Auction Managers: Watchers and Drivers

How important is the auction manager to the success of your reverse auction?

At TradingPartners the auction manager is central to the whole process – from the supplier selection and training through to actively driving the negotiation during the reverse auction itself.

For example during a TradingPartners auction the auction manager can be seen communicating via instant messaging with bidders in order to encourage additional bidding. I have written before about how judicious use of instant messaging increases bidding activity and therefore savings.

My moles in other providers tell me that many other purveyors of auction systems seem to treat the auction itself as a technical activity that pretty much runs itself, barring any technical mishaps. The auction manager’s role is a more “up front” role to get bidders ready for the auction. On the day of the auction event the auction manager’s role is to watch the event rather than to drive it, and to respond to technical issues rather than to stimulate further competition.

When I have discussed the role of instant messaging with non-believers the usual riposte I get is something like: “Ok, you have shown how sending an instant message at 10 minutes into the auction got you an extra bid and more savings, but even without that instant message, you would have got that bid in the revese auction extensions.” It is impossible to prove one way or the other what ‘would have happened’ so it’s an impossible argument to refute. When it’s been my budget up for grabs I’ve been keen to take every possible opportunity to get the best possible result rather than leaving things to chance.

If you are planning reverse auctions as part of your sourcing strategies take the time to consider whether you expect your auction managers to be watchers or drivers, and understand what your vendor/provider’s approach is.

Reverse Auction Guidelines from Purchasing.com

Purchasing ran an article some time ago providing guidelines on running electronic reverse auctions.

They make 7 points presented as questions and answers that buyers should take into account when figuring whether to run a reverse auction. Here are the 7 points:

1. The more competition the better
2. Do your supplier qualification before the event – protect yourself from having fly-by-night bidders offer an attractive price that then turns out to be unsustainable
3. Make the spend in the reverse auction as large as possible to make the reverse auction as interesting as possible for your suppliers
4. Make sure your specs are clear and watertight
5. Beware of running reverse auctions where a strategic relationship with your supplier is important (reverse auctions may damage supplier relationships)
6. Reverse auctions can offer a range of benefits in addition to (or instead of) lower prices e.g. faster sourcing times, a clear audit trail
7. Make sure you factor in all non-price parameters as numerical values into your auction

It is a great article and I just want to add a few comments/clarifications from my perspective.

Point 1: The more competition the better. I do agree with this – and generally I would like to see 4 suppliers in a reverse English auction. But bear in mind that in 2008 the auction industry now has more experience across a range of auction designs that can be particularly useful where have limited competition. In particular I am thinking of the successes I have seen with reverse Japanese auctions.

Point 5: Your ability to gain the benefits of a reverse auction, and still have a strategic relationship with your supplier, depends on how well you manage the process and not on whether you include a reverse auction or not. New suppliers are usually happy to win business through a reverse auction. Incumbents are usually unhappy having to compete with anyone to retain your business (whether through a reverse auction or whether simply through any traditional offline mechanism). In my own personal experience I can say that I have got a great relationship with the software development company that I selected via a reverse auction.

Point 7: I still see very many buyers shying away from incorporating non-price factors into their auctions. The good news is that there are nowadays robust methodologies in place to make doing this easier for you than would have been the case even 5 years ago.

Reverse Auctions in the news

See  here .

Local government and schools are hoping to join forces to cut what each unit spends on millions of sheets of paper each year.
Rick Morrisey, purchasing manager for Lafayette, is working to arrange a bulk paper purchasing contract along with the county, Ivy Tech Community College and possibly others.

Despite rising paper prices Morrisey believes that by going through a spend aggregation exercise and then running a reverse auction on the aggregated spend that he will be able to achieve valuable savings.

Assuming he runs his auction process well I’m sure he will, and I wish him all the best in his project. Reverse auctions aren’t 5-minute jobs but when run well they tend to blow away people’s expectations.

Gearing up for more reverse auctions in 2008

This is from Supply Management in May. A quote from John Paterson, VP & CPO at IBM:

Sellers are more aggressive in their terms and pricing as they desire to maintain capacity and revenue streams. Sharp buyers recognise this and will typically look to place more business up for bid, take actions to renegotiate contracts, and seek out new suppliers. As always buyers should recognise markets change over time and they should do nothing that will damage their buying position when it becomes a sellers’ market again.

In these sorts of conditions reverse auctions are a great tool because they are able to cut through long-held assumed market prices and uncover exactly where suppliers are willing to go. But note John’s sage advice about not abusing market power. Again, reverse auctions, done well, are a good foundation on which to build solid supplier relationships (this has certainly been the case for me).

 

eAuctions at Procurement Solutions Tomorrow

I’ll be at the Procurement Solutions for the public sector event at Earls Court tomorrow 9th June. Doing a talk on auction types at 10am and then at 2:40pm an auction demo with Chris Chettle from OGCBuying.Solutions.

Hope to see some of you there.

 

eAuctions in the news

Always good to see some  (positive) coverage of eAuctions in the trade press. Here’s an article from Purchasing.com about BlueBird’s use of eAuctions. For non-US readers, Blue Bird make those iconic yellow N. American school buses.

