Daily Archives: June 14, 2006

(Reverse) Auctions

Monday we defined a basic strategic sourcing process, indicated there were five critical process driven phases that can be greatly enhanced by software solutions, and indicated that we would spend one day discussing each of these technologies this week.  Monday we discussed spend management and spend analysis and yesterday we discussed RFX.  Today we are going to discuss reverse auctions.

Auctions are not new, with historical records indicating that auctions were held as far back as 500 BC in Babylon where women, sought after as brides, were commonly put up for sale.  They were also very common in the Roman empire.  Furthermore, English auctions, where a number of well-to-do ladies and gentlemen gathered in a parlor with their numbered paddles waiting to place bids on pre-determined lots have been occurring regularly for hundreds of years.

Furthermore, internet auctions are not new either – with Free Markets holding online auctions back in 1995.  However, online auctions have come a long way since the first market place offerings which closely mirrored their real world counterparts.

In addition to supporting a host of auction formats, such as sealed-bid, reserve price, fixed-price, Japanese, Brazilian, Vickrey, Dutch, and Yankee, auto-extend features such as last-bid time, and auto-termination features, such as minimum reserve price met, today’s auctions will allow you to analyze bids on more the just price.

Advanced auction platforms will allow you to define adjustments to take into account differences in a multitude of user-defined quality ratings such as waste, reliability, and on-time delivery and rank bids according to these adjusted quotes. This allows you to either award the business to the bidder with the overall best value relative to your defined adjustments and metrics or give suppliers better feedback if a decision optimization and final negotiation round is to follow.

However, even though auction technologies have been around for a decade, as with RFX, there is still room for innovation.  Specifically, I predict that the future leaders in auction technology will incorporate some form of decision optimization directly into the live event.  This will allow you to take best practices and total value management into account during the auction and guarantee that the identified awards not only respect all of your business rules but are optimal in that respect.  You will be able to define constraints, such as no more then 50% of the volume can come from any supplier and at least two suppliers must be selected to mitigate risk, and global value modifiers, such as a non-incumbent supplier comes with a one-time fixed supplier setup charge of $10,000 (amortized over the entire buy from the supplier), and be confident that the award takes these rules and costs into effect.

But don’t expect too many providers to have these capabilities in the near future.  As we will discuss at a later time, optimization is hard – very hard, and even today only a handful of vendors actually have real decision optimization capability in their non-real-time analytics offerings.  With the exception of CombineNet, which is attempting to claim ownership of the sourcing and logistics space (especially now that MindFlow, like many of its other former competitors, is gone), I know of only one other provider of e-Sourcing technologies working toward this capability.  I know of a few that have tried and failed and a few more that decided the potential reward was not worth the perceived risk.  However, if you have the skills to pull it off, when you consider how valuable this will be to a sourcing organization with a large spend and limited resources who could bring even more spend under management while automatically optimizing non-critical direct materials during an automated auction, I think the cost, effort, and overall reward is worth the risk.