Careful! Don’t Auction Away Your Supplier Relationships

Spend Matters welcomes this guest article by Jim Kiser of GEP.

There comes a point when management tasks procurement to save money quickly due to some recent poor performance or profit results to the financials. Either raise sales, cut staff or reduce cost of goods sold in order to get profitability back on track. One way to drive savings quickly is through the use of e-auctions or online electronic bidding events. These events can help to save money but also can have a big trade off; loss of relatively healthy supplier relationships or creating more “arm’s length” styled commercial ties to the supply base for large spend categories.

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It’s important for procurement to understand how to plan what suppliers are involved and why. In other words, are they the types of competitive leverage relationships we can challenge in the market with an auction and still gain savings while sustaining performance from the relationship?

Understand that incumbents will resist reverse auctions seeing that it will lower profit margins and sidestep value-added services. Suppliers that come into the bidding event from the outside will see it as an opportunity to expand their existing businesses.

What are a few steps regarding planning for auctions with respect to supplier relationships procurement should consider?

  • First, ensure that procurement chooses categories that are truly a competitive leverage market. This means supply exceed demand, multiple suppliers in the market can provide the product or service to your organization and the specifications are open and not too restrictive.
  • Secondly, ensure you choose suppliers that understand the nature of the auction and strategy. It is not to tear away margins at the sake of savings dollars, but rather to ensure competitive pricing at a fair margin while expecting performance guarantees in addition to winning the business.
  • Thirdly, suppliers should be actively involved in the electronic bidding process as well. Rules need to be understood clearly and know the criteria for evaluation and award (lowest price versus best value), weights for each of the criteria, a timeline for decision-making and the reserve price (if any). Procurement should position incumbents differently than new suppliers coming in to participate. Understanding that incumbents have inside knowledge and idea of requirements, but need to be told that all suppliers will have a chance to win the business in the end. This avoids “preferencing” or favoring certain suppliers that may not feel compelled to provide best pricing as a result. New suppliers will generally find it advantageous to participate in the auction, because participation provides potential profit and additional market share gained.

Ultimately, procurement can be successful in implementing a well-planned, communicated and executed auction to help management reach its profit goals. More importantly, the manner in which you position the event in a professional manner with all participants understanding the rules and expectations for a fair outcome for all participants will go a long way in managing the relationships with suppliers during and after the commercial contract is complete.

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First Voice

  1. Nick @ Market Dojo:

    It can quite often be a case of tail wagging the dog whereby prospective procurement teams look into running eAuctions and approach their supply-base to get their view on it. Needless to say, many incumbents give a list of reasons why it is a bad idea. Well of course they would say that; it’s eroding the hefty profit margins they were making!

    So many times in our experience have we heard incumbents state that they will not take part in an auction. So many times have they actually taken part in said auction and reduced their pricing by large margins.

    Ultimately the auction identifies how ‘good’ that relationship really was, by clarifying that it was costing the buyer 10-40% above market rates.

    Should the incumbent be found to have offered a competitive price all along, welll, that’s a hugely valuable peace of mind.

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