BravoSolution Real World Sourcing – maximising the benefits of eAuctions

We had the third expert briefing in our Real World Sourcing series yesterday with BravoSolution – Guy Allen leading the discussion on “Maximising Success from eAuctions”.

It's a subject where he's really an expert – in fact, he claims to have run the first e-auctions in the UK way back in medieval times with Freemarkets. As a new CPO, he's used them as a great tool to demonstrate to very senior colleagues the value that procurement can bring.

He started with a great point – as well as any cost benefits, auctions provide transparency which is an advantage - full stop. That immediately brought to mind some of the recent frauds we've heard about, like the Sainsbury's potato example, that could not have happened if auctions had been a standard tool.

But his experience also comes from work on the supply side, which has led him to the view that too often buyers don't exert any commercial pressure through auctions, and he gave us some examples of that situation.

He then talked about four criteria for e-auctions -

  • Is the requirement definable?
  • Is your business attractive to the market?
  • Is there a competitive market? (Essential – don't close down the market)
  • Can you define the selection criteria?

At SmithKleinBeecham, where Allen worked some years back, there was a presumption to use the process - you had to go to e-auction unless you could show it didn't fit under those criteria. But generally, auctions are not used as much as they could or should be by most organisations. That's for a whole host of reasons , including opposition from the procurement function itself, who might see the technique (wrongly) as de-skilling the procurement task.

He also demonstrated, by getting us to bid for some £50 notes, that if you don't make the award criteria clear, and conduct the auctions in a fair and transparent manner, then you very quickly annoy your supply base. And eventually that will mean less competition and less impressive results.

It was a great session – we'll have some further highlights from it next week and we'll have access to the slides as well for you.

We're now on the summer break from the series, but we're back with three more in the Autumn. The next, which I'm leading on September 5th, is “Assessing the  Procurement Function” - a topic I find fascinating. How can you know how good you and your function actually is? I'll have a few challenging comments and ideas on that subject.

There are a few places left, and you can book here . It's also an excellent networking opportunity, and there's a decent lunch as well....

 

Voices (11)

  1. Phoenix:

    Great session yesterday from Guy. One critical message came through loud and clear:

    Make it abundantly clear what the winner will win, whether it’s:

    “- winner takes all
    – guaranteed shortlisting
    – first choice testing

    But NEVER:
    “We will use the Auction oprice together with other factors to determine the winning bidder.”

    Crystal.

  2. Rob:

    A trip down memory lane for both of you…

    http://money.cnn.com/magazines/fortune/fortune_archive/2000/03/20/276391/index.htm

    1. eSourcingSensei:

      Hi Rob – thanks for sharing that a very interesting read (I hadn’t seen it before) – I was pleased to see the line:

      “No auction can take place, however, without an enormous amount of preparation”

      I reckon Peter could dedicate a whole post or two just looking at the subject of tender preparaton…………..

      I was really intertested to read how Freemarkets came about – I didn’t know the full story – however I think I am going to investigate further the claims (just for fun – I am so sad LOL 🙂 ) of the “first to develop eSourcing/Auction technology”. In the article it clearly attributes Glen Meakem with presenting this idea in 1994.

      However in an article I reviewed it stated that the forerunner to the eSourcing platform was “The development of “Competitek”— by Amory Lovins and his colleagues at Rocky Mountain Institute” – anyway I wonder how many others have claimed to develop or influence the start of eSourcing technology

      Anyway again thanks Rob it was eye opening

      Sensei

  3. eSourcingSensei:

    LOL Hello Guy – Oh my word – how about the same year – 1997!!!

    And I didn’t cheat that would simply be fraudulant LOL

    The event was on direct materials (printed cartons)

    My funniest memory – love to get your thoughts on this – sorry Peter for taking over your publication…………

    A colleague and I were observing the auction, watching prices fall like crazy until just two suppliers were bidding and it was obvious that neither of them wanted to loose

    As we watched the price fall I turned to my colleague (he was a packaging technologist) and I said – “Hasn’t the price they just offered fallen below the price of raw paper board?”

    Indeed both suppliers had bid unsustainable prices that were below the cost of board. (For those that don’t understand cartons the cost breakdown is raw material, energy, print, lay costs (plates), overhead (fixed and variable) labour, margin, transport – more or less……..

    We had to stop the event and talk to both suppliers – their ego’s had got the better of them. And we removed their bids from the analysis and still came out with huge savings and a lesson learnt…………..

    Ensure suppliers are well briefed and remind them to understand their internal costs BEFORE they bid in a Reverse Auction

    Anyway Guy thank you for responding – maybe one day we will meet without me being “Sensei”

    Take Care

  4. Guy:

    Dear Senei

    I almost dont want to know the anser to this, as it will ruin my pitch when I present eAuctions in the future, but in the spirit of ‘fun’ the statement I made was that we ran the first eAuctions in the UK, and also first to use it on indirects. Both were within a month of each other and I’d have to check the year, but it was 1997 or 98.

    There I’ve shown my hand now, very easy for you to come in with 1996!

    Thanks for your comments, whether you beat me to it or not you clearly are another true believer

    Cheers
    Guy

  5. eSourcingSensei:

    Hi Peter

    I would love to hear when Guy Allen led his first Freemarkets eAuction as I was part of a team that were fairly quick off the mark then so it could be an interesting “race” to see who was really first – anyway that;s not serious that’s just fun.

