Daily Archives: May 28, 2010

Should You Use Seller Side Auctions for Your Commodity Buys?

A recent article over on Industry Week trumpeted the benefits of Seller Side Auctions (SSAs) for commodity sales over traditional negotiations, indicating that the more open and transparent process they enabled bring with it a number of benefits that include:

  • refocused sales resources on higher margin activities

    an auction reduces the time and direct costs associated with commodity transactions which allows sales teams to focus on custom products and value-added services

  • improved revenue visibility and forecast accuracy

    bilateral contracting standardizes terms and conditions across customers, simplifying revenue visibility and visibility and eliminating the invisible risk created by bilateral contracts with customized, non-standard, terms and conditions

  • reduced renegotiation risk

    inconsistency leads to errors, which start disputes, renegotiations, and, sometimes, even litigation

  • improved customer relationships

    buyers and sellers are no longer adversarial, the buyers are competing against other buyers, not the seller … which lays the foundation for a better relationship going forward

  • reduced price barriers and market intelligence

    auctions greatly reduce the acquisition cost as well as the cost of market intelligence

  • new customer acquisition and penetration into underserved market segments

    increased efficiency allows the supplier to serve market segments which might otherwise be too costly to serve

But what about the buyer? What benefits do they get beyond market intelligence (and what their competitors are willing to pay)? The relationships will be more cordial, but if it’s a commodity, the supplier will not be strategic and there is no obvious value from a good relationship. They will get a more efficient process, but they would also get that if they just held their own auction and invited suppliers to participate. So where’s the real value?

From a buyer’s perspective, the real value is quality merchandise at true market cost at great efficiency. If a buyer holds an auction and the only suppliers who participate are those that produce lower quality products and/or those that can only produce small volumes, the buyer might get stuck with lower quality products or having to buy from multiple suppliers, which will increase total cost of ownership (with increased service and warranty costs, logistics costs, and even product costs if the suppliers don’t have the economies of scale). But if their supplier(s) of choice are holding auctions, they can participate in those auctions and obtain the commodity products at true market cost, which is always set by the buying organizations. Furthermore, the buyer doesn’t have to waste her organization’s resources setting up and holding the auction. All she has to do is bid. And if she loses the bid with the first choice supplier, she moves on to the second choice supplier.

It’s an interesting idea, and one that deserves further consideration.

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