Let's discuss one of the most loved (if not the most loved) purchasing tool by buyers, which is also at the same time the most hated by suppliers: the auction.
In an increasingly digital world, it is common to find dozens, perhaps hundreds of eSourcing tools. eSourcing is the term that refers to “Electronic Sourcing”, meaning digital purchases. It is the set of tools, systems and methodologies that aims to help buyers through the use of technology.
Ivalua, SAP Ariba, Coupa, Krinati and several other systems are available to buyers and the auction is relatively simple. Have you ever watched the cattle auctions or fundraisers that are often broadcast on TV? You may have remembered that at one time in your life you've heard the auctioneer saying super fast the famous "who gives more?" And "I give you one, I give you two, I give you three, sold”. The electronic auction happens essentially the same way.
We have a “pool” of suppliers that receive an invitation from the buyer to access the system that will be used. The supplier must create their access from the invitation link. Once created, this access allows the supplier to submit their prices for a particular item.
The auction used in Purchasing is called “reverse auction”. In the conventional auction, through the famous “I give you one, I give you two, I give you three”, the auctioneer tries to locate the buyer who is willing to pay more for the auctioned item. In the purchasing area, the objective of the auction is to find the supplier who is willing to sell at the lowest price.
The buyer can define some rules for the auction, for example: Participants can be informed of the value of the lowest bid or can be informed in which position their bid is (lowest, second lowest, etc.). The buyer can also determine the time for the auction to take place, add and delete participants.
An important tip, especially when the buyer informs the lowest bid amount or the supplier's bid position, is to add a clause to the auction rules stating that not necessarily the lowest bid will get the business. The buyer can also add a contingency clause, whereby the supplier will only be the winner if the conditions of quality, delivery, punctuality, transparency, etc. are met.
The problem starts when the cost reduction method is applied without restrictions. Because it usually brings quick results, some buyers often manage their portfolios based on auctions.
Auctions bring 2 main problems:
The first is the loss of focus on TCO (Total Cost of Ownership). As the main focus of the auction is the reduction of the unit price, important attributes such as delivery, quality, punctuality and guarantee end up being left out.
The second problem is the aversion of some suppliers to this type of “negotiation”. We often come across suppliers who submit their initial bids but immediately withdraw from the process when they discover that the subsequent phase will be an auction. Generally, suppliers that refuse to participate in auctions are those that provide value to companies in ways other than through cost, for example, parts suppliers or MRO (Maintenance, Repair and Operations) which generally offer the service of VA/VE (Value Analysis/Value Engineering)
It is up to you, as a good buyer, to know the methodology and use common sense when to apply it.