so he could keep the plant running. I think this experience was common in the past.”
Baker advises that distributors participate in reverse auctions only if they need to. Even so, “you’re better off spending time with a customer that understands the value of productivity savings, a long-term relationship and working together to reduce manufacturing and labor costs.”
Adam Fein, president of Pembroke Consulting, says it’s a golden time for wholesale distribution. End demand is strong, and price inflation is boosting bottom lines. “Many distributors are not feeling the pinch from reverse auctions,” he says. “They are more willing to walk away from bad accounts.”
Flexible E-sourcing Techniques
Other e-sourcing techniques exist beyond reverse auctions, some of which are complementary. Some of the more common include the basic electronic request for quotes, electronic request for proposals and electronic requests for information.
Project management software is also providing another level of control for buyers looking to implement reverse auctions as a sourcing tool. As the software grows more sophisticated, Watson says it may improve how reverse auctions are run. The software walks buyers through every aspect of a reverse auction.
It helps buyers find qualified suppliers, set up the auction itself, communicate with suppliers on a consistent basis, monitor and manage project milestones, and interact with members of the sourcing team. Project management software also helps manage project information such as requirements, supply market dynamics, supplier evaluations and negotiation approaches.
Software providers have also started to offer what could be a more welcome approach to e-sourcing. Expressive bidding, also called flexible bidding, gives distributors more power by allowing them to make offers that make the most sense for their business. This means suppliers can offer bids based on alternatives to what the buyer puts up for auction: alternative bundles or offers that differentiate them on price and non-price attributes, including product specifications, location or delivery options, conditional offers, tiered pricing, and rebates.
When Should You Participate?
- Use reverse auctions strategically, Watson advises. When you are invited to participate, really give it some thought. Do you need to protect your business? Or do you want to grow and win new business? “I don’t think it’s a bad thing to walk away from a particular auction, but you should communicate your reasons. Be forward,” Watson says. This may help keep you in the loop.
- Watson advises distributors to find a niche. Participate in auctions where you know the product area well an area that is your core competency so you have a broad understanding of market forces and prices in that particular market and what will be required to maintain a contract.
- Eruysal recommends distributors “get as much clarity as you can up front.” This means asking: what the criteria for selecting a bidder will be, whether there will be ongoing negotiation after the event, whether a contract is already ready for the winning bidder “Ask to see what you will be signing.” Also, incumbents should not be afraid to ask whether their customers have considered switching costs.
- Distributors should also be sure they are comfortable with the interface being used in the reverse auction. If not, they should participate in practice auctions their customers offer.
- Fein recommends distributors identify one person in-house who will respond to reverse auctions. Distributors should have a plan as to how and when they will respond to and participate in reverse auctions.
- Reverse auctions may be an opportunity for distributors to open a new account using a loss leader just make sure that is actually the case before jumping in, Fein says.
- Take advantage of reverse auctions to see how you rank in the field. No company sees another company’s information or bid, but you will see how you measure up. Also, you don’t have to be active in a reverse auction. If you are satisfied with your bid, sit back and watch, Ehrie says.
Reverse auctions have left many distributors with a bad taste in their mouths. But new and cheaper technology is addressing some of the issues that turned off many distributors from this e-sourcing tool. Some buyers have learned from their mistakes and are spending more time to find better qualified suppliers in the pre-auction phase to avoid problems on the back end.
Could reverse auctions be coming into their own? Some industry watchers think so.
While many distributors have learned through bad experiences to avoid them, reverse auctions could be transitioning onto more neutral ground as technology advances and becomes more affordable, and the unsustainability of price-focused auctions is exposed.
Online sourcing is just now moving from its adolescent phase into young adulthood,” says Tim Minahan, senior vice president for marketing at Procuri Inc., which develops and provides e-procurement software. Minahan was the head of the Aberdeen Group’s supply chain research practice for eight years before joining Procuri in March.
Price-focused tactics are unsustainable because only so much can be removed from a supplier’s profit margins before endangering the health of that supplier. This, of course, is not news to distributors. But backlash from suppliers is one of the reasons some buyers have reconsidered their methods.
Minahan points out one other factor in play: “Unlike in the mid- to late-90s when online reverse auctions first burst on the scene, it is no longer a buyer’s market.” Global economic uncertainty, rising energy costs, inflation and tightening supply markets are driving buyers to use more collaborative and total-cost-based negotiations.
A Few Key Changes
Multi-attribute auctions are becoming more common. In addition to using price, buyers are considering such factors as ability to meet equipment specifications, delivery areas and timeframe, service options, and experience. And they are looking at these considerations more closely before an auction begins.
