Not just a cost-reduction tool

Technology frees up time for buyers to work on strategic sourcing.

By Jim Carbone -- Purchasing, 2/17/2005

Not too long ago, electronics buyers viewed reverse auctions strictly as a way to get lower prices from suppliers. Today they see it as a time-saving tool that lets them focus on supplier quality issues, vendor-managed inventory programs, and contract negotiations.

A case-in-point: cable television equipment manufacturer Scientific Atlanta will use reverse auctions this year to buy between $150 million and $180 million of commodities—such as semiconductors, printed wiring boards and mechanical items. (Its total production procurement spend is about $900 million).

Its original motivation was to save costs. And the Atlanta-based company has done that. In the first year alone, it saved 30% on the commodities it put through reverse auctions. But by using reverse auctions to secure $550 million worth of goods the past three years, it also found that it can conduct online bidding with fewer buyers because the process is automated.

"My staff has been reduced significantly over the years," says Rick DeHart, vice president of worldwide procurement at Scientific Atlanta. "We have been able to do that with a smaller staff because of online tools. That is a significant efficiency improvement."

What's more, without abandoning the cost-savings goals needed to continue to reduce the selling price for its equipment, DeHart has been able to empower his buyers to work on more strategic sourcing issues. Reverse auctions "allow your people to negotiate [not just pricing], but some of the other terms and conditions, [and address] vendor-managed inventory programs, payment terms and supplier quality issues."

Motorola has seen the same evolution, in that its buyers now can focus on parts or suppliers that may need more attention in the quoting process, says Rob Harlan, senior director, eProcurement, corporate for Motorola. "With stampings, for instance, we set up eight auctions of 30 parts each" for the 240 parts its buys. "Buyers can quote those out and focus their time on the higher runners."

And, like Scientific Atlanta, Motorola has benefited not just from a cost standpoint—but from a productivity standpoint.

Motorola—which quotes out about 1,000 semiconductors electronically four times per year and purchases $2.8 billion of goods through reverse auctions—has reduced its cycle time for quoting by about a third, says Harlan. And it only needs one or two buyers to load the parts into its electronic quoting tool, Motorola Internet Negotiation Tool, which is powered by Emptoris software.

These kinds of cost savings and efficiency improvements are prompting more companies to increase the amount of their spend that goes through reverse auctions, says Dallas Stevens, director of strategic sourcing service for Procuri, which provides software for reverse auctions.

"Some companies mandate reverse auctions for certain commodities that are above a certain dollar level," he says. That's in contrast to a few years ago when there was internal resistance at both OEMs and EMS. "There was a fear of auctions."

But not everyone has moved in that direction. "On a worldwide basis, I don't set goals to put a certain amount of dollars through reverse auctions," says Scientific Atlanta's DeHart. "We leave the decisions up to commodity teams to sort out when a reverse auction makes sense." (Typically when there are multiple sources for a commodity and the price for the commodity isn't where it should be.)

In addition, larger companies are more likely to use reverse auctions.

"Our sweet spot for companies using our tools are companies that do over $1 billion in revenue," says Kevin Potts, director of product marketing at Emptoris, a software and sourcing solutions provider based in Burlington, Mass. "That's because they have a good negotiating position with suppliers."

And while price will always be an issue, more buyers today use reverse auctions to determine best value. That is, they factor into the reverse auction equation the quality and delivery performance of suppliers. They will evaluate potential suppliers before including them in reverse auctions.

"If they pass our quality audits, and, if they pass our financial audits, then we may allow them to participate in reverse auctions," says DeHart. And while existing suppliers sometimes balk at being part of a reverse auction, they often "come out looking good," he says.

While reverse auctions are mostly used by large companies for commodity parts with multiple suppliers, some buyers use them for small volumes of scarce parts, where the sources of those parts are independent distributors.

"We are in the photonics industry," says Sanat Dave, director of purchasing and commodity management for laser manufacturer Coherent of Santa Clara, Calif. "So our buying power (in electronics) is small [and] our usage is low."

To compensate—and prevent the shortages that tend to occur when your materials resources planning "fluctuates wildly" and you can't get "a lot of attention from distribution, Coherent buys from nonfranchised distributors through reverse actions, using a company called World Component Trading (WCT), based in Fremont, Calif. "They have taken the process of buying from nonfranchised distributors, streamlined and automated it."

He also uses reverse auctions to buy mature hard-to-find parts for the company's lasers, which have life cycles of 10 to 12 years. "I am not in the consumer world where you reintroduce products every nine months with the latest and greatest of technologies." As a result, parts such as electrically erasable programmable read only memory, or laser diodes can be hard to source.

That's the same strategy used by Chris Brozek, procurement manager at Trimble in Sunnyvale, Calif. "We use reverse auctions for older parts and for parts needed for new product introduction. Trimble buys a variety of resistors, capacitors and semiconductors. Reverse auctions give us a competitive advantage on price."

Trimble uses the same strategy, only in reverse, to liquidate its excess inventory.