Hey Bidder, Bidder . . . It's an Online Auction

The online auction is really beginning to take hold. But are you ready to purchase a product or service with an electronic gavel?

[From iSource Business, September 2000] Jim Tyson of Pier1 Imports in Fort Worth, Texas, says he's not a computer guru, but he is saving his company money by participating in online auctions. And the well-known EDS, a company clearly identified for its technical prowess, used online auctions to identify and select suppliers more quickly and get products to market faster in both its Texas and Canada offices. The electronic auction is really beginning to take hold.

According to its February 2000 study, "eMarketplaces Boost B2B Trade," Cambridge, Massachusetts-based Forrester Research projects that $1.4 trillion will flow through online markets in 2004. By 2002, 93 percent of firms expect some of their business trade to flow over the Internet, and a quarter of firms anticipate that most of their online trade will flow through e-marketplaces. e-marketplaces include auctions, aggregators, bid systems and exchanges.

Online auctions include traditional auctions, in which a supplier lists goods to sell and purchasers bid on them. But reverse auctions, in which purchasers identify what they want to buy and suppliers compete for their business, seem to be catching the fancy of buyers, who don't need to be technical experts to get involved.

Online Auctions at Work

Pier1 Imports: Starting Slowly

Tyson, director of corporate purchasing for Pier1 Imports, used to work with Wes Guillemaud, founder and CEO of sorcity.com. "He contacted me to see what I thought of trying an online auction, and I thought it sounded great," Tyson says. "It sounded really useful to purchasing, because we spend so much time trying to find sources."

Sorcity.com might host reverse auctions for standard items such as $10,000 in copier paper or for something as unique as an onsite, outsourced print center. Guillemaud had been an e-business consultant for 10 years before launching his online auction site. The site is free to purchasers; suppliers pay a 2 percent fee once they win an auction. Buyers can set up auctions to last a few days, if desired, and inform potential suppliers about the site so they can log in and submit bids.

"Suppliers are eliminating sales and marketing costs by using online reverse auctions," Guillemaud says. "It's a huge chunk of change. When they connect these dots, they will be more competitive and will be winning business away from other competitors."

Tyson wanted to try his first online effort on something simple -- Frisbees given away as promotional items. The company was paying 90 cents per Frisbee, but through an online auction they found a supplier that provided the same item for 30 cents each. Through sorcity.com, the buyer posts a request and a deadline, regularly returning to the site to check on the bids.

"We saved 60 some odd percent and got the same Frisbee. It looked the same and served our purpose," Tyson says. "This caught our attention, and we've since used reverse auctions for four to five other items." These included cameras for store employees to photograph defective incoming merchandise. Pier1 purchasers expected to spend in the "mid-teens" per camera but found cameras for $6 through their online auction.

"We'd never bought cameras before," Tyson explains. "A purchaser would have to spend a lot of time to find three to four suppliers. Through an online reverse auction, we could open it up to the entire country. It was a relatively small purchase but it would have taken a disproportionate amount of effort on our part to source the cameras the traditional way."

Despite not being a guru, Tyson has found online auctions easy to use and expects them to become commonplace. "I think everybody in any large company will have to get on the bandwagon. We all have to find more efficient ways to function, and I think this will be the way we will all do business." 

EDS: Looking for a Web-Based Solution
Paul Musgrave, vice president of systems and operations for CoNext, a division of EDS, and former vice president of systems and processes for EDS Global Purchasing in Plano, Texas, used eBreviate for a reverse auction to buy corrugated cardboard, a commodity for which the company spends $2 million a year. eBreviate emerged from A.T. Kearney¹s strategic sourcing practice, a management consulting subsidiary of EDS. However, EDS did perform due diligence on eBreviate and did pay for the service.

