Buyers turn wary eyes on electronic auctions

By Anne Millen Porter -- Purchasing, 8/24/2000

While e-auction capability is becoming de rigeur in Net marketplaces, the general buying population remains far from sold on the concept. In fact, a recent reader poll by Purchasing Magazine finds fewer than 20% of buyers reporting that either they or someone else in their purchasing organization has ever participated in an e-auction.

What's more, among the 81% of buyers who have never participated in e-auctions, slightly better than half (53%) say they don't intend to do so in the foreseeable future.

Among those rejecting the e-auction model at this time, there appear to be three major reasons:

• Size. Some in the group of e-auction cynics simply see themselves as too small, too lacking in purchasing power to command much benefit from e-auctions. For example, the purchasing supervisor for a high-tech firm in Radford, Va., says his company "does not have sufficient volume to produce savings." Thomas Brassard, senior buyer for Alenia Marconi Systems in Westlake Village, Calif., says, "We purchase only minimal quantities in support of prototype designs for future possible manufacturing overseas."

• Time. Others say they've simply been too busy meeting the demands of a booming economy to spend time investigating and testing this new-fangled e-purchasing technique. "We might be interested in 2001," says the purchasing manager for a maker of lighting fixtures in Illinois, "but currently our business is growing too fast." The purchasing pro for a metals fabrication outfit in Sun Valley, Calif., says, "At this time I haven't done enough research to see if [e-auctions] are applicable to my company." The senior buyer for a $3.2 billion OEM supplier in Batavia, Ill., says he's "not familiar with B2B e-auctions."

• Fit. Those most adamantly opposed to e-auctions say the model simply doesn't jibe with their methods of dealing with suppliers. (Interestingly, this group appears to be dominated by OEM buyers.) For example, the senior purchasing agent for a major semiconductor and electronic equipment manufacturer remarks that, "Most parts are specified as to supplier and performance." The senior PA for a major appliance manufacturer says, "We buy very few commodity items and most are supplier specific due to performance or other approvals." Meantime, the purchasing pro for an automotive company believes that e-auctions are "not structured enough for blueprint types of items."

Buyers take long view

One big problem for purveyors of e-auctions is that the buying population at large remains unconvinced that the short-term benefits of e-auctions outweigh the long-term risks. Even among buyers who say they've participated in e-auctions, only 43% feel they clearly paid less than they would have in offline negotiations. Fourteen percent feel they paid more, while the remaining 43% either aren't sure or they aren't talking.

Even if e-auctions do yield big short-term price gains, many buyers remain concerned about the less easily measured long-term costs of broadly deploying this New Economy tool.

For example, buyers who've been through at least one or two economic business cycles in their careers fear the damage they might do to long-standing supply relationships-positive associations that tend to pay off in terms of availability and pricing leniency when supplies get tight. For example, the buyer for a major metals company in Arizona thinks e-auctions could "anger current long-term suppliers" leading to a "loss of aggressive pricing" at times when market supply becomes constrained.

Others have come to rely on suppliers for assistance in designing products that can be manufactured less expensively and brought to market more quickly. In this respect, the purchasing pro for a heavy vehicle manufacturer thinks e-auctions could lead to a "loss of confidence among existing suppliers." Likewise, the purchasing agent for a maker of manufacturing inspection systems says, "In the electronics field, there is definitely a risk of losing local support. Manufacturers' reps and local distributors work hard with our engineers to spec in parts. If we were to auction these parts disregarding territory, it would be disastrous."

Other e-auction risks, according to buyers, include the potential for long-term slides in product quality, availability, supply base diversity and innovation. The purchasing agent for a medical electronics firm in Texas suggests that too much emphasis on driving down prices could lead to a "degradation of non-specified quality factors." The PM for a food manufacturer in New Jersey says, "You get what you pay for eventually." The senior purchasing agent for an electronics manufacturer in Illinois suggests that the e-auction mode of awarding business could cause a return to "inconsistent quality."

Gary Post, manager of purchasing for Airborne Express in Wilmington, Ohio, thinks e-auctions might drive down sales prices to the point where too many suppliers become unprofitable. "This limits growth and threatens the existence of companies," he says. The materials manager for an OEM in Livingston, Tenn., fears that supply-base shakeouts could lead in the direction of monopolies. "Prices will be higher in the end." Likewise, the director of purchasing for an Alabama university suggests that "localized collusion could become a problem" over the longer term.

Beyond their concerns about the long-term structural effects of e-auctions, it's clear from Purchasing's poll that sellers of e-auction technology will need to deliver more than price-only auctions (see editor's note at the end of this story). Having solicited bids for production requirements, the purchasing pro for a $5 billion chemical manufacturer remarks that, "Prices were lower, but we've been unable to attain comparable quality in service." The director of purchasing for a maker of aluminum extrusions and injected molded plastics says, "The cheapest price is not the lowest cost. I think e-auctions are a good tool, but they're no substitute for well-developed business relationships." The materials manager for a metal stamping company in Michigan agrees: "Moving business is about more than just price. Quality, delivery and service can cost more than the difference in price obtained. Those who move their business based solely on price will, at some point, regret their decision."

(Editor's note: For information one how some companies have developed "multi-factor" or "total cost" e-auction technology, see story starting on page S31 of the June 15 issue of Purchasing Magazine or access an archived version of the story at Purchasing Online at www.purchasing.com.