5 Tips for better reverse auctions
Reverse auctions can reduce price and total cost for electronics components—but only if you do them right. Here's the guidance to follow.
By James Carbone -- Purchasing, 9/11/2008 2:00:00 AM
Like their peers in other industries, electronics buyers use reverse auctions as a way to control and reduce cost. Many even view them as as a way to automate the negotiation process, allowing them to "negotiate" with suppliers online in a timely, cost-effective fashion. "In some cases, online negotiations require fewer resources than our standard negotiation and cost process," says John Kern, vice president global supply chain management at Cisco Systems in San Jose, Calif.
"When we can get the same or better results with fewer resources that is a win for Cisco, our suppliers and our shareholders."
While suppliers often view reverse auctions as a tool buyers use to squeeze them on price, many OEMs and EMS providers say reverse auctions can be used to reduce total cost of ownership as well as piece price. How much savings are realized varies depending on the commodity. Some OEMs report 30% cost reduction when reverse auctions are used initially. Then, they realize 10–15% savings in subsequent reverse actions.
"The scope of savings depends on the event," says Kern. "In some cases we have doubled our normal productivity run rate. In others, we have prevented increases. In general, when we've chosen to use online negotiations we have achieved better results than our normal process," he says.
While reverse auctions are an effective way to reduce cost, buyers must make sure they don't jeopardize supplier relationships. "Our relationships with our suppliers help accelerate our success," says Harvinder Sembhi, vice president, supply base solutions, for EMS provider Celestica in Toronto. "We value those relationships with our suppliers, so it is essential to have a clear understanding with suppliers on the auction process."
He says reverse auctions should be used selectively and not for every part. "It is important to use reverse auctions only when it makes business sense."
The following are tips from buyers and industry experts on how to successfully run a reverse auction.
1. What should be auctioned? Electronics OEMs and EMS providers often do reverse auctions for both indirect and direct materials. However, production parts are easier to put through reverse auctions because "the product specifications are easier to understand" than services where a lot of background and terms and conditions need to be laid out prior to the auction," Sembhi.
Kern of Cisco says reverse auctions should be used for commodities that are "multi-sourced and are not supply constrained or predicted to be on allocation." He says Cisco uses them for products that "have had poor productivity performance."
Many semiconductors, passives and connectors, mass storage and displays can be put through reverse auctions.
Sun Microsystems, based in Santa Clara, Calif., has used reversed auctions for years. It regularly buys memory ICs and other semiconductors, connectors, hard disk drives, power supplies through reverse auctions. It also uses reverse auctions to award business to EMS providers for printed circuit board assembly and box builds.
Electronics buyers involved with reverse auctions say that custom semiconductors or other products that have a lot of intellectual property associated with them should not be purchased through reverse auctions. Reverse auctions work best for parts that have a robust and competitive supply base.
2. Qualified suppliers only. For most commodities, three or more previously qualified suppliers should be included in reverse auctions. Some companies don't like to have more than five because they don't want to antagonize key suppliers. Buyers should never allow an unqualified supplier to participate in a reverse auction just to drive down the price.
Sun often has three suppliers and uses reverse auctions to apportion business among each participating supplier. Suppliers know they will get a share of the business. The question is how much. Most buyers say it is important to use reverse auctions with suppliers that they already do business with.
"Only previously qualified suppliers that are capable of supplying the components or assemblies should be included in reverse auctions," says Pascale Mardirossian, vice president supply management worldwide operations for Sun. "A good rule of thumb is that if you wouldn't invite a supplier to bid in your traditional sourcing process then you should not invite them to bid in a reverse auction."
She adds if a company is looking to identify new suppliers for a reverse auction, a request for information (RFI) event should be used before the reverse auction. Such an event informs suppliers of the upcoming reverse auction and asks if the supplier has the parts that will be included in the auction and if the supplier is interested in participating. New suppliers should be qualified before business is awarded.
3. Plan and prepare. Preparation is key to a successful new auction. Electronics buyers need to have the latest information on market conditions for the parts that will be put through reverse auctions. These days buyers need to monitor raw materials costs because they can affect the supplier's cost, says Jim Wetekamp, senior vice president of solutions strategy, at BravoSolution US, a Malvern, PA.-based firm that conducts reverse auctions for companies.
He adds prior to the auction, buyers need to set a price strategy. "In strategic categories where you have a lot of bargaining power, collect a cost breakdown so that you can better understand your suppliers' cost drivers and your negotiation potential," he says.
However, buyers need to determine what the key decision drivers are in determining who will get business. While reverse auctions are used to reduce price, buyers should award business based on total cost of ownership, he says.
"Plan to measure more than just price. Use auctions to examine non-price components of supply such as quality, delivery and innovation," he says.
Buyers should also make sure that suppliers are prepared for the event. Buyers should hold a pre-auction conference or "rehearsal" with suppliers. They should make sure that business and technical representatives can answer suppliers' questions about the reverse auctions in real-time and that the auction can be paused if a major question or problem arises.
4. Be transparent and ethical. Since buyers set the "rules of engagement" for a reverse auction, they need to stick to them. There should be no side deals after the reverse auction. Transparency is key. Suppliers need to know where they stand in the reverse auctions and see where their bid ranks. However, their confidentiality needs to be guaranteed.
"We never show supplier names, but we do show each supplier their position relative to the other suppliers engaged in the event," says Kern. "In some cases, we show the actual value of the lowest bid in addition to the relative ranking information."
To ensure transparency, Celestica "hosts reverse auctions on our own systems, behind our firewall to manage and protect the confidentiality of our suppliers and our customers," says Sembhi.
5. Consider the supplier perspective. New suppliers may see an auction as an opportunity to win business, while incumbent suppliers may feel threatened, says Wetakamp.
"The feedback we hear from suppliers is mixed depending on the commodity," says Kern. "Some suppliers are concerned about the emphasis on price in online negotiations. When Cisco uses online negotiations we are very clear that pricing is only one factor in the final award decision," he says. Some suppliers choose not to bid in online negotiations if their cost structure or productivity plans are not competitive, according to Kern.
While some suppliers may not like reverse auctions, others view them as a way to win more business from EMS providers and OEMs or to enhance a relationship with a customer.
Sembhi says while Celestica conducts reverse auctions with its suppliers, it also participates in auctions with its OEM customers. Increasingly OEMs are holding reverse auctions for printed circuit board assembly and box builds.
"We've been successful in winning business through reverse auctions with OEMs," he says. Celestica has won business because of its total cost of ownership strategy, according to Sembhi.
"Price is only one component of the overall cost. Leadtimes, freight and flexibility needs to be taken into account. We've won business because we have low total cost of ownership."
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