What Do CAPs Latest Findings Tell Us (Besides the Fact Auction Usage is Down)?
Supply Chain Digest recently did a good job summarizing some of the highlights of CAPs latest cross-industry benchmark report on procurement and sourcing. I wrote about this topic in late June. You can find my earlier post here. SCD calls out a number of areas that mention again "for the third straight year, procurement operating expense as a percent of company revenue remained at .36%, meaning the relative cost of the procurement function itself has neither risen nor fallen during that time." Another insightful metric is that "Offshore spend as a percent of total spend rose substantially in 2007, rising to 25.92% of the total versus 22.49% in 2006." And it's also good new news to note that "the percent of suppliers being reported as 'e-Procurement enabled' rose sharply in 2007 to 19.6%, up from 16.46% in 2006."
What's the one surprising factoid in the report? Reverse auction usage is down. SCD notes "the percent of spend that went through e-Auctions declined in 2007 to just 2.58%, down from 3.18% in 2006." Anecdotally, I suggested the same thing earlier in the year in a previous post on Spend Matters where I commented that "as companies have transitioned to self-service models, I fear that declining transparency -- and a lack of market rules enforcement -- have damaged the credibility of auctions in the eyes of many suppliers beyond the point of repair. Perhaps this explains why, I'd argue, actual reverse auction usage is down inside many companies despite the widespread availability of tools to all sourcing professionals (this is my observation, not an empirically based fact, mind you)."
I’d be curious if Spend Matters readers could speculate on other reasons for declining reverse auction usage as well.
- Jason Busch
What's the one surprising factoid in the report? Reverse auction usage is down. SCD notes "the percent of spend that went through e-Auctions declined in 2007 to just 2.58%, down from 3.18% in 2006." Anecdotally, I suggested the same thing earlier in the year in a previous post on Spend Matters where I commented that "as companies have transitioned to self-service models, I fear that declining transparency -- and a lack of market rules enforcement -- have damaged the credibility of auctions in the eyes of many suppliers beyond the point of repair. Perhaps this explains why, I'd argue, actual reverse auction usage is down inside many companies despite the widespread availability of tools to all sourcing professionals (this is my observation, not an empirically based fact, mind you)."
I’d be curious if Spend Matters readers could speculate on other reasons for declining reverse auction usage as well.
- Jason Busch
However, while giving it more thought, I think that the steep increases in market prices in all areas simply kill reverse auction fundamentals. Rule number one when running RAs is that the buyer has to know beforehand that he can get more favorable terms in the market place than he gets right now.
It is probably easier and more effective to twist existing supplier arms and make them honor current pricing rather than opening up a Pandora's Box with transparent pricing in a reverse auction.
Thomas Kase
Sr. Sourcing Manager
AECsoft USA
I agree with Thomas that rounding up all of the inforamtion is very time consuming. Unfortunately vendors have done a poor job of providing easy to use tools and quality access to data such as specifications and suppliers that woulkd make it easier for companies to use auctions as a tool for all procurement.
At safesourcing we support self servcie with on line information such as templates, product specifications and a robust supplier database that keeps the events fresh and interesting, while supporting sustainability in the future at a lower cost for events that have run before.
That does not seem real strategic to me.
Lynn James Everard, C.P.M.
Our own use of auctions has declined primarily because our clients are looking for more collaborative, innovative ways to achieve savings (or cost avoidance). I'm not saying auctions don't have their place... they do when pricing transparency does not exist or it's a true buyer's market but I'm seeing a lot more "other" ways of obtaining mutual benefit.
Digging into the report, CAPS suggest that 40% of manufacturing firms are reporting a decrease in the use of reverse auctions. However just 28% of non-manufacturing organisations report a decline in usage and 50% are actually reporting an increase.
Please see summary slide here: http://i34.tinypic.com/14dedfo.jpg
Is the rising commodity market causing auction usage to decline faster in manufacturing companies? Are procurement professionals moving away from auctioning critical supply inputs? Is the reported 50% increase in non-manufacturing firms due to the greater focus on forcing indirect spend categories via auctions?
I don't have the answers - for that you'll need to speak with Steve Wade at CAPS. However, to build upon what you said, I feel there is one overriding factor why auctions fail to deliver:
The complete lack of relationship segmentation and supply market analysis.
A recent example I observed was one of the Oil 'Super-Majors' attempting to auction critical commodity chemicals that are in short supply (e.g. Glycol). Such auctions collapse due to insufficient competition as suppliers can easily sell for higher prices elsewhere.
Another good example: Last year I interviewed a Medicines Procurement Specialist Pharmacist, who is an advisor to the UK healthcare trusts. He shared an example where the National Health Service (NHS) awarded a reverse auction contract for an Epilepsy drug to a generic supplier of Fluzinamide.
However, the NHS had huge delivery problems after awarding to the cheapest supplier and at one point were down to just 1 days worth of inventory. The interviewee explained that this was like Tesco (the UK's biggest supermarket) running out of bread.
Now, due to the lack of due diligence displayed by NHS purchasing managers, there is little respect for auctions within the NHS. Indeed, Helena Fuller, the Chief Operating Officer at the Yorkshire and Humber Commercial Procurement Collaborative, recently stated:
"Reverse e-auctions have been a fad for NHS procurement at both a local level and within the collaborative procurement hubs."
To summarise I feel that auction usage is declining not due to the reverse auction mechanism in itself, but the inexperience of the individuals hosting the event. Auctions work really well when hosted by a knowledgeable category manager but the 'self serve' auction model operated by 'lazy' professionals is doing irreparable harm to the industry.