Category Archives: Auctions

#9 e-Auction

Yesterday saw the release of SI’s new sponsored white-paper on the “Top 10 Technologies for Supply Management Savings Today”. Sponsored by BravoSolution, this new whitepaper introduces the top 10 technologies that can help a company realize the goldmine of untapped savings opportunities it is sitting on. Properly employed, these technologies could help an organization tap cost reduction and savings opportunities that could collectively add up to 30%, or more, of spend across major direct and indirect categories.

e-Auction technology, which stands for electronic reverse auction technology, is typically the second entry point for a company moving from a paper-based sourcing process to a modern technology-enabled supply management solution and an organization’s second stop to supply management savings.

The savings from e-Auction technology are essentially the same direct savings, from goods and services cost reductions, and indirect savings, from process efficiency and value generated from supply base expansion, found in RFX technology, with the major difference being the speed at which the event can be conducted.

With electronic auctions, once the sourcing manager creates the specifications and sets up the auction, including the weighting and award rules, the process drives itself. The suppliers sign on at the appropriate time and place their bids. When a time-limit or bid floor is reached, the auction ends and the award is made.


The major advantages of e-Auctions are the ability to define precise lot requirements and acceptable bid ranges, which can ensure cost reductions meet a minimal threshold; the ability to define different auction types, which can drive more competitive behaviour in the supply base if properly selected; and the extreme efficiency that can allow a large number of non-strategic or low-value categories to be brought under management.

Properly applied on the right categories at the right time, e-Auctions have been generating savings for over a decade. Back in 2003, in one of the first significant studies on e-Auctions, CAPS Research found that direct cost reductions usually averaged between 10% and 20%, that cycle time reductions could be as much as 40%, and that there could be a “power shift” from strong suppliers to weaker buyers not previously attainable. One company realized 165 Million of savings on 912 Million of spend, a major service provider estimated average savings of 20% on 30 Billion of reverse auctions, and a recent report from the IBM Centre is estimating that the Federal Government could save 8.9 Billion annually through reverse auctions alone.

And this technology is only #9 on the list of the Top 10 Technologies for Supply Management Savings Today. Imagine what could be saved with the top technology, or even the third best technology. Or better yet, instead of imagining, download Top 10 Technologies for Supply Management Savings Today and find out! (Registration is required for this one but the doctor believes it’s worth it!)

Public Sector Reverse Auctions: 8.9 Billion in Savings in US Federal Government Spending Alone!

As the astute reader may have guessed from our last post, the doctor is not a big fan of reverse auctions in the private sector. In many cases, he cringes at their mention — because the savings are typically one-time, short-lived, and come with a hefty virtual price tag that is sometimes greater than the initial savings (which doesn’t materialize for months or years to come).

But reverse auctions have their niche, and that niche is the public sector. The unique (and typically illogical) spending constraints often make reverse auctions a perfect fit, and where the public sector is concerned, anything that can reign in rampant government spending gets a go ahead in the doctor‘s book. As per our last post on reverse auctions where we noted that old is new, but one-time is still just one-time, while the relative lack of spending constraints in the private sector will result in the realization of most (if not all) of the benefits of reverse auctions in the initial use, the public sector will realize the most significant competition and price benefits again and again. (It’s sad that this is the case, but given how slow policy and process changes in government agencies, we must work with what we have.)

And in the public sector, where the utter lack of anything resembling best practice supply management process and technology is often the norm, these benefits, at least initially, can be almost as significant as the benefits decision optimization brings leading edge private companies. As per Wyld’s results, which were based on an in-depth examination of reverse auctioning at the Department of State:

  • there is a proven savings factor of 11.9%
    (at the Department of State, which reverse auctioned over 613 M of spend over 4 years)
  • which could be applied to 75 Billion of annual spending that is appropriate for auction-based procurements
  • and this yields an annual expected savings of 8.9 Billion

Furthermore, this savings potential is fairly consistent in the implementation of reverse auctions around the globe. South Korea expects to save about 10.5% annually. The UK Office of Government Commerce sees similar savings opportunities on their addressable spend. And a recent study from researchers affiliated with the United Nations that meta-analyzed reverse auctions across four different government entities in the US and Europe reported an average savings rate of 12.1%.

