This article was compiled and written by Manav Sachdeva and Vinod Jose
In this time of financial paralysis, organisations that respond well in times of historic crises are fast and agile. They make decisions quickly and implement those decisions effectively and efficiently, bolstering business resilience, and putting them in a position to recover and grow financially once the crisis has passed. The COVID-19 pandemic has underlined this point, as companies across South Africa change their operating models to adjust for a market in crisis.
What does all of the above mean for South African organisations beginning to post multi-year operating losses? Tightened spending, cutting operating costs, freezing capex, improving margins, maintaining liquidity, renegotiating contracts and reducing procurement spend.
Procurement spend especially is a fundamental piece of this puzzle. Procurement is pivotal to an organisations’s crisis-response strategy because it is both an immediate cost lever and key to future revenue streams. If efficiencies can be found in procurement, the entire value chain is positively impacted.
This is why Procurement eAuction is a tool that warrants greater investigation. Procurement eAuctions are a powerful instrument that can help reshape an organisation’s entire procurement function in a fast and cost-efficient way, delivering immediate cost savings in an efficient and structured way.
Procurement eAuction fundamentals
It has never been more important that organisations leverage agile and efficient cost saving mechanisms that deliver instant and tangible benefits to the bottom line. Procurement eAuction – popularly known as a reverse auction – offers a procurement function a means to achieve these goals.
Invented in the 1990s, Procurement eAuctions are widely used for sourcing and competitive negotiations in mature markets, such as United States and Europe. South Africa’s procurement fraternity has been a laggard in this regard, with only a handful of companies experimenting with this negotiation strategy.
Consequently, executing procurement eAuctions is a rare skill in South Africa and among those who have done so, not many have been completed successfully. Some procurement executives even harbour a preconceived notion that eAuctions are damaging to their organisation’s reputation, without ever executing one or being involved in a single eAuction.
So, what really is a Procurement eAuction?
A Procurement eAuction is a process by which suppliers compete among themselves for business in real-time through an electronic and interactive portal until a last bid is placed or bidding window is complete in accordance with a pre-determined set of rules. There are two types of commonly available Procurement eAuctions portals or platforms in the market:
Free platforms: These are free online platforms (with advertisements – hence they are free!) that offer limited capability, typically lack a user-friendly interface and have no guarantees whatsoever on client and/or supplier confidentiality, data privacy and information security
Paid platforms: These are typically embedded in the eSourcing modules of cloud-based source-to-pay technologies. While these platforms offer strong capability and multiple auction formats, these solutions are only available as a multi-year SaaS solution, requiring capex for licensing and implementation
Types of Procurement eAuctions
In addition to the types of platforms available, there are four recognised types or ways to conduct an eAuction for supplier negotiations.
These types are English, Dynamic, Dutch and Japanese. Choosing a specific type is determined by factors such as buyer’s final award strategy (single or multi-vendor), starting bid variance and number of suppliers in the mix.
Dynamic auction: Ideal where there are three or more suppliers and their starting bids or pre-auction offers (via RFQ) has a variance of less than 10%. In this auction type, the rank of a bidder, in relation to other bidders, is displayed and the bidder is only allowed to enter a bid if it is lower than the bidder’s current best bid. This format allows for single, dual or multi-vendor award strategies, and each bidder’s lowest price information is available to the buyer.
English auction: Similar to the Dynamic auction, but the best bid is displayed to all the bidders. The bidders are only allowed to enter a bid if it is lower than the current best bid of the auction. This auction type allows for only a single vendor strategy, as the buyer is only interested in the best overall bid, and not necessarily the best price from each supplier.
Japanese or the ‘opt-out’ auction: The buyer determines the starting price (e.g. R100) and decreases the price (e.g. R2 per bid-step) at regular intervals (e.g. one minute per time-step). After every bid-step, the supplier must indicate its willingness to remain in the auction at the current price. The auction is over when only one supplier remains, or when a pre-determined number of suppliers remain. This allows for multi-vendor award strategy, with the lowest price information from each supplier available to the buyer. This auction is ideal where there are two or more vendors and collecting market information is more important than savings.
Dutch or the ‘opt-in’ auction: Puts maximum psychological pressure on the supply base, especially on incumbent suppliers, and are often over in a matter of minutes. Dutch auctions are similar to Japanese auctions but work in the opposite direction. The buyer determines the starting price (e.g. R80) and increases the price (e.g. R2 per bid-step) at regular intervals (e.g. one minute per time-step). The auction is over when a bidder opts in and accepts the current bid. This auction allows for a single vendor award strategy and are ideal where the buyer wants quick negotiation for low value, high volume purchases.
