Category Archives: Auctions

Bravo to CPO Agenda for Pointing Out That Charging Suppliers to Bid is a Really Bad Idea!

As I’ve told everyone who has ever asked, charging suppliers to bid is a really bad idea. Not only does it generate ill-will, but as this recent article over on the CPO Agenda that gave “tips for understanding why charging suppliers to tender is a bad idea” noted, it could even be illegal. But let’s take the tips one-by-one because it seems that this practice, which started rearing its ugly head at the start of the recession, is still trying to push through.

  • It is Counter-Productive
    It reduces the expressions of interest from time-wasters and quality suppliers alike. This is what goes through the head of a serious bidder with a quality product: “I know my product is quality, and so do my happy customers, so why should I pay $1,000 just for the opportunity to submit a bid? I’m not even guaranteed my product will be evaluated. I’m going to bid on these four other RFxs instead.” So, what you’ll end up with is a set of suppliers who are desparate for your business. But why are they desperate? Maybe their sales team can’t sell worth a damn, or, maybe (and the doctor leans this way) their products just aren’t as good as their competitors, or if they are, they are not able to produce them as cost effectively. Do you really want inferior products or unnecessary premiums for quality?
  • Suppliers with No-Pay-To-Play Policies are Out
    Not only will you likely knock out most of the quality suppliers in your potential supply base who, while quite willing to bear the costs of providing you with product samples, etc, are not willing to pay just to bid, but you will definitely knock out any supplier with a no-pay-to-play policy that prohibits them from bidding on any contract that requires a bid fee. These could be the best suppliers in the world.
  • There’s no Rationale for it
    The logic is that it takes time to collect, verify, and analyze a bid, and while this is true, with modern e-RFx / e-Auction software, you can collect, verify the completeness of, and compare a bid to a benchmark in less than a second. You will likely only need to analyze the Top 5, accoring to your weighted metric, in detail at the end of the day. And, since you can now buy unlimited use of these systems for less than what a single project used to cost, it doesn’t cost any more to collect fifteen bids than five bids.
  • It is Unethical
    There is way too much opportunity for corruption or the perception of favouritism. (In simple terms, you are sending this message: We value suppliers who bribe us for our business.) Plus, there is always a chance that this restriction could be illegal, in breach of fair competitive practices, or public procurement law. Oops! Can you say “class action lawsuit”?
  • It Says Your Company Is An Ass
    Okay, so the original article said it sends a strong message to the supply base you need to connect with that you are actually uncooperative and uninterested in building a relationship that will benefit both parties, but this sums it up nicely. Unless your organization has a monopoly, and can get away with being a self-centered smug corporate ass, just don’t do it.

Will Your e-Auction Be A Success? Or Will You End Up in Court?

 

As an April Fool’s joke, SupplyManagement.com ran a piece about how a ‘court battle looms over e-auction “error”‘ which discussed a fictional case in the UK High Court as a result of legal proceedings initiated by a Chinese business in an attempt to hold a supplier to a price submitted in an e-auction. According to the article, one independent consultant William Sommers (represented by the UK law firm Jester & Prank), said he was participating in an e-auction for project management services while working at home where he left his iPad alone for a few moments to answer the door. He claims that during that time his daughter grabbed the iPad (because she loves a bit of Angry Birds) and must have pressed something to place a bid on his behalf as he returned to the iPad to find a bid he couldn’t change. As a result, to honour the bid he would have had to offer his services for “almost nothing” for a three-month project and argues that the supplier, Hohhot Axle Industries, is being unreasonable in trying to hold him to an offer that was a “genuine mistake”.

While this article was a prank, the issue it discusses is all too real. As pointed out in this recent piece on ‘a genuine bargain or a genuine mistake’, (poorly designed) e-auction software makes it very easy for buyers to submit incorrect bids and, even worse, correct bids that the supplier might decide, after the heat of the auction is over, that it does not want to honour. What do you do when its time to sign the contract, after you’ve informed all of the other suppliers that they lost and won’t be getting your business, and the supplier tries to back out? Especially if you need the goods or services quickly?

Chances are you panic and pay more because not only were the other bids higher, but when you desperately have to scramble to find product quickly, suppliers will know they have the upper hand and won’t be as competitive as when they (believed) they had to compete for your business. You’re taking a loss. But can you recover it in court?

