Why e-auctions don't work (and alternative strategies)

Monday, 01 November 2010 00:00

Why reverse auctions (e-auctions) for stationery, consumables and office supplies often meet cost targets but at the expense of product and service quality.

The commoditised nature of stationery, consumables and office supplies makes this category of products an obvious candidate for this streamlined technology-enabled tendering process. Many buyers see reverse auctions as the perfect strategy to drive down costs where there is little or no product differentiation. From the buyer’s point of view, the process is very attractive because it narrows down the field of suppliers very quickly and saves the buyer time.

The process works as follows…

A reverse auction is run at a particular time and date and is always conducted on-line. During the period of the reverse auction, suppliers bid on a basket of goods and are often even able to see the rank of their bid compared with other bids submitted. These rankings however do not reveal the amounts of money bid. The reverse auction normally runs for a period of up to one hour and suppliers can keep resubmitting their pricing with the ultimate goal of coming out on top. To ensure some degree of quality evaluation, the two suppliers who submit the lowest bids are sometimes invited in for final discussions before the contract is awarded.

But there are problems to consider…

What looks like an effective technology-enabled procurement process can also lead to a new set of problems. Because the reverse auction doesn’t initially seem to take into consideration quality of service, sustainability or environmental objectives and appears to be merely price driven, suppliers often need to bid below cost to win a contract. (note that some quality suppliers may simply not enter the bidding process because they do not believe that the resulting contract will be worth having). Having won an unprofitable contract, the supplier then needs to “manage” the contract creatively to achieve some level of profitability and there are three ways to do this:

Substitute products from the original tender with lower quality/higher margin versions
Actively promote non-standard, higher margin products (often using staff inducements)
Reduce service costs to an absolute minimum

How can the buyer stay in control?

The nature of office supplies/stationery and consumables means that it is practically impossible for buyers to prevent some or all of the above tactics:

There are often thousands of different products involved
Order quantities and values are often low, but order frequency is high
Most orders are placed on a “just in time” basis, so product substitutions are more likely to be accepted
Multiple staff are often involved in ordering and each can have their own way of doing things

With these challenges in mind, establishing a system to manage the contract and control deviations from the tender is extremely difficult. A procurement manager risks implementing an over-bureaucratic system which may slow down the organisation’s performance and result in criticism from parts of the organisation. The result is that over time, the supplier will generally succeed in driving more margin into the contract by deviating from the terms of the contract.

Does this mean that reverse auctions do not work?

It is an accepted fact that many reverse auctions do not deliver the value that they originally intended, because the initial process is too cost-centric and suppliers have worked out how they will be able to turn a loss-making contract into profit. In summary, the supplier is in control of the contract.

The next generation of reverse auction

Mintprice.com is a unique platform, using patented price comparison technology to create an on-demand instant tender with multiple suppliers connected live to a single ordering system.

It works as follows:

Mintprice.com is an ecommerce-enabled website with over 20,000 stationery and office supplies products
Multiple approved suppliers are linked to the site and upload their price file for all products
The buyer inputs an order into Mintprice.com containing as many items as they wish
Mintprice.com will immediately check all the prices with several suppliers and show the supplier with the best price for all items on the order
The lowest cost supplier is selected by the buyer and the order is then placed immediately through Mintprice.com to the successful supplier
The selected supplier immediately receives the order and delivers directly to the buyer

Mintprice.com provides the following advantages over the current reverse auction process

The buyer is in control of the contract, not the supplier
No single supplier wins the tender and then has an opportunity to “manage” the contract without further competition from other suppliers.
An unlimited number of suppliers can be linked to the system
Several suppliers compete live and online for every order placed (no matter how large or small) - in effect this creates an “instant tender”
Mintprice.com compares prices on "baskets of products", not just single items, so buyers do not need to shop around for the cheapest basket price. Mintprice.com will always tell them the cheapest price for their basket and show which supplier to buy from
Suppliers will not run loss-leader pricing strategies, because they need to make a reasonable profit on every order that they win – this removes any motivation to try and influence the buyer to choose alternative higher margin products
Mintprice.com will save money off even the most aggressively negotiated contracts because several suppliers are competing "live" for every order and must maintain a competitive price catalogue at all times or risk losing business
The price results for each order can be presented by price and geographical proximity of supplier to enable buyers to comply with any environmental targets
Procurement managers achieve compliance across the organisation with everyone using the same system
Powerful online reporting enables procurement managers to monitor buying behaviour and make necessary changes to policy
Procurement managers can monitor supplier performance and add/remove suppliers at any time
Users will find Mintprice.com easy to use – searching for products and placing orders is a rapid process which saves significant time when compared to other supplier systems
Mintprice.com is rapidly deployable, even in a large organisation, delivering rapid cost and time savings
Mintprice.com is proven to save private sector organisations between 20% and 65% off previous spend
Mintprice.com supports many of the directives that are listed in the Government's Gershon Report for the adoption of eprocurement strategies in the public sector
This technology could easily accommodate other commodity product categories (eg medical supplies, personal safety equipment, building supplies, electronic components etc)
This technology could be own-branded and licensed for use in specific sectors

Other information

Mintprice.com has been developed by and is fully owned by Newcastle-based Bestpricepurchase Ltd.
The concept is proven with hundreds of active customers, and over 150 new customers joining every month.
A patent has been granted for this concept in the USA and a patent application is pending in Europe.