e-auctions How to Conduct It Right Bristlecone Whitepaper November 2017 Author: Mr. Abhishek Parmar

e-auctions How to Conduct It Right Bristlecone Whitepaper November 2017 Author: Mr. Abhishek Parmar

Table of Contents Executive Summary... 3 Prelude to Conducting e-auctions... 3 Decisions for e-auctions... 4 Avoid Unethical Practices... 7 Conclusion... 7 About The Author... 8 2

Executive Summary As procurement organizations become more matured and streamlined, they would want to utilize the full potential of their e-procurement suite. The best way to get hard dollar savings is to use e-auctions for effective negotiations with suppliers. Proven results exist to validate that not only have e-auctions helped organizations achieve the best price in the market, but they have also helped them realize buying at near to true market prices from suppliers. However, despite such proven benefits, we have heard organizations say that e-auctions do not fit into their business models; e-auctions are driving their suppliers away; or they are not getting the savings that they expected. If an organization s goal is to streamline and maximize the benefits derived from the e-procurement suite, especially e-auctions, why aren t they able to get the desired results? This white paper acts as a myth-buster and explains how to effectively conduct e-auctions to get the best possible results. Prelude to Conducting e-auctions Potential organizations have faltered in using e-auctions by not conducting the required due diligence before going for an e-auction. It is necessary to follow the best practices before deciding to conduct an auction for a requirement or a category. a. The RFx Process. Conducting the RFx process becomes necessary if you want to ensure that you have a baseline to compare your prices, within an e-auction, and to validate and approve quality suppliers. RFx stands for Request for X, where X can mean RFI Request for Information, RFP Request for Proposal, or RFQ Request for Quotation. Use the above combinations judiciously to make sure that you pre-qualify suppliers before asking for a proposal or a quotation from them, and have your requirements clearly defined in an RFP to build a base for e-auctions. The more details you provide the better the RFP process would be and better the position of the supplier to offer you a proposal with the correct market price in mind. RFx can be conducted using a host of electronic tools available. This will help you to conduct the process in a streamlined manner, reduce the turnaround time required to close an RFx, and enable you to instantly compare proposals or quotations from multiple suppliers. 3

a. Selection of Suppliers Getting a supplier to give you a quote in an RFx is a mammoth task, but if done correctly, you can achieve the desired results within the expected timeframe. To make sure that you have quality suppliers participating in your RFP, leverage RFI as a tool and ask as many questions about the background of the supplier as well as their current company standing, and evaluate them objectively using a scoring matrix. This will remove any biases that an individual might have towards a supplier and will act as a potential filter in attracting the best of the best. To be twice as sure about their performance, ask suppliers for references from their previous customers which also outlines their standing in the industry. Additional tools like an Earnest Money Deposit for high value RFx also act as a magnet to genuine companies, making your job of finding the best suppliers even simpler. c. RFx Evaluation Evaluating suppliers after they have responded to your RFx is critical, since this would be the trigger for conducting an e-auction round. At this point, buyers need to make sure that the suppliers have provided proposals as per their expectations and all of them stand at apple to apple comparison. Any deviation from the original requirement should be addressed to the supplier appropriately before deciding on an e-auction, as it is necessary to bring all the suppliers at the same comparative level. Decisions for e-auctions The hardest part is to decide if you really need to conduct an e-auction round; does your category fit into it; and will your suppliers agree? Well, the best practices that will help you make the decision are listed below: There are six factors that you need to keep in mind to arrive at a decision of conducting e-auctions. Known as the Six C s of negotiation, they are: i. ii. iii. iv. v. vi. Clearly Defined Requirements Competitive Market Cost Margins of Supplier Commitment of Business from Buyer Commercial Attractiveness Criteria for Supplier Qualification The above factors can be applied to any situation that a buyer might face with respect to any category. 4

