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Strategic Sourcing Techniques Using Reverse Auctions

Thursday, February 2nd, 2012

Today’s post is by Ryan Melowic Director of Customer Services at SafeSourcing.

Strategic sourcing is critical to any business owner or buyer in today’s market.  Strategic sourcing techniques that focus on getting the best deal possible when purchasing products or services should be a part of any organizations procurement strategy.  By having suppliers competing for your business it allows an organization to discover the best terms that their particular market has to offer.  Most small to mid-sized businesses don’t have the resources or connections available to discover vendors outside of their local market place. By utilizing strategic sourcing tools like reverse auctions, your organization can more effectively control costs, achieve better terms, increase value from existing purchases all while maximizing efficiencies of your purchasing process.

Reverse auctions as a sourcing strategy can have an incredible influence on an organization’s cost of operating their business which speaks directly to the bottom line.  Taking into consideration even a small cost savings on products or services can have a value increase that can significantly impact the bottom line.  Studies show that just saving 7% – 10% on procurement costs can have a direct increase on an organizations profit margin and in some cases seeing a 30% – 50% increase.  Strategic sourcing techniques using reverse auctions can be a great strategy for increasing profit margins.

The strategic sourcing technique of using reverse auctions is just one sourcing strategy that allows organizations to feel confident that they are getting the best deal possible when purchasing products and services.  Historically reserved for large corporations and multimillion dollar purchases, today’s newer reverse auction solutions, such as the one offered by SafeSourcing, allows this technique to be available to small and mid-sized businesses and for purchases of all sizes.  Representing capitalism at its best,  reverse auctions a re a strategic sourcing tool that brings competition together to have an opportunity to bid for business they may not have otherwise gotten while at the same time putting the purchasing power of an organization in a platform where these vendors compete aggressively in a real-time environment for their business.

For more information on Strategic Sourcing Techniques Using Reverse Auctions, please contact a SafeSourcing Customer Service Representative. 

We look forward to your comments.

Posted in B2b Reverse Auction, E-procurement Solutions, Reverse Auction

Reverse auctions will drive consistent results over time.

Thursday, December 22nd, 2011

To use a baseball analogy, you may not get the grand slams and homeruns typically seen during first year implementations of reverse auctions but with proper planning and execution you will at a minimum continue to beat market pricing. Think of it as singles, doubles and triples for the at bats after you have hit a home run.

In order for this to happen we have to understand how to conduct successful auctions in today’s business world and it is not the same old same old where the low bid always wins. The number one job of any business is to drive bottom line profitability. Because of this, companies that win your business during an E-RFX process need to make the business they have just won as profitable as possible. They may take your business during an auction as a loss leader in the hopes of selling you more volume at a lower margin or selling other products to you. They may take your business at a loss in a down economy to drive cash flow in order to just keep going. They also will take actions during the next year or two to drive their internal costs down. All of these circumstances and more mean that there is potentially more compression on the table the next time around. The why is actually pretty simple? Your new supplier wants to keep the business and the relationship, your old supplier wants their business back and other suppliers want new accounts.

There are many other benefits to running these auctions again and again. New products offerings with better features, new suppliers that you are not aware of, suppliers you strategically did not invite the 1st time, existing products with new technologies and quality improvements to name a few. To support this, don’t sign contracts for periods of longer than two years or you will be paying too much by contracts end.

If your e-procurement solutions provider knows what they are doing, reverse auctions can and should become a long term tool in your procurement tool box.

We all know that the consistent hitting of singles and doubles wins more games. In fact a grand slam can’t happen unless there are already runners on base.  If you want to hear more about how to succeed year in and year out with this process, please contact SafeSourcing.

We always appreciate your comments.

Posted in B2b Reverse Auction, E-procurement Tools, Reverse Auction

Part III of III. There are all types of reverse auctions.

