Category Archives: Auctions

The 6 Days of X-asperation: Day 2 – Questions to ask your e-RFX and e-Auction Vendor!

Just like we did in the X-emplification series, we’re going to start with e-RFX and e-Auction as we tackle the generic questions that you should be asking every vendor, and the types of answers you should be expecting.

1. What do I have to do to get a good handle on how to make effective use of this technology, and for an organization of my size, how long is it going to take?

Before you even consider selecting an e-RFX and e-Auctions platform, you should have reviewed your categories, divided them into projects, and achieved a good grip on what categories are appropriate for sealed bid RFX and what categories are appropriate for reverse auctions. Then, you should review these categories with the vendor and see if their recommendations match yours. If the vendor’s recommendations are different, they should be able to back them up with data and experience and an ability to transfer that knowledge to you if you go with their solution.

Furthermore, neither e-RFX nor e-Auction is new, and both offerings should be very straight forward. Therefore, it shouldn’t take long to install and deploy these solutions on your first project, once it is identified and the requirements determined. (A SaaS vendor should literally be able to set you up on the platform and help you get your first e-RFX and e-Auction up and running in a few days.)

2a. How much functionality is my organization realistically going to be using in 12 months?

e-RFX and e-Auction functionality is pretty basic compared to other e-Sourcing and e-Procurement offerings, and there’s no reason that you shouldn’t be using most of it within a year.

2b. How much functionality do I really need?

All of the basics. And all of the functionality that was outlined in the original X-emplification post, although you probably won’t be ready to use complex formulas, splits, and cross-lot rankings right away.

This means that you don’t need a 1001 template library or automatic project creation from a bundled spend analysis or reporting tool to be productive and, more importantly, get savings. If you have the flexibility to build any RFX you might need, you can always download a free template from a resource center and build it yourself. Sure a built-in one might save you a few hours, but how much is that few hours costing the organization relative to how much the total buy is costing and, more importantly, what if the bundled template isn’t quite right? In other words, be sure you’re not sacrificing core capabilities just to get a few frills.

Note that even though RFX is a mature technology, there are inflexibilities baked into many of the tools that analyst firms blindly label “best in class.” There have even been outright failures of RFX software, despite this maturity level (one might almost say, “because of it” — some companies have stopped innovating entirely in RFX as of several years ago). So when you evaluate RFX, make sure to pick a tough category with complex pricing grids and make sure the RFX solution you choose supports them. You might be unpleasantly surprised if you do not.

2c. And how does this functionality solve my #1 pain today, which is X?

Chances are, if you’re looking at e-RFX, you’re number one pain is sourcing cycle time. Make sure the tool automates as much as possible. If you’re looking at e-Auction, chances are your number one pain is cost. Make sure the tool supports a reasonable number of different auction formats, because empirical evidence seems to indicate that certain auction types get better results in some categories, while others get better results in other categories. (See Alan Buxton’s Where Next blog, for example.)

3. How much training is my team going to require to effectively use the software? How long is it going to take them to absorb this training?

e-RFX and e-Auction is very straight forward, but you still shouldn’t overlook some basic training. This training should include the set-up of a sealed-bid e-RFX project, the set up of a basic reverse auction, a review of what the supplier sees (so that the buyer can competently answer questions), an overview of the communication and collaboration capabilities, and troubleshooting techniques. This should only take a couple of days, but it’s an important couple of days.

4. How much is this software REALLY going to cost me in the first year and each subsequent year?

e-RFX and e-Auction software are a commodity now. Decent solutions are available in the low five-figure range. Furthermore, since the solutions are mature, updates, whether they are minor bug fixes or minor updates, should be few and far between, so maintenance should be low – in the 10% (or less) range per year. Installation should be free if delivered as true multi-tenant on-demand software, and if it’s behind the fire-wall or hosted ASP installation, no more than a couple of days of reasonably priced consulting time. Furthermore, there should be no need for technology services – the basic training should include everything you need to know to get started. (Although you might want to consider using them for category expertise consulting, if they have it.)

