Reverse auctions – Don’t tell the suppliers!

(We're pleased to feature a guest post from Jonathan Rollason, an ex CPO, CIPS Past President and now director of Purchasing Auctions).

I have always been fascinated by the psychology of purchasing - when do you know you've really got the best deal for your company?

A few years ago I became CPO of a major financial services company and was keen to make my mark quickly and show that purchasing could make a major contribution to profits. I called in suppliers where we spent over £250,000 a year and explained I was looking to improve service levels and reduce costs - in that order. I asked them to come back to me in a month’s time with their performance against service levels (where they existed) and their cost reduction ideas. I used the "higher authority" ploy and explained that my boss was putting me under pressure to find savings – but I was fully aware of the need to maintain standards. Although I didn't say so, I did not want cost savings to be achieved by reduced service or quality, which would have attracted unwanted bad publicity for me within the bank.

After a month, suppliers came back with their ideas and although I really did not expect too much, I was pleasantly surprised by some of the offerings. The office services (stationery) supplier came back and offered an £80,000 saving on a £300,000 spend if we extended their existing contract by a year. I was fully aware that this might be a Trojan horse but hey, an immediate saving of some 26% was worth taking and I had bigger fish to fry!

I was pleased and the saving was registered in the savings log. The supplier universally advertised the first-rate deal I had been given, and emphasised how tough our negotiations had been. But nothing could have been further from the truth!

As I delved deeper into the cost base and started tackling the more interesting aspects of purchasing, such as major outsourcing and brokerage costs, the renewal of the stationery contract was relegated to the back burner. In the interim, the supplier asked for a price increase, but I refused and he was complaining that the contract was unprofitable!   As an outstanding action point on the purchasing plan, I directed one of my commodity managers to bid the requirement again.

We decided to use a reverse auction for the first time and of course the supplier complained that this was really not the best way to get value for money – others would try to buy the business. I explained that cost was just one part of the value equation and I would ensure that service, quality and prior experience would play an important part in the supplier selection process. (And the registration process asked suppliers to agree to the terms and conditions, that clearly said the contract may not be awarded and may not be awarded to the lowest bid)!

On the day of the auction I invited the CFO to watch it unfold.  The approved items list was pretty accurately assessed, based on the previous 12 month spend, and due to my intervention it had come down to about £230,000 - which I thought was good going. Was I embarrassed!! The auction quickly drove costs down and at the end we had 3 suppliers with bids between £120,000 and £130,000 and the current incumbent had stopped bidding at £160,000. I made a good face of it and told the CFO it was the first time the bank had used an auction. His retort was, “Great, when is the next one?”

We didn't award the contract to the cheapest supplier, but the incumbent lost the contract and I had overpaid some £150,000 during the last 18 months. I was annoyed I had not taken the initiative earlier.

I then became an advocate of auctions and managed to take some £70 million from the bank’s cost base.  Rarely did we award the contract to the lowest price - of course there was always clarification required post auction, so it was not the end of the negotiation. We also fully respected the work suppliers had undertaken to compete for our work and subsequently debriefed unsuccessful suppliers on the deficiencies of their bids. Suppliers are now well versed in auctions and fully understand that the lowest price does not necessary win, but it puts huge pressure on their bottom line.

The lesson for me was that although I felt I was a good negotiator, any help in pushing the envelope and speeding up the process was always welcome, and without doubt the leverage applied during a reverse auction always seemed to pay dividends.   And I never told the suppliers was how rare it was that the cheapest bid won the contract!

Since then I have built a reverse auction site (www.purchasingauctions.co.uk ), auctioned goods valued in excess of £150 million and only in about 30% of cases has the lowest bid secured the contract.  Please don't tell the suppliers.

First Voice

  1. Charles Eddolls:

    I am very surprised by the comment “Rarely did we award the contract to the lowest price – of course there was always clarification required post auction” I trust this was not applicable to the Public Sector reverse auctions that you managed as if this is the case I would suggest that you need to re-look at the way you ran your auctions. My understanding is that a bidder should be able to see what he needs to bid to win the contract even though weighting may mean that the contract is not awarded to the lowest bidder. I would not advise any company to take part in an auction such as you describe as that is not fair and open.

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