e-Auctions — Savings Machine or Inflation Nightmare?

When e-Auctions were first released, they were heralded as the saving grace that Procurement was waiting for because early efforts, in the early 2000s, were always a smashing success with double digit percentage savings on almost every category and endless praise and admiration for the Procurement organization, and their astuteness in the selection of an e-Auction provider to help them find more savings than the organization knew existed.

But mature organizations know that the glory days didn’t last. The next time the auction was run on the same category, double digit percentage savings became low single digit savings, which, if the organization was lucky, barely covered the cost of the pay-per-use auction platform and the services around it. Then, a few years later, when the third auction was run, costs increased, sometimes substantially in the double-digit percentage range that almost equalled the savings found the first time around. The savings machine became the inflation nightmare — run an auction, spend more money.

Auctions were dropped like a hot potato, old-school muscle was broken out of retirement, and in a few organizations, Procurement returned to the dark ages. But now, with many mid-market companies able to afford next generation sourcing suites where pay per use starts in the four digit range and can be put on a P-card and where unlimited use starts in the mid-five figure range (and not the high six figure range), auctions are making a comeback, and the cycle is starting all over again.

But this time, those of us who have been in the game for over 15 years know how the story ends, and can honestly tell you Auctions are not a saving grace. They are an out-of-control spend nightmare.

To understand this, one has to understand why auctions worked in the first place.

  1. The outsourcing and rightsizing crazes of the 80s and 90s pushed more and more spend out, while oversight remained the same, and this resulted in less and less oversight on the majority of categories. As a result, suppliers could keep inflating their margins because of “inflation”, “oil price increases”, “minimum wage increases”, etc.
  2. The lack of market knowledge resulted in most organizations not knowing the breadth of the competition or the true production costs.
  3. The lack of e-Platforms meant that most organizations could barely handle 3-bids and a buy with the usual suspects each time contract renewal went up.

It was the perfect profit storm for suppliers. But with the introduction of auctions:

  • Suppliers could self identify and the buyers knew the extent of the marketplace.
  • Hungry suppliers with efficient processes could afford to offer the product at cost + 10% whereas long-term suppliers who believed they had no competition got fat and lazy and needed 1.3 x cost + 10% to remain profitable. (Also, desperate suppliers could offer for perceived_cost in the hopes of using the award as a loss leader for future business.)
  • Running the auction on line in real time gave hungry and desperate suppliers auction fever and they often bid the majority of their margins away. So where there were 40% margins, there were 30% savings.

But here’s the thing. With respect to savings, Auctions didn’t do anything. Exposing market truths isn’t identifying savings. Reducing margins isn’t identifying savings. And hastening the process isn’t identifying savings. The same “savings” could have been identified with an RFX.

Especially when those margin reductions hurt the supplier. A supplier that is suffering has to increase margins or go out of business. And inflation is back, so if the supplier is at rock bottom pricing, and the costs are going up, what is the supplier expected to do? Bid less and go bankrupt?

Savings is identifying better products, better processes, more innovative suppliers, better delivery schedules, and fat that can be trimmed to reduce cost. Savings isn’t about reducing a supplier’s fair margin to nothing.

And this lack of ability to deliver true savings is just one of the many problems with auctions. To find out the rest, download Sourcing Innovation’s latest paper on The Dangers of e-Auctions today, sponsored by Trade Extensions, before one of the big problems brings your supply chain to a screeching halt.

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