    For a number of years a company I worked for used the obligationary rule of using eSourcing for all negotiations except where materials were in a unique/bespoked supply situation.

    It would be true that within our industry from around 2002/3 – 2007/8 we were regarded as leaders in the use of eSourcing technology so much so that certain providers developed some of their eSourcing technology including Optimisation Tool sets with our input and assistance.

    Sadly we are no longer in a position to claim such a highly honoured place. However I am one of the few left who were part of that development age and as such believe I have some valid experience in eSourcing strategy and engagement

    The four criteria that Guy gave you are actually correct, sorry to disagree with you Tony. The fourth point that Tony disagreed with, is not that Guy says you don’t need to define the selection criteria for a succesfull eAuction, but in fact that you must be able to define such. Each of those points were questions the buyer must ask themselves as they consider running an eAuction.

    If the buyer cannot answer “Yes” to each of those points then do not run an eAuction but if for example the fourth point is a roadblock, go away, seek out the criteria by which you can define the selection criteria and then return and run your event. When Tony states “I can agree with the first 3 criteria for e-auctions, but not the 4th” I just think he may have mis-read what point 4 was saying.

    On another interesting point concerning a “competitive market place” whilst it is absolutely essential that a competitive market place exists, do not be defeated if at the time you ask yourself this question you come back with, “No, there is only one supplier out there manufacturing this item, so I have no competition” (sorry long answer for a simple “No” but I wanted to quote from an actual personal successful experience)

    When I came to this point within a portfolio I managed I reviewed my industry and started a dialogue with a number of suppliers within it to further understand why this particular item/group of items were unique. As a result three suppliers showed interest in reviewing their capabilities. In the end one of the alternate suppliers succesfully developed a matching item and passed several trials including factory production trials. This took just under 12 months to achieve.

    The result was that one year from me having a sole supply situation with no competition, I had developed a second creditable supply and more importantly, competition.

    Now given the nature of Reverse Auctions and even “Rank Only” feedback, running an event with only 2 suppliers can be done, but I would not advise it due to confidentiality (it will not be that difficult for inteligent suppliers to work out there is only two involved). So I ran a RFQ – the first ever for this item anywhere in Europe, the result was that the incumbent retained business but with a reduction in cost of 32.5%!!!!!

    And do not worry about the other supplier, they did not win this but did win other business with us, and were able to supply other manufacturers with the item they had developed with us. Eventually they indeed took on the supply to us of the item they originally developed.

    Now, I as always have been cautious around the full details. You are aware Peter of who I am where others are not, and I think you will know that this is absolutely genuine.

    One day I may even share how I ran a RFQ with even less suppliers in and saved nearly 24% in spend!!

    Having read Tony’s article it is very anti Procurement and I would suggest means that your (Tony’s) experience of a Procurement team is very poor. What he cites as issues in his article simply would not be acceptable within our organisation and whilst I am soemone who will always champion the use of eSourcing technology, I do so based on a whole range of pre-supposed criteria and that includes extensive knowledge of the market place a buyer is involved in and (as within our business) the ability to identify supply risk, both financial and material related, and the requirement to have a range of contingency plans for when the unforseen happens. There is absolutely no way my company would withdraw from a market because Procurement could not provide the goods or services required to remain in that market place in a competitive manner.

    So I think the four points raised by Guy are spot on, but I would also always raise a challenge to Procurement that when faced with roadblocks, don’t just turn your car around and go back the way you have always gone, look for an alternate route….nothing is impossible and the rewards are potentially huge

    Sensei 🙂

  6. Tony Colwell:

    To focus on price is a blinkered purchasing view. What is important for the business is to get the best value. See “The Role of Procurement: Cost Saving or Adding Value?” http://acuityconsultants.com/wp/?p=574

    E-auctions have their rightful place. I would not advocate their use for all categories, and the same applies to partnerships.

    Also it is naive to think that auctions get you the best price. The winner may be prepared to go lower. By conducting a proper supplier evaluation (which I would only do for critical requirements) it is possible to determine which supplier is best positioned to meet your business strategic needs… that could include lowest cost base and capability to supply at lowest price.

  7. Plan Bee:

    it sounds like you willing to allow your ‘supplier partnerhsips’ (whatever they are) to charge you a price higher than the market price. An intersting approach!

    1. bitter and twisted:

      Theres worse outcomes . Eg paying below the market price for the wrong stuff.

  8. Tony Colwell:

    I can agree with the first 3 criteria for e-auctions, but not the 4th. Being unable to define the selection criteria rules out e-auctions; being able to define the criteria may also rule them out. The latter is clearly the case when the criteria involve capabilities to add value which go beyond meeting a qualification threshold. I’m talking about supplier partnerships.

    Not only can it be ineffective, it can also be damaging to invite a ‘partnership’ supplier to a reverse auction. It sends mixed messages to the supplier – undermining the trust that is essential for effective collaboration – and is definitely not the way to get the best long-term deal.

    For more detailed comments see “E-auctions: when (not) to use them… and dirty tactics to look out for!” at http://acuityconsultants.com/wp/?p=721

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