Strategic Sourcing and Reverse Auction Design: A Timeless Challenge

A column I wrote for Information Week back in 1999 on event and sourcing market design eventually landed me at FreeMarkets. One of the founders had read it, and within a couple of months, I was sleeping on a floor in an unfurnished apartment in Pittsburgh, waiting for the late moving truck to show up from Boston. But that is a story for another day.

However, some of the highlights from that original column remind me of some key takeaways in a recent guest blog in Procurement Leaders by Margarita Sapozhnikov. In The pitfalls of procurement auctions, she argues “all too often [we use] the wrong type of auction … [and that] auction approaches still are not utilized to their full potential. Procurement auction mechanisms that are becoming more common often are too simplistic and limited in many ways.”

At Spend Matters, we’ve taken this thinking even further by suggesting that competitive negotiations (through advanced sourcing or optimization) combining greater flexibility for suppliers to submit a range of RFI responses (including variations in actual offers based on such criteria as order quantity, frequency, contract duration, etc.) with the ability for procurement to make awards decisions that apply internal constraints is potentially a more useful approach. To learn more about my own personal journey of discovery in this regard, I recommend reading an essay I wrote on the topic, A Personal Lesson: Reaching the Limits of Reverse Auctions and Strategic Sourcing: When Collaborative and Quantitative Approaches Would Have Delivered More.

But back to the subject at hand, reverse auction design and lessons. Sapozhnikov offers up a couple of auction design structures in her column, but she provides a number of key takeaways at the end of her analysis as well, all of which are quite useful. These include, for example, the importance of attracting "enough supplier interest” regardless of format. To achieve this end, “bidding processes that are fair, transparent, and efficient attract multiple suppliers and ultimately result in lower prices and administrative costs” are valuable. But just as important, we should also insure that processes are “flexible enough to easily expand to include more products, more suppliers, etc.”

In other words, there is no “perfect market” or reverse auction design – during a given event, in a given quarter, with a given supply market, even for the exact same RFP, supply market conditions can change considerably.

To be continued …

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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