Friday, December 16th, 2011

I like these types of words. Vickrey has a certain ring to it doesn’t it? In fact there are so many types of reverse auctions that we can’t deal with them all in a single blog. Some of the other types beyond the reserve price auction we have already discussed in this series and the Vickrey we will discuss today are English Auctions Yankee Auctions, Dutch Auctions and many more. Each type of auction evolved to be used for different type of purchasing.

I like the premise behind the Vickrey auction because of the gaming discipline that psychologically encourages bidders to keep fishing or playing. To this author what is important in today’s e-procurement platforms is that all features of all auction types ought to be available for use within a single event. By this, I mean we should be able to use all features of any auction type within a single event. An example might be using deciles, market baskets and units as a framework for a single event and have the flexibility to apply any feature such as reserves, ranking, indices, extensions and any other feature to each as well as each line item within an area. This flexibility drives the best possible savings for the host within one event.

Now back to the Vickrey.

According to Wiktionary the Vickrey reverse auction is named after a Canadian professor of economics named William Vickrey (1914-1996) who was also a Nobel laureate.  Vickrey’s paper, Counterspeculation, auctions and competitive sealed tenders, was the first of its kind using the tools of game theory to explain the dynamics of auctions. Any one that truly understand the magic of a reverse auction understands that the same type of psychology that drives gaming in a Casino drives the dynamics of a reverse auction.

Because there are so many types of reverse auctions it is important to develop an individual strategy for each category that you decide to take to market. Specifically to the opening question, a Vickrey auction allows for selling single items where the lowest bidder sells the item at the price offered by the second lowest bidder.

Now try and figure out how you would implement this strategy. Would you use ranking? If so, what impact might it have?

We look forward to and appreciate your comments.

Posted in B2b Reverse Auction, Reverse Auction, Sourcing Strategy, Strategic Sourcing

Part II of III. There are all types of Reverse Auctions.

Thursday, December 15th, 2011

In a reserve price reverse auction, the buyer establishes a “reserve price”, the maximum amount the buyer will pay for the goods or services being auctioned. This is also sometimes called the desired price, or a “qualification price”. Careful thought is required on the part of the retailer in determining their reserve price. I personally have seen retailers try to just use their existing price from their last contract. This type of practice may set unreasonable expectations, particularly if the market has changed dramatically in an upward direction since the last award of business. In today’s market, fuel would be a great example of something that you would not set a reserve price based on a previous contract if you wanted incumbent or new suppliers to take you seriously.

Traditionally, if the bidding does not reach the “reserve price”, the buyer is not obligated to award the business based on the results of the reverse auction. However once the reserve price is met, the buyer is obligated to award the business to a participating supplier or group suppliers based on previously published auction rules.

Additional pricing considerations can be given to adding other price points or qualifiers in a reserve price reverse auction such as entering a market price. In the case of fuel, this may be from a price index such as OPIS. This information can be visible or blind to the supplier, but let’s the retailer compare a suppliers mark up strategies. This also offers a nice opportunity to calculate cost avoidance during an up market.

We look forward to and appreciate your comments

Posted in B2b Reverse Auction, Eprocurement Auction, Strategic Sourcing

Reverse and Forward Auctions are getting more attention now than any time in the last ten years.

Wednesday, December 14th, 2011

I was reading the Wall Street Journal yesterday by Francesco Guerrera titled Facebook’s $10B Question which was about their planned IPO. The article went on to discuss the possibility of using a Dutch auction for the IPO versus building a traditional book like most IPO’s. Quite franking I found it an intriguing approach and it has been used before for this purpose. I’m just not sure I would use the Dutch auction approach.

However that is for another discussion. The point of this post is that most companies using reverse and forward auctions are not even aware of the number of auction types available or how to use them for achieving specific purchasing goals. A couple of years ago I posted about the variety of auctions types and their use. I’m not even sure that most e-procurement companies could answer your question if you asked them to define the specific types and how you might use them for different situations.

There are all types of Reverse Auctions. If you check back tomorrow we’ll discuss a Reserve Price Reverse Auction which is one of the most common and how to use it.

