Perfecting Your Auction Strategy

Has being invited to participate in a reverse auction left you feeling like being invited to your first dance? Don't let inexperience get in your way  plan a strategy.

It's late Friday afternoon and most of the other employees at your organization have left for the weekend. You are just wrapping up when the phone rings. You hit the speaker box button. Berger here, you say.


 Jeff, it's Phil. I'm with Donna and we're in her office. Can you come up?


You answer: Sure. Be right there.


"Now what?" you think. Phil is your executive vice president of sales and marketing and Donna is the CEO. Your mind races between two primary thoughts: "What have I missed?" and then the nobler, less defensive thought, "Is the company in some sort of trouble and they need my help?" Upon your arrival, Phil hands you the hardcopy of an e-mail. It begins: You have been invited to attend an online reverse auction& The invitation has been sent by one of your best customers  we'll call them BuyLo  that is considered to be strategic to your business. Both Phil and Donna look at you. How are we going to handle this? they want to know.


If this hasn't happened to you yet, it probably will soon. And if your company has already received such an invitation and you weren't consulted, both you and the company have missed a golden opportunity. As the purchasing and supply chain functions continue to evolve from back office to the boardroom, more opportunities arise for supply management professionals to be impact players at the corporate level. Supplier companies in receipt of auction invitations likely know the danger of online auctions, but may have never considered the opportunity. It can be a big one for the company and the purchasing and supply management professional, but only if the supply chain management team and the sales team work together.


Game Time  Fight or Flight


To get in the reverse auction game effectively, you must map out a strategy. Yet, strategies are different for incumbent suppliers than for those challenging the job. But for the purposes of this article, we'll deal only with incumbents, and assume that you (the purchasing and supply management professional) work for the incumbent supplier.


As the incumbent supplier, we have two fundamental choices  we play or we walk. Since BuyLo is strategic to us, we'll mail our Intent to Bid with an affirmative selection and begin our preparations. But don't mail it in immediately. Give BuyLo something to think about. Wait until the due date to make your intentions known. BuyLo will be calling you long before that date rolls around, asking for a verbal commitment. If you don't hear from them, you've picked up a valuable piece of information.


Here is the point at which value-added purchasing can be taken to a new level and contributions can be made where they haven't traditionally been made. As a supply management professional, you know that sales and purchasing types are about as compatible as Ariel Sharon and Yasser Arafat. By collaborating with your own sales team to ensure the company successfully retains BuyLo's business, you can greatly enhance the purchasing department's value to the firm. By being the catalyst that fosters a close working relationship between sales and purchasing, your chances for success go way up  and not just with this customer. Picture a constant flow of fresh information between sales and purchasing, each receiving from the other information that can make a difference in tough negotiations for either revenue optimization or cost containment to the betterment of the company. Everyone is talking about collaboration. As supply chain management professionals, it is important to lead the effort to collaborate within our own organizations. 


Additionally, in the current environment, companies are aggressively protecting their market share. Keeping customers is much more manageable and less expensive than adding new ones. By working with the sales team on this auction, you can be instrumental in the protection of your market share. If you can help the sales executives keep the business, and maybe obtain a larger share of it, you've reached the next level of supply chain management contribution. Supply chain management professionals with this type of vision will be highly sought after in the marketplace.


The Game Plan


1. Preparation is the first step in the game plan. In order to be prepared, you must:


·      Have the right place


·      Have the right team


·      Have the right intelligence


The Place


BuyLo has most likely set up some sort of war room. This is a room that is dedicated to the execution of the auction. It would behoove you to do the same. You need an area where you can bid, think, calculate, watch, ponder and maybe even pray. BuyLo will probably use a large conference room, with multiple PCs and a phone for communications. Projectors will be on hand to simultaneously display the bid summaries, detailed lot activity, and reports and graphs. Your connection should be as fast as possible, with no dial up. Have a copier and a fax machine nearby as well, just in case the technology crashes.


Team


This one is easy. Have the following on hand:


·      A CPO/SCM professional to help with the bidding strategy and provide insight into the bidding behaviors of your competitors. This will help keep surprises to a minimum.


