Pfizer's procurement provides 12 tips for reverse auction success
Pharmaceutical giant provides best practice recommendations for e-sourcing users at all levels.
By William Atkinson -- Purchasing, 12/11/2008 2:00:00 AM
When it comes to online reverse auctions, some users may think their success depends solely on the technology. But not Samuel Dowell. The senior director of worldwide procurement for New York-based Pfizer has been conducting what he views as successful reverse auctions for more than four years and agrees technology is important, but says the "people issues"—both on the internal customer side and the supplier side—are significantly more important for success.
Dowell adds that Pfizer considers online auctions to be a tool, rather than a strategy. "We don't use them for everything," he explains. "They are coupled with our sourcing strategy. The auctions are one tool that we use in the strategy to create a competitive market space."
Pfizer's strategy can be boiled down to 12 tips that Dowell says almost any procurement organization should use to guide its use of online reverse auctions.
Tip #1: Select and prepare the right people
The first priority on the "people" side of reverse auctions is preparing the internal stakeholders for the move to the tool. According to Dowell, no procurement team should attempt to use the tool without first gaining senior leadership sponsorship. He notes that a lot of procurement organizations will look at some less strategic internal spend areas as entry points for reverse auctions. At Pfizer, though, the R&D organization was the first organization where reverse auctions took place. "One reason was that we found a willing audience among R&D leadership to try it," he explains.
Along those lines, Dowell says selecting the people involved in the process is important. While it may be easy to get started in reverse auctions in some areas, it is not always easy to reach some other categories, especially highly specialized ones such as R&D. "You are only able to touch some of these categories if you can convince leaders in these areas that you have a real value to add to the process," he states. "As such, you need to have truly collaborative, highly functioning sourcing professionals." Dowell's staffers work very closely with each other, as well as with the medical people and the scientists in the R&D organization at Pfizer.
"I have seen a lot of sourcing professionals elsewhere who are technically very competent, but aren't able to communicate well with others," he says.
Tip #2: Take ownership
Dowell also emphasizes that, when it comes to reverse auctions, the sourcing professionals have to take personal responsibility for the process.
"I think a lot of purchasing professionals complain that they could help some non-traditional areas if they would let them. However, they don't want to take any risks themselves. They want the [business unit stakeholders] to take the risks."
At Pfizer, if the e-auction goes well, the business unit stakeholders can take credit for it and present the results to their leadership. "But if it goes badly, they can blame me," he says. Of course, when first pitching the idea of reverse auctions, Dowell and his team were always quick to follow up with the comment that they weren't going to let it go badly.
Tip #3: Get the right tool for the job
While the people issues are very important, having the right reverse auction technology is also a big part of the success. Pfizer's procurement leadership, including Lisa Martin, senior vice president of worldwide procurement, and Philip Presti, the vice president of research development and medical procurement, have pushed for the investment in Pfizer's Ariba toolset. As a result, according to Dowell, Pfizer has the appropriate infrastructure internally to run the events effectively, as well as the technical expertise to get the Ariba tools set up and suppliers trained. "The investment has paid off many times over in the results we have achieved."
Tip #4: Have a backup
Part and parcel with assuming all risk, procurement needs to offer a failsafe backup plan. If the auction doesn't go well, it is important to have the ability to default back to the traditional paper-based RFP process. "For example, if there is a technical issue or lack of participation among suppliers, we inform the suppliers that we are ending the event," Dowell says. Suppliers are then instructed to submit their proposals and pricing via the traditional method.
Tip #5: Sell it internally
In promoting the concept for the first event, emphasize things to internal customers that will resonate specifically with them. "Procurement professionals often like to focus on cost, but in R&D speed often resonates more." Dowell's team demonstrated they could conclude very complex price negotiations with multiple suppliers in an afternoon, which the R&D team appreciated. Typically it would have taken weeks or months of serial meetings with multiple suppliers to negotiate this in a traditional fashion.
Tip #6: Explain the rules and process
Another key to building acceptance among internal customers is to explain that they aren't obligated to accept the lowest bid in a reverse auction. "In drug development you don't want to feel like you have to go with the lowest cost supplier" Dowell says. They are looking for best total value."
Dowell and his team made it clear to R&D and the suppliers that there are benefits to creating a competitive bidding event, but that there would be multiple factors for selection. Pfizer uses a weighted evaluation criteria, where price may represent 90%, or it may represent 30%, depending on what is being sourced. Pfizer uses the auctions to get pricing, and then puts the pricing into the weighted evaluation criteria. As such, it is possible that the supplier that comes in second or third on price is awarded the business because it is exceptionally strong in areas such as quality or previous work experience.
Once R&D staffers realized this, a lot of resistance to the process just fell away. "We were also up-front with this information to suppliers, too," he adds. "However, they knew that they couldn't come in seventh and expect to win the business."
Tip #7: Prepare the supply base
Dowell says it's also key to prepare internal customers for the negative supplier reactions that may occur in connection with an e-auction. At Pfizer, suppliers historically interacted directly with senior doctors and scientists in the company, says Dowell. "Suddenly, procurement has been inserted in that relationship, making it uncomfortable for some suppliers." On top of that, the procurement team was asking suppliers to participate in a reverse auction. For these reasons, Dowell and his team coached and prepped R&D people on what kind of supplier reactions they could expect, including suppliers trying to talk Pfizer out of the reverse auctions with the rationale that it doesn't work for their products.
