[From iSource Business, January 2002] If you stay well connected to supply chain news, you've probably been inundated lately with stories about the latest and greatest in such things as wireless tracking, 'total' supply chain visibility and real-time collaboration. With all of the focus on those companies that are leading the pack with the newest supply chain technology, it's easy to believe that anything less will put your company behind the crowd.
In reality, many companies still struggle to make that first, critical leap to e-procurement, and many purchasing and supply chain professionals are still trying to convince their company's executives that such technology can save a lot of money. For the most part, though, the benefits of B2B and enabling technology are no longer ignorable. Executives are taking notice and evaluating the technology available - from the simplest auctions to the most high-tech product lifecycle management (PLM) systems - to assess what is most valuable for the needs of their companies. And many have made the strategic decision that less is more.
Ultimately, it is important to remember that the most innovative new products in supply chain technology are not necessarily the products that are going to save your company money. In an effort to resist the tugging current of marketing hype and get grounded with the purchasing and supply chain departments of the real world, iSource sat down with Bill Coyne, director of purchasing at Welch's. We asked him to help our readers re-examine the pains and gains of utilizing auction technology, and to understand the patience needed to assess these leaps and bounds based on their companies' needs alone, rather than that nebulous, but powerful, tide of change.
The result is a reminder that being in the early stages of this technology is not synonymous with 'lagging behind.'
iSource: Talk to us about the food industry's use of enabled technology.
Coyne: It seems like a lot of companies are looking at technology to improve the efficiency of their purchasing transactions and to assist them in planning. But I elected not to take that approach at Welch's. I believe that most companies in the food industry need to focus first on making the markets in which they buy more efficient and more price-transparent. We need to drive for lower pricing. The focus on the market and driving for lower price produces a lot of savings - way more savings than you could get by making transactions more efficient. That's how we came to choose the reverse auction technology of FreeMarkets. It's always better to make markets more efficient than to make transactions more efficient.
iSource: What about the risks associated with online reverse auctions?
Coyne: The main risk is that you could very well find yourself making more supplier changes than you did in the past. And making supplier changes can result in disruptions to your plant operations.
iSource: What about alienating some of your suppliers? Has that been a concern?
Coyne: That is certainly a concern. You run the risk of damaging important supplier relationships.
But we have a plan to deal with this challenge. If you decide to go out for bid in a particular packaging component or particular commodity, it's not much of a leap to get a supplier to accept that. Therefore, if the supplier understands that you're going out for bid anyway, using a reverse auction is not that much more different. It's just a more efficient way of taking bids. You have to try to get them over the hurdle by telling them that it's good business to periodically go out for bid. And if they accept that, then it's a tiny step to get them thinking that bidding through a reverse auction is not that much more of a leap of faith.
iSource: Strategic sourcing is very big in the market right now. Do you feel that companies using reverse auctions are at a disadvantage by not being able to evaluate non-price factors?
Coyne: If it is a pure commodity, where there is absolutely no distinction among suppliers in terms of quality, technical support, service or anything else, then there is some benefit in saying that the lowest bidder wins. You get a little more competition that way for the lot. In most cases, food companies don't have that situation. We arrive at the price using the reverse auction, and then we go through more traditional processes. We evaluate the lowest bidders against one another in terms of technological support, quality and all the other factors that go into supplier selection.
iSource: How have you seen other companies in the food industry using this type of technology?
Coyne: As far as reverse auctions, I think the food industry kind of lagged behind other industries at the beginning. There were a few companies, like Welch's, employing this technology early on. Just within the past year or so you have seen a lot of other companies adopt this technology. It's been somewhat of a slow start, but we're certainly catching up, and there are a lot of food companies using it today.
iSource: How has the current economy affected the use of this technology?
Coyne: Well, I think a company's first inclination may be to pull back on initiatives like this. However, I think you'll see that the smarter companies out there will recognize that an economic downturn makes this type of cost-cutting initiative more important and timely than it was before. Now that applies to reverse auctions and things where you are driving for some real cost savings. Larger, more expensive systems that focus on collaboration and planning and making transactions more efficient ... I think some companies are pulling back from this. They don't have as large of a ROI [return on investment] or as large of a payback as reverse auctions have.
iSource: A lot of marketplaces and auction providers have failed recently. Why do you think FreeMarkets is still around?
Coyne: It seems that they have the right application for what a company like Welch's is looking for. They also focus primarily on reverse auctions, driving for lower prices, making marketplaces more efficient, and driving for price transparency and more competitiveness among bidders. It's a real value proposition that they have. Some of these other companies that are selling huge systems to manage all your transactions and planning ... it certainly makes sense, but it is a bigger investment and takes a lot more time to implement. And I think those companies will feel the downturn in the economy to a larger degree than companies that are focused on things like what FreeMarkets' focuses on.
iSource: Tell us about the training that is required within the purchasing department to use the auctions.
Coyne: When you're dealing with reverse auctions, they're generally user-friendly systems that don't require a whole lot of training. The training and uses of software are not really what it's about anyway the lotting strategies, or bidding strategies, are where all the value comes in. What you begin to learn is that the decisions you make, like whether to award the low-bidder in an auction or not, are important. You also have to focus on decisions like how to group more attractive commodities with less attractive commodities to get more bidder interest or to make sure that you get better pricing on the less-attractive commodities. You have to decide whether to allow the bidders to see prices or simply where they rank in the bidding process is something that you have to consider. There is a lot to thinking through and developing the strategy for a reverse auction. That's really what the whole game is. The simple approach would be just to take the traditional way of going out for bid and run it through some marketplace software, but I think that FreeMarkets had something to teach us. That's why we stayed with the full service offering that first year.
iSource: What lessons have you learned along the way, and what advice would you give to others beginning to use reverse auctions?
Coyne: I would say that, number one, you want to get everybody involved in the process. You want to include them in the team that sets up a reverse auction. You want to make sure that, in addition to procurement people, you also include R&D [research and development] people, quality assurance people and plant people. You want to get their buy-in very early in the process. You want to get them understanding the process and supporting it, rather than having a purchaser run an auction on their own, make a supplier selection and then try to force it upon the rest of the organization.
The second thing we learned is that it takes a little bit of time to set one of these up and to develop a very detailed and good RFQ [request for quote], but that time is well spent. You want to make sure you have all of these bidders bidding on exactly the same thing. You don't want to have different bidders making assumptions as to what your needs or requirements are, or what it is they are bidding on.
iSource: What do you see in the future of e-purchasing?
Coyne: I think that most companies have focused on the transaction side first and cost savings later. And I think that's a mistake. There are a lot of smart people out there that have very good reasons for doing that, though. If you are in a situation where you are constantly running out of supplies and things because you have poor planning systems, poor MRP [materials resource planning] systems or ERP [enterprise resource planning] systems, then maybe it does make sense to do that first. But, if you're humming along in a fairly normal mode, it seems to me that you are probably better off focusing first on making the marketplace more efficient and catching up on the transactions later.