·      A financial professional, for things like number crunching and cost/benefit analysis. This person also helps with the calculations in the tool.


·      A decision-maker, for obvious reasons.


·      A technical professional, just in case something happens to your connection or hardware.


Have your team ready to go. Events such as these typically last only an hour or two, so you're not tying up anyone for an inordinate amount of time. Assign clear and detailed responsibilities, such as bid input, graph/report monitoring and new bids placed monitoring. Be aware of the rules of engagement, which may be structured so that you must win the earlier lots to win the plumb lot, which is usually the last lot scheduled.


Intelligence


This is probably where most suppliers stumble.  It's not that they don't want to be thorough. It's just that this step takes time and effort. As a bidder, you need to know, first and foremost, the technology.


The best place to learn the technology is the practice event. At some point in the process you will have an opportunity to participate in an all-day practice auction. You may see a mirror image of the live auction or you may see a totally unrelated category of items to bid on. Test the tool.  Attempt to place bids that break the rules. Break every bidding rule you can think of and note the tool's response. Download any and all graphs and reports. Look for oversights in the software, such as supplier names when you use a mouse-over feature on a report or graph (it's been known to happen). Know the rules of engagement. Test the decrements. See if you can change a bid back after accepted. If not, call it in to the Help Desk to gauge their response time and competence. Make sure you understand how the tool calculates total costs, if it does. Have your financial professional audit the calculations. Play with the total cost calculations, revising price and non-price factors, going both up and down (some tools allow you to move bi- directionally as long as TCO goes down). By understanding how the tool manipulates your bids, you may be able to ascertain rankings and weighting  mission-critical information on game day. Make sure you understand what the tool is doing with your bids. Attempt to log in using the same password at multiple machines. If the tool allows you, attempt to place bids simultaneously and see what happens. This may help you later if the buyer uses concurrent log bidding. And do not attempt to win the practice auction. Do not practice like you will play  practice differently. Be all over the map. Someone may be watching to see how competitive you are. Make sure you show them nothing as you practice. Also, test the extension function  bid in the last few moments to see if the practice session will go into overtime. See how many additional minutes you're given  you may be given the same period in the live event. The bottom-line result will be that on game day you will be focused on executing your strategy and you won't have the added stress of figuring out the technology on the fly.


The next piece of intelligence with which you need to be armed is knowledge of the provider. If this event is assisted or outsourced, learn what you can about the provider. Visit the Web site, network with others who've been in events hosted by the provider and learn what to expect. For example, a favorite tactic of some providers is to keep you off balance by using concurrent lot bidding. Lot 2 will open before Lot 1 has closed so that you will be managing two lots simultaneously. The remedy is to have multiple PC's set up in your War Room. Assign team members to specific lots. Prioritize the lots so you know the ones that are most important to you.


Third, know your competitive landscape. You already know most of the contestants  you compete with them daily. An opportunity to peek behind the curtain is the supplier conference. This is the most often used method of handling questions from the participants, and it may be a one-on-one session or a dial-in teleconference. The teleconference is used when the supply base is too large for one-on-ones or time is too short. Either way, do not miss the conference. Learn who the provider is, if you don't already know, and find out as much as possible about them. Network to see if you have contacts in other companies that can give you some intelligence. If it is a teleconference, stay on the entire time to see what information you can glean from the questions being asked. Most of your primary competitors will be there, but also listen for the unknowns. A dark horse may be added to the mix. Many of today's providers actually bring suppliers with them. 


2. Strategy: The strategy is straightforward: you want to either make the short list or tie the top challenger. Most events are down select in nature, meaning that the top three to five suppliers will be called in for second round negotiations. Rarely will an award be made at the conclusion of the event, unless all non-price issues have been resolved and the item or items auctioned are pure commodities. If you've learned that the top finishers go to the second round, your strategy will be to finish at the bottom of that pack. The worst-case scenario for incumbents is a price-only, winner-take-all event. In that case, your strategy should be to come in slightly higher than the best bidder. The degree of separation should just about equal the switching costs so that you are essentially tied with the best bidder. As in baseball where the tie goes to the runner, a tie will go to you. Everything you do from here until auction day should support your strategy.


