Lee S. Crane
March/April 2008, eSide Supply Management Vol. 1, No. 2
Is an e-RA Really the Way to Go?
Before your next electronic reverse auction, or e-RA, ask yourself five key questions to determine if it really is the best possible sourcing option for your organization.
5 Questions to Ask Before Your Next Live, Dynamic-Pricing Event
In the supply management profession, we are obsessed with applying technology to deliver value for the organizations we represent. As a consequence, we sometimes fall prey to using tools because we believe we are supposed to, not because we believe they will deliver the best combination of quality, cost and service to our clients.
The electronic reverse auction, or e-RA, is one technology that lends itself to misunderstanding and misapplication. Is your initiative a good fit for a live, dynamic-pricing event? Thoughtful and honest assessment of five key questions will provide the answer or direction.
Adequate competition is probably the most important factor in running a successful e-RA. The live, dynamic-pricing environment functions best when suppliers are working against each other, driving prices down to the market-clearing figure. Having several bidders in the auction is a good way to lower unit pricing and is a prerequisite for holding an event.
While the quantity of bidders is important, the quality of offerors cannot be overlooked. The most desirable (and lasting) results are achieved when only best-in-class suppliers participate in the auction. Consider prequalification to ensure this occurs.
A particularly complex item or service creates substantial risks when using an e-RA. Success largely depends on whether or not the bidders are all quoting on exactly the same product and/or service. An e-RA is not properly suited to allow tenders on apples and oranges in the same event. If the product or service cannot be specified to the point that suppliers are completely clear on what is being requested of them, the results of any e-RA will be suspect at best.
Commodities with clear, universal grading are ideal candidates for online auctions. It is essential that the supply management professional recognize and account for any differentiations throughout the sourcing initiative. However, when these problems cannot be avoided, there are other electronic market-making options available that might be a better fit for more incomparable spend categories: multiattribute reverse auctions and combinatorial optimization tools.
When contemplating the use of an e-RA, it is important to always keep the big picture in mind. The last thing we want to do as supply management professionals is negatively impact our organizations' business operations. By definition, live, dynamic-pricing events pit supplier against supplier; this might be the wrong way to commence or strengthen a long-term strategic partnership. Buyers must consider the impact on the entire organization under such circumstances.
By design, the e-RA makes a buyer's job easier. At the same time, it should increase the effectiveness of a sourcing initiative and allow the organization to reap larger benefits, quicker. Before using the tool, supply management professionals must understand all the expected benefits of its use to authoritatively weigh those advantages against the anticipated negatives.
If it is clear that the technology can be used to assist the buyer in lowering the total cost of ownership without sacrificing quality or service levels, the use of an e-RA might be appropriate. Similarly, when a live, dynamic-pricing event will streamline the sourcing process and shorten the purchasing cycle time, allowing the buyer to move on to the next project more quickly, the tool is adding value to the process and might be a good fit.
There are other, less-considered benefits to running e-RAs, including the transparency it lends to a sourcing initiative. While particularly valuable to government contracting officers, private industry agents in the post-Sarbanes-Oxley Act world are increasingly enjoying this benefit.
Electronic reverse auctions do not always end well. Poor results are often due to a lack of participation, actual bid prices which are higher than the base line and offerors rescinding bids placed at auction. These and other problems are typically avoidable when supply management professionals carefully consider all the risks associated with the event before those hazards are able to undermine its success.
For example, it is extremely important that all applicable evaluation factors can easily be translated into numerical values. No matter how subjective in nature, these determinants must fairly and consistently be compared across prospective suppliers, and this is best accomplished when the factors are quantifiable. The less qualitative the nonprice factors, the more likely an e-RA will be successful. Remember, the risks must be identified and addressed as early as possible in the process to avoid poor results.
Electronic reverse auctions can be an effective market-making and price-collection mechanism. The challenge to supply management professionals and their managers is separation of good e-RA opportunities from bad ones — and to do so as quickly and easily as possible. The five questions posed in this article will go a long way toward meeting this challenge.
Lee S. Crane, C.P.M., CPIM, is a contracting officer with the U.S. Postal Service. He has run more than 25 e-RAs, multi-attribute auctions and combinatorial optimization events. To contact this author, please send an e-mail to email@example.com.
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