E-Procurement Tools and
Reverse Auctions for Sourcing
Services
By Larry C. Giunipero, Ph.D., C.P.M. Florida State University
ISM Professor of Purchasing & Supply Chain Management
Northeast Supply Chain Conference
September 19-21, 2004
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2004
E Promise 1999-2000
► The
Dot Com era
► Lots of Hype
► Soaring equity prices value is dead
► Lots of venture capital thrown at e-Business
► Many new startups
► All kinds of activities
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Ebust 2001-2002
► The
Dot Gone or Dot Bomb era
► How low can the stock price of your
favorite go?
► Many have gone bankrupt
► Survivors are struggling
► Prices are falling for more powerful
solutions to generate cash
► Accounting scandals shake confidence
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Dot back 2003-2004
► Selective
e purchasing practices grow in
use
► Survivors stronger and pricing competitive
and promises more realistic
► Selection standards are strict and final
selection very detailed require tangible
returns
► E Tools and systems continue to grow in
sophistication
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There is Hope!
Organizations are moving to e Purchasing
Forrester’s data and others show this
There is a lot of internal work in developing
buy side systems or internal portals
Internal requisitioning systems
Visibility into suppliers inventory
Business rules to support the buyer
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Technology is the Enabler of
Change
► Moore’s
Law – Every 18 months computing
power doubles while cost stays constant.
► Metcalfe’s Law – The utility of a network is
equal to the square of the number of its
users.
► Coase’s Law- As costs decrease, the
complexity of a firm diminishes. Size is a
function of the complexity of transactions
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G’s Technology & System’s Law
► It
will always cost more than promised
► It will do less than promised
► It will take longer than promised
► But it will still provide advantages if it is
properly selected and implemented
► It will move supply management forward
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Sourcing processes and technology have evolved considerably
over the last two decades while procurement has gained greater
importance within corporations.
Drivers behind the evolution from Purchasing to Electronic Procurement include:
•Lower Transaction Costs
•Lower Information & Searching Costs
•Shorter Cycle times
Importance within
Corporations
•Market Prices
Electronic Procurement
•eSourcing
•eProcurement
•Web Services
Strategic Procurement
Purchasing
•Manual
•Fragmented & tactical
•Project Management
1980s
Source: Global eProcure
•MRP, MRPII, EDI, ERP
•Strategic Sourcing
1990s
2000s 
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Organizations have successfully used eSourcing for the
procurement of materials and operational goods over the last
few years.
Price Reduction
Open competition among bidders leads to an additional savings of 15%
on average
Sourcing Cycle Time Reduction
Reverse Auction process reduces supplier negotiations time by 50-75%
(from weeks to hours)
Standardize Sourcing Practice Across Organization
All buyers use similar process and learn from best practices
Improved Ability to Evaluate & Analyze Suppliers
Automated evaluation of suppliers is done using online tools
Source: Global eProcure
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Defining e Purchasing plus
a process and set of tools that
Purchasing/supply management
professionals employ to streamline
processes and leveraging
technology in order to meet the
needs of the organization.
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What is e Purchasing plus?
Process Change
Technology Tools
Integration
Plus (strategy,skills)
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Process and People
► “The
crucial ingredient to B to B success isn’t
technology it’s human” Andrew Brooks 2001
► Our main finding put simply, is that the
central issue is never strategy, structure,
culture or systems. All those elements and
others are important. But the core of the
matter is always about changing the behavior
of people, and behavior change happens in
highly successful situations mostly by
speaking to people’s feelings. Feelings then
alter behavior sufficiently to overcome all the
many barriers to sensible large-scale change
John P Kotler, The Heart of Change
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Process Analysis and Uncoupling
► What
is the current process?
► Is there value by using third parties
► Can we reduce the amount of space or time
in the process
► Most supply management processes involve
at least three parties. (supplier, buyer and
process owner)
► How can technology enable the process?
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eSourcing Landscape
Complex bid optimization
“expressive” competition
Reverse Auctions
Strategic
e RFX
e document exchange
“Buy side”
eVMI
e settlement
e exchanges and “hubs”
e-catalogs
portal
e requisitioning
Tactical
Intranet
Resources
Source: CombineNet
p card / e p card
Internal
External
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e-Tools Terminology
► Reverse
Auctions
► Sourcing Optimization
► Collaboration
 CRM
 SRM
► Cataloguing
and Content
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Reverse Auction Definition
► Electronic
bidding event held in a secure
environment which allows buyer to
simultaneously engage qualified sellers to
bid their requirements in an interactive real
time environment. The process creates a
more efficient marketplace and shortens
buyer’s cycle time from quote to award.
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Reverse Auction Environment
► Costs
are driving organizations
► On line competitive bidding format
► e Bay is a familiar auction site
► Buyer’s offer and seller’s respond
► Prices decline over the course of the auction
► Time duration varies
► Prices are transparent
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Reverse Auctions
► Technology
tool to streamline the bidding
process
► Involves several phases of preparation
► Internet based technology
► Scheduled day and time
► Secure environment for suppliers
► Sellers don’t know who they are bidding
against
► Sellers see the prices of their competitors
► Pricing occurs in a real time environment
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Reverse Auction Activity
► $192
Billion in 2001
► $350 Billion in 2002
► Growth 84% 2002 over 2001
► $600 Billion in 2003
► Growth 312% 2003 over 2001
► Savings Vary - one report 18% on $1.5
billion spend 417 events 869 auctions
Sources: IDC Research & Pantellos
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Services for Reverse Auctions
► Janitorial
► Temporary
► Temporary
► Logistics
Clerical
Professional
► Security
► Cafeteria
► Information Tech
► Travel Services
► Transportation
Services
► Express Mail
► Printing Services
► Consultants
► Disposal Scrap &
Equip
► Insurance
► Medical
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Questions to Ponder
► What
is your Reverse Auction selection
criteria?
