Many factors complicate a company's decision to test the markets and determine fair prices for goods and services:
• Resource constraints—does the procurement organization have the resources to manage a full sourcing process?
• Insight into supply market dynamics;
• Expertise to evaluate/qualify new suppliers;
• Timing—can a sourcing process be completed before existing contracts expire?
• Relationships—even if the incumbent supplier wins the business, will the working relationship be damaged during the sourcing process?
One strategy—Reverse Auction events—in combination with leading market intelligence, can help you optimize cost reductions while comprehensively evaluating the right suppliers, all in less time than you might think possible.
Limitations of the traditional sourcing processes: The typical Request for Proposal sourcing process can be a lengthy one, especially when you factor in bid release, submission and subsequent negotiations. This typical process will not normally push a supplier to their lowest prices; this comes through subsequent negotiations, which again can be lengthy. Existing relationships can also hinder the objectivity of supplier evaluations during the post-sourcing period.
Benefits of reverse auctions: Reverse Auctions essentially combat many of these inherent, sub-optimal sourcing traits. They significantly shorten the cycle time and aggressively drive down supplier pricing. By letting the competitive bid environment "do the work," buyers can reduce the time needed to conduct numerous bid analyses and subsequent one-off negotiations with suppliers. The shorter sourcing process leads to faster implementation and quicker realization of savings.
Use cases and prerequisites: A necessary prerequisite for Reverse Auction success is supply market knowledge to be able to identify the appropriate supplier pool to include, and expertise to effectively manage the process. Make sure that potential suppliers have been fully vetted and the goods and/or services fully specified prior to the event so that those factors are normalized, leaving price as the primary criteria for awarding business. Furthermore, ensure alignment on strategy, including how much visibility and feedback to provide to suppliers, and how to evaluate bid responses. Suppliers and buyers also need to be trained on the process to combat any preconceived notions about Reverse Auctions.
Case-study example: In 2012, a consumer goods client sought to rebid and reallocate a portfolio of spend amongst its incumbent supply base. The choice to only consider incumbents was due to time constraints (rapidly expiring contracts), internal resource limitations and the cost of evaluating new suppliers. By introducing and advocating Extended Reverse Auctions (each bidding event lasted several hours), we helped the client drive meaningful hard-dollar costs savings in a rapid cycle-time.
The company's portfolio of goods and services was well suited for a Reverse Auction because pricing was the main factor in supplier decisions. Through an Extended Reverse Auction, suppliers could revisit and modify pricing at a more relaxed pace and receive real-time feedback about where pricing proposals fell relative to competitors. The "extended" feature allowed for dialogue between supplier and client. The auctions lasted three weeks, with the award opportunity increased in each subsequent event to keep suppliers engaged through the last auction.
Benefits: Contrary to traditional bid solicitation, Reverse Auctions promote an objectively driven sourcing process and eliminate bid submission limitations. Also, pricing can be quickly and aggressively driven to the lowest price that the market will bear.
Author Stephen Corrato is a sourcing associate at Procurian (www.procurian.com), a leader in comprehensive procurement solutions. The company's built-out Specialized Procurement Infrastructure integrates with businesses to optimize spending and deliver real savings that equal a margin point or more.