Posts filed under 'reverse auction'
The poor, misunderstood reverse auction
Reverse auctions as we we know them today started in the mid 90s. So now seems about the right time for them to be going through their poor, misunderstood phase.
Tim Cummins writes a great analysis of how buyers reap what they sow: screw your suppliers when times are good and you can’t expect your suppliers to queue up and looking for win-win opportunities when the markets move against you.
Two years ago, IACCM was warning its members that the change was coming and that suppliers were shifting their loyalties – for example, they were investing their marketing dollars in emerging markets, rather than their traditional (disloyal) customers.. We alerted buyers to the fact that they would pay a price for alienating the supply base. But the good times rolled on – commoditization, reverse auctions, confrontational contract terms – these were just some of the ways that buyers showed their lack of loyalty to the traditional supply base in their haste to grab low prices and exert their dominance.
A timely warning, and nothing contentious, you might think. But now read the paragraph again and see how “reverse auction” is equated with “showing disloyalty to your suppliers”.
This is to put the cart before the horse. It’s (short-sighted) buyers who screw suppliers, not reverse auctions. And don’t forget that short-sighted buyers are able to screw suppliers with all kinds of methods: you certainly don’t need an auction to demonstrate disloyalty to your suppliers. You can screw a supplier perfectly well using certain contract clauses – but that is not to say that contracts are a bad idea.
From my own experience: I recently awarded a contract for software development services via a reverse auction. I have a good relationship with both the current and previous supplier. I believe this is because I was open and up front during the whole process (including explaining to the incumbent why I was going to market). The reverse auction in fact helped the decision making process be more transparent. And the contract was far easier to implement than would have been the case without an auction.
In that example the reverse auction helped both with achieving the right price and with helping build the supplier relationship.
Add comment May 27, 2008
eAuctions in the news
Always good to see some (positive) coverage of eAuctions in the trade press. Here’s an article from Purchasing.com about BlueBird’s use of eAuctions. For non-US readers, Blue Bird make those iconic yellow N. American school buses.
Blue Bird procurement uses an e-auction tool to help consolidate the company’s supply base and transform purchasing.
Whose e-Auction tool? TradingPartners’, of course!
But you have to read the article carefully to get the full story. On the one hand Purchasing says
In the year since he assumed his current post with the bus manufacturing company, Marshall has used an e-auction tool of Trading Partners in Chicago to negotiate pricing with suppliers of safety supplies, crib supplies, corrugated packaging and office supplies. While the lowest bidder doesn’t necessarily get the contract—quality and delivery are equally important criteria, he says—the tool has helped to reduce costs in some spend categories by 30%.
Read this paragraph and you’d get the impression that Blue Bird bought a license to use a piece of software to run their auctions on.
But later on Purchasing says
Marshall, who has more than 30 years experience working in purchasing in the auto industry, views Trading Partners, which has conducted more than 20 e-auction events for Blue Bird, as an extension of his purchasing team and sought its expertise when analyzing the company’s spending. Blue Bird’s database is huge—there are approximately 30,000 part numbers on an average bus.
In other words – it’s the service that Blue Bird has bought into, not just the software.
This is an important distinction.
If you buy software for your e-auctions (which may well be pretty cheap), then unless you have some pretty dedicated people on board, you will struggle to achieve the adoption levels you hoped for. Strategic Sourcing (and, by extension, Auctions) is a very different beast to processing purchase orders. Strategic Sourcing is much more of a “Barely Repeatable Process”, to use Sig’s phrase than the kinds of “Easily Repeatable Process” that ERP-biased software houses build their software around.
So, until some BRP-style software for eAuctions turns up you should consider carefully whether what you really need is the software, or whether what you really need are the results. If it’s results you are after then think seriously about buying the service rather than just buying the software.
1 comment May 14, 2008
On Reverse Japanese Auctions
Paul Ferraro recently left a comment asking about reverse Japanese auctions.
I can only scratch the surface in a single blog post, so if you’d like to discuss this more then please leave a comment and we can continue the conversation. Also – I run workshops at TradingPartners every month (and also occasionally at CIPS) so if you want to dig further into different types of reverse auctions feel free to drop me a mail.
In brief the question was: “Are reverse Japanese auctions only appropriate when there is a small number of suppliers bidding?”.
Briefly the answer is “In theory a reverse Japanese auction will work just fine, all the time. But in practice you’re best off keeping to Japanese auctions where there are fewer suppliers.”
