We Didn’t Start the Auction

Free Markets, Ariba, Procuri, Iasta
Perfect Commerce, PurchasingNet, B2E Markets

Ketera Tech, VerticalNet, Trading Partners, and Moai Tech
K2 Sourcing, the Commerce-hub, and e-Breviate

Emptoris, SciQuest, Sorcity, Synertrade
WhyAbe, eDynaQuote, and aGlobal eProcure

Procusoft, Quadrem, Co-exprise Marketplace
AECSoft, A.T Kearney, B2B Marketplace

We didn’t start the auction
It’s been always raging
Since the world’s been trading
We didn’t start the auction
Though we did ignite it
We just couldn’t fight it

Generally speaking, the conventional wisdom is to run auctions in loose markets where supply exceeds demand and the power resides in the hands of the buyer. However, auctions can also be helpful when supply is tight and commodity costs are rising, when the power theoretically rests in the hands of the supplier, especially if we have an inflationary market. Why? Even though demand may be tight, in an inflationary market, spending goes down, and demand will only remain high if consumers can ultimately afford the products being produced.

In these conditions, if you are unable to control prices, demand for your products will drop. And your suppliers, whether or not they want to admit it, recognize that demand could drop for end-user products at any time, and thus the components and materials they provide, at any time. This means that they are likely desperate to lock in business and should be willing to agree to an ethical auction.

This is good news, because a well-designed and well-run auction allows you to determine the true market price for a product or service, especially those where only part of the cost is due to commodities that have increased in price since your last sourcing event. If a supplier believes its business might drop, it might be a lot more willing to reduce it’s profit margin on the value-add component of its offering.

Thus, if the category is one that you’d normally auction, you should probably still do so. Don’t get jumpy and switch sourcing strategies just because the market has changed since the last time you examined the category. If your analysis indicates that the category is right for a sealed-bid negotiation, do a sealed-bid negotiation; if your analysis indicates that you need strategic sourcing decision optimization, use decision optimization; and if your analysis says that the category is appropriate for an auction, use an auction. As long as it’s well planned and well executed, even though your costs might not decrease, they could still be less than the average market cost. Good analysis and strategies withstand the actions of the market. So stick to them.