Supply constraints have not been a big issue for most commodity markets in the past couple of years due to the slumping manufacturing and high-tech markets. For the most part, suppliers have been hungry for contracts and that hunger has fed right into the hands of the online reverse auction technology. But as the manufacturing recovery builds, buyers are becoming more concerned that the auction tactics of today will come back to haunt them when supplies become scarce (think high-tech market in 2000). To get a better handle on that concern, Purchasing recently solicited opinions via an online poll at www.purchasing.com.

The responses show there are definitely those that feel the results of e-auctions today will show up to haunt the OEMs of tomorrow. One respondent to the survey said that when the supply market inevitably tightens, suppliers will start making decisions about who they will supply based on the profitability of the business. And the business won through e-auction is typically the least profitable for the supplier so it will be the first cut.

Rob Harris of the Industrial Fasteners Institute trade organization says automotive suppliers have been affected by reverse auctions more than most other industries because of the cost constraints the U.S. automotive OEMs have been under. Harris says e-auctions have put some U.S. suppliers out of business and landed more contracts with overseas suppliers, which may breed some hostility in the U.S. supply base.

"Companies still in business are strategically repositioning themselves and won't be available or interested in bailing out the OEMs, when the inevitable new start-up quality problems surface," says Harris. "These new suppliers may be thousands of miles away, subject to the whims of the sea, shipping and port problems and could care less about U.S. laws and business practices. We're already hearing about 6% defect rates in delivered parts and the need to build buffer inventories in this 'lean' manufacturing environment."

But the majority of survey respondents put the burden of responsibility on both buyers and suppliers equally in monitoring the use and effect of e-auctions. James Snitzer, purchasing director at Mead Westavco Consumer and Office Products in Sidney, N.Y., says some early e-auctions gave the technology a bad name for two reasons. First, suppliers were too eager to win business and underbid on many contracts, which meant they could not produce a profit or had to back out of the contract. At the same time, some buyers excited about the new technology and fueled by technology providers' claims overemphasized price in some early events and drove suppliers to the aforementioned scenario. But in the end, Snitzer feels auctions turn the focus of the purchasing process back to where it needs to be: evaluating value and price.

"A seller can self-justify a high price because the additional services they provide add substantial cost and, they think, even more substantial value. But, like beauty, value lies in the eyes of the beholder. If the buyer's company is being pounded in the marketplace, they cannot focus on anything other than cost. It is up to the sellers to develop creative approaches. For example, there may be an alternative material that will amply meet the consumer expectations at the low end of the marketplace, or offer manufacturing cost advantages. The bottom line for sellers is that they need to quickly understand what value means to their customer, and then find a way to provide it.

John R. Santos of 3M's global strategic sourcing organization says if suppliers feel they have been mistreated or exploited, they may seek revenge. But both buyer and seller need to decide if they are looking for short term or lasting business relationships.

"I suspect that good companies (buyers and sellers) will find the best use of these e-tools and continue to reduce and eliminate extraneous costs from the RFP and contracting processes," says Santos.

Terry Kimble of HWH Architects Engineers Planners says e-auctions have greatly impacted quality because it only takes one bad apple to spoil the supplier bunch. "There will always be someone willing to prostitute himself with a low price, but quality will suffer," he says. "I see that in specialty valves and other products that are now being manufactured in China. Price is down and quality is down commensurate with price."

Michael Kotowski of CIRQIT says the online auction process must be a two-way street with buyers extracting maximum value and suppliers operating competitively, efficiently, effectively, and reliably. Kotowski says that while auctions may be an effective strategy for commodity items, if suppliers sell customized items through the process, the quality will undoubtedly suffer.

German firm Linde Gas and Engineering started its auction use with English e-auctions where suppliers bid lower and lower prices, but eventually moved to Dutch e-auctions, where the price rises until suppliers say they will accept it. Udo Lein, head of purchasing services, says this format means the winning bidder gets the contract more often and suppliers are given a "crystal clear communication" on the contract award, which shows integrity.

Jamie Orzell now works for e-sourcing provider Advanced Purchasing Technology but was once a purchasing manager at Eastman Kodak. He says buyers view online bidding as a great enabler of improved sourcing processes in a time when many purchasing departments are short-staffed. At the same time, suppliers see them as a way to level the playing field and there will be limited backlash from suppliers if the events are handled properly.

"All suppliers get the same RFP information in the online process, which isn't always the case with paper RFPs," he says. "All bidders can see competitor's bids (though usually done anonymously), have an equal opportunity to win the competitive bid, and participate with an equal opportunity to win new business."

Several respondents said the responsibility lies with the suppliers to monitor their costs and margins to ensure they are competing in a healthy market. If a supplier allows its margins to get too thin through auctions, it needs to reduce its internal costs or bow out of the event.

"If they accepted a lower margin as a result of e-tools then we probably don't want them as a supplier anyway," says one respondent. "If and when they try to raise our price, we will re-source their items and drop them as a supplier."

Dennis Bailey, purchasing manager at CNH U.K. echoes those sentiments saying suppliers should enter an auction event having made some key business decisions such as what their desired margins are and what their lowest selling point would be, given the package on offer from the buyer.

"I therefore don't think, that revenge is on the agenda, unless of course the selling organization is inept and unprofessional enough to have been forced into a position where they are selling at no margin, or worse still, a loss."