A Modest Proposal: Recasting Auctions in Procurement, Supply Chain and Trade Financing


Looked at from an industry perspective, dynamic pricing and auction mechanisms have become the awkward middle child of procurement, supply chain and trade financing technology. What used to be the centerpiece of business models has become a secondary component of most procurement suites and technology models — or is downplayed as a feature rather than something at the core.

To me, this is a shame. The application of market pricing mechanisms and market-driven information discovery to all things procurement — not only limited to negotiations with suppliers during sourcing events, but far beyond, including internal stakeholder collaboration (e.g., prediction markets), invoice discounting and much more — is acknowledging that the invisible hand can do a better job than any direct human-to-human connection at determining a market clearing price. (However complex that market mechanism may be mind, you!)

Research download: Guided Buying: Making P2P Consumerized and Compliant

Perhaps it’s time to move on. Semantically speaking.

I believe it’s time to reframe the “auction” discussions around the concept of either dynamic pricing or marketing pricing mechanisms, terms that are as old as reverse auctions in the procurement space but bring less baggage with them, for whatever reason. Enough technology providers scoff at the auction term — some take so much offense to it for whatever reasons that they have even threatened to “never do business” with those mentioning auctions as a means of describing a capability — that it’s probably time we just admitted it's a scarred phrase and do away with it while keeping the concept.

So here’s my proposal, and what I’m personally offering to bring to the table, given the importance of the topic and the fact that the past label is clearly not doing anyone a service:

  • We cast semantics aside and adopt new terminology to describe the concept of auction markets. The terms above, “dynamic pricing” and “market pricing,” are possibilities but perhaps there are others. Any suggestions?
  • We start a new dialogue as collective members of the industry about all the areas where they are applicable and where they can be used within procurement, supply chain and trade financing.
  • We think about how best to educate, and evangelize, the concept of market mechanisms applied to pricing, procurement decisions and the rest. Since the burying of the original marketing behind FreeMarkets within the Ariba organization and then the Accenture behemoth, there has not been a champion for the cause of market mechanisms applied to these areas. Let’s work together and essentially create a new voice.

I’d like to propose an open discussion (webinar format) on the topic sometime in late November or December. If anyone would like to participate, present or co-lead this with me, please let me know. Also if you think I’m crazy and this is a waste of time, chime in as well!

At the minimum, here’s what I’d like to cover on the discussion:

  • All the areas within procurement and related functions where market mechanisms and dynamic pricing, based on price or non-price variables, have applied in the past
  • All the areas where market mechanisms and dynamic pricing, based on price or non-price variables, could apply
  • Dynamic pricing in related markets including a summary of the latest usage and academic work on the topic, and how it might apply to us
  • Ideas for reframing and marketing market mechanisms and dynamic pricing to a new generation of individuals and organizations
  • Anything else you’d like to see

I need help in this! Let us know if you’d like to join in the effort.

Not too many people know this anymore, but I originally got into reverse auctions because one of the founders of FreeMarkets read something I wrote on the topic and I decided to pay a visit to Pittsburgh to debate the topic and learn more. Without reverse auctions — and my fascination with the applicability of models to procurement — there would never have been a Spend Matters.

Please follow Jason Busch on Twitter @jasondbusch

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Voices (2)

  1. Alan Holland:

    Excellent point.

    Having come originally from an academic background and teaching Auction Theory and Game Theory at a University, I was very surprised at the irrational dislike of auctions in the procurement and supply chain community. This aversion is founded on the assumption that competing suppliers have the same or very similar production costs so margins drop to zero. But if that’s the case then its time for market consolidation or product differentiation to incentivise less price oriented competition formats. Complainants are focused on the wrong problem, it’s not the auction that’s the issue, it’s their product or service.

    What struck me as even more strange was that most people don’t appreciate that RFQs are just a sealed bid auction and the same equilibrium analysis is applied in continuous and sealed-bid auctions. In fact, the Revenue Equivalence Theorem tells us that clearing prices are the same in sealed-bid, English, Dutch and 2nd-price auctions. Bidders just operate with actual competitor pricing info or expectations of competitor pricing info.

    So the pendulum of opinion in the SCM and procurement communities continually change here but the underlying economic results tell us they are not so different in reality.

  2. Paul Smith:

    I wrote a couple of blog posts on this very topic way back in 2010. Still seem relevant today:

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