In our last two posts, we discussed the RFP and how the simplified processes that are typically presented by most analyst firms, consultancies, and consultants miss the main point — you need to have a deep understanding of what you need before you can even think of drafting a good RFP, assuming the situation is appropriate in the first place. As per part 3, there are usually (much) better options for a given situation, but most Procurement departments aren’t aware of them. In fact, the only other option most Procurement departments know about is the e-Auction, which is usually not the right option.

Now, today we’re going to pick on Joël Collin-Demers again because his post on e-Auctions gets most of it right.

In his post he breaks new sourcing events down into three categories:

• no apples to apples comparison capability -> don’t auction
• strategic or mission-critical -> don’t auction
• clear specs and 3 or more willing suppliers -> don’t auction yet

And this is pretty close. The reality is that clear specs, apples-to-apples comparison, and 3-or more willing qualified suppliers is more than a don’t auction yet — it’s often a don’t auction, ever.

According to Joel, if you:

1. run an RFI to qualify suppliers as real potentials
2. run an RFP to get the full details and verify that the product/service and supplier will serve your needs and you’d be okay with awarding a bid
3. run an RFQ to get initial pricing, and then select a set of suppliers within, or close to, price tolerance …
4. you can then run an e-Auction to get the BAFO and find the real value.

But this isn’t always the case.

• even if you are fully transparent up front, the suppliers who participate won’t be super excited about it and the best suppliers won’t participate
• the suppliers who do participate will hold back significantly on their bids since they will expect to have to drop considerably during auctions, and you may end up cutting some before the auction because it looks like they won’t be within your price range
• a desperate supplier will cut too deep into its own margin to win, and that can put it in financial distress which will jeopardize your supply and negate the whole point of the event
• if a supplier cuts margin too much, they will inevitably cut quality, even if you tell them they don’t have to — that’s just how they see auctions

Auctions shouldn’t be used for anything you need an RFP to qualify a supplier, product, and/or service for. Period. Auctions should only be considered for that for which you don’t need an RFP. After all, nothing prevents you from doing a multi-round RFQ, with feedback between rounds, which will get you the BAFO that won’t jeopardize the product quality or jeopardize the supplier’s existence. In other words, the situation in which you can safely consider an auction is a lot smaller than Joël’s graphic seems to indicate.

Especially since repeat auctions on the same product or service, as we have written before, actually increases costs!

Follow Joël Collin-Demers over on Pure Procurement.