Less than half of buyers use electronic reverse auctions

According to a survey published this week in Supply Management 60% of respondents do not use reverse e-auctions. Read the article here: http://www.supplymanagement.com/EDIT/Top_stories_item.asp?id=17116

Reasons against electronic reverse auctions include “it will damage supplier relationships” and “in industry X it’s still a problem finding suppliers that use e-mail.”

Reasons for electronic reverse auctions include reductions in administration and preparation time; easier comparison of data.

From my perspective it is puzzling that so many buyers are not even considering e-auctions. While I wouldn’t say that everything can always be auctioned effectively, there are always going to be categories that buyers will be able to achieve more (quality, savings, sustainability – whatever floats your boat) through the considered application of an e-auction.

A decade into the e-auction industry and there is still a whole lot of educating to be done amongst buyers about when and how to take advantage of reverse auctions.

I’ll say one thing (again): e-auctions are a tool. e-auctions do not damage supplier relationships, if you run then well. If you run an e-auction professionally and carefully you can get the best price in the market while still maintaining supplier relationships.

Freight costs on the rise

Reports The Economist, Nov 24th

All because of the price of oil? Apparently not. Part of the cause is “an ‘oceanic imbalance’ between the Atlantic and Pacific. Supply is spread across both oceans, even as demand is concentrated in Asia.”

As in so many of these stories, China takes centre stage. One illustration: Unable to satisfy its demand for iron ore from its traditional suppliers – India and Australia – China now imports significant quantities from Brazil. “It takes 3 times as long to move cargo from Brazil to China as from Australia … The cost of shipping iron ore from Brazil to China is now more than the cost of digging up the ore itself.” More of the world’s shipping is tied up bringing iron ore to China’s steel industry than ever before.

Similarly, the report describes how China has moved from being a net exporter of coal in 2001 to now being well on the way to being a net importer.

The takeaway for buyers: Expect freight prices to continue to rise until 2009 “when a huge number of ships are due to be launched” and downward price pressure will, hopefully, kick in.

How much did you really save? Part 2

My previous post looked at measuring procurement performance against annualised savings, as advocated by Steve Mallaband in a recent CPO Agenda article.

But actual savings are still important.

I had a few beers after work the other day. Enough beers that I felt the need to have a Burger King at the station on the the way back. And I was even inebriated enough to read the receipt, you know the way people in bars will sometimes read what’s written on a beer mat. And this is what I read :

Whopper Rg                  4.49
Coke Pmix 16oz
Fries Regular

TAKE AWAY                   3.83
VAT                               0.66
Amount  Due                 £4.49

CASH PRE-KEYED          £4.49
Change                         £0.00

Meal Deal Saving £1.60

Apparently I am saving money by making this purchase from BK.

There’s a difference between annualised and actual savings. The annualised saving here is over 35%. But obviously I know that buying burgers, fries and coke is not saving me money. There are no actual savings there. Similarly, in the real world, there are plenty of stories of people mixing up annualised and actual savings.

For example, suppose you run a reverse auction for consultancy services and save 20% on day rates. Yet changes in your organisation mean a far greater reliance on consultants compared to employees. So your overall spend on consultants doubles. Your annualised savings look good and have helped you hit your targets. But from a big picture perspective the company is spending more than ever on consultants!

The good news is that there are ways buyers can impact actual savings as well, and not just by implementing a state of the art e-procurement system. See this post on Supply Excellence:

http://supplyexcellence.com/blog/2007/11/16/cpo-summit-procurement-and-global-travel/

[E]ven with your top negotiator on the phone with travel companies, Merck realized a 15% savings by just having travelers book 14-days in advance of their trip. Procurement not necessarily needed but strict policy enforcement is. Merck runs reports to highlight those not complying with the 14-day advance policy; the team adds up the total cost and shows management. Sure, $25 here and there doesn’t particularly matter but if all 10,000 travel employees are incurring that extra cost it equals an unnecessary $250,000 spent. Now, that’s something management may want to see.