5. You say you care about your customers and that you are going to provide great service. Prove it!

Ask for references. Talk to them. If they have an upcoming user meeting or conference, ask to go to it. But most importantly, ask for examples of results their customers have achieved on the platforms recently, and how they can help you achieve the same.

6. Can I take it for a test drive or a short term lease?

Considering that all of this software is web-based, even if the provider isn’t delivering it using true multi-tenant on-demand SaaS, they should still have a test-drive platform up-and-running and they should be willing to let you do a test-drive at a very low, nominal, cost.

7. Can I buy it or implement it in pieces?

This is one of the few technologies, given that it is simplistic when compared to other e-Sourcing solutions and a commodity, that you may want to consider buying the technology up front rather than buying it on a per-event basis. You don’t have to use more than the basic reserve price reverse auction until you’re ready for more advanced features.

Having said that, though, nothing prevents you from using the technology for one or two events just to make sure that it works well, before signing a long term commitment.

The 12 Days of X-emplification: Day 1 – RFx & e-Auction

So, I bet you’re all wondering – what’s to x-emplify? I’m sure you’re saying that it’s just RFx and e-Auction … it’s been around for 10 years … and it’s pretty self explanatory. My answer to that is that you’d think it should be, but given the wide range of capabilities that exist in the various products out there, as well as the even broader range of sales pitches, I’d argue that RFx and e-Auction are still not well understood.

To help you understand what RFx and e-Auction is, isn’t, and should be – in addition to my various posts on RFx and e-Auctions, my guest contributions to the topics over on the e-Sourcing Forum [WayBackMachine] (RFx and e-Auctions), and my contributions to the wiki-papers [WayBackMachine] (RFx and e-Auctions), I’m going to point out some questions for each technology that you should be asking, as well as the answers you should be hearing, to help you cut through the sizzle and get to the steak.

e-RFx

0. Do I really need e-RFx at all?
I’ll probably take a lot of heat from everyone in the eRFX business for this, friend and foe alike, but if all you’re looking for is some basic information, or an occasional quote on office supplies, sometimes all you needis a free-form questionnaire or spreadsheet that’s mailed directly to recipients. It’s always interesting to see how suppliers respond to free-form questions — do they use marketing B.S., or do they have something useful and informative to say? Do they answer your questions honestly, or try to side-step them like your average politician or stereotypical used car salesman?

If you don’t really know much about the space, supplier, or type of product that you’re investigating, how can you ask anything but open-ended questions, anyway?

1. How much flexibility do I have in form definition?
Let’s face it – large template libraries are great ONLY if they offer the templates you need for the categories and commodities you need to source. You need to be able to create your own forms, from scratch, and have all of the form elements you need at your immediate disposal. You also need to be able to control and validate the data that gets entered into the form so that you can automatically compute scores on scorecards and identify important differences between respondents. You need more than free-form text-boxes – you need text boxes, check boxes, radio buttons, and tables (for starters), and you need the ability to define checks not only on individual elements but across elements and across rows and columns of tables.

If you’re building a weighting function, the weights should add up to a pre-specified number, like 100. If you’re asking the vendor to enter a delivery time, it should between 1 day and the maximum amount of time you can allow, like 60 days. “Next month” should not be an allowable response. If you’re sending out a survey to your internal departments to determine an order of priority between 10 sourcing projects, you should be able to enforce that each priority number between 1 and 10 is used only once. (Otherwise, they might all be ones and twos, and that won’t help you.)

Furthermore, it should be really easy to create such a form, re-organize the questions, create sub-sections (or pages), and enable or disable sections by vendors. (If you’re creating a general purpose vendor qualification form, you might not care about the “technical infrastructure” of your office supplies vendor.)