And these savings will materialize again and again. Public sector organizations will continue to see:

  • downward prices
    Not only is the public sector guaranteed demand, but it is demand that is typically guaranteed to increase over time in most categories and markets. As a result, supplier organizations will continually vie to profitably produce those products cheaper in an effort to win those lucrative government contracts which they know will be coming around again.
  • real-time market pricing
    Pricing will always be up to date each time the event is run.
  • time savings
    Since potential suppliers come and go more frequently, and since contracts continually change, the time savings are significant as much of the work required to implement the changes can be automated.
  • increased number of suppliers
    Every year, new suppliers will throw their hat into the ring for government contracts as they reach a size where they feel they can effectively compete.
  • sustainable cost savings
    Since government organizations must continually put categories out to bid, since past performance typically can’t be used to tip the scales one way or another, and since long term contracts can’t be cut on future offers, all savings must be measured against average market price. Since an auction will generate the best market price, the public sector government organization will save every time.

In short, if your organization is a public sector procurement organization, and it does not have an e-Auction platform, then your organization should get one today. The cost is minimal compared to the savings, accountability, and accolades that will materialize upon its proper utilization.

Reverse Auctions: Old Is New, But One-Time is Still Just One-Time!

The IBM Center for The Business of Government’s recent report by David C. Wyld (the Director of the Strategic e-Commerce/e-Government Initiative at Southeastern Louisiana University) on “Reverse Auctioning: Saving Money and Increasing Transparency” is a great read for government organizations and a good read for Supply Management organizations that are on the back-end of the supply management innovation curve, as long as these organizations don’t fall for some of the claims that are hyped beyond reality (with respect to the private sector). While a private sector organization will generally see all of the following benefits the first time they use reverse auctions:

  • downward prices
  • increased competition
  • real-time market pricing
  • process efficiencies
  • time savings
  • increased number of suppliers
  • sustainable cost savings

These are the benefits a private-sector organization will generally see the second time it runs a reverse auction:

  • real-time market pricing

That’s right. The only additional benefit an average private-sector organization will see continue to see the second time it runs a reverse auction on a category is real-time market pricing. Why? Let’s take the suggested benefits one-by-one.

  • downward prices
    Generally speaking, the first time suppliers are invited to take part in a transparent winner-takes-the-contract auction in a market that favours the buyer, the suppliers will compete so aggressively that they will even jeopardize profit margins. As a result, the prices they offer will generally be unsustainable in the long term. That is why auctions started to fall out of favour with market leaders in the mid-noughts. While the first auctions returned amazing results, the subsequent increase in raw material costs as demand rose resulted in their initial bids being unsustainable. Thus, the suppliers had to raise prices just to stay in business (and as soon as the power shifted back to them, the suppliers increased their prices substantially to make up for the loss).
  • increased competition
    Generally speaking, suppliers get so competitive the first time with their pricing that there is little, if any room, left to increase competitiveness the second time around.
  • process efficiencies
    Once you have shifted to the reverse auction model, you have already gained the process efficiencies you’re going to gain. Reverse auctions don’t get more efficient over time.
  • time savings
    Since reverse auctions don’t really get more efficient over time, once you have switched to the model, there are no more time savings to be gained.
  • Increased number of suppliers
    While electronic reverse auctions do allow more suppliers to be invited to the table without too much extra work, if the auction is opened up, all suppliers that want your business are going to jump in. And, when they fail to win your business, some of them will even back out the next time around.
  • Sustainable Cost Savings
    Simply ensuring that the organization gets real-time market pricing does not lead to savings. In fact, if raw material prices or demand is going up, it can lead to significant losses. The way to sustained savings in the private sector is through negotiating long term cost-reductions, process-improvements, and innovation commitments that will find additional ways to drive down costs once the fat is taken out of the supplier margin. This often requires a decision optimization, PLM, or SPM solution to find these new savings opportunities.