How much did you really save? Part 1

“So, how much did that e-auction really save me?”

Quantifying savings after an e-auction is notoriously difficult. After all, a saving is an absence of spend; you won’t see a line in the P+L for savings. But savings are a key metric for buyers. So how to measure savings?

Steve Mallaband in CPO Agenda offers a useful approach, that can be applied in all sourcing projects, whether you are using an e-auction or not.

Think of the following scenario:

Current price: €100m

Facing a market price increase: €25m

Negotiate new price (based on forecast volume): -€31m

Actual new price: €94m

Is the saving €31m or €6m?

Mallaband argues forcefully that procurement, and the business, must distinguish between Annualised and Actual savings. Actual savings are the real € difference between what was spent last year and what was spent this year. In this case €100 – €94 = €6m. Annualised savings are a notional figure that takes into account market price increases. In this case the €31m. Mallaband argues that procurement must be measured by annualised savings rather than actual savings.

This means that it’s critical to build any price increases into the baseline against which you are measuring your annualised savings and to get buy-in from the business as to what baseline you are going to be measured against.

As Mallaband’s says: ‘The baseline is often not a “real” price but one obtained by adjusting the current price or by using the price bid by a supplier before further negotiation. This is why “procurement performance” does not give you real, touchable money. What it does give you is a good estimate of how well procurement is doing against the market.’

Using this approach, buyers will not find themselves talking about cost avoidance, since any market price increases will already have been built into the baseline before the supplier negotations begin.

Some more comments on annualised vs. actual savings in my next post.

Couldn’t go to ProcureTech Live. How was it?

I had been looking forwards to attending ProcureTech Live, both because of the subject matter being covered and to check out the possibilities of this kind of virtual world for future conferences. Unfortunately I am running one of my e-auction game workshops at CIPS South Yorkshire branch today so am on a train all day. So although i’ll be able to replay the events later on, I’ll miss out on the fun of experiencing Second Life cum eWorld, and am not going to get a chance to get my paws on an Ariba Branded iPod.

I’m writing this on the train up to Sheffield and thought I’d see for fun how far I can get with my XDA Orbit. The System Check passes the following checks: Javascript, IE6.0/Firefox1.5, cookies. A big no, though, for pop-up blockers being enabled and for the Flash plug-in. Unfortunately I can’t figure out a way of changing security settings on the XDA, and Adobe doesn’t have a suitable Flash player for me, so I’ll have to miss the day and catch up on the events later.

How was it? Is it the future of conferences?

Reverse auction: it really doesn’t have to be just about price

I’ve seen a lot of auctions that take into account price and non price factors in the uk public sector. This is because since January 2006 public sector buyers who use auctions must award the contract to the person who comes first in the auction.

Whether it’s Consultancy workers on a 35% price / 65% non-price basis, or electricity on a 90% price / 10% non-price or temporary workers on a 60% price / 40% non-price, these kinds of auction have become pretty much business as usual in the UK public sector.

The private sector has been very slow to adopt this kind of methodology. Private sector buyers prefer to run auctions just on price and then to work out the details of how to make the award afterwards.

There are strong arguments on both sides of considering non price attributes during an e-auction. The significant benefit is that it levels the playing field amongst suppliers, letting them compete at what they are best at and producing a result that (in theory at least) is more easily implementable. Yet it is more work up front. And there does seem to be a perceived “lack of control” amongst some buyers of letting suppliers know this much information.

So it’s noteworthy when a private sector buyer chooses to build in non price factors. We had one such example a few weeks ago, for rental cars.

The potential suppliers were adamant that they would not take part in a reverse auction because they felt competing purely on price was not appropriate.

So the buyer built a dynamic rfp that weighted the participants 80% on price and 20% on non price.

In contrast to a price only auction that typically lasts about 1.5 to 2 hours, this was left open over a 24 hour period.

The potential suppliers could log in at any time to see their overall ranking, taking overall value for money into account. Value for money included other elements of the suppliers’ offers, for example: the percentage of hybrid vehicles in the fleet, the number of on-airport locations, reporting capability, percentage of cars with GPS, number of VIP memberships available, etc.