Dowell also points out that if suppliers in an R&D environment are used to dealing with business units directly, they may not understand the language or processes that procurement is using. "Some suppliers aren't used to giving price concessions, because they didn't have to give many pricing concessions to users before," he says.
E-sourcing tools are effective at shocking some suppliers into the new reality, Dowell says. Rather than just talking with procurement professionals, they are now faced with graphic evidence that they must respond to a specific online sourcing event, or one of their competitors might take this business away from them.
But that transparency can be used to encourage suppliers to participate in the events. "During reverse auctions, suppliers can obviously see their own bid and the low bid," notes Dowell. "However, we also allow them to see their rank among all the participants."
Supplier training prior to an event is important. "You don't want any complaints later where they claim they didn't know how to use the tool or interface," Dowell says. Pfizer solicits supplier input and conducts a mock auction ahead of time, which allows suppliers to get comfortable with the process.
It is also important to provide clear specifications and service level requirements to suppliers ahead of the event. If the specifications aren't as clear as they should be in the paper world, a change to the RFP can be issued or suppliers can be contacted to correct misperceptions. But during an e-sourcing event, inaccurate specs are very public and visible, and any mistakes that procurement professionals make in preparing the event are magnified, because there is no time to go in and fix things.
"Everyone needs to have a common understanding of what they are bidding on, or the auction results just aren't as valid as you would like."
Tip #8: Invite only the right ones
There's a fine line when it comes to how many suppliers to invite to an e-auction. While too few can mean not enough competition, too many suppliers invites those with less than true intentions, so pre-event qualification is key.
"In our online auctions, suppliers can see what each other bids," states Dowell. "If they were willing to go much lower, but none of the other participants forced them to do so, you can lose out." The reason is that suppliers will be able to sit at a higher price than they might have in a paper-based bidding event where they don't know what other suppliers bid.
Tip #9: Get RSVPs
It is also a good idea to require pre-bids before the actual event starts. "This ensures that there are no password problems and that they are able to access the system, get in, and place a bid before the actual competitive bidding starts," Dowell points out.
Requiring an "intent to participate" message is also important. Pfizer requires this a week or two prior to the event, asking suppliers to report that they either are going to participate or are not going to participate. The reason: "There is nothing worse than throwing a party and having no one show up," says Dowell. "If we invite seven suppliers to participate, and find that only three are going to participate and one is not going to be very active, we have the opportunity to cancel the event."
Tip #10: Watch the action, check the system
A successful reverse auction should have realistic bid decrements (the opposite of increments). "If you are bidding an event with $10 million of business at stake, you don't want people lowering their bid $100 at a time," he explains. Pfizer often sets bid decrements at 0.25%, which, for a $10 million event would be $25,000.
Dowell recommends setting up parallel communication routes during the auction, so suppliers can communicate with hosts if there are problems communicating via the reverse auction. At Pfizer, suppliers can access the individuals hosting the auction in three different ways: land line telephones, cell phones and e-mail. "If they are having technical problems, or if they entered an incorrect bid by accident, we need to be able to correct those things quickly," he explains.
Tip #11: Talk it up
"I always invite senior leaders, such as vice presidents and senior vice presidents, to come in and witness the event," Dowell says. He has found that this has been crucial to success. "The energy and appreciation they gain from watching procurement manage these live events has been very beneficial for us in marketing future events."
Assuming the first event is a success, it is important to publicize the event as a procurement win that can in turn market future events. Once Dowell and his team got their first win in one R&D category, they were able to market the concept to the other categories in R&D very readily.
Tip #12: Track the data
According to Dowell, reverse auctions at Pfizer have generated savings of anywhere between 12–50%. But when Pfizer has coupled reverse auctions with low-cost sourcing total savings can be as high as 80%. However, he admits, it is difficult to determine how much of the savings are due to the auctions and how much are due to taking the business overseas.
There is a common misconception, Dowell says, that reverse auctions can impact quality. "In the last four years, we have never had to de-source any of the suppliers that we have selected through reverse auctions."
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Great tips! Even though it is a farly new concept it surely is very promising. Has anyone tried www.oltiby.com reverse auction platform? Is it for personal or B2B use? Thanks.
stive foster - 12/28/2008 6:01:00 PM EST -
Atkinson does a good job of introducing the E-Sourcing concept in the article. However there are more steps that can be taken to make this process a success within your business system. As the lead purchasing professional that has utilized this tool for over five years now, I would love to share those with the author for a future article that could be a followup. Some key points:
- Planning your annual spend that will move through E-Sourcing.
- Setting up an automated process for repeated bids such as fabricated tooling.
- How purchasing can get involved early on with R&D, Engineering and other spending functions.
- Using the E-Sourcing process for indirect services.
Judy A. McFarland - 12/23/2008 12:30:00 PM EST
5 Tips for better reverse auctions
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