How can procurement make sure it’s getting the most out of the e-auction process?
Historically, e-auctions were designed to ensure the best prices for commonly used low cost goods such as stationary or component parts. However, the practice has since evolved into an important asset in procurement’s toolset and can provide exceptional value when applied in the correct circumstances.
A great example of this is health club business Virgin Active using e-auctions to make savings of £150,000 on items such as towels, stationary and water treatment services. A saving of close to 17%. In a similar context, pharmaceutical company Bayer Healthcare, last year announced that it would be doubling the amount of spend through e-auctions, following the level of savings achieved in previous years.
Of course, e-auctions are by no means the be all and end all of supplier management. There are many situations in which implementing an e-auction could cause more harm than good. In this post, I will examine a few of the pros and cons.
The benefits of e-auctions
One of the key benefits of e-auctions is the early focus on requirement specification. The latter forms the basis of any successfully run e-auction and ensures that suppliers are aware of exactly what they are expected to provide. This transparency is beneficial to both parties and will help ensure a sustainable relationship throughout the contract.
There are also multiple benefits for suppliers. For instance, an e-auction may allow an agency to benchmark itself against its competitors. In this circumstance, a supplier might discover that it is second in terms of price, an insight which may lead it to reconsider its business strategy. Timing is another mutual benefit. Whereas some price negotiations can drag on for weeks, e-auctions are usually finished within 60 minutes. Good news for buyers and suppliers.
On the other hand, e-auctions can also be used as means to counter supplier tactics. For example, if multiple suppliers decide to raise prices for a given product simultaneously, an e-auction can serve as an effective protection. As an attendee at a recent meeting of the Food & Drink Industry Procurement Forum explained, tenders and auctions should not be seen as the bad side of procurement.
Supplier pre-conditioning, i.e. adjusting their expectations ahead of the e-auction itself, plays an important role in e-auctions as it helps both sides save time. Conditioning messages can be used by procurement as a tool to ensure suppliers start their bidding at a realistic figure. It helps ensure that suppliers are aware of what sort of prices or quality levels you are looking for. Let’s be clear this should not be viewed as a threat, but more of a drawing of boundaries.
When to avoid using e-auctions
One of the main criticisms of e-auctions is that they remove the personal element from supplier interactions. Procurement may not be able to leverage its face-to-face skills to develop deeper relationships with suppliers. This is a valid point and e-auctions should never be a business’s default option when sourcing products.
Typically e-auctions can only be used in certain distinct scenarios. It is clear that the tactic will be ineffective when dealing with supplier monopolies, but could also damage relations with long-standing suppliers. Innovation, process improvement and collaboration are not typically associated with e-auctions. It is important to understand what a supplier can offer beyond price.
There are also certain situations where it is risky to run an e-auction as it may damage your bargaining position. For example, if no suppliers bid, then it will be very difficult to negotiate a good price following an unsuccessful e-auction. In this situation, best case scenario will be maintaining status-quo, whereas a negotiation may have yielded a small decrease.
Differentiating between price and value
It is important to stress that in many cases it is not just about price. There are a range of requirements to evaluate when it comes to any type of good or service. Also do not be afraid to use e-auctions in more innovative ways, for example run a reverse e-auction as part of the final selection process among short-listed suppliers. This type of hybrid system could well deliver best all round value.
E-auctions can provide exceptional benefits to businesses, ranging from lower costs to creating a more transparent process. The key is knowing when and where to employ this valuable tactic. Remember that when it comes down to it, e-auctions are no different to other sourcing practices: take the right data into consideration, ensure a level playing field and engage with suppliers. The technology which makes e-auctions possible is just a small element of this.