Part III. Why don’t middle market retailers use reverse auctions and other e-procurement tools?

August 22nd, 2008

Now that we understand why the middle market is not participating in reverse auctions

Now that we understand why the middle market is not participating in reverse auctions, let’s review exactly what a reverse auction is how simple they are to use and the potential financial benefits?

In parts one and two of this three part blog we discussed why middle market retailers are not using reverse auctions to reduce costs of goods and services and provide some insulation for earnings during the current trying economic times.

Let’s summarize. Reverse auctions are web based applications that let retailers find the best suppliers for any resale or not for resale product or service they want to source. Using a web based reverse auction tool, middle market retailers or groups of middle market retailers (collaborative groups) can invite far more suppliers to take place in reverse auctions than they could possibly find or manage using traditional 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. Additionally at auction conclusion which is typically less than 30 minutes long retailers can review savings scenarios and award business on line from their desktop.

Now let’s get to the simple financial benefits. Let’s assume a $150M Retail Supermarket 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. One can just not ignore this type of opportunity.

I look forward to your comments.

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