Some initial comments regarding reverse Japanese auctions:
1. I once saw an eAuction manager just after he’d run a reverse Japanese auction with 8 suppliers in. Haggard is a good way to describe him. The reason is that you have to collect up to 8 bids at each price level before decreasing the price. What with internet connections, technical issues at the supplier side etc you can pretty much guarantee that one supplier will need additional coaxing and assistance to prevent them from missing a price decrement. A reverse Japanese auction can be pretty hard work for the eAuction manager to run because it relies on the eAuction manager to drive the competitive element.
2. I was talking to a UK body recently who are intending to run a reverse Japanese auction on a supply base of 200 suppliers (due to the vagaries of the category). I hope that with a bit of investigation a better way of running this auction as a reverse English auction will transpire.
3. We are seeing a lot of success with reverse Japanese auctions at TradingPartners but I do wonder sometimes whether weighted auctions would be better in some of the cases where a Japanese auction was used. (e.g. in my example below where you could apply a weighting to reflect switching costs).
But to get back to Paul’s questions. I’ll use a highly simplified example to illustrate what I mean when I say that reverse Japanese auctions are most appropriate when there are fewer suppliers:
Suppose you have 2 potential suppliers, Incumbent Supplier and New Supplier. You are currently buying from Incumbent Supplier and she knows full well that it is going to cost you about €30,000 to switch supplier, not to mention the hassle factor involved from your side of things if you have to switch. New Supplier, on the other hand has no idea of what these numbers are.
First let’s run this as a reverse English auction, with an opening price of €400,000.
New Supplier wants to win the business so places a bid of €390,000 early on in the auction. What happens next? Incumbent Supplier won’t bid – she knows the business is still safe with her. Nor will New Supplier bid more aggressively – he thinks he’s in the lead. So the auction ends, Incumbent Supplier keeps the business and New Supplier is left with a bitter taste in his mouth about this whole auctions business.
Now let’s run this is a reverse Japanese auction, again with an opening price of €400,000.
Buyer drops the price to €390,000. New Supplier and Incumbent Supplier both have to accept this price level, without waiting to see who else accepts first. And they both know that they need to accept the price level to stay in the auction. They both accept. The buyer then drops the price to €390,000. etc etc.
Now let’s change the scenario. Instead of 2 potential suppliers there are 20 potential suppliers. Even in a reverse English auction you’ve now got sufficient competition amongst all the suppliers to encourage competition and to bring the incumbent into that competition
Obviously the example above is a trivial but I hope it gets the general point across – that reverse Japanese auctions are most use when you have a small-ish number of bidders. (In reality you might use messaging, for example, to stimulate competition even with only a small number of suppliers).
Add comment May 12, 2008
Reverse Auction workshop updates
I’ve been doing Reverse Auction workshops for CIPS (UK equivalent of ISM) for quite some time. These cover general issues in running a successful reverse auction and a fun game that is designed to show buyers the differences between English (aka descending bid), Japanese (aka descending clock) and Weighted (aka multi attribute) auctions.
Yesterday I did the first one of these events hosted by TradingPartners at our London office. It was a good session so we’ll be doing these workshops every month.
If you’re a bit sceptical about what a good reverse auction can do for you, or if you’ve only ever seen a reverse English price-only auction then there’s going to be something interesting in it for you. It’s also a good opportunity to network with buyers from other industries and to share reverse auction experiences with other buyers.
So far in the diary we’ve got 15th May and 19th June (both start at 9am in TradingPartners’ London office). Send a mail to me or check http://www.tradingpartners.com/europe/events.page and look for “free Understanding eAuctions workshop” for more details.
Add comment April 25, 2008
Reverse Auctions in a downturn (2)
Lisa Reisman over on Metals Miner has a rather more sophisticated analysis of reverse auctions in the current economic climate than most. Worth a read, but for the impatient (and click-averse), here’s the conclusion:
I would argue a reverse auction in a stagflationary environment can achieve benefits for the buying organization, more for further worked products containing metals than for semi-finished or raw materials. And though we still predict some prices to drop further this year, there is nothing like a reverse auction to show exactly where the market really is…
Add comment April 24, 2008
Reverse Auctions in a downturn (1)
Procurement Leaders opened its latest issue with the words “Good news, we’re in recession”. I’ve long agreed with this view, as you know, so it’s good to hear the likes of Jason Smith, Principal Advisor of KPMG’s procurement advisory service, reported in Procurement Leaders on the subject:
“Increasingly people are looking to procurement to deliver results,” says KPMG’s Smith. “They can’t actually increase the top line so it’s ‘how can we save money from within the business?’”