If you can’t wait, contact a SafeSourcing Customer Services representative and they’ll be glad to discuss it with you.

We look forward to and appreciate your comments.

Posted in B2b Reverse Auction, Strategic Sourcing

The Source of Internal Fear for Sourcing Projects

Tuesday, December 13th, 2011

Today’s post is by Mark Davis; Vice President of Operations and CTO at SafeSourcing.

Fear is the anticipation of the unknown yet assumed negative action that is about to occur. 

As it relates to sourcing, there are two very important pieces to this definition that can begin to unlock why some sourcing projects fail internally before they ever begin: the “unknown” and the “assumed negative.”  Today’s blog is going to focus on these two items as you begin to think about your 2012 projects.

Decision-Making Control – One of the greatest fears procurement departments encounter from their internal customers is the fear that they will lose control of the decision making process and that price will end up being the only thing used to evaluate the final decision.  The important thing here is a kickoff meeting to discuss the project and reassure the team that every aspect of the project from the layout, to the participants, to the actual award decision will be reviewed and approved by the business owners.  Showing the clear checkpoints for evaluation will help ease the unknown of what is to come. 

Strong vendor relationships – Vendor relationships can be the cornerstone of many companies and one that initially can create apprehension for some sourcing projects.  The key at this stage, no matter what approach is being taken (RFI, RFP, RFQ, etc.) is that the team understands that the overall goal of the project is to collect the information needed to make the decision defined in the scope.  In the process of doing this, the business must continue to operate so establishing that communication with vendors (particularly incumbents) will be handled with the upmost care.. 

Sourcing something new  – The biggest unknown and thus a big source of potential fear is the sourcing of a new item or service.  It is natural for an organization to run into some road-bumps when sourcing something new, especially a new service.  They important key here is to budget the time necessary to understand the service or item and the companies that offer it.  Many times the flow for a project like this will collect internal information through a survey, move into an RFI or RFP and if applicable wrapping up with final pricing collection.  Take it slow and you will see that new projects can actually present faster timelines and quicker final decisions.

As with any project there will always be objections and concerns from members of your organization.  Taking the time to communicate the objectives with the organization, showing them specific milestones where they will be intimately involved is the key for success as well as taking the time to gather all of the details necessary to make a final decision.  For more information on overcoming internal objections of your upcoming 2012 sourcing projects, please contact a SafeSourcing Customer Service Representative.  

We look forward to your comments.

Posted in B2b Reverse Auction, E-procurement Solutions, Eprocurement Auction

Is it possible to compress prices in this market? Commodity prices are rising aren’t they?

Tuesday, June 14th, 2011

This is the precise reason why some companies are profitable and others are not. Just because the commodities that are the basis for products we buy are up, is no reason to not try and compress pricing through the use of e-negotiation tools or other more traditional methods. With that said e-negotiation tools will make the process much easier and insure compression in a much shorter period of time.

There is a lot that goes in to the products companies buy and maybe even more in the prices they pay. Two things are certain. There will always be suppliers that want to bid on your business. There will always be suppliers that are willing to invest to get your business. This dynamic is what will allow you to compress prices in an up market.

However, there is work to do on your part in order to make sure you are sourcing the categories or products that make the most sense at any given point in time. Here are two things you can and should do. Check your current contracts. Those that are over two years old with the same supplier will be more likely to drive savings. Check the commodity markets for specific commodities that will impact your pricing. As an example, the price of oil is up so freight will be more expensive. A great place to check commodity data is index mundi. You can check current and historical commodities and product related pricing.

Understanding everything about what you re buying and what drives its prcing and using the proper tools to leverage the supply base can and will result in price savings even in an up market.

We look forward to and appreciate your comments.

Posted in B2b Reverse Auction, B2b Supply Chain, Business Sourcing

What is a Reserve Price Reverse Auction?