Blue Bird procurement uses an e-auction tool to help consolidate the company’s supply base and transform purchasing.

Whose e-Auction tool? TradingPartners’, of course!

 

But you have to read the article carefully to get the full story. On the one hand Purchasing says

In the year since he assumed his current post with the bus manufacturing company, Marshall has used an e-auction tool of Trading Partners in Chicago to negotiate pricing with suppliers of safety supplies, crib supplies, corrugated packaging and office supplies. While the lowest bidder doesn’t necessarily get the contract—quality and delivery are equally important criteria, he says—the tool has helped to reduce costs in some spend categories by 30%.

Read this paragraph and you’d get the impression that Blue Bird bought a license to use a piece of software to run their auctions on.

 

But later on Purchasing says

Marshall, who has more than 30 years experience working in purchasing in the auto industry, views Trading Partners, which has conducted more than 20 e-auction events for Blue Bird, as an extension of his purchasing team and sought its expertise when analyzing the company’s spending. Blue Bird’s database is huge—there are approximately 30,000 part numbers on an average bus.

In other words – it’s the service that Blue Bird has bought into, not just the software.

 

This is an important distinction.

 

If you buy software for your e-auctions (which may well be pretty cheap), then unless you have some pretty dedicated people on board, you will struggle to achieve the adoption levels you hoped for. Strategic Sourcing (and, by extension, Auctions) is a very different beast to processing purchase orders. Strategic Sourcing is much more of a “Barely Repeatable Process”, to use Sig’s phrase than the kinds of “Easily Repeatable Process” that ERP-biased software houses build their software around.

 

So, until some BRP-style software for eAuctions turns up you should consider carefully whether what you really need is the software, or whether what you really need are the results. If it’s results you are after then think seriously about buying the service rather than just buying the software.

 

 

e-Auctions in Supply Management

Gratifying to see that Andrew Moorhouse’s research has put e-auctions it into Supply Management’s news pages. Even if the news headline is the rather sensational “Suppliers disrupt e-auctions“.

Supply Management chose to focus on some stats, like the fact that some incumbents refuse to take part in e-Auctions. But there is some other information in the study which I’d like to emphasise here. I’ll declare an obvious bias given that I work in the e-auction industry, but nevertheless I hope these comments serve as some sort of counterpoint to the Supply Management version of events:

Incumbents who took part in e-auctions dropped to their bottom line price 86.1% of the time. 5.6% of the time they stopped above their walk away price (this was due to the incumbent having inside information from their contacts at the buying organisation as to what target price was expected). 8.3% even went below their walk-away price (this only happened when a senior director was present). If you don’t auction your incumbent you are leaving savings on the table.

Producing clear and unambiguous specs is a significant challenge when running an e-auction. Many e-auctions fail due to poor specifications. Only 37% of self-service e-auctions had clear and unambiguous specifications. But amongst third-party managed e-auctions, 78% of the e-auctions had clear and unambiguous specifications. A third party auction specialist will improve your auction result.

Here’s a quote from one of the respondents that Andrew used in his report: “3rd party self-serve auction tools have degraded and destroyed the reverse auction market place. Inexperienced procurement professionals didn’t maintain auction integrity and abused their position of power”. Again, you need a decent e-auction manager to run decent e-auctions

Citing data from CAPS eProcurement Benchmarking report 2007:

43% of manufacturers see an increase in e-auctions; 38% see a decrease; 19% see no change
50% of non-manufacturers see an increase in e-auctions; 28% a decrease; 22% no change. e-Auctions are on the rise. Sure, they still have a way to go but unless you are running an e-auction, how can you be sure you are getting best value in the marketplace? (I am not talking about lowest price only).

I’m sure you could find all kinds of ways of spinning the research – I can only suggest you read it for yourself and take on board its lessons for improving the design of your e-auctions.

Does Procurement eAuction Design Matter? (part 7)

This is the 7th and final posting from my eWorld presentation series.

My last eWorld tip is, again, arguably as much about strategic sourcing as it is about eAuctions. But again, the clarity and open-ness of the eAuction process brings the issue out into stark relief.

As usual, I have a story to illustrate the example.

There was a buyer who ran reverse auctions but who didn’t have the slightest intention of moving to a new supplier. The reverse auction was competitive and identified a significant saving. The buyer then used that information as leverage to get his incumbent to deliver some savings. From the buyer’s point of view this approach seemed too good to be true: running reverse auctions helps you achieve savings targets without ever having to go through the effort and risk of changing supplier.

The suppliers, meanwhile, were aware of what was going in the marketplace and soon got wise to the buyer’s approach. By year 3 of this approach, the buyer was finding it very very hard indeed to encourage suppliers to participate in eAuctions. And why should they? They know it would be a waste of time.

An approach that seemed the most expedient to the buyer in year one turned out to be a counter-productive strategy over the medium term for his employer.

So if, as a buyer, you are interested in medium and long-term sustainability of your supply markets, you’ll be interested in the 5th and final tip:
Trust plays a key role in negotiations in general, and auctions in particular. Protect your reputation and your credibility in the supply market and you will reap the rewards again and again and again.

