CAPS Research study defines staying power of e-auctions
David Hannon -- Purchasing, 8/14/2003 2:00:00 AM
Online reverse auctions are "here to stay and their use will continue to grow," according to a recent study conducted by the Center for Advanced Purchasing Studies (CAPS Research of Tempe, Ariz.). CAPS completed a comprehensive study of online reverse auction use and presented the findings at the annual Institute for Supply Management conference in Nashville in May. CAPS interviewed power e-auction users, suppliers who have participated in e-auctions, technology and service providers and firms that have rejected the use of e-auctions. The study found that more than 35% of firms with a spend of $100 million or more are using e-auctions, but the level of spend users put through e-auctions is still less than 5%.
One factor found to be driving e-auctions as a long-term strategy was the savings results reported by e-auction users. Users reported 15% savings on average from e-auctions and cycle-time reductions of up to 90%. The study found only one company that had signed up for e-auctions and then abandoned their use due to poor results—the early resistance to the technology is reportedly waning as users understand it better.
Another factor found to drive e-auctions was the relative ease of implementation. The low-cost of e-auctions allows them to be deployed quickly and bring a faster return on investment without requiring major integration with other systems. The newer self-serve e-auction tools are especially favorable in these areas.
Efficiency of the negotiation process was touted as another factor proving that users are in favor of e-auctions. Even when the savings are minimal, the process efficiencies are apparently enough to win buyers over. Other factors included the ease of use for all members of the purchasing staff and the integration capabilities with e-RFx tools.
The study also found that buyers reported no drop in service levels from suppliers as a result of price pressure in a reverse auction, a drawback often cited by suppliers.
"Based on the evidence collected in this study, there is little or no evidence that [online reverse auctions] are driving suppliers into nonsustainable relationships with buyers," the report states. In fact, there is evidence in the study to suggest the opposite is true and e-auctions are sharpening the relationships by removing some of the ambiguity about market prices and forcing buyers and suppliers to agree on clearer specifications.
While incumbent suppliers often express reluctance to enter e-auctions, the report found that very few suppliers actually sit them out, for fear of losing the existing business. And new suppliers welcome the chance to win the business away from incumbents in an open forum. Other supplier benefits noted in the study include lower marketing and sales costs, quicker award decisions and improved feedback from buyers as to why they lost the bid.
The ability for buyers and suppliers worldwide to communicate the bid process in real-time has been a big selling point for e-auctions. Also, the development of newer, more user-friendly e-auction software has allowed a broader range of buyers to hold e-auctions. And the greater emphasis on cost/price in today's economy, where superior quality and service from suppliers are givens also contributed to e-auction acceptance.
"This research has concluded that for a growing number of buying firms, [reverse auctions] have found an appropriate niche in their strategic sourcing toolkits, allowing them to efficiently source goods and services that are highly standardized, have sufficient spend volume, can be replicated by a reasonable number of qualified competitors and have insignificant switching costs."
Skeptics credit e-auction growth to the current buyers' market and ask what will happen when supply markets tighten and commodities are hard to come by. Two possible outcomes to that scenario are presented in the study. First, in the event of a tightening of the supply market, suppliers may turn the tables and hold forward auctions to sell their capacity to the highest bidders. Another possibility is that the market returns to more traditional negotiations and relies less on e-auction tools.
The study also reported on the potential ethical concerns among survey respondents. The top concern was that buyers will put suppliers out of business by driving prices too low. Other concerns include buyers pretending to be suppliers in e-auctions, using suppliers that are not qualified, and supplier collusion issues.
According to the study, some buying organizations found e-auctions actually improved the state of ethics and fairness by making the sourcing process more objective through the elimination of cronyism and supplier "wining and dining."
Regarding the success of repeat e-auctions, the study found it is simply too early to tell, as the vast majority of items sourced through e-auctions are not repeat buys. "However, the few companies that have performed repeat buys have reported successive cost reductions, albeit generally smaller than those obtained through the initial event." Repeat buys were reported most often in markets where prices tend to fluctuate more frequently, such as printed circuit boards—buyers want to ensure they are getting the best prices.
The most effective method of implementing e-auctions was found to be a top-down approach where auctions are endorsed by high-level management and pushed down into the organization.
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