asking, the answers you should be expecting, and, most importantly, why, so that when you set about choosing a technology to help you with your sourcing and procurement challenges, you choose the right one.”
Needless to say, his posts are packed with actionable information and, as should be expected, not light on the criticism of any vendor technology that lacks what he feels is critical for success. I considered offering some analysis of my own, but his spiked eggnog version of holidays, speaks for itself. My only recommendation is to take his analysis on each technology that applies to your company and reformat it for your own needs and challenges. These are worth saving.
Entry Filed under: Functionality, General, Reverse Auctions, Supply Management Best Practices, Technology, e-RFx, e-Sourcing Marketplace
December 13th, 2007
David Bush - Iasta
I ran across an interesting article, which continued my recent trend of running into a great deal of new content about reverse auctions. Sort of a strange phenomenon, but true. This one was discovered on CFO Magazine and tells the story about research being done to create software which attempts to infer the lowest possible qualified bid by a supplier. However, the article left me looking around to see if I missed something, because it just ends, sort of like No Country for Old Men. There is no attempt to go into greater detail about a somewhat intriguing concept. This is about the best you get:
“Described in a working paper by Sandy Jap, professor at Emory University’s Goizueta Business School, and Prasad Naik, professor at the University of California Davis Graduate School of Management, the model — dubbed BidAnalyzer — aims to infer a supplier’s optimal bid; that is, the lowest price the supplier can offer while still making a profit. BidAnalyzer can begin to make such judgments with as few as three bids per supplier, although accuracy improves with more bids and cost-structure data.”
In No Country, I was just getting ready for the big scene and to watch Llewellyn valiantly win the showdown with the baddest man in movies since El Mariachi in Desperado. But, to no avail, it does not happen and I am left confounded to what I missed, just like this article. However, with the movie, I left very entertained and felt like I had spent my 2 hours wisely. The article, unfortunately, left me wondering why the page did not scroll further down and yearning for the 3 minutes back.
I guess I will wait for the sequel of Bid Analyzer to find out what happens to the suppliers.
Entry Filed under: Analysts/Research, Reverse Auctions, Suppliers, Technology
November 27th, 2007
David Bush - Iasta
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!
Entry Filed under: General, Reverse Auctions, Supply Management Best Practices, Technology
September 4th, 2007
David Bush - Iasta
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.
Entry Filed under: General, Reverse Auctions, Supply Management Best Practices, Technology
August 20th, 2007
Agatha Degasperi - Iasta Europe
The success of your auction is not only limited to the results you obtain, but also to how smoothly the process runs. Too often, buyers are very communicative up until the auction runs and then forget about the vendors. For continued success and to increase your chances of having vendors take part in future e-sourcing projects, take into account the following suggestions when awarding your business:
- Vendors are informed that the lowest bidder does not automatically win the business. Nevertheless, they should feel like they are being considered (i.e. phone follow-up, possible face-to-face meeting, etc…). If they are not selected (and there may be very good reasons for this), they should receive very concrete feedback as to why they didn’t win the business (preferably not by e-mail).
- Always take into account the award strategy that was given to the bidders in the RFQ document. If for some reason this award strategy will change - it is important to notify the vendors and see how they react as this could very well negatively impact their prices since they were bidding according to the possible volume they were going to be awarded.
- When establishing who will win the business, it is always good to have a back up plan in the initial phases of the award. For example, if you said you would award to 1 vendor, have a 2nd also go through the post auction negotiations in case your selected vendor cannot stand by their pricing, or experiences some change in the business. Same if you said you’d award to 2, a 3rd one in the sidelines is always helpful.
- When your final selections are made, formally notify ALL the vendors of your decision (we’ve had instances where vendors have taken part in auctions and ended up having a very negative perception of the client (and process) because they never received any feedback once the auction was complete - needless to say this does not encourage them to participate a 2nd time).
- Make your award decision as quickly as possible to maintain the momentum. Both the winning and loosing bidders do not have to waste time and energy chasing for responses/award decisions. These vendors have to plan future potential income streams and therefore quick responses (even if they are unsuccessful) can leave a positive impression.
Entry Filed under: General, Reverse Auctions, Supply Management Best Practices, Technology
July 31st, 2007
David Bush - Iasta
As a follow up to my recent post on Good People First, Good Systems Second, I’m going to highlight a recent article in Supply and Demand Chain Executive: e-Sourcing Tools - Means to an End. This article points out that in addition to good people, you also need effective process definitions and process integration in order to realize the full value provided by an e-Sourcing Tool.
The article points out that one of the primary benefits of an e-sourcing tool is that it allows staff to enter information in an autonomous, distributed manner while also allowing management access to reports that consolidate and aggregate the information into a comprehensive picture of department-wide activity but that if the staff responsible for providing the information are not aligned and using the same data definitions and usage guidelines, then the reports generated will have little or no value.
Therefore it is important that you establish uniform data definitions and provide training, build data collection requirements with the end result in mind, and capture the right data.