As the above article indicates, if one party makes an error that the other party should know is a genuine error, the offer, even if it is an implied contract, can be rendered void by the courts. In fact, if the court believes that the details or circumstances of the offer from one party are such that the other party should know that a genuine error has been made, or the council for the party can argue that the other party should have known that a genuine error has been made, that is enough to void an offer.

So what can you do to prevent this from happening? Take lots of precautions.

  1. Describe the auction process in detail.
    Describe end-to-end how the event is going to play out from the initial invitation, through the pre-event data collection and supplier qualification, to the actual auction and the final contract award. There should be no unknowns in the supplier’s mind.
  2. Define the rules and force a bidder to accept the rules.
    Describe the rules for participation, the process for bidding, and the terms and conditions associated with the contract award up-front and force the supplier to accept all of the rules, processes, and terms and conditions before they can participate in the event.
  3. Create a secure account for each individual authorized to use the system and force them to accept full responsibility for the account.
    Force each representative to assert that this is their account, they take full responsibility for it, no one else will be allowed to use it, and they take full responsibility for all offers made through the account.
  4. Use software with controls and make sure you use the controls.
    Not only should you force confirmations on bids to prevent “genuine mistakes”, but you should also put limits on how much lower a bid can be with respect to the current lowest bid (to minimize errors as a bid should not drop from 10,000 to 100, which would indicate either a decimal point error or a misunderstanding as to lot size) as well as an absolute floor that defines the minimum acceptable bid (as you should not accept a bid that you know is lower than the theoretical lowest cost based on your cost model and the maximum efficiency that is achievable).

While this may not be enough to guarantee that 100% of bids will have to be honoured, as you cannot always predict the results of a court case if an argument were to go to court, it certainly puts the odds in your favour and minimizes the chances of a supplier making a bid that the supplier would be uncomfortable in honouring (especially since you’d have a stronger case if it went to court).

 

#9 e-Auction

Yesterday saw the release of SI’s new sponsored white-paper on the “Top 10 Technologies for Supply Management Savings Today”. Sponsored by BravoSolution, this new whitepaper introduces the top 10 technologies that can help a company realize the goldmine of untapped savings opportunities it is sitting on. Properly employed, these technologies could help an organization tap cost reduction and savings opportunities that could collectively add up to 30%, or more, of spend across major direct and indirect categories.

e-Auction technology, which stands for electronic reverse auction technology, is typically the second entry point for a company moving from a paper-based sourcing process to a modern technology-enabled supply management solution and an organization’s second stop to supply management savings.

The savings from e-Auction technology are essentially the same direct savings, from goods and services cost reductions, and indirect savings, from process efficiency and value generated from supply base expansion, found in RFX technology, with the major difference being the speed at which the event can be conducted.

With electronic auctions, once the sourcing manager creates the specifications and sets up the auction, including the weighting and award rules, the process drives itself. The suppliers sign on at the appropriate time and place their bids. When a time-limit or bid floor is reached, the auction ends and the award is made.


The major advantages of e-Auctions are the ability to define precise lot requirements and acceptable bid ranges, which can ensure cost reductions meet a minimal threshold; the ability to define different auction types, which can drive more competitive behaviour in the supply base if properly selected; and the extreme efficiency that can allow a large number of non-strategic or low-value categories to be brought under management.

Properly applied on the right categories at the right time, e-Auctions have been generating savings for over a decade. Back in 2003, in one of the first significant studies on e-Auctions, CAPS Research found that direct cost reductions usually averaged between 10% and 20%, that cycle time reductions could be as much as 40%, and that there could be a “power shift” from strong suppliers to weaker buyers not previously attainable. One company realized 165 Million of savings on 912 Million of spend, a major service provider estimated average savings of 20% on 30 Billion of reverse auctions, and a recent report from the IBM Centre is estimating that the Federal Government could save 8.9 Billion annually through reverse auctions alone.

And this technology is only #9 on the list of the Top 10 Technologies for Supply Management Savings Today. Imagine what could be saved with the top technology, or even the third best technology. Or better yet, instead of imagining, download Top 10 Technologies for Supply Management Savings Today and find out! (Registration is required for this one but the doctor believes it’s worth it!)

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.