What can be eAuctioned?
eAuctions can be used to procure goods and services where two or more suppliers are able to supply the required volumes according to a buyer’s specifications. Globally, organisations are using eAuctions to procure direct and indirect spend categories, such as raw materials, capital equipment, construction, maintenance and repairs, consumables, logistics, IT products and services, marketing, business support services, etc. The below table provides an overview of the achieved saving ranges, and ease of implementation, across various indirect spend categories.
Historically, eAuctions were designed and used to negotiate best pricing for low-value, low-risk, high-volume commodities such as stationery, consumables and MRO parts. However, as strategic sourcing functions matured over time, the practice of using eAuctions evolved. eAuctions are now used successfully across direct and indirect categories, under the correct circumstances.
A highly applicable, recent example of this change is a global brick-and-mortar retail giant employing eAuctions-as-a-Service to run a 12-month eAuctions programme across its direct and indirect spend, and across multiple geographies. The client pushed almost $1 billion in spend over 300 auction events, achieving overall savings of $90 million within the 12-month period.
In South Africa, the client partnered with Letsema to push over R500 million of spend through auction events, achieving immediate savings of
R35 million, referred to in the attached case study. The global eAuctions programme has been so successful, the company has decided to extend it
for another 24 months, targeting an additional 500 events.
Of course, eAuctions are only successful if used under the right circumstances, especially as they are designed to deliver cost savings on baseline spend. There have been instances of auctions delivering negative savings or minimal supplier interest, causing more harm than good to buyers and suppliers. Let us look at some of the key benefits of eAuctions for buyers and suppliers, and when not to use them.
Benefits of a Procurement eAuction
Process consistency and transparency: Defining requirement specifications forms the basis of any successful eAuction and ensures suppliers are aware of what they are expected to provide. This sets a level playing field for incumbent and potential suppliers in a common environment. The incumbent and potential suppliers are leveraging the same available information, there is equal opportunity to compete for business, and knowledge of what exactly is being bid for.
Time savings: For the buyer, eAuctions provide real-time market information, live comparisons of different supplier bids and resulting savings in relation to the baseline. Negotiations with multiple suppliers that may otherwise take weeks, or sometimes even months, can be completed in a matter of minutes or hours. For suppliers, it reduces sales cycle times and cost of sale. It also provides immediate and real-time feedback to suppliers on their pricing and competitive position in the market.
Cost savings: eAuctions have been proven to deliver between 25% and 50% higher savings than your standard face-to-face negotiations during an RFP process.
When not to use Procurement eAuctions
One of the primary criticisms of eAuctions is they remove the personal, human element from supplier interactions and are sometimes damaging to supplier relationships. eAuctions are not meant to replace supplier relationships and should not be used as a default negotiation instrument for all sourcing activities.
eAuctions are used where a number of pre-qualified and pre-conditioned suppliers are able to supply products or services in accordance with the buyer’s required specifications and volume, at a price determined by competitive bidding. They fail in a monopolistic environment and the collusive tendencies of oligopolistic scenarios can render them ineffective.
It is important to stress that eAuctions are pure price play. It does not factor in other selection criteria like service levels, quality, or delivery. The qualitative supplier evaluation needs to be incorporated into the eAuctions process as a preceding step. eAuctions are highly effective for supplier consolidation or as the final step of an RFP process to select a supplier among pre-qualified bidders.
Another consideration is the cost of switching suppliers. eAuctions are more likely to be used where the cost of switching vendors is low. Suppliers are also more likely to participate in such scenarios, for if suppliers perceive there to be high switching costs, they would not participate out of a belief the buyer will ultimately not switch.
If a procurement function takes these non-use conditions into account, they will be able to leverage the inherent strengths of Procurement eAuctions. As discussed, when executed successfully, Procurement eAuctions help enterprises achieve quick and significant savings, without compromising on quality or supplier relationships.
In the current context, achieving these goals can mean the difference between surviving the current COVID-19 economic crisis, and placing a business in a position to grow from strength to strength as soon as the opportunity presents itself.
To find out more about Procurement eAuctions and how they can help your organisation’s procurement function, contact our Next-Gen Operations team at nextgen.operations@letsema.co.za. Alternatively, connect with Manav or Vinod via LinkedIn.