1a. Can I build advanced sourcing grids?
After 10 or more years of RFx software development, you’d think that this question would be a no-brainer. You’d be wrong. There are deep differences in the way that different eRFX products build grids, and there are deep limitations in many of them as to how big the grids can get, and how manageable/unmanageable the process may be. Every sourcing consultant worth his or her salt has recent horror stories of users unable to build the grids that they needed, period.

So don’t believe anyone who claims that”all of the sourcing vendors in this very-long list have ‘good’ RFx platforms.” They all have RFX platforms, but you will often find that there are profound differences between them and that many may not be suited to your needs.

2. Can the forms be completed by the vendors off-line?

Let’s face it – if you’re diligent about supplier and product qualification, and quality, you’ll be collecting a lot of information. Information that the individual assigned to complete the form is not likely to have at her fingertips, information that might take a long time to collect, and information that might take a long time to input. The individual should have the option of completing the form off-line, at her convenience, wherever she is – on the shop floor, on an airplane, or at the wifi-less beach.

Also, in this situation it is beneficial if the vendor can designate multiple individuals to handle multiple sections of the RFx, and if each individual can access, and complete, only their sections off-line.

3. Are the forms secure and uniquely identified?

Let’s face it, if you’re going to allow off-line completion, you want to make sure that the forms that are uploaded were actually filled out by the intending party. (Otherwise, their competition could fill out the forms and answer “no” to all the required regulation compliance questions, causing you to immediately disqualify what could be your best new vendor.) Furthermore, if your vendor doesn’t have unique identification built in, then you’re going to have to come up with your own unique identification method to insure that attachments don’t overwrite each other when a vendor uploads their form, or, even worse, that the different users who upload the forms that contain just their sections filled out do not overwrite the filled out sections completed by other users with blank data.

I’m going to tell you right now – point blank – that most RFX vendors don’t have this capability – and that they’ll probably try to skirt the issue by pointing out that “their user authentication algorithm insures that only designated supplier representatives can log in to the system and access their forms, and this will imply that only they will have access to the forms, and that since they will be uploading the forms through their login, the form is automatically identified” except they’ll use significantly more words while blowing though the well-practiced demo at breakneck speed in an attempt to woo you with their sizzle in an attempt to leave you too stunned to realize that this most of what they are saying is BS.

The answer you want to hear is:Yes. We use built in DEC/RSA 256-bit or better encryption combined with a unique secure digital id that uniquely identifies the form instance by user, by supplier, by buyer, and by original template instance id. And you want to hear this within three seconds of asking your question, delivered in a confident tone with eye-contact and no squirming. Otherwise, what the vendor has doesn’t even come close and they’re trying the above weasel-tactic.

Why is all that identification important? If it was just by supplier and form template and user id, then if the supplier serviced multiple buyers through the same on-demand platform, the form could be uploaded to a different buyer! If it was just by buyer and supplier and form template, then each user’s upload could overwrite the previous user’s upload when multiple users are filling out a form on behalf of a supplier! If it was just by buyer and user and supplier, then you wouldn’t know what template to attach it to if the user had mistakenly created two forms with the same name (but in two different projects)! And of course, if it was just by buyer, supplier representative, and form template id, then if the supplier representative was actually an employee of a 3PL working on behalf of the supplier, the data could be attached to the wrong project and exposed to other suppliers!

4. How easy is it to export the response grids for analysis? To Excel? To Access? To an OLAP analysis tool?
Automated scoring mechanisms are usually not good enough to select a vendor, and they often eliminate vendors that ought not to be eliminated. How can you write a fair scoring algorithm for a space you don’t know that well? You could be building in your own uninformed bias, or (worse) that of a vendor who has “helpfully” provided you with an RFP template! (And I think you know what I think about some of those templates!)