And here’s the slide for completeness.

Postscript

Well, that’s it. I’ve tried to compress down TradingPartners’ last 8 years of eAuction experiences into less than 10 slides. And font sizes less than 30. I think I achieved about 70% success rate on the 10/20/30 rules, but most importantly  I hope you’ve enjoyed reading these posts and have taken away something that will help you run better eAuctions (whether or not you choose to do them with us). As a re-cap this is what I covered:

Reverse Auctions Background

1. The Reverse Auction Family Tree. Reverse Auctions have moved on significantly over the past decade and there are a number of different types of auction suited to different supply markets.
2. From Consultancy Services to Dairy Cream there is a reverse auction type most suited to your category and supply market conditions.

Reverse Auction Tips

1. Specifications (Remember the waterproof matches)
2. Plan and Execute an appopriate Messaging strategy
3. Strategic Sourcing (and Reverse Auctions) are not one-hit wonders that apply only once for a category. Markets change and can offer new opportunities for buyers
4. Auction structure impacts success (Remember the UK vs Swiss 3G auctions)
5. Protect your reputation in the marketplace

 

 

Does Procurement eAuction Design Matter? (part 6)

Nearly there now: I’ve summarised the recent history of auction types and given examples of how differnet auction types achieve better results in different supply markets. And so far I’ve provided 3 tips that I’ve seen help TradingPartners (and hopefully you) run better reverse auctions.

This tip is all about structuring your reverse auction to encourage maximum competition. My presentation used some pretty basic clip art and animations to get the point across – that won’t really work as an image attached to a blog post. But I can give you the story equally well.

I’m not going to talk about reverse auctions for this tip. I’m going to talk about sales (forward) auctions, specifically the sales of 3G license spectrum in Europe in 2000 – 2001. Auctions are now a commonplace method of auctioning the rights to part of the radio spectrum but back in 2000, in Europe, they were quite a new idea. I’m going to compare 2 of the European auctions: Great Britain (a resouding success) and Switzerland (an umitigated failure).

Great Britain

There were 4 main existing mobile phone providers in the market place. The government had 4 licenses they could sell for this new type of spectrum. Each of the existing phone providers wanted a piece of the action. and the market knew this. Potential new entrants into the market were put off attempting to take part. How could a new company compete with one of the established behemoths? Any new company could expect to spend a fortune preparing their bid, only to be comprehensively outbid by the big guns.

There were various solutions touted around. But in the end the government was able to change the specifications and offer a 5th license. 5 licenses, 4 key players: At least one new entrant would win a license. All of a sudden the marketplace was abuzz with enthusiasm and 9 new entrants were attracted into the auction. 5 bands, 13 bidders: the competition was intense and the result was a tremendous success.

Switzerland

On the other hand, Switzerland’s auction was a mess. They started the process with 4 licenses amongst 9 potential bidders. But there was a quirk in their auction rules: joint bidding arrangements amongst companies were allowed. Sure enough, with only a few days to go before the auction the 9 bidders had formed joint bidding arrangements such that only 4 distinct bidding entities were left. The Swiss government tried to cancel the auction. They were sued. They lost. They had to award the licenses at the reserve price (which, to add insult to injury, had been set very low). Ouch.

 

The tip here applies as much to reverse auctions as it does to forward auctions: Make your auction as interesting as possible for as many bidders as possible to enter. But be careful of your rules as bidders will try and take advantage of the rules if they can.

 

Does Procurement eAuction Design Matter? (part 5)

I am sometimes nervous of showing this information because it is a warts-and-all summary of the case where we have managed a reverse auction for the same client, for the same category, two years running.

But it does address one important assumption that many people have about reverse auctions in particular and strategic sourcing in general. This assumption is that, once you have reverse auctioned (or strategically sourced) a category, there are no further benefits to be achieved by reverse auctioning it (or strategically sourcing it) again.

So here’s the slide. It shows the savings from 6 different categories which were auctioned two years running. The blue bar represents savings in year 1; the orange bar the further savings in year 2.

In some cases you make larger savings in year 1 than in year 2. In other cases you make smaller savings. In some cases the price goes up. (This is life, right?). The simple point is that there is no simple rule that says you cannot run save money by running a reverse auction on the same category twice. (*) 

It’s not even (just) as simple as tracking the general price trends in the market. A colleague once told me the following story about some paper products.

We had a client who had recently auctioned some paper products. They had achieved a good price and since their auction the paper price indices had risen. So they were understandably nervous about what would happen if they went back to market. What they didn’t know was this in the meantime one of the large banks had just completed a significant consolidation exercise in the same category. In other words, while some suppliers to that bank had seen their orders increase, there were many suppliers who had suddenly lost a customer. Ironically this meant that despite a rising market there was a lot of surplus capacity in certain sections. To cut a short story shorter our client did go back to market and did secure a further (modest) saving.

So tip number 3 - which again is as much a strategic sourcing issue as it is a reverse auction issue is: Know your market, and get as far behind the headlines as you can.

Back to a strictly auction tip in my next post.

(*) If you are facing price increases, then running a reverse auction is a great way of minimising those price increases.