The article also lists ten crucial data elements that need to be captured:
- Project Type
- Project Status
- (Over-arching) Program
- Savings
- Vendor Diversity Opportunity
- Project Description
- Project Status Update
- Risk Indicator
- Issue List
- Priority
As well as giving a number of tips for online eRFX and Reverse Auctions, including:
- Auto-scoring capabilities can be better leveraged by structuring as many requirements as possible as binary yes/no or numeric value answers.
- Vendor training saves time and effort.
In conclusion, process integration considerations for a successful e-sourcing tool rollout may seem like a substantial amount of work (and it is), but in reality it is a small investment relative to the payoff received in the form of enhanced efficiency and effectiveness from the sourcing process. With significant dollars and time on the line, it is vital that the enterprise plans ahead and allocates sufficient priority and resources to process integration when making a decision to implement an e-sourcing tool.
Entry Filed under: Functionality, General, Reverse Auctions, Supply Management Best Practices, Technology, e-RFx, e-Sourcing Marketplace
July 12th, 2007
Agatha 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.
Entry Filed under: General, Reverse Auctions, Supply Management Best Practices, Technology
July 5th, 2007
Michael Lamoureux
At EyeForProcurement’s recent Technology for Procurement Forum held in San Francisco, Art Laszlo, Director of Strategic Sourcing for Brunswick Corporation, gave a presenation on Effective bidding, common pitfalls, and proper approaches to e-auctions. This was a good presentation, and one who’s content you know was worth it’s weight at least in silver since Brunswick Corporation was featured as one of the case studies in Aberdeen’s recent Advanced Sourcing and Negotiation Benchmark Report.
In his presentation, Art covered the benefits of auctions, strategies to avoid the pitfalls, ethics, and the benefits to suppliesr. Nothing you haven’t heard before if you’re a regular reader of eSourcing Forum or Sourcing Innovation, but it did a great job of tying everything together. In brief, here are the highlights of Art’s presentation:
Benefits to Buyers
- removes the human factor from price negotiation
not all buyers are good negotiators, and, by definition, only
a handful of buyers can be selected as your best negotiators
- higher average cost reduction
especially when compared to a basic 3-bids-and-a-buy RFx process
- increased efficiency and price transparency
what used to take months can now be done in a couple of weeks
- assists in the identification of the “best total cost” supplier
as you can also track “bids” on delivery terms and conditions
- a foundation for supplier relationship development
not only are they open and fair (done right and ethically), but
they require a great deal of communication up front and post auction
(including to losing suppliers) to get right
Avoiding the Pitfalls
- select items that exist in a naturally competitive environment
if you only have a couple of sources, go for supplier development instead
- select an item where the contract is ending
bidders don’t want to win business for one or two years down the road; but more importantly, make sure you have no (other) contracts in place before advertising an auction
- if you invite new suppliers, have the ability to switch
if you have a long-term contract with an existing supplier, or the costs with switching are too high, you don’t have the right conditions for an auction
- clear, complete, and well defined specifications
since you need to be able to award the business to the winner
- identification of relevant non-price factors
this could disqualify some suppliers and indicate delivery terms that you need to track or have suppliers bid on
- intend to award the business!
not only is it unethical to hold an auction unless you intend to award the business, but if you get a reputation for not following through, you’ll have no suppliers bid next time
Ethics
- clearly communicate your intentions, the process, and your
ultimate goal
if you just need to reduce cost, and you’re honest, suppliers will respect that
- do not use auctions for benchmarking or price discovery
suppliers don’t want to be be used solely as a tool to beat down an incumbent
- award must be to a supplier in the auction
it’s really unethical to award to a supplier who didn’t bid but then struck a deal after the auction closed
- set realistic starting prices
if raw material prices haven’t dropped, asking for a starting price that’s 15% lower is not reasonable
- allow adequate time to train and support the suppliers
especially right before the auction
- do not allow for after-the-fact negotiations
in fact, if a supplier tries to negotiate after the fact, they should immediately be disqualified
- properly qualify all suppliers pre-auction
you must be able to award to all winning suppliers
- contact ALL participants after the auction ends
especially the losing ones - taking just 5 to 10 minutes to explain why they lost goes a long way - and might help them shape up to provide you better bids and service the next time they are invited to a bid
Supplier Benefits
- it’s a fair and competitive bidding environment
everyone has an equal chance of winning
- more efficient process
they’ll have their answer quickly, and no paper to fuss with
- increased business opportunities
they could have more opportunities than they would otherwise
- collaborative bidding environment
they can ask questions, and get answers
- even if they lose, they still get good information
they can see what the market is bidding, and find out why they
didn’t win (if you follow the ethics above)
- open processes require trust
even if they lose, they can get the information they need to
potentially win your business in the future
Again, even though most of this should not be new to you, it’s a great all-inclusive high-level overview on how to succeed in an e-Auction!
Entry Filed under: General, Reverse Auctions, e-Sourcing Marketplace
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