E.g. an off-the-shelf item with many suppliers can be considered by the buyer for an e-auction to achieve best prices, whereas a highly customized or a patented category might not suit an e-auction. Similarly, an abundant mineral or a metal with many suppliers/traders in the market should be considered with caution, given the limited margins that traders have on these traded commodities. Other examples include highly customized items for e-auctions, but provided that sufficient business volume is offered to the suppliers making it commercially attractive. And last but not the least, the criteria for qualifying suppliers also plays a role in opting for e-auctions, as suppliers who need to undergo vigorous qualification may not be interested in an e-auction considering the time and effort required in order to make them eligible to the buyer. a. Communication to Suppliers It is essential that the format as well as the correct date and time of the e-auction is communicated to the suppliers, well in advance, so that they can be prepared. Additional activities include deciding the starting price, the interval at which price changes occur, and if they would be able to see the market feedback. Also, the lot and line item details, which will be a part of the e-auction, need to be communicated clearly to the suppliers, ensuring they are aware on what they would be bidding for. b. Training Suppliers Training suppliers on the correct format of the e-auction is the most important step in making sure that the exercise is a success. It is always advisable to have training materials prepared in all formats for the suppliers and it is made available to them at the appropriate time. Web conference sessions or, in rare cases, in-house training sessions can also be conducted to make sure that the suppliers bidding for the auction are comfortable with the interface of the bidding platform, and they do not face any technical problems like logging in to the system, navigating correctly to the e-auction, and submitting their bids on time. As a general precaution, buyers should always advise the suppliers that the training as well as the participation in the e-auction is done in good faith, and the buyer should not be held liable in case of internet communication failure at the suppliers end or any technical problems arising out of the suppliers IT infrastructure which limits their ability to participate in such e-auctions. c. When to Go for a Reverse Auction Reverse Auction is a format of e-auctions where suppliers start at a price and then progressively reduce their price at regular intervals by a predetermined amount or more. The suppliers may or may not get market feedback depending on the settings you choose. 5

Buyers are advised to go for a Reverse auction when they have many suppliers for a high to a medium competitive category. It is a best practice to always show market feedback to suppliers so that suppliers are always aware about their position with respect to competitors and based on commercial attractiveness and their margins. This also motivates them to further reduce their prices and win business. The correct auction settings are also vital to the success of the event. As a best practice, never reveal the prices of other suppliers and never reveal the total number of participants. However, in some cases when suppliers prices are too close, it could be beneficial to reveal the lowest price in the auction. This helps improve competitiveness among suppliers, ultimately benefiting the buyer with the best market price. d. When to Go for a Dutch Auction Dutch Auction is a format of e-auctions where the buyer decides the start price, which is generally 20% or lower than the quoted price of all suppliers. This price is taken as the baseline and is then increased periodically at an interval of 1 minute or more by a designated amount up to the ceiling value, which is usually the lowest of the suppliers quoted price. It can be thought of as a buzzer round where suppliers are simultaneously logged in, not knowing about each other s presence and can see the price increase at a regular interval on their screen. The first supplier to hit accept wins the auction and others lose the chance. Dutch Auctions offer a very quick way to negotiate prices with suppliers. They can be used where buyers have limited number of suppliers i.e. less than 3 which means conducting a reverse auction would not be competitive. Dutch Auctions have a psychological effect on the suppliers where they are tempted to grab buyers business as quickly as they can, lest they lose the chance altogether. Caution: Dutch auctions tend to give a null result if not used judiciously. It is always advised that buyers qualify the suppliers properly and get them to participate actively to make Dutch Auctions a success. e. Conducting an Auction On the scheduled auction day, it is advisable that the event be conducted in an open and transparent manner. If possible, the sessions should be recorded and phone conversations, if any, between suppliers should be recorded as well for transparency purposes. Buyers should ensure that the suppliers are logged in before time and are online before the auction starts. During the bidding process, strict adherence to auction rules should be followed and the event should not be closed early or extended to provide an undue advantage to any supplier. Any offline requests to know the prices or the positions of other suppliers from any supplier should not be entertained at any cost. If they are persistent, such suppliers should be immediately blocked from the system and should not be allowed to further participate in the e-auction. 6

