Reverse auctions provide good chemistry for Shell
At Royal Dutch Shell, reverse auctions are a key tool in managing the commodity chemicals spend.
By Alan R. Earls -- Purchasing, 3/12/2009 2:00:00 AM
Over the past decade, online reverse auctions have been tested and, for many organizations, have proven their value. For manufacturing operations that source commodity chemicals they can be a particularly valuable purchasing tool.
Royal Dutch Shell (Shell), a global group of energy and petrochemical companies with 100,000 employees, is a case in point. In addition to its prominent role in energy exploration and delivery, the company also has operations that make synthetic fuels, chemical feedstocks and a range of petroleum-based products for domestic, industrial and transport use. And acquiring chemicals at the right price is a key ingredient in company success.
Guy Frankling, e-sourcing and implementation manager at Shell, says that reverse auctions are used extensively at the company to the tune of about 100 reverse auctions a month because, among other things, they have historically saved money. "We have used reverse auctions since 2001 and are currently using the Emptoris platform. The system is part of the toolkit we provide to Shell buyers and they choose to use it if it is deemed that it will add value to their category strategy," he says.
Commodities first
Frankling estimates that overall, chemicals represent 3–5% of the company's total reverse auction activity, though he said the company cannot release specific dollar values. Frankling says his company favors reverse auctions for most bidding projects but not all. Some things are a natural fit. For example, notes Frankling, for buying anything with commodity characteristics reverse auctions work well. On the other hand, air travel, which Shell buys in large volumes, is not so easy to reverse auction. There are all kinds of classes and permutations of services as well as a multitude of destinations for a multinational such as Shell. "My overall view is that if it is something you can manually put out for a sealed tender bid and are intending to award the contract to one supplier, you can do it online because the evaluation process is primarily the same," as if it were a manual process, he says.
But, he stresses, doing a bid electronically doesn't always mean it will be easier. "It won't solve all your problems because all the many product permutations won't go away," he says
But Frankling points out Shell's e-sourcing implementation was closely aligned with the company's specific processes and needs. In particular, the Emptoris "transformation" functionality allows for fine tuning of bid requirements in real time, adjusting the weighting for different factors within the bid package to produce bids from suppliers that best meet Shell's needs so the bids can be compared efficiently. Frankling says actively adjusting the bidding is better for Shell "because we are then clear internally that we are awarding business to the actual best bid winner rather than just awarding on price alone." From the supplier perspective the same process ensures that suppliers don't end up in situations where they win a bid but "we have to come back and give it to another company because of some factor other than price," he explains.
Giving suppliers the opportunity to adjust their bids in real-time lets them know where they stand in the bidding. "I have lost count of the number of times that in 'the old days' where a supplier wouldn't get the business and they would want to know how close they were to winning," Frankling says.
"This system eliminates that problem," he says.
Frankling says chemical suppliers usually just see their rank in the online reverse auction relative to other bidders, all of whom remain anonymous. "They might see the transformed price they have to beat but normally they would just see their rank," he adds.
Words to the wise
Frankling offers some suggestions for purchasing organizations that are looking to source chemicals through reverse auctions. For one thing, he says, when a purchasing team is considering a reverse auction tool like Emptoris, be sure to "kick the tires." Be clear on what you are purchasing and what you level of functionality if needed. "These toolsets often have lots of added functionally that you might not need but you might be paying for."
Also, he says, be very clear on the material specifications you are seeking when bidding out a contract with a reverse auction tool. Know what you are buying. "If you are not clear on your specification you won't be successful doing it either manually or electronically."
Finally, he notes, be sure there is really competition on the auction. Reverse auctions can be done with as few as two suppliers but that just increases risk for the buyer. "If one of the suppliers decides they don't feel the business being bid on is right for them and they don't provide a bid, you might get stuck with the other supplier and not even at an advantageous price."
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Shell is pleased with the reverse auction results it has achieved to date. "It is hard to compare reverse online auctions to the process of using sealed tenders or RFQs, however if there is a 10% savings on reverse auctions, I don't think sealed tenders would be any better." But the biggest advantage is really openness. "Everyone knows the rules and can see the results," he says.
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