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.

Can Your Platform Handle Direct? Take the Direct Procurement Challenge!

Or at least attend the upcoming ISM webinar, sponsored by Pool4Tool and featuring both the doctor and the prophet who will discuss how

  • the direct procurement lifecycle is different from the classic indirect procurement lifecycle, which was cost-centric perfect for indirect
  • key requirements of each phase of the direct procurement lifecycle …
  • … and key requirements indirect procurement platforms lack
  • key technological capabilities required to truly manage direct procurement
  • 15 ways your platform probably isn’t up to snuff for direct, if it even address the issue at all — and —
  • the consequences of using the wrong platform for procurement management!

The fact of the matter is that you wouldn’t use a Chihuahua to herd sheep, so why are you trying to use a mouse to herd cats (which is mission improbable anyway)? (This is exactly what you are doing if you try to use an indirect sourcing platform for direct sourcing.)

Join our webinar on June 28, 2016 @ 11:30 AM PT, 14:30 PM ET, and 19:30 PM BST (UK Time) and find out why your procurement platform may not be doing your Procurement organization justice.

Don’t think you need a better platform? Remember that while the most blood an indirect procurement manager sourcing office supplies and temp labour has ever seen is the blood on his finger from a paper cut from signing the paper contract, people have been seriously injured and died (in the dozens) from poor judgement in direct sourcing. And if you don’t believe me, check out the many examples cited in the new white-paper on The Direct Material Procurement Challenge: An Indirect Tool for Direct Procurement is Mission Improbable — Direct Procurement Requires Different Capabilities by the doctor! (Just another reason to join our webinar on The Direct Materials Procurement Challenge. Registration is free and can be done now by following the link.)

As this is an ISM webinar, 1 CEH Certificate will be awarded to each attendee.

Free webinar. Free credit hour. Free white paper. How good does it get?

Don’t Let Tail Spend Take You For a Tail-Spin!

Download Sourcing Innovation’s new white paper on An Introduction to Tail Spend — and why you need a technology-based solution (registration required) today (sponsored by Claritum) and find out how tail spend could be keeping an additional 3% of revenue from hitting the bottom line (and, depending on your industry, and its margins, reducing your profit potential by up to 50%).

The first thing that the paper does is define just what tail-spend is. It’s more than just the “tactical” (or “nuisance”) spend in the lower-left quadrant of the famous 2*2 Krajlic matrix, which describes the traditional strategy of “purchasing management” to manage non-critical abundant supply that can be sourced locally in a de-centralized manner for maximum efficiency. And it’s less than any transaction less than $200,000 which is how Accenture describes tail spend.

Tail spend is essentially that spend that shouldn’t be put through a rigorous sourcing project, because the ROI that would be obtained is not enough to warrant the effort. If the ROI is not at least 3x, the spend just needs to be appropriately managed. Maybe that’s a low bid auction. Maybe it’s the cheapest product or service in a vetted catalog. Maybe it’s the preferred item from a catalog (or even strategic) supplier to increase total spend and negotiate additional volume based discounts.

It’s not leaving it up to whomever to do whatever whenever with whomever they like. When tail spend is not managed, the following can happen:

  • rebates and discounts can be lost
    when contracted volumes are not met
  • process costs can increase
    as tail spend invoices, often submitted through fax and e-mail, continue to increaseas tail spend will inevitably expand over time (and it will increase with no accompanying or referenced purchase order)
  • liability risk increases
    when service vendors without appropriate insurance are contracted
  • reputational risk increases
    when junior buyers buy from a supplier with a poor CSR record
  • supply risk increase
    when junior buyers buy from unstable suppliers
  • non-compliance risk increases
    when mandated MWVDBE vendors or fair-trade vendors are bypassed
  • (personnel) fraud risk increases
    as buyers can put charges on p-Cards with little or no documentation (and submit the same receipt 3 times over 6 months)

In other words, tail spend needs to be managed, but it can’t be managed until you understand what it is and how it should be dealt with. This is where Sourcing Innovation’s new paper on An Introduction to Tail Spend — and why you need a technology-based solution (registration required) today (sponsored by Claritum) comes in. It will help you understand what tail spend is, why it is important, how you can manage it, and the value that can be extracted from good tail spend management.

What’s the Real Reason for the Driver Shortage?

SI has regularly blogged about the driver shortage and the dire predictions that the shortage in the US alone could top 100,000 drivers in a few years. (See this classic post on how new estimates put the driver shortage at 240K drivers, for example.)

A lot of reasons have been given for this including, but not limited to:

  • low wages
    truck drivers make an average wage over 4K less than per capita income and 13K less than median household income
  • poor working conditions
    truck drivers often have to be behind the wheel up to 14 hours a day (sometimes sitting in traffic or in lines to load/unload for over half of that), six days a week, and they don’t often get to eat well
  • poor healthcare
    as they have the worst plans possible, can’t keep regular appointments, and can’t always see a doctor on the road
  • danger
    not only do truck drivers often have to sleep in their cabs in unsafe conditions, risk getting robbed on the road, but 12% of all work-related deaths in the US are from truck drivers in auto accidents

But is the real reason that we have a driver shortage perception and stereotypes? When you get down to it, almost 95% of truck drivers are men. Even though the stereotype of the driver as a brawny, macho man dressed in a lumberjack shirt has fallen by the wayside, driving is still very much a man’s world. And even if the majority of drivers are not perpetuating the man’s world stereotype, they certainly aren’t doing anything to counter it. Consider this article over on the BBC from late fall that asked Why Don’t Women Become Truckers?

All over the world it’s the same – a woman driving a lorry gets funny looks and has to listen to unfunny jokes.

How are we ever going to solve the driver shortage if 51% of the population doesn’t want the job?

In other words, the real reason for the driver shortage may be the industry’s own fault.

Tard Wishes SI Happy Birthday


Happy Birthday. You Got Old.
 

That’s right. SI turned 10 on the 9th of June (which was two days ago). Ten long years. Many blogs have come and gone (and, in fact, only SI and SM remain) but SI shows no sign of slowing down. Education is needed as much today as it was 10 years ago, and SI will continue to deliver.

P.S. That’s high praise from Tard. At least we didn’t get:


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