3. Tactics: Starting with the Intent to Bid, create an atmosphere of reluctance. Give BuyLo the sense that you will participate but that you have serious misgivings about this type of event.  You're concerned with integrity, equity, security and professionalism. Be supportive of your customer, but look for something in the tool or the process to question. Try to create some uncertainty in your customer toward either the technology or its provider. Some things to question are:


·      Security  who sees what? How secure are my bids?


·      Does the tool incorporate the latest security technology?


·      How many passwords will be issued?


·      Can a single password be used simultaneously at multiple PCs?


·      When will the award be made?


·      What if the tool won't accommodate my bidding strategy?


·      What if I make a mistake? How will it be corrected?


·      What if you make a mistake? How will it be corrected?


·      What if the technology fails?


·      How real time is my data? What's the refresh rate?


·      How many overtimes will there be? (They won't tell you, but it doesn't hurt to ask).


·      How can we reach you if we need to talk with you?


·      Where does my bid data go? Is it stored or deleted?


·      What are my assurances that the playing field will be level?


Submit your Intent to Bid at the last minute and be aware how aggressively BuyLo courts your participation. Again, if the relationship has been a good one, the buyers want to see you do well.  If they're not calling you and asking for a commitment to bid, they are sending you a very distinct message.


As the bidding opens, wait  but know the decrement rules. If you wait too long you might not be able to cover enough ground to catch up if the rules limit the size you can drop with each bid. Most of the activity will occur in the last few moments of the event unless one of your competitors attempts the big bang strategy of taking most of their concessions in a single bid. This tactic has been used to intimidate other bidders into giving up before the game is done. Know the decrement restrictions and wait until the late innings to move. If no one moves precipitously, then bid slowly, staying in the middle of the pack, always within striking distance of the leaders but never in a hurry to play your cards. And remember that they've probably set up unlimited extensions, so attempting to wait until the last second and trumping a bid won't work. If the bid meets certain requirements, the auction will be thrown into overtime so that greater price concessions can be achieved. Keep your target numbers in front of you, and know what you will do if you hit them. Know when to say when.


In short, you have the advantage. BuyLo will most likely be using your value-added service levels as the standard to beat, so everyone will be playing to your strengths. Change is painful and BuyLo doesn't really want to move their business to an unknown supplier. Leverage that desire as creatively as possible. Be ready to suggest an initiative to integrate some of your processes and systems with BuyLo's, if that is a reasonable representation. Look for other ways to strengthen the relationship, such as helping BuyLo find new business (get your sales team to help you come up with ideas). In short, bring something extra with you to the negotiating table.


As a purchasing professional not only can you save the company money, but by extending the olive branch to your sales team you can also save the company customers and perhaps even add new ones. Educate your sales team on this new world of e-sourcing and go to battle with them on auction day. Collaboration is the key in the new millennium, and everyone will benefit from it.


SIDEBAR: Who's Idea Was This, Anyway?


The decision to go to auction is often driven from the top down. Oddly enough, the who's idea question is asked by both buyers and suppliers. The buyer will ask it rhetorically, because they know generally what has occurred. The supplier will ask it in dismay because they want no part of an online reverse auction. Neither side is particularly anxious to test drive this new twist in sourcing. Let's peek behind the curtains of both parties to get an idea of what goes on in the trenches.


Buyer Reluctance


There can be some comfort in the knowledge that the CPO at BuyLo probably has grave concerns about this new age sourcing. He or she is under tremendous pressure to conduct the event, and failure is not an option. BuyLo's buyers are also concerned. Supply chain professionals are often haunted by the following questions:


·      If this works and we really do obtain price concessions in the 20 percent range, will questions be raised as to my competence?


·      Will I have to present the results to the CEO? (In almost all cases, the buyer has gone from relative obscurity to the highest visibility, since everyone is watching the event.)


·      Will this damage the relationship I've built with my supply base?


·      This is just more work for me. The current process has proven itself many times. This process is new and unknown, and what if it blows up in my face?


·      What if my suppliers won't play? How will I convince them? I know the management team will want to know who's coming and who isn't, and they expect me to get everyone on board.


