Category Archives: Best Practices
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.
Why You Should Download The New Spend Visibility Implementation Guide Today!
Last Wednesday, Sourcing Innovation released it’s new white paper on Spend Visibility: An Implementation Guide. Clocking in at over 130 pages, this is the first white-paper to be released that not only defines what spend analysis and spend visibility really is, but that also offers a step-by-step, vendor-free, implementation guide that demonstrates how an organization can achieve substantial year-over-year savings.
One could argue that you should download it today because:
- It’s chock-full of information that many spend analysis service providers don’t want you to know.
The information within could result in many service providers losing a good chunk of their business if you found out that many of the “challenging” analyses they do for the organization (and charge thousands for) are, in fact, quick and easy for any analyst to do herself with the right package in a few hours. - It’s already been called the The Definitive Book on Next Level Performance (Spend Matters, December 8, 2011)
by the author of the only independent (non-vendor) blog that’s been around longer than Sourcing Innovation in the space - It’s 100% FREE.
No pay wall, no registration wall, and not even a cookie crumb is tracked! - It saw hundreds of downloads in its first week.
Many sponsored white papers, even by leading analysts, top out at just a few hundred downloads over their lifetime behind a registration wall!
but the doctor is not going to make any of these arguments. Today, he’s going to make only one argument as to why you should download Spend Visibility: An Implementation Guide if you haven’t already. Simply put:
- This White-Paper Could Lead To 100 Million Plus in Savings.
Spend Analysis is one of only two sourcing technologies that has been repeatedly found to generate double-digit percentage savings year after year. (Typically 11%.) If a supply management department is sourcing 1 Billion dollars annually, this says it has a cost-reduction opportunity of approximately 110 Million before it. An opportunity that will only be realized with a proper spend analysis and visibility effort — which goes well beyond bringing in an automated spend analysis service that’s not going to go beyond your Top N categories, commodities, and suppliers.
A typical supply management organization knows about 70% to 80% of its Top N categories, commodities, and suppliers already, focusses 80% of its effort on these categories, commodities, and suppliers and, as a result, typically only has, at best, 20% of its savings opportunity on these Top N categories, commodities, and suppliers. The biggest savings are often in the “Next N” categories which have not been strategically analyzed and sourced as the average organization often doesn’t know what they are or where the biggest opportunity lies. For example, a manufacturing centric organization might not realize just how much is spent on temporary labor in preparing for holiday seasons around the globe to get shipments out on time and ignore the spend which could be in the tens of millions. Unmanaged and unleveraged, this spend often contains a 30%, or more, savings opportunity the first time it is strategically sourced. If the organization was spending 50 Million on temp labor, that could be an instant 15 Million savings opportunity.
Not only does this white paper cover the full ten step process required to do proper spend analysis and visibility, but also provides numerous examples of the types of analyses an organization needs to do to find all of the different opportunities available to it — and realize the year-over-year savings, which average at 11%, that are available to it. To the best of the authors’ knowledge, no other guide has ever done that.
So download Spend Visibility: An Implementation Guide today. The time and effort you put into learning the knowledge contained within will pay off one hundredfold, if not one thousandfold, as you apply the knowledge within.
Do You Know How Much Your Trash Costs You?
An average organization is filled with cost-savings opportunities. One big opportunity is cleaning services — and the savings go beyond manpower savings by identifying those third parties charging above market average rates for unskilled janitorial services and replacing them with third parties charging market average rates.
For example, trash removal often represents a considerable savings opportunity in a large organization, and one that can be identified and executed in a matter of hours. Typically, the cost of emptying your dumpster out back is a function of two factors:
- Hauling Fee
The cost to obtain a dumpster and to have it removed; driven by the frequency of the pickups. - Tipping Fee
The cost to ‘tip” the dumpster into a landfill. Driven by the local landfill costs.
Assuming the organization does not change the amount of trash it is generating, it can look at the size of the dumpster it uses. If it has a bunch of small retail locations with mostly non-food trash, it may be able to reduce its costs by increasing the size of the dumpster it uses and reducing the number of hauls.
For example, let’s assume the organization has a 2 cubic yard dumpster and that the hauling fee is fixed at X for dumpsters between 1 and 8 cubic feet. If the tipping fee for a 2 cubic yard dumpster is X and this is emptied every week, the total cost for a month is going to be:
Two Cubic Yard Picked Up Every Week:
| Monthly Pickups | 4 | once per week |
| Tipping Costs | X | X for 2 cubic yards |
| Hauling Costs | X | fixed |
| Total | 8X | 4 * (X + X) |
If the organization replaces the 2 cubic yard dumpster with a 4 cubic yard dumpster, while the amount paid to tip will stay the same per cubic yard, the hauling fee will effectively be halved (as it does not increase for a 4 cubic yard dumpster).
Four Cubic Yard Picked Up Every Other Week:
| Monthly Pickups | 2 | every other week |
| Tipping Costs | 2X | twice the 2 cubic yard |
| Hauling Costs | X | no change |
| Total | 6X | 2 * (2X + X) |
| SAVINGS | 25% |
This is just one of the many savings opportunities detailed in Spend Visibility: An Implementation Guide — the newly released white-paper from Sourcing Innovation that is, to the best of our knowledge, the first white-paper that not only defines what spend analysis and spend visibility really is, but that also offers a step-by-step, vendor-free, implementation guide that demonstrates how an organization can achieve substantial year-over-year savings!
Download your FREE – No Registration Required – copy of Spend Visibility: An Implementation Guide, which is already being called “The Definitive Book on Next Level Performance” (Spend Matters), and find out what other, significantly larger, savings opportunities await you!