Not too long ago, Procurement Leaders (PL) published a piece on the pitfalls of procurement auctions that did a good job of exposing some of the traps in Procurement Auctions. It is worth a read, but it missed a few entanglements that also need to be understood in order to determine when, where, and why an auction should, or should not, be used. In this post, after reviewing the traps of the PL piece, we will discuss some of those.
According to the piece, there are four main traps of Procurement Auctions:
- lack of auction knowledge
The author notes that many business have a pre-conceived notion of what an auction is, even though the concept is very broad and flexible and can be adapted to your business needs. Modern e-Auction platforms support upwards of ten types of auctions, many of which are described in the e-Auction WikiPaper the doctor co-authored years ago.
- lack of an appropriate platform
As a result of lack of knowledge, many Procurement teams will lock in with an e-Auction provider before understanding what they really need and settle on a platform that, while great, isn’t right for them.
- lack of supplier interest
Auctions don’t work unless you have enough suppliers who can meet your needs who are seriously interested in winning your business. This will generally only be the case only if there are multiple suppliers who can supply the good or service you need (that are not locked in non-compete agreements with your competition that would exclude you) that see your auction process as fair, transparent, and efficient.
- lack of planning
As noted above, there is no auction type or platform that is “one-size-fits-all” so you need to select an approach that is flexible and you need it to be repeatable when you need to run the auction on the category, or a similar category, again in the future.
These are big traps, but not the only ones. Four more traps include:
- lack of market knowledge
Auctions generally work well when supply exceeds demand and generally work poorly when demand exceeds supply. A buyer who runs an auction at the wrong time will generally not get good results.
- lack of supply market knowledge
Just because a supplier is interested in bidding doesn’t mean it should be allowed to bid. Only qualified suppliers that have been confirmed to have the necessary capabilities should be allowed to bid. Otherwise, an unqualified supplier could win the business or suppliers, seemingly separate but in league, could collude to keep prices high. (Do you really know what goes on overseas?)
- lack of e-Sourcing expertise
Auction’s don’t have to be stand-alone events. They can succeed RFxs and they can preceed decision optimization. They can include real-time optimization and rules for sole-source awards, split-awards, baskets, etc. The right knowledge can not only lead to the selection of the right type of auction, but an auction that complements the overall sourcing cycle.
- lack of perceived trust
As per this article on the potential pitfalls of e-Auctions over on the MIT Sloan Management Review, suppliers often see open-bid auctions negatively. They believe that the buyer is using an open-bid auction to unfairly force prices down through the inclusion of unqualified suppliers or fake bids.
Don’t be afraid of e-Auctions – they work great when used appropriately. Just don’t rush in until you do your planning.