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.

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.

Collusion in e-auctions

Alkiviadis Trigas made a comment on a recent post  asking about how to address (suspected, apparent) collusion in reverse auctions.

This is a topic in itself and worth a post (or several) in its own right. Although the question is posed with regard to e-auctions in fact it has as much to do with buying in general as it does with e-auctions in particular. So I’ll take a provisional stab at both sides of the question.

Collusion amongst suppliers in general

It’s worth remembering that this is not a new issue. Adam Smith, in The Wealth Of Nations (published 1776) writes that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Now I am no legal expert but from what I can tell, such price fixing is illegal. Except when it’s not.

In practice, I have yet to find a buyer who was able (or willing to expend the effort) to actually prove collusion. Most seem to accept that just as buyers want to get as much as possible for as few $$$ as possible, sales people want to deliver as little as possible for as many $$$ as possible. Indeed, most anti-collusion cases come about when one member of the cartel breaks ranks for whatever reason.

In practical terms the best defences buyers have is knowledge of the supply market, and to use that knowledge to broaden the supply market as much as possible. For example – even if there appear to be many distributors, are they only being supplied by a handful of manufacturers? Are there any alternative sources of supply overseas?

Buyers need to have this information – which is only really achievable through deep relationships in the supply market – early on in their sourcing processes. It’s no good waiting until you ask for pricing (whether you are doing an Excel RFQ or a reverse auction) to find out that the supply market is narrower than you thought it was.
Collusive behaviour in e-auctions

Collusive behaviour has been studied in both forward and reverse auctions. I give some examples in my white paper on e-auction design. One of my ‘favourite’ examples is the sale of 3G telecommunications licenses in Switzerland. There were 9 bidders bidding for 4 licenses. Each bidder could win at most 1 license. So the bidders formed joint bidding arrangements such that by the day of the auction there were only 4 entities bidding for 4 licenses. In the end each of these 4 bidders was awarded at the very low reserve price. (A great book to read on auction design that describes the 3G license auctions in detail is Paul Klemperer’s Auctions: Theory and Practice most of which is available online for free at http://www.paulklemperer.org/index.htm)

So what does this mean for reverse auctions?

As with any buying project, start by understanding the supply market and by widening it as much as possible.

From a strictly auction point of view, if you are stuck with what you suspect is a potentially collusive environment then you can still run an auction

1. Keep the number of bidders confidential
2. Run a reverse Japanese auction. In a Japanese auction the buyer sets the price level and suppliers accept that price level or withdraw. The buyer then progressively lowers the price level until the last supplier withdraws. I have seen this auction tool achieve quite impressive results, even in tight markets.

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.