f. Award Once the auction is completed, buyers can objectively evaluate all suppliers using the evaluation matrix defined. Prices as well as savings percentage can be considered as a major factor while awarding the auction to a supplier. Hence the best practice is to always award the auction to the lowest price supplier, ensuring that the buyer sends out the correct message to all the suppliers out in the market who participated in the auction. This also motivates the Lowest Price supplier to fulfill business and participate in further auctions. It also motivates other suppliers who couldn t win this auction to fare better in the upcoming ones. They also get a sense of confidence that if they are the lowest price supplier in any auction, they will win the business for sure. Avoid Unethical Practices It is strongly recommended that buyers avoid unethical practices while conducting e-auctions. Though these may seem to deliver good results initially, they don t work in the long run and your company might end-up losing its reputation in the eyes of suppliers. Though this may not be an exhaustive list, the following unethical practices should be avoided at all times for best results: i. ii. iii. iv. v. vi. vii. viii. ix. Use of a dummy supplier to reduce prices. Lowering the start price of supplier from their quoted prices by a high percentage like 10 or 20%. This squeezes their margins even further demotivating them from participating in the auction. Every time forcing them to reduce their prices by a margin larger than the desired amount. Conniving with or favoring one supplier over other suppliers. Unexplained early closures or extensions of auction events to provide undue advantage to one supplier over other suppliers. Not awarding the deal to the Lowest Price supplier after the auction is completed. Unrealistic savings expectation from commodities which do not have enough cost margins. Abusing the surrogate bidding power to artificially lower supplier prices and then forcing them to accept it. Asking for gifts or a percentage share in the business from suppliers. Conclusion e-auction is a wonderful tool available out in the market. And like any other tool, if it is used correctly and ethically it can deliver great results to organizations in terms of Hard Dollar savings. Thorough planning should be done before conducting an auction which ensures the endeavor is a success, always. 7

About the Author Abhishek Parmar is an Expert in Implementing Ariba Upstream Solutions and is working in Bristlecone as a Senior Consultant with the Digital Sourcing and Procurement Practice. He is also a Strategic Sourcing Expert. He has worked on a number of Strategic Sourcing Projects with his previous organization and Ariba Upstream Implementation Projects during his tenure in Bristlecone, providing excellent solutions to customers to streamline their end to end Sourcing and Procurement Process. Partner with Bristlecone Managed Services to enhance your business efficiency. Our scalable application support solutions help you realize maximum value from your Supply Chain execution investments. To set up a discussion with our team, please send your inquiry to sales@bcone.com Corporate Headquarters San Jose 10 Almaden Blvd, Suite 600 San Jose, CA 95113 T (650) 386 4000 F (650) 961 2369 www.bcone.com Partner 2017 Bristlecone Ltd. Bristlecone believes the information in this presentation is accurate as of the presentation date. The information is subject to change without notice. Bristlecone acknowledges the proprietary rights of the trademarks and product names of all companies mentioned herein. All Rights Reserved. 8

Bristlecone is a premier Supply Chain Advisory and Analytics SaaS+ firm headquartered in California s Silicon Valley.We have offices in the United States, Canada, United Kingdom, Germany, Switzerland, Singapore, Malaysia, and India. Learn more at www.bcone.com. To set up a discussion with our team, please send your inquiry to sales@bcone.com 2017 Bristlecone Ltd. Bristlecone believes the information in this presentation is accurate as of the presentation date. The information is subject to change without notice. Bristlecone acknowledges the proprietary rights of the trademarks and product names of all companies mentioned herein. All Rights Reserved. 9

An ever increasing amount of data is being generated throughout Supply Chains, which can be used as an advantage. Irfan Khan CEO Bristlecone