9 June 2011 | Adviser Q&A
How should I fit reverse auctions into my organisation's overall procurement strategy? What factors will influence the outcome of a reverse auction?
Supply chain manager, Milton Keynes
Adam Smith, purchasing and logistics manager, Morgan Technical Ceramics
It is unwise to use reverse auctions with suppliers of goods or services of high strategic importance, where real value is being added or a product is unique and provides competitive advantage. Reverse auctions are probably best suited for products or services that are purchased in a transactional way.
Somewhere in between strategic and transactional purchases there are other opportunities, but there are several criteria that should be considered before taking the plunge. These include:
• Specifications to be fixed and transferable between suppliers.
• Cost of switching suppliers should be low or non-existent.
• Ensure contractually you are in a position to switch suppliers.
• There should be at least two suppliers willing to participate.
• Ensure you have appropriate software and process trainers.
• The whole cost of the goods or services must be considered.
Be sure to talk to several specialist auction providers before making any decisions. They will help you identify what will work.
Claire Sexton, account principal, BravoSolution
An estimated one in 10 procurement projects now include the use of an e-auction, delivering savings between 3 per cent and 30 per cent.
When introducing e-auctions into your procurement strategy, you should consider a range of factors. Simple commodities are more obvious candidates than complex services, although sophisticated e-auction strategies and software make the latter possible.
There are a number of variables to consider:
• Value of contract. An attractive level of spend will attract a higher level of competitive bidding.
• Market dynamics. Consider commodity prices, economic cycle and industry economics.
• Comparable products or services. Specifications should be set to allow bids to be compared, where possible, on a like-for-like basis.
• Willing suppliers. You need a sufficient number of suppliers who are motivated (and capable) to supply your requirements.
• Communication. Offer suppliers training and technical support so they understand the process and how they can participate.
Jonathan Rollason, director, Purchasing Auctions, and a CIPS past president
E-auctions are only a small part of the purchasing cycle, but they can realise significant savings. They should in no way replace tendering, but are often the preferred process for negotiating price. A recent US study found e-auctions saved an average of 15 per cent more than paper-based tenders. The fact we are seeing average savings of some 30 per cent supports this finding.
Price is rarely the sole factor in selecting a supplier and e-auctions should be used to help rather than drive the supplier selection process. They should be used whenever there is a competitive market and a clear specification.
Firms normally start by auctioning goods and services of low risk to the business, before extending their use, including for complex price negotiations with multiple suppliers. A recent white van leasing auction embraced purchase price, residual cost, fuel, repair and maintenance cost and interest rates.
E-auctions are a great tool which support the purchasing cycle and are quick, transparent and result driven.
Steve Horton, director, Pro-Cured Consultancy
E-auctions were the professed panacea for every procurement team in the early part of the noughties. So why haven’t e-auctions took over the procurement world as much as early adopters and providers would have liked?
There are a number of reasons. The data that builds any e-auction has to be 100 per cent correct – most companies, whether large or small struggle to retain any rich data that make an e-auction possible.
The category scope of any single e-auction needs to be clearly defined and idiot proof. Over complicated categories that are open to interpretation will create turmoil.
But the most important reason e-auctions don’t always work is that suppliers hate them and the vast majority of incumbents will try and sabotage the process from within (some more subtly than others) by casting a shadow of doubt with your internal stakeholders. Complaints include: “Procurement hasn’t taken into account pack size differences”, “Our product is of superior quality compared to other suppliers”, “We haven’t had enough time to prepare” or “Can I come in and negotiate face to face”.
You should look at an e-auction as a procurement tool rather than strategy, similar to a traditional RFI and RFP. As with any other process, ensure the data is correct and the scope is clearly defined. The Holy Grail in running an e-auction is engaging with your stakeholders and ensuring they are fully involved in the process and know how the auction has been built. Get your stakeholders to watch the auction if possible.
Key Facts
1. Speak to a specialist auction provider to identify what goods or services could be put to auction
2. Involve enough suppliers to make an auction worthwhile
3. Try it out with goods or services that are low risk to your business
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writers’ personal views and should be regarded as general guidance only.
