Do you use Transformational Bidding or Total Cost Bidding as part of your bidding strategy?  Do you know the differences between the two?  If not, then hopefully this post will clear up confusion you might have.

Total Cost

There are factors other than price which impact how a buyer should award business.  Although an item may cost $2000 to buy, it will cost $3,000 to ship it.  In some cases, some suppliers may charge more for shipping based on where they are located.  In addition, there may be taxes charged for both the shipment and the item.  Alternatively, if a buyer switches from an incumbent to a new supplier, then the buyer may have to incur additional costs such as training on the new item or the cost of updating inventory lists.  In these cases, a buyer should determine what their total cost is before awarding a supplier.  This total cost can be turned into a formula such as: Price * Quantity + Shipping + Taxes + Switching.

After the buyer has defined total cost, the buyer can determine what strategy to use for the auction.  The buyer could ask suppliers to send the tax rate and shipping cost prior to the auction.  Alternatively the buyer may want to ask for this information during the auction.  In what circumstances should the buyer do one versus the other?  What information should he reveal to suppliers in the auction?  What if the buyer doesn’t want suppliers to know what he is charging them for a switching cost?  What if the buyer knows the Shipping cost will stay constant?  What if taxes are dependent on the amount of quantity he buys?  What if he doesn’t want suppliers to worry about bidding on shipping costs during the auction?  The answers to these questions determine what type of solution the buyer needs.

Transformational Bidding

            First, Transformational Bidding’s definition has been typically overloaded.  Transformational Bidding is not total cost as described above, although sometimes has been referenced as such, but it is solution for solving how to model total cost within an auction.  Transformational Bidding is the act of “transforming” a suppliers bid such that a given supplier will see pricing information relative to their own pricing.  In order to transform a supplier’s bid, the following rule applies:  The supplier can only have one cost variable to bid on (in the Transformational Bidding case it is price) and the rest of the costs must be fixed prior to auction start.  I could go into the theory as to why the costs must be fixed in order to transform bids, but my post is already too long.  This limitation means a buyer can not have negotiable factors in a Transformational bid.  This is important because a supplier will not able to adjust their costs during an auction even if they were willing to do reduce them in order to win the business.  A subtle, but important, rule is all costs affecting the rank are supplier specific.  A cost which is the same for all suppliers won’t affect the outcome of the event and need only be entered if this information were being tracked.

            The benefit of Transformational Bidding is the suppliers only need to worry about price.  They do not have to adjust any of the costs during the auction, because they can’t.  In turn this can speed up the supplier decision making and thus speed up how fast the auction runs for.  Another benefit is the ability to mask the impact of the costs from the suppliers.  Because the supplier can only see other suppliers’ prices, they are unable to determine how much of a penalty they are receiving.  If one decides not to reveal supplier bids or the lead bid, then the only thing which is exposed is rank.  This leads us to the blurry line between Total Cost Bidding and Transformational Bidding.

Total Cost Bidding

             Total Cost Bidding is different from Transformational Bidding because it doesn’t have the limitations of collecting costs prior to auction, however one still has this option.  This means a buyer can collect costs and enter in these costs per supplier prior to the auction exactly like Transformational Bidding.  However during a Total Cost Bidding auction the supplier will not see other bids transformed and the supplier can either see the raw total cost of the other bids (or it could be just the lead bid), the raw total cost of their own bid, or their own rank.  Transformational Bidding and Total Cost Bidding are exactly the same in this last case where suppliers can only see their own rank and, more importantly, when there are only supplier-specific costs collected prior to the auction.  Thus at the very essence, where the least amount of information is revealed, these two bidding formats behave in the exact same manner!

            In addition to collecting costs during a Total Cost Bidding auction there are other flexibilities on ranking of bids and revealing of market information.  One option is to rank bids by price, but still collect and calculate total cost for the buyer.  This means a supplier could potentially supply answers to cost terms in a pre-bid (or during the auction), but the supplier would solely compete on price. Thus their ranking would not be impacted by changing their answers to questions which impact the total cost.  The second option is to reveal the raw total cost of their bid and their rank.  This exposes how much of a penalty a supplier gets.  If there are many factors, then this will make it hard to determine how big of an impact it is to change any given factor.  Side Note:  By revealing a supplier’s own total cost before submitting their bid, this gives the supplier the ability to change costs to figure out which ones have the most impact.  In some cases, buyers want to reveal more information about the total cost equation they are using.  Therefore the third option is to expose the “components” of the total cost formula.  With these options, one has the ability to also expose the lead bid as well as other supplier bids.  Thus one can make the Total Cost auction completely “open”.  Revealing this information could have the added benefit to drive their overall cost to the buyer down.  This would require upfront work by the suppliers for them to determine what negotiable costs they could lower.

