Strategic Sourcing and Reverse Auction Design: The More Things Change, the More They Stay the Same

- December 10, 2013 11:04 AM
Categories: Procurement Commentary, Sourcing | Tags: ,

In yesterday’s installment, I shared a number of observations from Margarita Sapozhnikov on the topic of reverse auction design and usage. She recently wrote an essay for Procurement Leaders, titled The pitfalls of procurement auctions. Summing up an argument we agree completely with at Spend Matters, Sapozhnikov writes: “We find that many businesses have a pre-conceived idea of what an auction is. [But] there is no one auction design that is best in all situations. Limiting yourself to an ‘off-the-shelf’ platform risks adopting an approach that does not meet your needs and could be detrimental to your business.”

For example, as she observes, the use of “multiple-round bidding and enforcing a ‘winner-take-all’ outcome in which you commit to purchase from only one supplier can work well when a relatively small number of units need to be procured. However, in many cases the purchaser is much better off by allowing two or more suppliers to provide the desired number of units. Having the flexibility to contract with more than one supplier allows for a more competitive bidding outcome and lower prices (but doesn’t preclude purchasing from only one supplier)…”

Go back fifteen years and I was beginning to make similar arguments about the need for flexibility. In an Information Week column, Wanted: Better Auctions, I suggested at the time that while “consumer Internet auctions have become popular … business-to-business commerce will be a more important application in the near future. [But] trust has proved a major hurdle in existing consumer-oriented auctions because there is no clear relationship between buyer and seller, but a business-to-business setting is a far more controlled environment. Early adopters include FreeMarkets OnLine, among the first business-to-business online auction services, and FastParts Trading Exchange, which anonymously links buyers and sellers of electronic components. English, or ascending-price, auction models still dominate [or the reverse for sourcing], but a better ideal might be a modified version of the traditional price-sealed bid auction as suggested by the late Nobel laureate William Vickrey.”

Sourcing and auction design have become a timeless topic. But now that we have new types of sourcing software available that focus on decision optimization by encouraging greater supplier (and buyer) flexibility, even in a competitive environment, and virtually unlimited computational to crunch through award scenarios, anything is possible. It is a great time to be in the procurement and sourcing world no doubt. But as Sapozhnikov offers up in her final recommendation, take the time to understand your options. “Request a demonstration … Before committing to a procurement approach, hands-on experience will give you confidence whether it meets your needs and provides opportunities in the future that you may not have considered.”

Who is on our short list to learn from? It’s short indeed: CombineNet, Trade Extensions and BravoSolution. Start there. Then add Iasta,  IBM/Emptoris and MarketMaker4 (MM4) depending on requirements if you want more “competition” for advanced sourcing tools once you’ve gotten smart on the possibilities.

In the meantime, see related posts on sourcing from Spend Matters PRO and the free research library:

Using DMAIC 2.0 to Blow Up the N-step Procurement Process

Zycus: Singing from the Ariba Hymn Book for Source-to-Pay Suite Leadership

Sourcing Optimisation – Extracting Value from Complexity 

Indirect Category Sourcing Savings: Fact or Fiction?

Everything You Wanted to Know About MRO Sourcing But Were Afraid to Ask 

E-Sourcing: Criteria for Selecting a Provider

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