The result: the openness generated sufficient competition to achieve greater savings than the buyer had thought possible.  Don’t be surprised with this result. Many of this kind of auction I’ve seen have helped the buyer achieve increased savings.

Oil at $150 a barrel?

According to this report on the World Energy Congress from Purchasing.com: http://www.purchasing.com/article/CA6501890.html?nid=4017

Kuwait-based consultant Usameh Jamali told attendees at the conference oil prices could go as high at $150/barrel. As the Guardian reports, Jamali said, “People in the market believe that $100 is sustainable and there is continued upward pressure…we should be expecting some downward pressure in a couple of years [only].”

HMRC attempts to enforce penalties on a supplier

HM Revenue & Customs (HMRC) is preparing  to sue a supplier, EDS, for failure to pay agreed penalties in respect of a botched computer system. The trouble is … EDS has not breached the terms of their penalty payment agreement, according to Computer Weekly 16 October (print edition). Check http://www.techworld.com/news/index.cfm?RSS&NewsID=10359 for more details.

According to Techworld:

Problems with a computer system provided to implement tax credits at HMRC led to millions of pounds of overpayments. HMRC signed the £71.25 million ($146 million) compensation deal with the firm in November 2005, with more than £25 million of the settlement dependent on the contractor winning future government work – a provision strongly criticised by the Public Accounts Committee.

According to Computer Weekly: “By the end of 2006 EDS had paid less than £250,000 of the [contingent part of the settlement] – at that rate it would take about 100 years to pay off the full amount”.

Computer Weekly quote HMRC chairman Paul Gray as saying that “It is quite clear that over the past two years EDS has been less successful in winning contracts for provision of public sector IT support in the UK than it was expecting”. He goes on to say, “I am determined to ensure that we obtain the full amount of the settlement, even if the flow of new business to EDS is not enough to generate the full payment to us.”

It is great to see the government standing up to bad suppliers (so much of the time the stories are about the government meekly handing over more taxpayers cash to pay for delays and errors).

But given that the penalties were imposed because of poor performance, it seems that linking the penalty payments to EDS’s ability to generate more revenue from the government was a bit of a daft move on the part of HMRC: “You’ve screwed up royally and we’ll make you pay for your mistakes, but only from any profits you make from future screw-ups work you do for us.”

Looks like HMRC are going to have their work cut out to get EDS to cough up.

Dealing with suppliers during an e-auction

I gave one of our e-auction game workshops today for a group of students studying post-grad degrees in Logistics. The games are always great fun to do and the question and answer sessions can be very illuminating. In particular, consider this scenario:

At the end of the auction in lot 1 the incumbent offered a reasonable, but not very impressive saving. On the other hand a new supplier came in with a very aggressive price and a saving that couldn’t just be ignored. This new supplier had credible experience and good references  in another geography, but none at all in our country of interest.

How should the buyer go about the award process?

By the end of the debate the general consensus was that the buyer would be well served by awarding a small part of the volume to the new supplier, with a view to awarding the new supplier the whole lot if performance were satisfactory. However, the group felt that splitting the lot this way would contravene the rules of the auction and so might not be permitted.

Experienced buyers may scoff at such apparent naivety: of course buyers can change their minds if need be; it makes no sense in the real world to let yourself be hamstrung by a process that doesn’t let you achieve your goals.

All fair enough but the concerns do raise important issues that buyers should take on board:

  1. Know your supply market before the event. If there are new entrants to the market who are prepared to be aggressive on price, it is best to know this early in the process. It may even affect the way you structure the bid.
  2. Suppliers will have more respect for buyers who play by the rules than for for those who (they feel ) are out to extract whatever advantage they can. Whether you need this respect is a separate question … though presumably long-term collaborative relationships will be tough without it.

Of course, these kinds of issue apply across all kinds of sourcing irrespective of whether e-auctions are used as part of the process. But the extra transparency provided by e-auctions brings them into stark relief.