E-Auction Playbook

Specializing in the e-sourcing market, Frictionless software greatly improves the efficiency and effectiveness of corporate purchasing(resulting in hard-dollar savings.

Bidding custom parts
By Thomas P. Collins, vice president of operations, ThreeCore

Reverse auctions are an efficient means of creating competitive markets when securing optimal costs is a priority. Experience shows significant savings accruing to both large and small enterprises participating in the auctions. In the area of commodity items, reverse auctions allow buyers to create competitive situations between suppliers and distributors for well-defined products. The results are predictable and effective.

While reverse auctions have proven to be a valuable tool for procuring commodity and MRO materials and supplies, can custom direct materials buyers and suppliers expect to enjoy the same successes? Unlike commodity items, where there is little, if any, differentiation across products, the greatest ethical and operational challenge to custom direct materials procurement is selecting the appropriate suppliers to participate in a reverse auction. Custom direct materials are manufactured to specification or blueprint, and are unique to each buyer. By definition, custom direct materials are not found in catalogs or through distribution channels. They are generally critical to the buyer's operations and an important variable in the margin equation.

The importance of these materials-to-production processes and their stringent manufacturing specifications alter the definition of success for reverse auctions. In fact, the key to holding a successful and ethical reverse auction to procure custom materials is ensuring that the suppliers participating in the bidding process do, in fact, have the appropriate skills, equipment and personnel to manufacture the products under auction. Suppliers must be certain they are bidding against similar types of companies, and buyers must be confident that each supplier is truly capable of carrying out the work at the lowest total cost. This certainty cannot be achieved by using general supplier listings or reviewing SIC codes. The most effective method to ensure that appropriate suppliers are invited to review and participate in reverse auctions is to pre-qualify the suppliers (third parties can be employed) prior to their participation in the auction event. This pre-qualification effort is essential as it places boundaries around the auction participants. The evaluation of suppliers certifies that bidders possess similar processes, procedures and capabilities that suit the buyer's needs.

The keys to pre-qualifying suppliers are to identify their core competencies and leverage that investment for efficient pricing. Phone interviews, or supplier self-assessment forms typically cannot be used to make informed decisions about a suppliers' competencies. To ensure objective, thorough and accurate supplier assessments, a formal audit of the supplier's facilities is necessary. This eliminates subjectivity in the assessment and confirms that the supplier does possess the skills necessary to perform the job. This also prevents a reverse auction comprised of mismatched participants. The ethics of having unqualified participants artificially driving the cost down is a new phenomenon for purchasing professionals to consider as a result of the reverse auction process. An effective and ethical supplier audit not only allows for buyers to have the correct data to invite the correct suppliers to a reverse auction, but also prevents the suppliers from receiving invitations to bid on jobs they are incapable of executing. This wastes suppliers' time and creates risks for buyers.

The objective of the reverse auction process is to obtain the optimal cost for the buyer. If this is done without a thorough understanding of participating suppliers' capabilities, other factors in the buying decision are at risk of being compromised.

The importance of materials-toproduction proceses and their stringent manufacturing specifications alters the defininition of success for reverse auctions.

-Thomas Collins, ThreeCore

Variables that influence a buying decision include quality, delivery performance, support requirements, and suppliers' financial stability. Appreciating the potential impact of these variables on the buying process is critical to participating in reverse auctions. Entering into a reverse auction, with a full understanding of how important the role of qualified suppliers is to protecting the integrity of the reverse auction process, will support delivering the anticipated savings and process efficiencies.

ThreeCore offers strategic procurement services dealing with sourcing of custom goods and machined parts for small and mid-sized companies. Uses the Internet as a platform to bring together buyers and qualified (audited) suppliers..