Reverse Auctions have been in use for several decades when buyers need to negotiate with multiple suppliers at a time. Both suppliers and buyers appreciate the transparency that online auctions bring to the process. With greater awareness of the benefits, more and more companies across the globe use online auctions.
However, while they work for some companies, they do not work for others. Why? After all, it is just a software enabler of the negotiation process. In this article, we look at some of the key reasons why eAuctions fail to deliver the desired results. Addressing these points will no doubt deliver optimum value to an eSourcing initiative.
Reason 1: Inviting unqualified suppliers to the auction event
Auctions should ideally be the final step in the negotiation process. Negotiating with suppliers post the auction is a big no-no. Similarly, qualifying suppliers post the auction has its demerits too. Assume the lowest-ranked supplier is disqualified post the auction. The next ranked supplier will doubt the veracity of the event and will likely be peeved.
Reason 2: Poor supplier management
Suppliers would much rather compete in a transparent and fair market, where their capabilities can be fairly evaluated. They prefer to participate in auctions with similarly capable suppliers. They doubt an unclear selection and shortlisting process. Having a simple auction tool is critical to ensure suppliers aren’t discouraged from participating in online auctions.
Some common supplier queries are the following:
- Why is the buyer even conducting a reverse auction? We have serviced them well over the years and delivered terrific value, so why this change?
- Am we competing against suppliers that have a poorer manufacturing facility compared to ours?
Reason 3: Having price as the sole criterion for award
This point cannot be stressed enough. Not just the suppliers, but internal stakeholders within the organization (from Quality, Manufacturing, After-Sales, etc.) too need to be convinced that the procurement team is not out to sign deals with the cheapest suppliers.
Hence, the reiteration of the earlier point on the supplier qualification process is extremely important.
Reverse auctions too need to support this. When suppliers with varying capabilities compete in the same auction, the benefits of the more-capable suppliers must be accounted for.
Read this article – Transformed Pricing helps in comparing prices from dis-similar suppliers – that details why Total Cost auctions are an absolute necessity.
Reason 4: Selecting the wrong category for the auction
Category dynamics play a major part in the outcome (read savings) of a reverse auction. For example, selecting an item with hardly any compressible margin, say sheet metal fabricated items, will not deliver any measurable savings even though the spend may be high.
Reason 5: Unclear specifications, terms and award criteria
Conducting online auctions assumes that precise specifications can be drawn up for the product being sourced. Having precise specifications and service expectations help suppliers in pricing their offering accurately, especially when the bidding gets competitive. We cannot expect suppliers that have been awarded the business to meet the unstated requirements later. While the reverse auction process gets blamed for this, this often happens in offline negotiations too.
For commodity-driven categories, a long-term agreement without any price factoring does not work.
The award criteria is a key motivator for the supplier. When a supplier places the lowest bid, they expect to win a higher share of the business. So buyers need to clearly mention the intended share of the business. Will a single vendor be awarded the entire business? To 3 vendors? If 3, then what’s the typical share to each? If it’s a new supplier, then what’s the ramp-up period & process to achieve the stated share of the business?
Reason 6: Lack of management support
Studies show that the implementation of reverse auctions has a better outcome when it has a top-down approach. With the management’s support, the following was achieved:
- Supporting functions worked jointly with purchase teams to deliver on bigger goals. This encouraged innovation and a focus on several cost-reduction levers as well.
- Resistance from suppliers to participate in online auctions was better managed. Suppliers could sense a serious buyer intent to negotiate via reverse auctions across a broad set of categories.
Krinati provides Program Management Services that help customers achieve an optimum outcome from their eSourcing initiative. Our eSourcing playbook helps our customers navigate through every phase of the journey – train users, shortlist categories for cost reduction, manage suppliers, address change management, set up a review mechanism and much more.