White paper. Reverse e-auctions. A Recipe for Success

Transcription

1 White paper s A Recipe for Success

2 Executive Summary Enterprises and organizations whether small, medium or large have used s with varied degrees of success in the strategic sourcing cycle. While some buyers use it to drive substantial price reductions, others leverage it as a tool for price discovery and to gain knowledge of the supply market. At the other end of the spectrum, supplier organizations have conflicted views on s some find them fair and transparent while others believe only buyers stand to gain in s Overview Businesses conduct s as part of the strategic sourcing process mainly to drive down prices of products and services. Some companies leverage them as a tool for price discovery to ensure that their current prices are competitive in the market while others use Reverse e-auctions to understand supply market dynamics and supplier behavior in a competitive environment. In all these cases, suppliers need to be clear about their expectations from the process at the beginning. In its basic form, is an online real-time dynamic negotiation process between a buying organization and a group of pre-qualified suppliers. by squeezing supplier margins. However, with the right approach, administration and execution, s provide significant benefits to buyers and suppliers by delivering value and improving business outcomes. This white paper discusses the process and key considerations of building a business case for s as well as the critical success factors that buying organizations must be aware of before starting a project. s in an alternative tactical The suppliers are competing against each other to win contracts to supply goods/ services with clearly defined specifications for design, quality, quantity, delivery, and related terms and conditions. Suppliers compete by bidding against each other over the internet using specialized software. They submit successively lower priced bids during a scheduled time period, usually lasting about an hour. However, multiple and brief extensions are allowed when bidders are still active at the end of the initial time period. It is important for organizations to understand that a is a tool to facilitate online negotiation sourcing tool to support the negotiation process and require careful administration and execution. This paper also explains popular misconceptions about the process and serves as a guide to successfully identify, prepare for, and execute successful e-auction events. within the sourcing process while presenting a viable alternative to oneon-one negotiation with suppliers. As a proven technique for discovering the best commercial offer the supply market has to offer, this tool is most successful when coupled with rigorous research analysis, a robust sourcing strategy, clearly defined Requests for Proposal (RFP)/ tender documents, and a competitive supply market. However, it is not suitable for all types of spend categories and is not the only e-sourcing tool relevant to the sourcing process. More importantly, it is not a substitute for the strategic sourcing process and behaves as a complement to the negotiation process. Select your e-sourcing Strategy carefully There are several factors to be considered before choosing an e-sourcing strategy such as spend segmentation, supply market competiveness, specifications, supplier switching risk, and associated cost. The table below presents an analysis of key factors as guidelines to choosing a strategy in three situations RFP, and a combination of both. RFP RFP & Reverse Auction Reverse Auction Spend characteristics Complex Custom Generic/ Commodity Product/ service specifications Created by buyer Created by buyer Industry standard Driver Predominantly Value Value and price Mostly price/ volume Supply market competitiveness Monopolistic Competitive Very competitive Supply base Single or few Many Large pool Supplier relationship Strategic Limited Transactional Switching cost and risk Very high Medium Low Guidelines for an e-sourcing strategy using an RFP, reverse e-auction or a combination of both

3 Where do s fit in the Strategic Sourcing Process? Assuming that strategic sourcing is a seven-step process, enterprises engage in s at the fifth step after conducting supplier analysis and supplier short-listing. At this stage, enterprises want the shortlisted suppliers to state their prices. Spend Analysis/Opportunity Assessment 7 Step Strategic Sourcing Process Category Internal/External Analysis Develop Sourcing Strategy Shortlist Suppliers Develop RFP/RFQ/Conduct Auctions Negotiation/Agreements s will come into the picture in the 5th stage of the strategic sourcing process assuming a 7 step standard process. The process kicks in once you have completed your supplier analysis and developed the supplier shortlist and you now want the shortlisted suppliers to provided prices Implement Agreement Monitor Performance Approaches to Reverse e-auctions Companies need to carefully choose the stage at which they leverage Reverse e-auctions in order to ensure a smooth process. Auctions can be conducted after the Request for Information (RFI) stage selects a final list of vendors or, in cases where there are a large number of potential suppliers, after an elaborate Request for Quotation (RFQ)/ RFP process. While there are several approaches to conducting s, they are all driven by the need for additional screening to choose the best supplier after considering non-price factors. In cases where the suppliers are already known, s can be directly conducted. The recommended five approaches to conduct s are shown below: 1 RFI 2 RFI RFQ 3 RFI RFP 4 RFQ 5 RFP Recommended approaches to conducting a

