How Not To Conduct Reverse Auction
by Sujit Assudani EmpoweringCPOReverse Auction is one of the most important tool used for
negotiation during execution of Strategic Sourcing Projects. At the same time
it should also be noted that conducting Reverse Auction is not the only remedy or
solution for achieving savings, in-fact the success also depends on how well
the other steps are executed. These steps again can be classified as those
before the Reverse Auction, those involved during the actual conduct of the
Reverse Auction and also the steps that are involved after the Reverse Auction.
The subsequent section of this article talks about the sub steps involved
during the above listed 3 phases. For each sub step the points have been listed
which can negatively or positively affect the results:
Steps Before the Reverse Auction:
1) Supplier Research or Market Making
This is one of the most important steps as half the battle
is won if all the right suppliers have been identified. Higher the number of
suppliers better can be the result. Again this should also take into
consideration the criteria for selecting these vendors, care should be taken to
ensure that only right suppliers, those eligible to cater to the requirement
are selected for the Strategic Sourcing Process. If the number of suppliers are
low the entire Reverse Auction process will lack competitiveness and hence will
adversely affect the results. Hence it is very important that all eligible
suppliers are included for the process.
2) RFP Preparation
During this step the scope is shared with the shortlisted
vendors and also the process that would be adopted is disclosed to all the
participants. A typical RFP Package can include sections like Scope Document,
Qualitative Questionnaire and Pricing Worksheet. The scope document usually elaborates
on the Scope for Service or Product, desired SLA’s, Important Contract Terms, RFP
process and the associated timelines. It is advisable that at this stage, as
part of the RFP process, the vendors should be informed that online negotiation
may or may not be conducted, as the decision for conducting or not conducting
Reverse Auction is usually taken after the bids are analyzed. The vendors may not
quote their best price if it is known to them that the next step is Reverse
Auction. They would usually keep some buffer and this can lead to wrong
decision and lower savings if the vendors are not competitive during the actual
Reverse Auction. So to avoid this scenario it is also advisable to inform all
participants that the first round of price bidding will be an important
criteria for shortlisting for the next phase.
3) Pricing Worksheet Creation and Lot Creation
This sheet captures the Total Cost of Ownership and hence
should list down all cost components with breakup. The key success factor for any
Reverse Auction is the Lotting Strategy adopted. Lotting strategy is all about
logically grouping the SKU's so as to ensure maximum participation. Refer the
link (http://www.empoweringcpo.com/index.php/blog/lotting-strategy-key-to-successful-reverse-auction/)
for more information about the best practices around Lotting Strategy. The
pricing worksheet creation and Lotting strategy go hand in hand. Example if
there are 5 SKU's in an RFP and there are total 10 suppliers. If out of 10
suppliers only 5 suppliers are capable of supplying the first 3 SKU's, in this
scenario it is advisable to have two lots, the first lot can represent the
first 3 SKU's and the second lot can represent the other two SKU's. This is an
over simplistic example but the idea is to ensure maximum participation.
5) RFP Analysis
The objective of any RFP analysis is to rank vendors on both
qualitative as well as pricing front. It is strongly advisable that the focus
of analysis should also be data crunching so as to identify the lots and help
in designing the right Lotting strategy. The analysis is incomplete if it is
not able to present the right Lotting Strategy.
Steps During Reverse Auction:
1) Practice Auction / Vendor Training:
It is important that the vendors are well trained before the
auction so that they are familiar and comfortable with the process. This will
allow them to focus on the price front and they won’t have to worry about the
technicalities.
2) Live Auction:
During the live auction it is advisable that the duration of
the first lot is longer compared to other lots as this will allow the
participants some breathing space and will allow them to settle down. Also the
market making team should reach out to the vendors on phone as this will boost
their confidence and help them realize that the team is there to help them in
case they face any problems during the process.
Steps After the Reverse Auction:
1) Collecting Pricing Worksheet
After the Reverse Auction process is over, all the vendors
should be asked to resubmit their bids in the format as defined as per Pricing
Worksheet. This will allow the Sourcing team to have written record of the
final bids, this can help in avoiding any disputes at a later stage.
2) Informing Vendors About the Award Decision:
As a best practice after the analysis is complete and the
bids are analyzed the vendors should be updated about the award decision.
To Summarize The
Main Questions:
a)
Do not limit the number of vendors during the
initial phase of strategic sourcing process.
b)
During the RFP process do not share with vendors
the upcoming online negotiation (Reverse Auction), because after bid analysis
you may decide not to conduct.
c)
Do not structure the pricing worksheet so as to
be unfair to some of the vendors. (Example pricing worksheet has a lot with 3
SKU’s and some of the vendors are able to supply only 2 SKU’s in this scenario
the pricing worksheet or lot creation methodology is unfair to these vendors).
d)
RFP analysis process should not be left
incomplete, the output should help in lot creation.
e)
Reverse Auction participants should not be left
to manage the process technicalities on their own, proper support should be
given to them.
f)
The sourcing team should not only bank on the
bids quoted online, instead a written confirmation should also be collected
after the auction.
EmpoweringCPO (www.empoweringcpo.com) is a strategic
sourcing service provider with vast pool of experience, they have plenty of
case studies to elaborate on how Reverse Auctions should not be executed. Since
last 4 years they have been helping their clients achieve higher savings with
Strategic Sourcing process. According to them the key is all about right
methodology and process compliance. For more information they can be reached at
info@empoweringcpo.com.
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Created on Dec 31st 1969 18:00. Viewed 0 times.