Monday, April 18th, 2011

In a reserve price reverse auction, the buyer establishes a “reserve price”, the maximum amount the buyer will pay for the goods or services being auctioned. This is also sometimes called the desired price, or a “qualification price”. Careful thought is required on the part of the retailer in determining their reserve price. I personally have seen retailers try to just use their existing price from their last contract. This type of practice may set unreasonable expectations, particularly if the market has changed dramatically in an upward direction since the last award of business. In today’s market, fuel would be a great example of something that you would not set a reserve price based on a previous contract if you wanted incumbent or new suppliers to take you seriously.

Traditionally, if the bidding does not reach the “reserve price”, the buyer is not obligated to award the business based on the results of the reverse auction. However once the reserve price is met, the buyer is obligated to award the business to a participating supplier or group suppliers based on previously published auction rules.

Additional pricing considerations can be given to adding other price points or qualifiers in a reserve price reverse auction such as entering a market price. In the case of fuel, this may be from a price index such as OPIS. This information can be visible or blind to the supplier, but let’s the retailer compare a suppliers mark up strategies. This also offers a nice opportunity to calculate cost avoidance during an up market.

We look forward to and appreciate  your comments

Posted in B2b Reverse Auction, Reverse Auction, Reverse Auction Procurement

Will a Reverse Auction always result in savings?

Thursday, April 7th, 2011

To the above point, this author has never seen a single category or product that can not be sourced using a reverse auction. And, I know many will argue this point with me. My answer however is a little more complex and is based on the evolution of original reverse auction or e-negotiation tools. As these tools have evolved, so have the processes associated with them whereby today’s tools have many features that support the entire RFI to RFP process within the same toolset resulting in a final compression event of reverse auction?

The process is really what determines the success of your e-negotiation event and that includes the determination of what it is you are looking to measure. Simply indicating that you want to reduce last year’s price or the price from your last contract is not always a fair analysis. Markets fluctuate daily and a year after your original contract, markets that drive the product you are sourcing may not be favorable to reducing your current price. However utilization of these tools may be able to help you reduce prices you might have to pay while prices are rising or put another way help you avoid costs. Cost avoidance is a good thing, particularly if your competition is not doing the same thing.

In many cases, if your contracts are not current and you have not used these types of tools to negotiate your current pricing and you do not know where to find alternative sources of supply; you will most likely see savings during the first year. After that the category and commodity driving it will determine further compression, holding prices constant or cost avoidance. All are a benefit of todays best of breed e-negotiation tools.

We look forward to and appreciate your comments.

Posted in B2b Reverse Auction, Business Sourcing, Global E-procurement, Reverse Auction

Improving profitability 73% and why more companies don’t use reverse auctions and other e-procurement tools?

Friday, March 25th, 2011

Reverse auctions are web based  or Software as a Service (SaaS) applications that let retailers and other companies find the best suppliers for any resale or not for resale product or service they wish to source.  Using a web based reverse auction tool, retailers, other companies or groups of companies (Group Purchasing Organizations) can invite far more suppliers to take place in reverse auctions than they could possibly find or manage using traditional sourcing methodologies. During the reverse auction event they can review on one page all responses from suppliers, data about suppliers, notes from suppliers, product specifications and other necessary information at an instant. Upon auction conclusion which is typically less than 30 minutes retailers and other companies can review savings scenarios and award business from their desktop.

Now let’s get to the simple financial benefits. Let’s assume a $150M Retail Company with industry average earnings of one percent or $1.5M. Additionally cost of goods for this company is 70 percent or $105M. Let’s also assume this company were to only source ten percent of their for resale or above the gross margin line spend or roughly $11M. With below industry average savings of ten percent, total savings generated would be $1.1M which is a direct impact to net profitability. If all other segments of the P&L perform to plan and all savings are recovered during the same business calendar year net profitability would increase to $2.6M or a 73% improvement.

So, why don’t many companies use reverse auctions and other e-procurement tools? That’s a great question!

If this author were you, I just could not ignore this type of opportunity.

We look forward to and appreciate your comments.

Posted in B2b Reverse Auction, E-procurement Tools, Reverse Auction

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