Originally posted on on the e-Sourcing Forum [WayBackMachine] in 2007

At EyeForProcurement’s recent Technology for Procurement Forum held in San Francisco, Art Laszlo, Director of Strategic Sourcing for Brunswick Corporation, gave a presenation on Effective bidding, common pitfalls, and proper approaches to e-auctions. This was a good presentation, and one who’s content you know was worth it’s weight at least in silver since Brunswick Corporation was featured as one of the case studies in Aberdeen’s recent Advanced Sourcing and Negotiation Benchmark Report.

In his presentation, Art covered the benefits of auctions, strategies to avoid the pitfalls, ethics, and the benefits to suppliesr. Nothing you haven’t heard before if you’re a regular reader of eSourcing Forum or Sourcing Innovation, but it did a great job of tying everything together. In brief, here are the highlights of Art’s presentation:

Benefits to Buyers

• removes the human factor from price negotiation
  not all buyers are good negotiators, and, by definition, only
  a handful of buyers can be selected as your best negotiators
• higher average cost reduction
  especially when compared to a basic 3-bids-and-a-buy RFx process
• increased efficiency and price transparency
  what used to take months can now be done in a couple of weeks
• assists in the identification of the “best total cost” supplier
  as you can also track “bids” on delivery terms and conditions
• a foundation for supplier relationship development
  not only are they open and fair (done right and ethically), but
  they require a great deal of communication up front and post auction
  (including to losing suppliers) to get right

Avoiding the Pitfalls

• select items that exist in a naturally competitive environment
  if you only have a couple of sources, go for supplier development instead
• select an item where the contract is ending
  bidders don’t want to win business for one or two years down the road; but more importantly, make sure you have no (other) contracts in place before advertising an auction
• if you invite new suppliers, have the ability to switch
  if you have a long-term contract with an existing supplier, or the costs with switching are too high, you don’t have the right conditions for an auction
• clear, complete, and well defined specifications
  since you need to be able to award the business to the winner
• identification of relevant non-price factors
  this could disqualify some suppliers and indicate delivery terms that you need to track or have suppliers bid on
• intend to award the business!
  not only is it unethical to hold an auction unless you intend to award the business, but if you get a reputation for not following through, you’ll have no suppliers bid next time

Ethics

• clearly communicate your intentions, the process, and your
  ultimate goal
  if you just need to reduce cost, and you’re honest, suppliers will respect that
• do not use auctions for benchmarking or price discovery
  suppliers don’t want to be be used solely as a tool to beat down an incumbent
• award must be to a supplier in the auction
  it’s really unethical to award to a supplier who didn’t bid but then struck a deal after the auction closed
• set realistic starting prices
  if raw material prices haven’t dropped, asking for a starting price that’s 15% lower is not reasonable
• allow adequate time to train and support the suppliers
  especially right before the auction
• do not allow for after-the-fact negotiations
  in fact, if a supplier tries to negotiate after the fact, they should immediately be disqualified
• properly qualify all suppliers pre-auction
  you must be able to award to all winning suppliers
• contact ALL participants after the auction ends
  especially the losing ones – taking just 5 to 10 minutes to explain why they lost goes a long way – and might help them shape up to provide you better bids and service the next time they are invited to a bid

Supplier Benefits

• it’s a fair and competitive bidding environment
  everyone has an equal chance of winning
• more efficient process
  they’ll have their answer quickly, and no paper to fuss with
• increased business opportunities
  they could have more opportunities than they would otherwise
• collaborative bidding environment
  they can ask questions, and get answers
• even if they lose, they still get good information
  they can see what the market is bidding, and find out why they
  didn’t win (if you follow the ethics above)
• open processes require trust
  even if they lose, they can get the information they need to
  potentially win your business in the future

Again, even though most of this should not be new to you, it’s a great all-inclusive high-level overview on how to succeed in an e-Auction!