20 May Things you thought you knew about e-procurement that you don’t #3 – e-auctions are the answer
The reverse auction, in which potential suppliers compete to provide the lowest price (usually) against a fixed specification, is often promoted as a tool to deliver large scale savings. It is true that in some circumstances the results of a reverse auction can be spectacular, but “some circumstances” are not “all circumstances” or even “most circumstances” and there are deeper concerns worth exploring.
Most people are agreed that strategic sourcing is a good thing. If you aim to conduct sourcing to develop and create strategic sources of supply of goods and services that ensure continuous production, then the main concern is not just purchasing well specified commodities at the keenest price–building and maintaining relationships with the players in the supply chain are also of crucial importance. By pressing suppliers on price above all other considerations, raw e-auctions neglect the element of supplier management and thus overlook the damage which may be done to the buyer-supplier relationship.
If your relationship with a supplier of a strategically important commodity is determined solely by their ability to offer cut-throat prices in the good times, they will have you over a barrel when times get harder. Worse, they may no longer wish to do business with you at all and prefer to work with other customers with whom they have a better relationship. In a cut-throat world the next throat to be cut may well be yours.
In such a case, e-auctions form the perfect example of counter-strategic sourcing.
This is not to say that there are not substantial savings to be made from e-auctions for some commodities in some circumstances, at least until the lowest sustainable price point is achieved. It is worth asking, though, why there are such savings to be made? One answer might be that up until that point your buyers have not understood the market, the players in it and economic factors operating within it. In short your buyers may not have been doing their job as well as they led you to believe. An alternative answer is that your buyers understand the market very well and have previously awarded contracts on the basis of value received and not simply price achieved and the auction might therefore have sacrificed value for price. A third is that the process leading to the auctions has encouraged a proper management of demand, including aggregation of demand where appropriate, and this permitted vendors to price differently. In any event it is not as simple as received wisdom suggests.