Category Archives: Auctions

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.

Why You Should Not Build Your Own e-Sourcing System, Part III e-Negotiation

In Part I, where we noted that Mr. Smith was right in his recent post over on Spend Matters UK where he pleaded with those organizations, and particularly those organizations in the public sector, who thought they could build their own e-Sourcing system not to, we gave a host of reasons on why they should not because, like Mr. Smith said, they are

  • going to waste OUR money building it,
  • waste exorbitant amounts of money keeping the system up to date and compliant with ever-shifting legislation, and
  • only feed those dangerous delusions at best (and possibly create an epic disaster as 8 of the 11 greatest supply chain disasters of all time were caused by technology failures, and 6 as a result of software platform failures)!

But we know this isn’t enough to convince the smuggest and most deluded from considering the notion. So we are diving in and addressing some of the difficulties that will have be conquered, one primary module at a time, continuing with e-Negotiation, which encapsulates e-RFX and e-Auction.

An e-RFX system has the following key requirements:

  • Flexible Construction
  • Fine Grained Security & Auditing
  • User defined weighting factors for comparison

And an e-Auction system has the following key requirements:

  • Flexible Lotting
  • Configurable reverse auctions with multiple parameters
  • Real-time Distributed Communication with Fault Tolerance

Let’s start with the flexible construction requirement for RFX. Since there are dozens of vendors with decent e-RFX solutions on the market, one may fool oneself into thinking that this is easy. And while it is easier to build an e-RFX solution than just about any other Sourcing (or Supply Management) platform, if usability is a goal, it’s still not simple or straightforward. Qualification questionaries could contain a dozen sections with dozens of questions each. Advanced tabbing and pagination with dynamic expansion and compression depending upon answers and level of detail needed is an absolute must. Moreover, most supplier organizations will require input from multiple people to complete the RFX (sales, finance, production, etc.) and will need to assign parts, but not all, of the RFX to different individuals so fine-grained roles-based security will be required on the supplier side as well as the buyer side with organization, department, and user level settings and overrides.

Now let’s jump over to the flexible lotting requirement for e-Auctions. Sometimes a buyer wants to put a single product (such as laptops when an entire department is due for upgrades) out to bid, sometimes the buyer wants to put an entire category (such as office supplies) out to bid, and sometimes the buyer wants to bundle products and services (such as MRO parts and installation services). And sometimes the buyer wants to put all of these lots into a single multi-round auction. Capisce?

In addition, both platforms will require the ability to define user-defined weightings against each survey response and bid so that the buyer can compute a weighted score for each supplier or lot. And these won’t always be simple — especially if the buyer wants to weight a fuel surcharge based upon product weight and supplier region. That’s not a simple modifier, that’s a formula. And these formulas can get pretty complex in complex tenders created by a sophisticated buyer.

Moving back to the auctions, we also have the requirement that the auction must be customized each time against a host of parameters that will include, but not be limited to, bid floors and ceilings per item and lot, minimum decrements, automatic time extensions, minimum time between bids for a single supplier, and so on. Furthermore, all of this must be evaluated in a system that supports …

Real-time Distributed Communication with Fault Tolerance. In an e-Auction, multiple bids are coming in at the same time, multiple updates must be pushed out at the same time, and formulas and weightings must be calculated and updated in real time so each supplier sees their true relative rank, and not just their true relative bid. This might sound easy-peasy, but you have to remember that even the average CS graduate has trouble with programming for concurrency. (Remember, the doctor was an academic in his former life and knows this to be true. Most Universities care more about $$$ than knowledge conveyed, most untenured professors care more about publishing, as opposed to perishing, than teaching, and most tenured professors are worn out and just don’t care. As a result, as long as the program is able to read the test data and create the right output, in one case, that’s enough for a pass. It’s sad, but true.)

And while this is just a high level overview of the challenges, the hope is still that it is sufficient enough to convince you that development is not an easy task and not an idea that the average organization should remotely entertain.

Optimize, don’t Compromise!

Continuing on our theme of analysis and optimization, every e-Sourcing suite on the market will support your organization in its sourcing activities, but not every product will allow your organization to optimize it’s sourcing activities.

Optimization requires advanced sourcing capability, and advanced sourcing requires the ability to analyze data, not just collect and report on data.

This means, that at the very least, you will require:

  • true spend analysis,
  • true category analysis,
  • true cost-based bidding, and/or
  • true bid optimization.

Without at least one of these capabilities, you’ll never optimize your spend. So don’t even both to try without them.

Why Bidding Flexibility Is Important to e-Auction Success

Regardless of what you want to call it — expressive bidding, lotting, market baskets, informed sourcing, etc. — the ability to let a supplier bid the way they can give you the best price is very important to e-Auction success. If all you can support is simple auctions on an item by item basis, and quotes on an item by item basis, you are not going to get the best deal.

This is rather easily illustrated. For example, let’s say your business is clone computer assembly for mid-sized businesses who don’t want the Dell or HP premium. Let’s also say that you buy six different components for these computer assemblies: cases, power supplies, motherboards (with on-board everything to keep it simple), memory, hard drives, and cable packs.

If you are forcing a supplier into separate bids by item, and the level of detail they can quote is price per unit, shipping per unit, and extended warranty per unit, you’re probably going to end up with quotes looking like this:

Supplier 1 Supplier 2 Supplier 3
Component Unit Freight EW Unit Freight EW Unit Freight EW
Case 20 5 1 22 4 1 18 6 0
Power Supply 40 3 6 36 4 3 38 4 2
Motherboard 199 5 24 195 5 19 189 5 30
Paired Memory Pack 49 2 4 47 3 6 51 3 4
Hard Drive 78 4 12 74 3 8 81 4 7
Cable Pack 22 4 0 24 3 1 19 5 0
Total 49 2 4 305 12 30 37 11 0
Grand Total 450

Not bad for a clone server, but if you bid out the basket and allow the supplier to bid on just the components they want and do so as a bundle, you might find that you get this result:

Case Power
Supply
Mother-board Memory Hard
Drive
Cables Freight Warranty
S-1 B-1   19   38   20   8   5
S-1 B-2   45   71   5   8
S-2 B-1   20   33   6   2
S-2 B-2   195   14   5   10
S-3 B-1   45   72   5   9
S-3 B-2   185   14   7   30
Grand Total 414

An 8% savings by allowing a supplier to bundle bids according to their operational efficiencies!

Get it now?