In its first year, San Francisco-based eBreviate auctioned $1.7 billion for more than 20 clients involving over 400 suppliers. The company started by providing downward, or reverse, auction capability and saw an immediate need. Says co-founder and President Niul Burton, "We've been surprised at the speed of our growth, because some fairly risk-adverse buying groups have adopted our tool and used it in a variety of spend areas." eBreviate's other clients include Volkswagen, Entergy and Sprint.

EDS chose eBreviate because it seemed easy to use. "Suppliers don't have to load up any software. They just go to a URL and send their pricing during the auction, versus other tools that require them to load software at the supplier's desktop," Musgrave says.

Before the auction date, Musgrave already knew of a handful of suppliers he wanted to bid on the corrugated cardboard. "You have to use the normal strategic sourcing methodology to choose suppliers," he says, mentioning that an online auction would need at least three suppliers in order to allow for enough competition during the bidding process. Musgrave sent invitations to four suppliers, informing them of the auction and his specifications, and planned a two-hour auction.

During an eBreviate auction, the purchaser watches the bid amounts and the supplier names come in; suppliers can see the lowest bid and when it comes in, but other bidders remain unnamed. "That's the magic of it," Musgrave says. "If everyone puts in their first price and sees someone a lot lower, they'll wait and see what happens or move to meet or beat that price."

The reverse auction process allowed Musgrave to shorten his bid process and enable his company to get to market faster. His organization also realized "several percentage points of savings" on corrugated cardboard through the online auction.

"Corrugated cardboard was pretty straightforward," he adds. "With technical labor or software it gets tougher, and that will be part of our approach to see what lends itself to this process."

EDS Canada: Quantifying Technical Labo

EDS Canada was next to participate in a reverse auction. Patricia Moser, Toronto-based director of purchasing for EDS Canada, says they hosted a reverse auction in March for temporary technical labor. "For us, technical labor is one of our significant spend areas. It was a good area to move forward on." 

EDS Canada's purchasing department issued a request for price (RFP) to 35 suppliers in February, looking for total Canadian coverage for technical skill sets. Twenty-two suppliers responded. "A couple did not respond when they saw that this would be an online auction. They thought we'd just be interested in price," Moser says. "But it's much more qualitative than that."

The purchasing department used qualitative parameters such as geographic location and e-commerce capabilities to shorten the list from 22 suppliers to six, Moser says. Then they hosted a supplier conference via telephone two weeks before the auction.

EDS Canada received almost 1,000 bids on temporary technical services they needed for three different regions and 30 job codes. The company had asked suppliers to provide hourly rates and markup rates. At the end of the auction, they realized savings of about 25 percent. "We got a lot of market intelligence as well," Moser adds.

Final supplier selection was not based strictly on the lowest bid. The purchasing team rated suppliers based on qualitative factors and then mapped the price, coming up with two top suppliers. They decided to use one as the prime supplier and one as the secondary supplier. "Both suppliers brought value," Moser says. "We made our decision and are going to implement very quickly -- within zero to 10 weeks -- when it could have taken us six months to source the traditional way."

Moser was pleased with the results of the online auction and saw it as an effective way to purchase temporary technical help. "A lot of people wouldn't see temporary technical help as a commodity product. But if you do your homework and do your ranking on qualitative data first, you can auction anything." Her department is also considering using electronic RFPs for promotional items.

"You don't know what to anticipate during an online auction," she adds. "But it's a lot more fun than having a whole bunch of meetings with a whole bunch of people to squeeze a dime out. My staff can move onto the next initiative instead of spending the next two months negotiating a deal. I gain, and the organization gains because we can work on more strategic initiatives."

Welch's: Five Reverse Auctions

Concord, Massachusetts-based Welch's opted to use FreeMarkets because of its interest in the online auction's "market making" service that helps identify suppliers and markets for the items a company buys, says Bill Coyne, director of purchasing. Welch's has held auctions for grape concentrate, sugar, corn sweeteners, labels and corrugate. In March they announced more than $67 million in purchases of direct and indirect materials through FreeMarkets.