► How good is your statement of work?
► How standard is the sourcing process?
► How competitive are the suppliers?
► What is the variation in your key selection
criteria across the supply base?
► How important is the current relationship?
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Provider Support
► Total
Solution - consulting, software,
training suppliers, conducting the auction
► Partial Solution - selected consulting, and
software
► Stand alone - Lease or rent the software
and conduct the auction
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Payment for Provider Services
► Buyer
► Seller
► Both
► Percentage
► Flat
fee
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Rules of the Road
► Bidder
selection
► Type of Auction reverse or rank
► Internet Explorer version
► Time Duration for the auction
► Handling price changes or mistakes
► Telephone contact during auction
► Freight
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Rules of the Road
► Insurance,
Liability, Certifications etc.
► Varying rules by different lots in the bid
► Right to split award to more than one
supplier
► Costs and expense borne by supplier
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Case Study 2: During the printing bidding
event, the client achieved double the savings
target – 25% or over $3 million.
•6 suppliers invited to bid on various direct mail pieces
•Over 75 bids were placed during the online auction
•The lowest bidders provided 25% savings to the client
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.
eSourcing Tools
Spend Analysis Tools
Conduct
Automated
Spend/ Opportunity
Analysis
•Identify operating and
sourceable expenses
•Identify suitable
candidates for
eSourcing
•Estimate savings
•Develop
implementation plan –
program timeline,
project team, cash
flows from savings
Source: Global eProcure
1.
Conduct Supply
Market Analysis
2.
Develop eRFP
•Identify current and •Develop
past suppliers
detailed RFP
with specs and
•Identify additional
functional
suppliers from
requirements
databases and
market research
•Develop
supplier
evaluation
criteria
3.
Evaluate
Suppliers
4.
Conduct Online
Negotiation
•Review and
analyze RFP based
on evaluation
criteria
•Train suppliers on
web based tool and
conduct practice
sessions
•Rank various
suppliers based on
qualitative (nonprice) criteria
•Provide
operational support
to conduct bidding
events including
surrogate bidding if
necessary
•Provide Q&A
support to
suppliers
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5.
Conduct Total
Cost of Ownership
Analysis
•Rank Suppliers
based on Price and
non-price criteria
•Analyze total costs
including service
costs, supplier
qualification costs
etc
•Assist in final
supplier selection
and develop
performance
metrics and saving
and performance
tracking mechanism
Sourcing Evolution
Type
Traditional
Bids
Reverse
Auctions
Parameters
Simple
Simple
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Sourcing
Optimization
Complex
Sourcing Optimization
► Sourcing
team can evaluate an unlimited number
of alternatives
► Move to a more optimal solution
► Suppliers like the process better than R.A.
► Implementable allocations
► Permits negotiations
► Fast analysis, decision making and implementation
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Optimization defined…
Supplier bidding
 Item level bidding
► Suppliers can bid individually
on items in a lot and see a
real-time ranking at item, lot
and overall event level
 Bundling
► Suppliers can group together
items as a ‘package’ price and
give a % or $ discount
 Business volume discounts
► Suppliers can give a % or $
rebate for volume (units/$) in
a given category or categories
Buyer analysis
 Supplier count
► Evaluate single, dual,
triple sourcing strategies
 Supplier volume
► Guarantee suppliers
(e.g., minority) a certain
% of business
 Supplier performance
► Incorporate performance
costs into decisions
 Split allocations
► Can be done at item level
to ensure supply
Source: Emptoris
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Flexible Alternative
► Item-level
volume discounts
► Total volume discounts and rebates
► Conditional discounts
► Price plus terms bidding
► Bundled bidding
► Capacity limitations
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Outcome Constraints
► Supplier
preferences
 National/International
 Local
 Regional
► Cost
& Unit constraints
 Distribution of business
 Volume requirements
► Item
Conformity
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The Awarding ProcessRole of Optimization
Flexible Requirements
Supplier Bids
• Item
• Spec
• Quantity
• Due date
• Proprietary attributes
(bid fields)
• Total cost formula
Purchasing Policies
• Budget limits
• Award splits
• Switching costs
• Contractual obligation
• Preferred suppliers
Source:
Emptoris
• Bundling
• Multiple price breaks
• Rebates
• Substitutions
• Quality and quantity ranges
• Multiple delivery locations
and times
Minimize
total cost of
ownership
(TCO)
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Supplier Ratings
• Supplier, category and
item level
• Qualification
• Quality
• On-time delivery
• Item attributes
(e.g., tolerance)
Evaluating Optimization Software
► Modeling
capability to support numerous
alternatives
► Ability to capture creative supplier ideas such as
volume rebates
► Well developed user friendly analysis tools with
reports and outcomes
► Performance and scalability that allows evaluation
by the sourcing team in house
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Key Benefits
Source:
CombineNet
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plus
Skills will need to change
► Strategy needs developed which focuses on
external and internal processes
► Some ePurchasing doesn’t need a strategy
►
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The Ideal Integration
SRM
ERP
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CRM
Drivers of Transformation
Knowledge
Strategy
Organization
Process
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Thank You!
Questions and or Comments
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