In fact, your analysts will want to pull the data into their own tools. These could be just about anything, from Excel models to Access databases to OLAP analysis tools. The ease with which data can be moved out of the RFx tool and into desktop analysis tools is an extremely important consideration. Sure, e-sourcing vendors will tell you that all the analysis can be done within the tool. And in some cases they’re right. But don’t limit your flexibility, because what if they’re wrong? And furthermore, what if you just don’t have enough hours in the day to learn somebody’s custom tool set? That can be a big investment in time and effort, especially if you only run one event a quarter. You could forget everything you learned, and have to re-learn it all over again each and every time. Sometimes it’s better to forget about the vendor’s tools, and just dump the data to a product you know.

e-Auction

1. Can I define my own bid type?

Let’s face it – not every bid is as simple as a price per unit – especially since you should be taking landed cost into account. Furthermore, this is more than just allowing a user to define a unit bid and a freight bid per unit – it’s also allowing the user to define a fixed processing cost per unit while the application automatically factors in an expected value for a variable fuel cost and it is defining your own adjustment that corresponds to the various utilization costs associated with different products from different vendors. For example, if you’re in food service, each type of sauce packaging implies a different amount of waste – metal cans and plastic bags and lined box-board have different “stick” factors, and the easiness of “scraping” or “draining” the contents from the package often varies by package design (such as cube vs cylinder vs tetrahedron).

2. Can the tool support complex formulas, splits, and cross-lot rankings?

Building on question one, not only do you want the be able to support bids based on complex formulas, but you also want to be able to rank bidders based on their individual bids on different lots and based on their entire package bids. A supplier might bid 100K for lot 1, 200K for lot 2, 300K for lot 3, and 400K for lot 4, but be willing to bid 900K for all four lots (equal to a 10% discount if they get everything). Without complex formulas and cross-lot rankings, the supplier couldn’t enter entire package bids or discounts, and you will not be able to capture the full value available to you through the auction.

3. Does the tool integrate with an optimization solution?

Complex formulas and cross-lot rankings are a good start to getting the lowest bids, but they do not capture all of the complexity associated with a sourcing scenario, and, thus, do not guarantee that the outcome of the auction will be an allocation that optimizes your total cost of ownership. Simply put, a dual-source strategy is preferable to a single-source strategy from a risk management perspective. A given supplier might be willing to make considerable infrastructure improvement investments if they get the business, resulting in year-over-year cost reductions that could, over a three year time-frame, significantly undercut the lowest bid another supplier is willing to give you today.

The reality is that most auction tools don’t support real-time optimization, and most of those that do support real-time “optimization” don’t support it very well, but that’s okay. The point is do they integrate with an optimization solution – since any high-value scenario on strategic categories or commodities should involve a separate optimization step where you run multiple what-if scenarios to understand what your business rules are costing you, what risks the lowest-cost solutions are exposing you to, and what the most valuable award is when you balance cost and risk. Thus, you should be able to easily import the results of the auction that you use to collect the initial bids, as well as easily create rules that guarantee the winner(s) of the auction receive a minimum amount of the award. (Remember your auction etiquette – if you don’t award to the winning supplier(s), you’ll damage your reputation. If you’re going to use auctions to collect bids for optimization, you should be willing to guarantee a minimum award to the winning suppliers. And if you properly define the bids and rankings, with an appropriate multi-source strategy, this shouldn’t be a problem. If you have a special situation where you think it might be, then use a multi-round sealed-bid auction instead of an open auction.)

the doctor Goes Mental on Auctions

With respect to e-Auctions, there’s a host of myths out there that need to be busted. Where-forth they sprang from, I don’t know, but to the graveyard, they must go! I’ll start with some of the more dangerous ones, and maybe the experts from e-Sourcing Forum [WayBackMachine] and Where Next will chime in with some of their personal favorites (or is that afflictions) in the comments.

Myth 1: Auctions won’t save me a single penny!
Dozens upon dozens of providers have saved hundreds upon thousands of clients millions upon tens of millions (and sometimes hundreds of millions) of dollars using e-Auctions – and sometimes saved this much on the first auction! Done right, on the right category, an e-Auction will save you money – with savings in the 5% to 35% range, depending on the category and whether or not this is your first time applying serious e-Sourcing to the category.

