Reverse Auctions – Know the Market Operating Prices

Wikipedia on Reverse Auctions – A reverse auction is a type of auction in which the roles of buyer and seller are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service by offering increasingly higher prices. In a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers undercut each other.

Reverse auctions take the supplier selection process a step further, enabling a buyer to collect and compare price and bid information of two or more suppliers in a real time, open bidding environment.

Reverse auctions are hosted by a single buyer and feature two or more suppliers competing for business. Such auctions are commonly used by organizations as a tactical way to achieve sourcing objectives.

When used appropriately, reverse auctions support the goal of strategic sourcing to significantly reduce the cost of purchases without sacrificing quality and service. Buying organizations can also realize the following benefits of auctions:

  • Greater insight into current market pricing
  • Superior savings as a result of the competitive dynamics
  • Less time spent negotiating best-and-final pricing

There are virtually no limitations to what can be sourced via reverse auctions, including the following examples: 1) Raw materials (such as iron ore, crude oil, and natural gas) 2) Processed goods (such as steel, chemicals, and polymers) 3) Business services (such as travel, accounting, printing, and legal) 4) Components and subassemblies (such as molded or machined parts, electronic components, or finished products) 5) One-time capital buys (such as cell towers or laboratory equipment such as freezers or centrifuges)

 

In order to ensure a successful reverse auction event, the buyer also needs to sell the concept to and get buy-in from suppliers. Some selling points to suppliers are as follows:

  • Auctions can reduce the sales cycle time, as award decisions can be made very quickly upon the completion of the bidding event.
  • Auctions offer transparency and set an even playing field, since all suppliers follow the same rules of engagement.
  • Participating in one auction event for an organization may create opportunities to sell to other divisions or business units.
  • Awards are made on the basis of more factors than just price, including quality and service level.
  • Auctions promote fair competition driven by market dynamics.

 

Procurement organizations have been running electronic reverse auctions for many years. However, the use of auctions has a long way to go to reach full potential. In fact, many organizations have yet to explore the benefits of auctions. Most others have yet to apply auctions to the full range of goods and services for which auctions can deliver value.

Supplier Management in Indirect Procurement

 

Supplier Management

 

Supplier management ranges from supplier qualification to supplier performance and risk management.  Starts with identifying the right suppliers who can give the desired quality. Suppliers must be checked against workplace safety, child labor and other social menaces. Next is to manage the performance once they have started working in the organizations.

 

Identifying and Onboarding New quality Supplier remains a challenge

All companies would like to keep adding quality suppliers who can provide best value for the buck but are limited by their knowledge of the outside world. For items under indirect procurement the huge time and effort spent on continuously searching the vendors often justified for the advantages which are actually realized. Plus the vendor base is often large and scattered across geography. The ability of companies and bandwidth of managers to identify and onboard new suppliers are also limited. Not to mention the time it would take for a manger to search, contact, negotiate and onboard a new supplier. The new supplier also has to be brought upto speed with practices of the company. Every company is different in its processes, payment terms, hierarchies and turnaround time. A new vendor has to learn all this and adjust. Research shows only 25% of the suppliers a company adds for indirect material are able to sink in with the practices of the company. Others may not be convenient with the process and try to compensate the friction by increasing their quotes.

Child Labor Audit

Apart from onboarding there are some other filters which every supplier should be put through. Social Audit is one of the important parameter. It includes an audit for child labor and worker’s safety. Many of the small indirect material supplier use child labor especially in the warehouses. As a socially responsible organization your company should not promote this. Periodic mystery audit for child labor should be done to prevent your organization becoming a party to a social menace.

 

Worker’s Safety

Worker’s safety is another parameter to evaluate your suppliers for. Best Of the organizations hire external consultant who audit the suppliers against following major work hazards:

Workplace Construction

Poor Equipments and Housekeeping,

Electrical – Wiring and Chords,

Fire,

Lockout/ Tagout

Chemicals,

Confined Spaces

 

Performance KPIs

Supplier performance part remains a challenging aspect for solution providers and organizations. Top management often wants supplier performance management to take place in the procurement system, because it creates transparency and removes the non performers.

Certain KPIs can be used to evaluate all suppliers (e.g. safety KPIs), but there should always be room for category- or supplier specific KPIs. Especially if an organization has very diverse business groups, a one-size-fits-all approach for supplier performance management is not ideal. Over the years many organizations have built their own category-specific dashboards and scoring methods. These should not be simply thrown away and replaced by the information in the system. It is best to work with the individual categories to design and configure the correct reflection of their performance management approach in the procurement system. Only by taking this approach it is possible to truly manage your suppliers and be able to work together with them, achieving higher performance.