During the first quarter of 2000, Pittsburgh-based FreeMarkets conducted online auctions for nearly $1.4 billion in direct materials, commodities and services, creating an estimated $300 million in potential savings for its customers, according to a company report. Since 1995, over $5.4 billion of commerce has been conducted through the FreeMarkets eMarketplace, creating an estimated $1 billion in potential savings for buyers.

The number of customers served through the FreeMarkets B2B eMarketplace grew to 47 in the first quarter of 2000, compared to eight in the same period last year and 34 in the quarter ending December 31, 1999. New customers announced in the first quarter of 2000 include Bayer, Bechtel, DaimlerChrysler Aerospace and Giant Eagle. Deere and Company and Anheuser-Busch also recently announced plans to work with FreeMarkets.

Welch's chose FreeMarkets because of its "consultative approach," Coyne says. "You meet with FreeMarkets and identify which of your spends would make sense to their process." The purchasing company also identifies potential suppliers. "FreeMarkets goes through a supplier outreach and tries to identify any other suppliers that you may not have thought of. They'll prequalify the suppliers and then you develop an auction strategy -- whether or not you'll select the lowest bidder as the winner9and schedule the auction."

Coyne mentions that for grape concentrate and sugar, Welch's knew of all the potential suppliers. But for the packaging auction, FreeMarkets brought in a number of suppliers with whom Welch's wasn't familiar. FreeMarkets also helped them prepare detailed requests for quote (RFQs) for the auctions. For agricultural purchases, the time of year may dictate when the auction should be held, but usually the timing is up to the buyer.

During a FreeMarkets auction, buyers can view bid postings as they come in. Typically, Coyne notes, Welch's auctions have run for a half-hour, which frequently goes into overtime. With overtime, if a bid is received in the last minute of the auction, the closing time is delayed by one minute. "You have to have 60 seconds of silence before the auction closes," he adds.

Welch's leadership and employees were eager to get involved in online auctions. "The purchasing organization was very supportive," Coyne says. "We didn't find any situations where buyers were resistant; they were very receptive to the idea of online auctions. If there are big differences in the capabilities among a limited number of suppliers, an online auction may not work very well. You need a number of suppliers to be interested in what you're putting up for bid."

While Welch's did save money on its online auction, they wanted to focus not on the amount but on the efficiencies they realized. "It's simply another way of going out for bid," Coyne says. "It's a very fair way. It creates a lot more competition than the traditional methods of going out for bid. But you wouldn't hold an online auction for anything you wouldn't already be planning on bidding."

Welch's will likely expand its use of online auctions toward larger, strategic purchases and may use features that allow buyers to set up their own auctions on their desktops. "We think this is how business will be transacted in the future and we're happy to be involved in the process," Coyne says.

Owens Corning: Looking for Efficiencies

Ohio-based Owens Corning was looking for ways to improve productivity and reduce costs. The company investigated reverse auctions, selecting FreeMarkets because employees wanted "somebody that could teach us," says e-procurement leader John Gellatly. "It's not like eBay. It took four to six weeks to develop and prep for our first bid." Owens Corning's reverse auction for pallets involved 158 suppliers and 1,000-plus bids.

Owens Corning also set up a successful reverse auction for construction services that worked well. "In this market, you're looking for capacity and different people's ability to do the job at any given time," explains Gellatly.

The prebid process involves preparing the RFQ with enough detail so all the suppliers understand what they're bidding on and then making sure potential suppliers are aware of the auction date. "In our view, it's not a software or technology game; it's a market-making game," Gellatly notes. "The making of the market, bringing suppliers together and the buying strategy are the important parts of the process."

Owens Corning averaged 10 percent savings in its online auctions and has already purchased more than a quarter of a billion dollars in goods and services via reverse auction. For the year 2000, they plan to spend $400 million of their purchases through reverse auction.

