Making Procurement auctions work; readers comment

We featured auctions recently and had very good interesting comments, including from Huthwaite, whose conference triggered our first post on the subject, and Garry Mansell of Trade Extensions, who provide software and services including for complex sourcing events - not purely auctions, it should be said.   We also had some practitioners chipping in with their views.   If you're interested in this topic, do go back and look at the comments in detail, but I thought we'd pick out a few key points here.

One issue was the whole question of whether the lowest bid does usually - or should - win the auction. That is a major source of contention from the sales side; they feel they don't understand the rules of the game which leads them to believe auctions are 'fixed' in many cases.  Garry points out that it is not a 'true' reverse auction if the lowest bidder doesn't win.

That's not to say that there is anything wrong with a more complex electronic selection and evaluation process; but if we are taking other factors and criteria into account, rather than purely price, then we are into a more complex optimisation-type sourcing event, not a 'simple' auction.  And the key factor that several people mentioned is the need for the buyer to be honest and open.  If you are going to take other factors into account, then that is fine; but explain that to bidders. As Garry says,

Good buyers spend a great deal of time talking to their suppliers before an auction and only then do they decide if they are going to buy on “price alone” when they know they are comparing apples with apples in all other aspects of the buying process.

Strong communication has to be good advice; it helps to motivate bidders to participate if they feel the buyer is being honest; it also helps ensure they know how to submit the best possible bid, which is in everyone's interest.

Kevin Potts of Emptoris made the point that, like any other form of buyer / seller negotiation, you have to know what your fall-back position is.  So are you really prepared to move your business if an incumbent refuses to take part in an auction or comes in expensive?  If you're not... be careful.   (It's all about your BATNA, as we seem to say regularly here!)

We also had some good analysis of suppliers' use of the Schindler tactic (see the original post - basically putting in a written bid pre-auction, or perhaps at the beginning of the event, then not moving on pirce through the process).  There was general agreement that it can be quite effective if used sensibly by suppliers.  And we had good and bad examples of auctions in which our readers have participated as both buyers and sellers.  Here's Guy talking about some bad experience:

In none of them was the prize of winning defined (i.e. if we won the auction, what did we win?). Also as they were multi lot auctions, and because of the way they were constructed, we couldn’t tell our ranking in the overall process during the auction, so felt no real competitive pressure. All in all pointless and it felt like the Procurement Department were running them just to tick boxes to achieve a certain amount of spend through eAuctions.

But Guy has also had some positive experiences ; and as Tim T says,

As a life long sales person I believe that the RA process is what you make of it and how you approach the opportunity. It is not going away! So why not embrace it and become a master of the process?

And a couple of people made the point that auctions could well be threatening, particularly to complacent, entrenched suppliers; we shouldn't perhaps 'sugar-coat' the process by pretending that it is always going to be sweetness and light.  Sometimes it is about looking for significant cost improvement, and some suppliers won't like that. As 'Bitter and Twisted' says;

If run badly they are unfair. If run well they cut profit. Lets not be mealy-mouthed and claim resistance is down to ignorance requiring “education”.

So, all in all very interesting topic, an excellent discussion, and one we'll come back to I'm sure in 2011. Thanks again to everyone who does comment on this and other posts; one of our goals for 2011 is to increase the number of people who do comment, so please don't be shy!

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First Voice

  1. Andy Moorhouse:

    Hi Peter,

    Some (public) quotes to further fuel the debate:

    Our research shows that the lowest bid often does not win the ‘e-auction.’ In just 17% of events the lowest bid is guaranteed the contract. Winners don’t come first! See our PowerPoint slides on this topic.

    SAP advises procurement professionals not to select the cheapest bidder:
    “Often you may find that the lowest bidder is not meeting quality and service grades and thus may select the second-lowest bidder”
    SAP Reverse Auction Best Practices Whitepaper

    The VP of Supply management at Sun tells it like it is:
    “There is no reason suppliers should like reverse auctions… It is a tool that is designed to transfer margins from them to me.”
    Kurt Doelling. Vice President of Supplier Management, Sun Microsystems

    TradingPartners suggest buyers should guarantee the lowest bidder a meeting – but not to guarantee them the contract.
    “Buyers will improve the result they can expect from an auction if they: guarantee to meet the first placed bidder promptly after the auction…The buyer must reserve the right to award the contract to a supplier at the buyer’s discretion, not necessarily the supplier who came in first.”
    TradingPartners Whitepaper: Does Procurement eAuction Design Matter?

    Finally, a confidential source at a global reverse auction consultancy informs me that ‘multi-attribute’ auctions make up less than 2 % of all their events.

    So the reality is:
    Procurement has conditioned suppliers to believe they have to be the cheapest. But unless procurement explicitly state ‘lowest bidder wins’, being the cheapest will not guarantee success.

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