Myth 2: I’ll e-Auction it! e-Auctions always save money!
This myth is almost as bad as myth #1. Not everything can be auctioned – and anytime some fool starts with the one – and I mean the one – high dollar category in the company that can’t be auctioned, and gets dismal results, he all of a sudden does a 180 and decides that he was wrong, and that myth #1 is right – and won’t ever budge from that position. (Even though his stupidity costs his company tens, if not hundreds, of millions!) There are a number of requirements for a successful e-Auction. The first two are the existence of a competitive supply base and demand exceeding supply. If there are only two suppliers in the whole world for the item you need, and if demand is increasing faster than their production capabilities, even if the suppliers agree to an e-Auction, your prices aren’t going to go down. The suppliers are going to bid high and stay there. And that’s if you’re lucky! If you’re unlucky, they’ll collude and you’ll be up sh*t creek without a paddle or a way to plug that slow leak in your canoe.

Myth 3: If I don’t like the results of the e-Auction, I can just hold it again.
If you believe this, then you’re the one giving e-Auctions a bad name! Assuming you can even get any of the suppliers whose chains you jerked to even agree to another round, do you really think they’re going to give you anywhere near their best price? And do you think they’re going to want to participate in your future auctions? And do you think they don’t talk to each other? The rule is this – if you commit to an e-Auction, you commit to an award based on the result of the e-Auction – whether you like the results or not. That’s why you do your homework before deciding to do an e-Auction and make sure that the category, and market, is right for an e-Auction. If it’s not, you choose another negotiation method, such as a multi-round sealed-bid RFx with Decision Optimization to help you appropriately analyze potential awards.

To find out more about the Key Steps to a Successful e-Auction and the ethics you need to abide by to build and maintain a positive reputation in the supplier community, check out the e-Auction wiki-paper over on the eSourcing Wiki [WayBackMachine]. You’ll be glad you did.

The Sorcerers of Sorcity

Another stop on my whirlwind tour of North Dallas was
Sorcity. My goal was to find out if they were an on-line auction platform, an e-marketplace, a combination of both, or something entirely different … since their site left me asking as many questions as it answered.

Founded in early 1999, it is possibly the oldest surviving stand-alone on-line reverse auction platform in the sourcing space (as most of the early major players have been acquired). [As a side note, Procuri (acquired by Ariba, acquired by SAP) is probably number two as it was founded in 1999 as well, and Iasta (acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric) is probably number three, as it was founded in early 2000]. In addition, it also serves as a marketplace with over 620,000 registered suppliers where you can potentially find hundreds of suppliers that could meet your needs. However, the real differentiator between the other online and on-demand SaaS reverse auction providers and other e-marketplaces is its managed services offering.

When you get right down to it, even with the best tools available, with finite resources, you can only conduct so many sourcing events on your own. The only way to conduct more events is to augment your team, either by hiring consultants or outsourcing part of the process – that’s where managed services comes in. With Sorcity’s platform, you can use Sorcity to assist with as much of the executable sourcing cycle (Preparation / RFX / Auction / Negotiation / Award) as you like … anywhere from just automating all of the time-consuming administration, negotiation, and analysis to having Sorcity conduct the entire event for you end-to-end.

With their tool alone, they claim you can save 1-12 days on the auction component alone, an additional 3-66% on price paid, and get anything you need with their very large supplier network. So they are definitely competitive with the service offerings of the on-demand providers like Iasta and Procuri. But as I just said, the real power is their managed services where you can outsource entire categories and events. Under this model, provided your bid is for 100K or more, you can successfully complete an event with just 1-2 hours over 1-2 weeks! Furthermore, it does not cost you anything – the fees are paid by the vendor who is awarded the business! (I believe they also have a consulting model, where they will help you for fixed fee, but, unlike most vendors, you only have to pay if they save you money. How can they do it? Years of experience has taught them where considerable savings are, and where they aren’t. So if they don’t think you can save enough money on a category / event to make it worth your while, they’ll help you find one where you can save enough to make it worth your while.)