By June 2001, Gellatly would like to see Owens Corning using desktop solutions so buyers could instigate auctions at their desktops. "We're a very risk-adverse company historically. The fact that we could ramp up and put as much as we did through the first year was surprising. I went in and begged for people's spend. I asked them, 'Where have you failed at holding down spend?' If we could succeed there, we could get some of the easier stuff. We've been successful. We've lowered prices on all but one auction."

Gellatly's advice to others? "Get started. It's how the market will evolve. Those that are not doing it are losing. If you wait too long and your competition enables itself, you may not be there. Some day you can envision that all your buyers will be day traders. They can put a bid together and host an auction in a week. Your best buyers are really going to be traders like stockbrokers."

Finding New Suppliers

In January, Bruce Platzman, CEO of Affordable Interior Systems (AIS), submitted an RFQ for edge banding. Based in Hudson, Massachusetts, AIS is a major manufacturer of office systems and workstations. The company typically pays about $170,000 for a year's supply of edge banding, a protective plastic molding that fits around the edges of furniture. AIS used SupplierMarket.com's "RFQ Builder" to input all of the technical and commercial qualifications a supplier would need to produce the edge banding, complete with drawings. SupplierMarket offers an online marketplace for made-to-order parts; it reports price reductions between 5 and 50 percent, depending on the commodity, says Brad Hafer, vice president of corporate development. Suppliers pay a 2 to 4 percent commission if they are awarded business through an auction. The company has focused primarily on the U.S. market but has recently added Mexican and Canadian currency capabilities.

AIS enjoyed the speed with which they could find suppliers via online auctions. "Ordinarily, it would take my team six to 12 months to circulate an RFQ and gather bids from potential suppliers," Platzman says. "We're still buzzing about the time we saved and how easy it was to post the RFQ and bid out the contract. In the end, we spent a total of a few days between posting the RFQ, answering a few questions on the online bulletin board and watching the bidding."

SupplierMarket.com used three methods to find qualified suppliers for AIS' edge banding needs. First, the SupplierMarket.com "SmartMatch" system automatically searched the 8,000 registered suppliers in its database. Those deemed appropriate for the bid received an e-mail inviting them to nominate themselves for the auction. Second, in addition to those found by SmartMatch, other registered suppliers who regularly browse posted RFQs nominated themselves. Third, SupplierMarket staff located and nominated suppliers. The list of qualified suppliers was delivered to AIS, who then pared it further.

"It was great control," Platzman says. "We could have three or 30 suppliers participate. It was up to us." AIS could also give SupplierMarket the names of any suppliers or competitors it wanted excluded from the process.

SupplierMarket contacted the suppliers AIS wanted and set the date for the auction. Suppliers, in the meantime, prepared their bids and posted questions to AIS using the SupplierMarket online bulletin board. "In the past, we'd have nine different suppliers call us with the same question that we'd have to answer over and over again. With the online bulletin board, all we had to do was answer the question once and all the participating suppliers see the same information," Platzman explains. On January 14, Platzman pointed his browser to SupplierMarket, and bidding suddenly started appearing on screen. "Suppliers were actively entering bids, and we watched as they got lower and lower," explained Platzman.

Two and a half hours later, the lowest bid came in at $102,000, a 40 percent savings. "The lowest bid was so low that we had to wonder, 'Who are these people? How can they afford to deliver a quality product at such a low price?'" AIS chose to be introduced to the low bidder, knowing they had a 30-day due diligence period to investigate them; if this supplier couldn't meet AIS standards, the company could choose the second- or third-lowest supplier and still recognize significant cost savings. SupplierMarket.com collected the finder's fee from the supplier and introduced the two parties. The low bidder was the world's largest supplier for edge banding, and AIS has been pleased with their performance and quality ever since.

Without SupplierMarket.com, it's likely that Affordable Interiors and its new edging supplier would never have connected. "Maybe we would have found each other on our own, but chances are that we wouldn't have," Platzman says. Affordable has since posted a dozen more RFQs for sheet metal, simple pallets, dies and tools.