4 Key Phases in a Event A event consists of six phases and can be a time-consuming and complex process depending on the product/ services being procured, number of suppliers and geographies involved, currencies, number of line items, etc. The six phases of the process are shown below: Select Category Feasibility analysis Share details with stakeholders Auction Strategy & Planning Choose right lotting structure Choose right bidding rules and disclosure Stakeholder communication Live Auction Configuration & Management Create event in system Monitor event Remove erroneous bids Surrogate bidding Answer queries through messaging system/phone Supplier Outreach Supply market analysis Identify,evaluate and screen Prepare shortlist Supplier Set-up and Training Communication Registration and set-up in system Conduct mock training event Clarify queries Post-auction Activities Scenario analysis Award suppliers Reporting Identifying an e-auction Category Prospect In a supply market driven by competition, commercially attractive spend value, and high availability of suppliers, s help enterprises negotiate for the best prices. There are some key factors to be considered when planning such a prospect as shown below: Key Considerations when planning an e-auction event Substantial spend value Supply market competitiveness Compressible profit margins Clearly defined requirements Supplier switching cost and associated risk Companies require considerable spend value for a given category to attract supplier participation. While the minimum requirement is USD 100,000, there are auctions where the spend value is as low as USD 30,000. In such situations, companies need to consolidate spend across business units, geographies, years, etc. s require a highly competitive environment with a high number of suppliers that can service the required category and are willing to partner with the company. Training can be provided to suppliers who are unfamiliar with online auctions to help them participate successfully. Further, companies can also provide positive scores to incumbents that have established a previous positive track record. Suppliers that operate on high margins tend to reflect these margins onto buyers owing to the competitive pressure of the auction. Product/ service specifications and contractual terms and conditions must be clearly defined to the supplier to ensure a successful Reverse e-auction. Typically, Reverse e-auctions are successful when the cost of switching suppliers ranges from low to medium and the associated risk is low. It is important to assess all cost elements of doing business with new suppliers to optimize Total Cost of Ownership (TCO).

5 Value Proposition for Buyers and Suppliers The common understanding is that s benefit only the buyers who gain business value by squeezing supplier margins. However, suppliers as well as buyers benefit from the two-pronged value proposition of such auctions. It is important for suppliers and buyers to be aware of their common and individual benefits to foster a collaborative and competitive relationship. Benefits for Buyers Benefits for Suppliers. Enables substantial spend savings (15-30%) Helps leverage real-time and dynamic competition Reduces administrative cost by (2-5%) Enables market transparency Lowers negotiation cycle time (25-40%) Reduces sales cycle time Improves knowledge of the supply market Improves market intelligence Increases buying reach/ reduced geographic constraints Ensures a level playing-field Improves process consistency and creates fair competition for new and incumbent suppliers Improves business opportunities for new companies Successful e-auction for a Range of Categories When administered and executed properly, all varieties of categories can be sourced through s provided they have passed the suitability test. In the past, e-auctions were conducted for categories ranging from raw materials, processed goods, business services, freight, marketing services, etc. A company can benefit from cost savings at an e-auction depending on several factors such as current pricing, category maturity, number of participating suppliers, and total value of the requirement. The table below displays a non-exhaustive list of Level 1 categories in which successful e-auctions have been conducted. Facility management Marketing services Office equipment Freight Real estate services IT hardware and consumables Contingent labor Print and stationery Telecom equipment Raw material Employee benefits Financial services Furniture Electrical components Maintenance services Construction Human Resource Services Packaging Mineral water