In short, properly used, auctions can be good for the private sector, but the greatness will only bee seen in the public sector where, on the other hand, organizations will generally continue to see the significant benefits each time a reverse auction is run on a category. Our next post will address why.

The Control Provided by e-Sourcing is Only an Illusion – YOU HAVE NO CONTROL!

A recent post on one of the lesser known sourcing blogs indicated that, due to the lack of economic upturn in most of the developed world, maybe now is the time to finally try reverse auctions. The rationale, quotes from a CEO and his team that watched their first reverse auction that indicated that it was simple, powerful, easy to follow, effective, and, most importantly, if you read between the lines, gave them an illusion of control over the process and the results.

This, and some of the messaging coming from a few of the smaller e-Sourcing providers, is scaring me. I fear that adopters may believe that adopting this technology may give them some control. Well, as this recent article over on Chief Executive on why you should embrace tomorrow’s strategies clearly points out, you have NO control! You can manage the process, but you have no control over the outcomes. Why? For starters

  • Cartels, cabals, speculators, organized crime, and entire countries are constantly manipulating commodity prices.
    Case in point: China possesses over 90% of many of the rare earth metals used in many technologies (smart phones, batteries, etc.) and when they recently reduced exports, a steep price increase resulted that triggered a costly disruption of delivery of the precious commodities to global business.
  • Disasters are on the rise.
    Industrial, agricultural, and political disasters are increasing in frequency and wiping out production in entire regions. For example, the nuclear meltdown in Japan affected most businesses that rely on a Japanese supplier.
  • Global currency fluctuations, unforeseen credit crises, and economic stagnation are increasingly severe and unpredictably enduring.
    The extreme fluidity in the valuation of imported and exported goods, services, and components is as equally difficult to predict and manage.

No e-RFX or Auction is going to help you regain control over these economic nightmares that you have to deal with on a daily basis. And any provider that’s trying to sell you 1999 e-Sourcing technology to deal with the current economic stagnation doesn’t have a clue. There’s only one way you can even hope to adapt to the constantly changing reality, and that is through the adoption of a supply management platform with advanced data analytics capability. You have to constantly monitor, react, adapt, predict, plan for what-if, monitor, react, and adapt again. This requires extensive data acquisition, mapping, transformation, and analysis that only a real analytics solution, with advanced (spend) analysis, optimization, simulation, and reporting is going to provide. Don’t get fooled. All auction platforms give you in this day in age is a false sense of security. Sometimes an auction is the right way to go, but, most of the time, an auction (on its own), is not the answer.

To Maximize Value, Don’t Overlook Tail Spend

A recent article in the Sourcing Interests Group Newsletter on “understanding tail-spend management” noted that while ROI for tail spend categories will generally be lower than for core categories, those companies that keep their eye on the efficiency/effectiveness equation and approach tail-spend intelligently can still find significant savings that make the effort worth while. So how does an organization properly approach tail spend, which:

  • rarely includes direct materials
  • contains a disproportionately high percentage of spend from the furthest-flung subsidiaries
  • contains suppliers that no one in procurement has heard of
  • contains large percentages of non-compliance and maverick spend

Intelligently. And iteratively. Data must constantly be reviewed in the light of changing business requirements to determine the best course of action using the following process:

  1. Spend Analysis
    Focus in on the tail-spend data and figure out what is being bought, from whom, where, and for how much compared to market value.
  2. Filtering
    Focus on commodities that can be reclassified into a category that will have enough spend to be worthwhile.
  3. Sourcing Strategy
    Once the category with the biggest opportunity has been identified, determine the right sourcing approach. If a sourcing project is the right approach, accelerate it with standardized templates, RFX, and/or auctions.
  4. Spot Buy
    If the right strategy is to spot-buy in a weak market, then aggregate demand across the organization and spot-buy through e-RFX or automated auctions.
  5. P2P
    And, regardless of the right sourcing strategy, drive as much spend onto technology platforms, like P-cards, so that it can be tracked and analyzed.

And, most importantly,

  • use procurement technology
  • simplify processes and increase controls
  • establish resources and manage performance