Auctions expand e-procurement menu

By William C. Copacino -- Logistics Management, 1/1/2001

The area of procurement has undergone as much change in recent years as any component of the supply chain. In particular, new tools and analytical capabilities have made strategic sourcing a core part of every procurement operation - for example, the emergence of online catalogs and new e-procurement software has radically changed and improved the requisitioning, purchasing, and payment processes. And business-to-business exchanges are providing an additional tool for matching buyers and sellers, aggregating demand, executing sourcing and purchasing transactions, extending the collaborative demand planning process, and managing the procurement and delivery processes.

In addition to these developments, companies now can use dynamic pricing tools such as online auctions to enhance their supply chain performance. Along with their role in pricing, online auctions also offer important supporting and complementary capabilities, including online sourcing ("e-sourcing"), putting out requests for quotation (RFQs), and negotiation.

e-Sourcing has proved to be an effective Internet-based approach to identifying and qualifying potential sources of supply or bidders to be invited to an auction. There are a number of increasingly sophisticated tools to support these activities. Online negotiation, meanwhile, is actually complementary to an auction and is typically used for more complex product specifications, customized products, or circumstances in which multiple criteria such as delivery, service support, and product-performance guarantees are required.

Many companies have used online auctions to achieve significant savings in procurement costs for both spot and contract buys. We have often seen savings approaching 20 percent and have even seen savings as high as 60 percent for some commodities.

There is an art - and a science - to effective online auction management. Considerations for those who are designing online auctions should include:

• Sourcing and selection of bidders. Finding the right number of bidders and deciding who should be invited to bid are important considerations for any auction. Too many, too few, or missing key potential bidders can limit results.

• Lot determination. The grouping of items into bid lots has a significant impact on outcomes. We have found that larger lots are generally more effective, particularly in concentrated markets. In some circumstances, however, individual item lots can make better sense.

• Visibility. Not every auction allows participants to see the number of bidders and the current bid price. We have had great success managing some auctions without bid-price visibility. We did, however, provide visibility of the number of bidders and had each bidder submit a best and final offer. This approach may be particularly valuable in concentrated markets.

• Operating parameters. The length of time an auction runs, the choice to extend the bidding period, and the inclusion of criteria other than price in the bidding process are other factors to consider when designing an auction.

Online auctions should be a part of your procurement arsenal. But to be most successful, they must be thoughtfully structured in a way that leverages knowledge of both the art and science of auction management.

William C. Copacino is managing partner of the Global Supply Chain Practice at Accenture (formerly Andersen Consulting). A frequent speaker before business and professional groups, Mr. Copacino has a number of publications to his credit, including the book Supply Chain Management: The Basics and Beyond (The St. Lucie Press, 1997). He is based in Accenture's Boston office, 100 William St., Wellesley, MA 02181. Phone (617) 454-4480.