·      I can't manage all the work I have now, and this will only add to my workload.


In short, the buyer is under a microscope. Regardless of how experienced and competent he or she may be, it is always uncomfortable to perform in the spotlight, especially if that's never been a requirement before. Understand that BuyLo's buyers may be especially stressed, so take the opportunity to be sensitive to their pain and listen for intelligence if they want to vent. And here's something executives at your supplying company probably don't know: A buyer like BuyLo would really prefer to keep you as the supplier and not have to break new sourcing ground. Some buyers have actually attempted to sabotage online auction events, using such tactics as benign as withholding critical supply base data to as outrageous as providing suppliers with inside information and coaching them throughout the process.


Supplier Target Practice


The injection of the Internet into the sourcing equation is generally what drives fear into the hearts of sales people on the supply side. Sales professionals are basically relationship guys and the Internet neutralizes their strengths of persuasion and customer relations. In addition to having to win the business all over again, salespeople must also suffer the indignity of seeing their bids posted on the Internet, which they don't like and trust even less. The salesperson probably has established the relationship with BuyLo over time and at considerable expense. The two companies like one other and prefer to conduct business together. Just as supply chain professionals have developed relationships with key suppliers, any new method that is perceived to be a threat to disrupt the relationship will be carefully scrutinized. At first glance, using online reverse auctions seems to be counterproductive to a well-conceived supplier relationship management (SRM) program. An online reverse auction seems cold and clinical, seemingly replacing the salesperson's knowledge and experience of the market and the supply base with simple price only selection criteria. To a supplier, this appears to be unfair (what have we done to deserve this?), unethical (how can you disclose our pricing to our competitors?), and unwinnable (at best we recover the business, but at a lower price point. Worst case, we lose the business and our competitors have picked up valuable market intelligence).


Other supplier concerns are:


·      Buyers are using back leverage with no intent to move the business. Rather, they will use non-qualified (or even fully qualified) competitors to lower an incumbent's prices.


·      There is no real business to be had and the buyer is simply conducting market intelligence (survey) and will not award business to anyone.


·      The auction is an attempt to commoditize a supplier's product, therefore marginalizing or eliminating their value added services.


·      How can a supplier be sure the buyer is the only one who will see the information?


·      The auction is being used to collect catalog pricing for later purchases.


Supply chain managers can help diffuse some of the stress by addressing the concerns of the sales team.


1. The Unfair Argument:


Often, the first question from a supplier to a buyer who has invited them to participate in an online reverse auction is How can you do this to us? Don't we have a mutually beneficial relationship? Tell your sales team that it's not personal but part of an ongoing process. A strong sourcing process compels you to periodically test market conditions and benchmark, always looking for the best value available. Buyers have to prove that yesterday's suppliers should also be today's suppliers. This is not really new. The reverse auction element hasn't altered your sourcing process, but has only added technology to the mix.


2. The Unethical Argument:


Conducting supplier selection via an online reverse auction is not, in and of itself, unethical. However, online auctions can be, and have been, used unethically. Re-examine your relationship with the customer. If they have a record of impeccable ethics, you can reasonably assume that the event will be conducted ethically, just as your previous dealings have been. If the customer has a history of business related hanky-panky, then you have to make the exact same decision you made last time you pursued the business. Is the business worth the exposure? If yes, pursue it. If no, then a tough business decision may need to be made. 


3. No-Win:


The supplier may have a point here. As the incumbent, you have everything lose. Worst-case scenario says you bid online, your competitors get the market intelligence and you lose the business anyway. In the best-case scenario, they still get the intelligence and you win the business, but at a lower price point. And winning next time will be even more difficult.


4. Other Concerns:


You'll really need to help the sales team with these. Using reverse auctions to beat up incumbents with no intent of moving the business is unethical. You'll have to determine if the customer's purchasing organization is ethical and proceed accordingly.


Reiterate to your sales team that this is a part of the strategic sourcing process and most of the time is simply a mechanism for gathering price and non-price data to be used in supplier selection. You've always had to bid on the customer's business, just not on the Internet in front of the entire planet.