Smith points to e-sourcing, strategic sourcing and outsourcing as basic tools to help cut costs. KPMG estimates there is a typical saving of between 5% and 35% using e-auctions and 10% via strategic sourcing. But he believes there’s much more mileage in these techniques.
“The leaders are starting to adopt these tools but they’re not taking them beyond pilot categories such as office supplies. But how can they use those tools on the more strategic indirect purchases? There’s still a long way for even the leaders to go,” he says.
A good question to ask. From my (probably biased) perspective I would imagine a big part of the reason for failing to take these initiatives beyond the pilot stage is largely down to a lack of resource and focus within the buying organisation. Any other views?
1 comment April 17, 2008
e-Auctions in Supply Management
Gratifying to see that Andrew Moorhouse’s research has put e-auctions it into Supply Management’s news pages. Even if the news headline is the rather sensational “Suppliers disrupt e-auctions“.
Supply Management chose to focus on some stats, like the fact that some incumbents refuse to take part in e-Auctions. But there is some other information in the study which I’d like to emphasise here. I’ll declare an obvious bias given that I work in the e-auction industry, but nevertheless I hope these comments serve as some sort of counterpoint to the Supply Management version of events:
Incumbents who took part in e-auctions dropped to their bottom line price 86.1% of the time. 5.6% of the time they stopped above their walk away price (this was due to the incumbent having inside information from their contacts at the buying organisation as to what target price was expected). 8.3% even went below their walk-away price (this only happened when a senior director was present). If you don’t auction your incumbent you are leaving savings on the table.
Producing clear and unambiguous specs is a significant challenge when running an e-auction. Many e-auctions fail due to poor specifications. Only 37% of self-service e-auctions had clear and unambiguous specifications. But amongst third-party managed e-auctions, 78% of the e-auctions had clear and unambiguous specifications. A third party auction specialist will improve your auction result.
Here’s a quote from one of the respondents that Andrew used in his report: “3rd party self-serve auction tools have degraded and destroyed the reverse auction market place. Inexperienced procurement professionals didn’t maintain auction integrity and abused their position of power”. Again, you need a decent e-auction manager to run decent e-auctions
Citing data from CAPS eProcurement Benchmarking report 2007:
43% of manufacturers see an increase in e-auctions; 38% see a decrease; 19% see no change
50% of non-manufacturers see an increase in e-auctions; 28% a decrease; 22% no change. e-Auctions are on the rise. Sure, they still have a way to go but unless you are running an e-auction, how can you be sure you are getting best value in the marketplace? (I am not talking about lowest price only).
I’m sure you could find all kinds of ways of spinning the research – I can only suggest you read it for yourself and take on board its lessons for improving the design of your e-auctions.
1 comment April 14, 2008
Does Procurement eAuction Design Matter? (part 7)
This is the 7th and final posting from my eWorld presentation series.
My last eWorld tip is, again, arguably as much about strategic sourcing as it is about eAuctions. But again, the clarity and open-ness of the eAuction process brings the issue out into stark relief.
As usual, I have a story to illustrate the example.
There was a buyer who ran reverse auctions but who didn’t have the slightest intention of moving to a new supplier. The reverse auction was competitive and identified a significant saving. The buyer then used that information as leverage to get his incumbent to deliver some savings. From the buyer’s point of view this approach seemed too good to be true: running reverse auctions helps you achieve savings targets without ever having to go through the effort and risk of changing supplier.
The suppliers, meanwhile, were aware of what was going in the marketplace and soon got wise to the buyer’s approach. By year 3 of this approach, the buyer was finding it very very hard indeed to encourage suppliers to participate in eAuctions. And why should they? They know it would be a waste of time.
An approach that seemed the most expedient to the buyer in year one turned out to be a counter-productive strategy over the medium term for his employer.
So if, as a buyer, you are interested in medium and long-term sustainability of your supply markets, you’ll be interested in the 5th and final tip:
Trust plays a key role in negotiations in general, and auctions in particular. Protect your reputation and your credibility in the supply market and you will reap the rewards again and again and again.
And here’s the slide for completeness.
Postscript
Well, that’s it. I’ve tried to compress down TradingPartners’ last 8 years of eAuction experiences into less than 10 slides. And font sizes less than 30. I think I achieved about 70% success rate on the 10/20/30 rules, but most importantly I hope you’ve enjoyed reading these posts and have taken away something that will help you run better eAuctions (whether or not you choose to do them with us). As a re-cap this is what I covered:
Reverse Auctions Background
- The Reverse Auction Family Tree. Reverse Auctions have moved on significantly over the past decade and there are a number of different types of auction suited to different supply markets.