So although I would hesitate to recommend their solution for in-house purchases (and I still believe all high-value and strategic purchases should be managed by a core team in one center of excellence under a center-led purchasing model) as I believe those should be executed under a platform that covers the entire sourcing cycle (and not just the executable sourcing cycle), I would certainly not hesitate to recommend that you consider them for those categories that are not critical to your business (and when you get down to it, the vast majority of your purchases are not, despite what you might think – if ten suppliers can make a part, it’s not strategic – only those components that can only be provided by a handful (< 5) of vendors or those components that can be, and often are, in short supply are critical, and therefore need to be classified as strategic). After all, the best way to do strategic sourcing is to strategically outsource everything you do not have a core competency for and everything you just do not have time to strategic source in house.

So check out Sorcity and check back to see if I am successfully able to convince their white-paper writer to guest author a post on why a managed services platform may also be appropriate for certain high-spend or strategic purchases.

(Reverse) Auctions

Monday we defined a basic strategic sourcing process, indicated there were five critical process driven phases that can be greatly enhanced by software solutions, and indicated that we would spend one day discussing each of these technologies this week.  Monday we discussed spend management and spend analysis and yesterday we discussed RFX.  Today we are going to discuss reverse auctions.

Auctions are not new, with historical records indicating that auctions were held as far back as 500 BC in Babylon where women, sought after as brides, were commonly put up for sale.  They were also very common in the Roman empire.  Furthermore, English auctions, where a number of well-to-do ladies and gentlemen gathered in a parlor with their numbered paddles waiting to place bids on pre-determined lots have been occurring regularly for hundreds of years.

Furthermore, internet auctions are not new either – with Free Markets holding online auctions back in 1995.  However, online auctions have come a long way since the first market place offerings which closely mirrored their real world counterparts.

In addition to supporting a host of auction formats, such as sealed-bid, reserve price, fixed-price, Japanese, Brazilian, Vickrey, Dutch, and Yankee, auto-extend features such as last-bid time, and auto-termination features, such as minimum reserve price met, today’s auctions will allow you to analyze bids on more the just price.

Advanced auction platforms will allow you to define adjustments to take into account differences in a multitude of user-defined quality ratings such as waste, reliability, and on-time delivery and rank bids according to these adjusted quotes. This allows you to either award the business to the bidder with the overall best value relative to your defined adjustments and metrics or give suppliers better feedback if a decision optimization and final negotiation round is to follow.

However, even though auction technologies have been around for a decade, as with RFX, there is still room for innovation.  Specifically, I predict that the future leaders in auction technology will incorporate some form of decision optimization directly into the live event.  This will allow you to take best practices and total value management into account during the auction and guarantee that the identified awards not only respect all of your business rules but are optimal in that respect.  You will be able to define constraints, such as no more then 50% of the volume can come from any supplier and at least two suppliers must be selected to mitigate risk, and global value modifiers, such as a non-incumbent supplier comes with a one-time fixed supplier setup charge of $10,000 (amortized over the entire buy from the supplier), and be confident that the award takes these rules and costs into effect.

But don’t expect too many providers to have these capabilities in the near future.  As we will discuss at a later time, optimization is hard – very hard, and even today only a handful of vendors actually have real decision optimization capability in their non-real-time analytics offerings.  With the exception of CombineNet, which is attempting to claim ownership of the sourcing and logistics space (especially now that MindFlow, like many of its other former competitors, is gone), I know of only one other provider of e-Sourcing technologies working toward this capability.  I know of a few that have tried and failed and a few more that decided the potential reward was not worth the perceived risk.  However, if you have the skills to pull it off, when you consider how valuable this will be to a sourcing organization with a large spend and limited resources who could bring even more spend under management while automatically optimizing non-critical direct materials during an automated auction, I think the cost, effort, and overall reward is worth the risk.