E-Auctions (hunh). What are they good for?

In the immortal words of Melbourne tough guy Johnny Morrison: “[R]eputations are based on a hundred facts – and a thousand fairytales. ” (*)

There are plenty of facts and fairytales surrounding e-auctions and e-sourcing. One that grates most with me is that e-auctions are about cutting costs and e-sourcing is about improving processes.

True, e-auctions (with all my usual caveats about them being well managed etc) will deliver a lower price than the same sourcing project done without an auction. And true, companies like TradingPartners do tend to sell e-auctions as ways of saving money, so to some degree we only have ourselves to blame.

But here are 2 subtle facts about e-auctions that often get missed amongst all the fairytales:

  1. In order to run an effective e-auction you need to do your homework up front and be crystal clear about specifications, award processes, requirements, service levels etc etc. In other words you have to run a robust sourcing process.
  2. An e-auction can’t magically deliver savings on its own. In a rising market you may well end up paying more than you otherwise would. However, an e-auction is your best bet to get the most competitive market price and will generally get you a better result than what is possible by other means. Assuming you plan, manage and run it well.

Whether the extra effort in running a robust sourcing process and planning, managing and running an e-auction is worth the $$$ benefits is a different question, of course.

The Buxton theory of cost reduction holds that falling house prices and/or falling markets put cost cutting onto the CEO’s radar, so I fully expect e-auctions to become used even more widely over the next couple of years. On one level this is good news for an e-auction provider like TradingPartners. But is also has a downside because it reaffirms in people’s minds the fairytale that e-auctions need only be about saving money.

(*) Quoted by Mark “Chopper” Read in his book Chopper. The full advice from Johnny Morrison is: “Mark, reputations are based on a hundred facts – and a thousand fairytales. A horse is only as good as its last race. So get in there, rip his head off and piss down his neck.” The second part is probably not so directly relevant but I thought I’d post it for entertainment value as much as anything else.

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3 thoughts on “E-Auctions (hunh). What are they good for?

  1. marc

    However, you’re still dictating to your suppliers your contractual expectations (e.g. terms, qa/qc checks, delivery, etc.) as opposed to getting all the right parties involved and negotiating until you have a deal that fits both parties. Sure this process takes longer, but I’d be interested to see statistics surrounding this method, as opposed to direct cost reduction sourcing, aka, Reverse Auctions.

  2. Hi Marc, thanks for the comment.

    If I understand you correctly you are saying that there are two approaches to negotiating with suppliers:

    1. Individual negotiations on all aspects (price, qa/qc, delivery, payment terms etc) directly between the buyer and each potential supplier

    2. A reverse auction aiming purely to drive down the price of a particular item

    If so, then that is exactly the viewpoint that I am challenging.

    From what I have seen of reverse auctions, they are a tool and nothing more. Many people assume a reverse auction is completely separate to other sourcing techniques. In reality it is just a better way of harnessing competition to do the negotiating for you.

    If you never do a reverse auction, chances are your supplier is uncompetitive.

    If you always dictate qa/qc checks, delivery requirements to suppliers then chances are you aren’t getting the best value for money deal overall.

    You need both discussion and auctions is the point I am trying to make.

    So how about a third approach to add to the two you described:

    3. Get all the parties round the table to come to some broad agreement about all the contractual expectations (rather than dictating them). Then, once you’ve done this, run a reverse auction to make sure you have the most competitive offers available for you to make your final sourcing decision.

    ?

  3. Pingback: The return of the reverse auction? « Where Next

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