Kevin Ehrie, senior principal at e-sourcing software provider Perfect Commerce, says more buyers are using a Total Cost of Ownership analysis. As part of this, buyers are looking harder at services their suppliers provide. Previous experience becomes a larger part of the pre-auction rankings. The ability to do a total-cost analysis has been around for years, Minahan says, but use of this capability has taken off more recently.
Buyers are learning to better incorporate online sourcing tools into their overall sourcing and supply management strategies. As they gain e-sourcing experience, buyers are focusing more on advanced negotiation capabilities to evaluate multiple parameters and total costs. In addition, technology has advanced to a point where e-sourcing is becoming easier and cheaper to implement.
“Over the years, e-sourcing providers have dramatically enhanced the usability and accessibility of these features by adding templates and configuration wizards,” Minahan says. So, for example, a sourcing manager today can consider what-if scenarios using a series of pull-down menus and configuration wizards and templates.
Flexible subscription and usage-based pricing models are also making advanced online sourcing more accessible and practical for more companies. Karen Watson, manager for Capgemini’s supply-chain buy practice, says some of her clients are starting to hire internally and buy their own software to manage their own auctions, rather than outsourcing the job. “The marketplace has become a lot more sophisticated,” she says.
If done right, a reverse auction can mimic a sealed-bid process, Ehrie says. More and more, reverse auctions are becoming part of an e-sourcing “suite” with project management tools at the front end and contracting tools at the back.
ITT, a $7.8 billion company, manufactures equipment for water and wastewater treatment and industrial processes, defense electronics and services, electronic components such as connectors and switches, and a wide range of industrial products. ITT started using Procuri to do reverse auctions as a way to maximize cost savings back in 2001. Lance Eruysal, director of global supply chain for Industrial and Biopharm Group at ITT, says at first, the company, like many others, jumped right into reverse auctions without fully thinking through the consequences. “A lot of the buying community got caught up in that,” he says. As a result, reverse auctions gained a stigma that lingers today.
ITT quickly learned that when reverse auctions are not done right, they can damage supplier relationships. “It became clear to us that reverse auctions are a powerful and potentially risky tool that needs to be used properly,” Eruysal says.
So buyers are spending more time in the supplier qualification stage before an auction. Eruysal says “conditions have to be right” to hold a reverse auction. ITT spends time analyzing the market, as well as the service and quality they are currently receiving from an incumbent supplier at a set price. It’s important at this stage to ensure the company is comparing apples to apples, Eruysal says. ITT also considers how much it would cost to switch suppliers. “If the switching costs are too high, it could erode the savings (gained from a reverse auction),” he says.
If ITT determines that an incumbent supplier is charging more than the market demands, the company approaches that supplier and tries to work with it to improve its competitiveness. If the company and the supplier are unable to come to an agreement, ITT may decide to move the work or go to a reverse auction and invite all suppliers who are qualified, including the incumbent supplier. But this step is only after careful review with the incumbent supplier and exhausting all possible methods to reduce costs in the current supply chain.
If a reverse auction is done, Eruysal says it is key to communicate with the incumbent and invite the incumbent to participate. Sometimes, the incumbent is still able to offer the best package. ITT’s work before the auction is crucial, Eruysal says. Communication and integrity in the process are especially important, he says. And companies need to follow through on reverse auctions. If a company’s reverse auction fails, “it’s not a failure of the tool, it’s a failure of your preparation,” Eruysal believes.
Still, Eruysal concedes there are many buyers out there who have not yet moved to a more comprehensive strategy when it comes to reverse auctions.
Indeed, many of the distributors reached for this article said they don’t participate in reverse auctions. Most cited bad experiences or that the focus of reverse auctions is typically on price, not service or quality.
“We see very few reverse auctions,” says Mike Baker, president of industrial distributor Quality Mill Supply Company, Franklin, IN. “They used to have them item by item but what we learned was that the buyer would select the best price only to find out after it was shipped it was not accepted because of brand preference or quality and was returned. One large customer indicated that the cost of returns and down time, wrong delivery and brand issues cost way more than the perceived savings.”
Baker described an experience with a large manufacturer who decided to have a reverse auction on grinding wheels: “This company actually started orders from the lowest bidder, got the wrong specifications, wrong sizes, terrible delivery and it impacted their production at the plant level. While the buyer may have looked good to someone up the chain, the poor production manager at the local plant was forced to buy the right wheels using a credit card