- From Consultancy Services to Dairy Cream there is a reverse auction type most suited to your category and supply market conditions.
Reverse Auction Tips
- Specifications (Remember the waterproof matches)
- Plan and Execute an appopriate Messaging strategy
- Strategic Sourcing (and Reverse Auctions) are not one-hit wonders that apply only once for a category. Markets change and can offer new opportunities for buyers
- Auction structure impacts success (Remember the UK vs Swiss 3G auctions)
- Protect your reputation in the marketplace
Add comment April 11, 2008
Does Procurement eAuction Design Matter? (part 6)
Nearly there now: I’ve summarised the recent history of auction types and given examples of how differnet auction types achieve better results in different supply markets. And so far I’ve provided 3 tips that I’ve seen help TradingPartners (and hopefully you) run better reverse auctions.
This tip is all about structuring your reverse auction to encourage maximum competition. My presentation used some pretty basic clip art and animations to get the point across – that won’t really work as an image attached to a blog post. But I can give you the story equally well.
I’m not going to talk about reverse auctions for this tip. I’m going to talk about sales (forward) auctions, specifically the sales of 3G license spectrum in Europe in 2000 – 2001. Auctions are now a commonplace method of auctioning the rights to part of the radio spectrum but back in 2000, in Europe, they were quite a new idea. I’m going to compare 2 of the European auctions: Great Britain (a resouding success) and Switzerland (an umitigated failure).
Great Britain
There were 4 main existing mobile phone providers in the market place. The government had 4 licenses they could sell for this new type of spectrum. Each of the existing phone providers wanted a piece of the action. and the market knew this. Potential new entrants into the market were put off attempting to take part. How could a new company compete with one of the established behemoths? Any new company could expect to spend a fortune preparing their bid, only to be comprehensively outbid by the big guns.
There were various solutions touted around. But in the end the government was able to change the specifications and offer a 5th license. 5 licenses, 4 key players: At least one new entrant would win a license. All of a sudden the marketplace was abuzz with enthusiasm and 9 new entrants were attracted into the auction. 5 bands, 13 bidders: the competition was intense and the result was a tremendous success.
Switzerland
On the other hand, Switzerland’s auction was a mess. They started the process with 4 licenses amongst 9 potential bidders. But there was a quirk in their auction rules: joint bidding arrangements amongst companies were allowed. Sure enough, with only a few days to go before the auction the 9 bidders had formed joint bidding arrangements such that only 4 distinct bidding entities were left. The Swiss government tried to cancel the auction. They were sued. They lost. They had to award the licenses at the reserve price (which, to add insult to injury, had been set very low). Ouch.
The tip here applies as much to reverse auctions as it does to forward auctions: Make your auction as interesting as possible for as many bidders as possible to enter. But be careful of your rules as bidders will try and take advantage of the rules if they can.
Add comment April 7, 2008
Does Procurement eAuction Design Matter? (part 5)
I am sometimes nervous of showing this information because it is a warts-and-all summary of the case where we have managed a reverse auction for the same client, for the same category, two years running.
But it does address one important assumption that many people have about reverse auctions in particular and strategic sourcing in general. This assumption is that, once you have reverse auctioned (or strategically sourced) a category, there are no further benefits to be achieved by reverse auctioning it (or strategically sourcing it) again.
So here’s the slide. It shows the savings from 6 different categories which were auctioned two years running. The blue bar represents savings in year 1; the orange bar the further savings in year 2.
In some cases you make larger savings in year 1 than in year 2. In other cases you make smaller savings. In some cases the price goes up. (This is life, right?). The simple point is that there is no simple rule that says you cannot run save money by running a reverse auction on the same category twice. (*)
It’s not even (just) as simple as tracking the general price trends in the market. A colleague once told me the following story about some paper products.
We had a client who had recently auctioned some paper products. They had achieved a good price and since their auction the paper price indices had risen. So they were understandably nervous about what would happen if they went back to market. What they didn’t know was this in the meantime one of the large banks had just completed a significant consolidation exercise in the same category. In other words, while some suppliers to that bank had seen their orders increase, there were many suppliers who had suddenly lost a customer. Ironically this meant that despite a rising market there was a lot of surplus capacity in certain sections. To cut a short story shorter our client did go back to market and did secure a further (modest) saving.
So tip number 3 - which again is as much a strategic sourcing issue as it is a reverse auction issue is: Know your market, and get as far behind the headlines as you can.
Back to a strictly auction tip in my next post.
(*) If you are facing price increases, then running a reverse auction is a great way of minimising those price increases.
Add comment April 4, 2008