 


SIDEBAR: History, Hype and the Real Heroes


Let's begin with a short history of online reverse auctions. Online reverse auctions were the genesis of a family of technology known as e-sourcing. e-Sourcing is the term coined to describe the application of technology to strategic sourcing, primarily Internet-based technology. There are e-sourcing tools that help automate each step of the strategic sourcing cycle, from spend assessment to contact compliance. Pierre Mitchell at AMR Research defines it as merely using IT to improve strategic sourcing processes& Note the word processes; e-sourcing does not imply simply throwing technology at a sourcing effort and hoping for the best. e-Sourcing involves taking a proven, successful strategic sourcing process and carefully inserting technology where it makes business (and purchasing) sense to do so. Online reverse auctions help automate a part of the supplier selection element of strategic sourcing.


In spite of the plethora of labels for auctions (Dutch, English, Yankee, Vickrey, Open, Sealed, Silent, Japanese), there are essentially only two kinds, the difference being one of direction. All auctions are either forward or reverse auctions.


Forward auctions are the most common with the Dutch, et. al., representing the various labels for the auction's rules of engagement. Sellers who post goods or services for sale and hope for price increases are the distinguishing factor of forward auctions, which can also be called upward auctions. They create a competitive environment by pitting buyers against one another with the intent of optimizing their margins. The auction houses of Sotheby's and Christie's are two of the most famous traditional auction companies. And who hasn't heard of eBay, the online equivalent? eBay has taken the forward auction and added Internet technology, creating a virtual auction house that reaches bidders all over the planet. As a supply chain management professional, you will probably be faced with overstocked inventory and/or asset recovery requirements at some time and will use forward auctions as a back-end mechanism for one last downward adjustment of the item's total cost of ownership TCO. 


Reverse auctions, such as the one to which you've hypothetically been invited, are aptly named, as it is the buyers who post their requirements for goods or services in hopes that the competition will drive prices down. The two parties, buyer and seller, reverse positions as it is the buyer who drives the event, in effect selling their next year's forecasted requirements to the bidder (or bidders) most able to meet all of the buyer's terms and conditions.


FreeMarkets is generally accepted as the pioneer and leader in the reverse auction space. According to its Web site, The world's leading and largest companies have used FreeMarkets to source more than $30 billion in goods and services, and identify savings of $6.4 billion to date. That's a 21.3 percent savings rate. Other providers, such as eBreviate and Procuri, offer equally compelling statistics.


Understand that, in the example at the beginning of the article, a C-level executive at BuyLo (the auction buyer) is probably convinced that reverse auctions represent the magic bullet that will propel the company toward its cost savings targets, which in turn will contribute to the company's estimated earnings per share EPS (Earnings Per Share) targets. Many times it is a top-down directive, with little or no input from the buying organization, so go easy on the chief procurement officer of BuyLo. As you've read above, providers are touting savings in the 20 to 25 percent range (non-published numbers are more impressive, reaching over 50 percent in some cases) across all categories, direct and indirect.


What's interesting is that practically no one reports the incremental auction savings, which is a better metric for determining the true value of reverse auction technology and accompanying services. As a rule of thumb, you can use the Pareto Principle to get the split  80 percent of any price movement from historical baseline pricing will be attributable to your sourcing efforts and 20 percent will be incremental auction price improvement. This reveals the reality of online reverse auctions  it is a tool applied to an existing process. Your current strategic sourcing process (or the one your outsourcer uses) delivers the lion's share of the savings, and the tool just adds the cherry on top. So when you're looking for incremental auction savings you'll probably find them tucked away in the sourcing process and mined from the expertise of supply chain professionals, either yours or someone else's. Sourcing technology enhances a buyer's effectiveness but cannot replace him/her. This reality shatters the myths that e-sourcing is a new sourcing methodology; that it will highlight a buyer's incompetence; or that it will replace a supply chain professional's expertise and market knowledge.


e-Sourcing tools will make you a more effective supply chain management professional, so learn all you can and use these tools to move both your company and your career forward.


Keith Baxter has 20 years of experience in accounting, finance, purchasing and supply chain management. He has dealt with reverse auction issues as both a supplier and buyer.