6 Critical Success Factors The main reasons for unsuccessful Reverse e-auctions are: Ambiguous specifications of products and services Improper/ inadequate training of participating suppliers on process and tools Internet connectivity failure during an The key factors that drive the success of a are outlined below: Ensure adequate planning and preparation Ensure buy-in of internal stakeholders as well as suppliers Establish baseline and get relevant permissions from finance departments on savings methodology Clear communication of auction strategy, items specifications and other terms and conditions Ensure thorough bidder and host training including mock s Ethical considerations Optimal e-auction time period is 30 minutes to 4 hours Sustainable and quick internet connection Leverage a robust e-auctioning tool while knowing its limitations Proper management of the live e-auction Build credibility and trust with suppliers by honoring auction results event Supplier cartelization Incorrect bidding and supplier errors during the event Critical Success Factors Impact on Success To plan properly for an event, stakeholders need to: Understand the supply market dynamics Conduct a feasibility study to select the most suitable categories Prepare a project plan detailing all the activities, timelines, and owners Employ project management for large and complex e-auctions Ensure adequate number of qualified suppliers participate in the event A larger number of suppliers generates more competition, thereby leading to improved savings E-Auction failures are usually due to lack of clarity, expectations, and process objectives. To ensure Medium buy-in from suppliers and buyers during the process, it is necessary to: Conduct awareness sessions on the process light the benefits for both buyers and suppliers To plan properly for an event, stakeholders need to: Understand the supply market dynamics Conduct a feasibility study to select the most suitable categories Prepare a project plan detailing all the activities, timelines, and owners Employ project management for large and complex e-auctions Ensure adequate number of qualified suppliers participate in the event Companies must accurately estimate category base lining since all savings are compared with the base line cost. This cost, also known as historic cost, can be the last purchased price/ average price for the previous fiscal year, the lowest purchase price, or a weighted average price. Companies must also ensure finance and other stakeholders approve the base line cost along with the savings calculation methodology. Buyers should clearly communicate the auction strategy, design, Lotting structure, and bidding rules Very to the suppliers to avoid ambiguity. s is a new trend and many suppliers are unfamiliar with this paradigm shift. Buyers should ensure that adequate training is provided so that all suppliers are comfortable with the online tools and are aware of their features. Having a trained supplier base is critical to event success. A recommended practice is to conduct a mock training event where suppliers can practice, clarify queries, and have firsthand experience of bidding and navigation. Companies can also send a customized deck for the auction type prior to the mock event. The e-auction window should be carefully chosen to optimize supplier participation and avoid supplier fatigue. Suppliers should be well-prepared to bid spontaneously during the e-auction period. A window of minutes provides the best results. In cases where companies need to cover several line items, they should decide upon a lotting strategy to ensure supplier interest as well as coverage. A recommended practice is to gather knowledge about supplier interest for a line item or lot prior to the event and invite those suppliers for that lot or line item. Superior internet connection is crucial to the success of an event for buyers and suppliers. A recommended practice is to ensure power back-up facilities in case of power failure. Suppliers can also contact the event manager who can place a bid on their behalf. Buyers should employ a robust e-auctioning tool that has basic features and functionalities along with the capacity to create lots and enable flexible bidding rules, preliminary bidding, messaging system, surrogate bidding, removal of wrong bids, and basic and advanced reporting. It should also allow awarding and scenario analysis when there are several line items and suppliers participating in the event. Companies need to be aware of the capacity constraints of the tool in supporting line items and suppliers to avoid system crashes and event failures. Buyers should monitor erroneous bids by suppliers and establish multiple communication channels for live support and quick query resolution such as instant messaging Frequently Asked Questions (FAQ) support and dedicated phone line for supplier support. They should also enable a stand-by system to monitor the event. Buyers must honor auction results to build credibility for s, establish higher supplier trust in the process, and ensure continued participation in future events. They should implement procedures that ensure a robust supplier short-listing process. Further, buyers need to be prepared to award business contracts based on the terms and conditions established within the promised timeframe. Medium Very Medium

7 Breaking Common Myths around Many buyers and suppliers have misconceptions about the process and efficacy of s. Some of these are outlined below along with market facts that support the benefits of this process: s are commercially viable only for indirect commoditized categories Reverse e-auction can be applied to any category with a sound business case that involves the factors discussed above. While it is applicable for both direct as well as indirect categories, indirect categories are more amenable for a. Only buying organizations benefit from a process Typically, both buying organizations as well as suppliers gain from the e-auction process. While buyers draw substantial price reductions owing to dynamic competition inherent to the process, suppliers benefit from better process transparency of the process, improved supply market intelligence and reduced negotiation cycle time. s focus on price and do not consider non-price factors While price and volume drive Reverse e-auctions, non-price factors must be taken into account before the e-auction process starts. Usually, elaborate RFIs and RFPs are used to bring suppliers to a level playing-field and eliminate those unfit for the current requirement. However, there are occasions where buyers focus only on whether the offered product/ service meets the basic requirement and do not consider other value factors that the supplier offers. The transformational bidding feature provided by some best-of-breed auction software can be used to offset this disadvantage by giving appropriate consideration to non-price factors. Choosing your e-auction Platform Provider Sourcing personnel can choose from a range of market-ready e-auction tools and service providers that offer different features and functionalities. As advanced functionalities can possibly overwhelm personnel that are unfamiliar with these software suites, it is important to select a tool with core basic functionality that drives efficiency, accuracy, consistency, and greater collaboration with stakeholders. They should also consider other factors such as price, features and functionalities and robustness of the system as well as non-functional requirements such as data security, scalability, etc. It is recommended that sourcing personnel conduct a thorough technical and functional evaluation of the product along with product demonstration before choosing their tool/ provider. The e-auction module is usually bundled with sourcing software. Companies should also be aware of the limitation of various tools in terms of capacity it can support, features and functionalities to address different business scenarios. Conclusion s are a tactical tool in the e-sourcing strategy tool kit that can be used as a means to discover and negotiate prices. As an alternative option to face-to-face negotiation, Reverse E-Auctions provide simplicity, quick results, and competitive pricing across suppliers and geographies. The process benefits suppliers as well as buyer by reducing spend, improving supply market intelligence, and providing process transparency. To ensure successful s, companies need to carefully select their categories and employ a robust execution plan, trained supply base, and a robust technology platform with best-in-class features and functionalities. Buyers should incorporate systems and procedures that ensure consistent communication with the suppliers throughout the process and query resolution before and during the event. By adopting the right approach and honoring the terms and conditions of the process, s become a valuable tool to build supplier-buyer relationship and deliver business value through optimized pricing and procurement.

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