How is Transformational Bidding done?

Assume Supplier A and B placed bids for the price at $100.  Also assume the buyer collected shipping costs before the auction began and the values for Supplier A are $10 and for Supplier B they are $0.  Thus

Total Cost = Price + Shipping

Supplier A’s Total Cost = $110

Supplier B’s Total Cost = $100

Now if Supplier A is able to see Supplier B’s bid during Transformational Bidding, Supplier A will end up seeing a price of $90 for Supplier B.   Supplier A must improve their overall Total Cost by $10.   If Supplier B saw Supplier A’s total cost, then what would it be?  It would be $110.

Transformational Bidding

Cons:

1)     Negotiable factors that impact rank can not be included other than price during the auction

2)     Information must be collected prior to the auction and entered in manually into the auction

3)     Limited to simple formulas.

4)     Doesn’t make sense to reveal total cost equation to suppliers, nor can you.

Benefits:

1)     Supplier is able to solely focus on price

2)     Theoretically speeds up how fast the auction runs.

3)  Buyers can mask the total cost from their suppliers more thoroughly when information other than rank is revealed.

Total Cost Bidding

Cons:

1)     Revealing Total Cost to suppliers may reveal too much information

2)     Adding too many factors can increase the auction time

Benefits:

1)     Ability to reveal actual formula to supplier

2)     Suppliers can optionally enter in costs which impact rank or total cost

3)     More information release options, rank on cost, compete on price.

               a. Reveal rank only, compete on cost

               b. Reveal rank only, but compete on price

               c. Reveal Rank and own total cost

               d. Reveal Rank, own total cost, and Total Cost Formula

Which one is better?

            Until there is more conclusive information, there is no way to say which one is better.  However, there are some clear choices based on requirements you may have.  If all of the following are true, then Transformational Bidding must be used:

1)     Must expose more information to suppliers other than rank

2)     Can’t expose the raw total cost to suppliers because it has sensitive information in it

3)     Can’t use scoring to hide raw total costs values because it could reveal penalty information

If any of the following is true, then Total Cost Bidding must be used:

1)     Must reveal total cost to suppliers

2)     Suppliers must be able to change costs during the auction

Do you use Transformational or Total Cost Bidding?  Let us know if this information was valuable or not.

2011 Sourcing Feature Survey Results…

I wanted to thank all that have responded to the 2011 Sourcing Feature Survey.  The responses had some surprises and some that I knew would be right near the top.  I also appreciate all the comments supplied with the responses.  Having both your scores and comments really helps to give some depth to the responses.

I have filtered the initial list from 25 down to the top 10 based upon the survey responses.  I would like to hear from the Ariba Sourcing community which of these ten need to be ranked the highest and why you feel that way.  I am thinking some customer’s use case might influence others and really push the really most important issues to the top!

To keep everyone focused, I plan to post five of the top 10 for the initial discussions.  I will add the 2^nd five in a week or so.

The First Five Features:

• Expand Event      Limits(Items/Suppliers/Terms)        
  • Buyers       want to run larger and larger events, and have the ability to optimize on       such is a must. The ability to have more line items/terms and suppliers       is desired.
• Messaging Improvements - package 02     
  • 1.       Include “To” columns
  • 2.       Sorting on all columns
  • 3.       Show all event messages to the Event Owner, not just the ones I       sent/received
  • 4.       Ability to turn off the suppliers’ email from the “reply field” in the       sent email to keep from corresponding outside the event
• % completion on RFI's/surveys
  • Ability       for the buyer to see a % completion figure for each of the respondents       that have indicated they intend to participate.
• Grading and Scoring Improvements -      Package 02  
  • 1.       Grading Page Pivot UI/Performance Improvements
  • 2.       Ungraded Questions Filter - allow for a filter on the Grading Page to       show only ungraded questions
  • 3.       Offline Grading via Excel/Word - at minimum, allow for a very usable       print version of the Grading Page, so it can be distributed to external       graders to record their grades, and have them entered manually.  The ideal solution would be a way for       grades to be collected offline and then imported into the system.
• Improve Supplier Response Team  
  • Add       the ability to create a Supplier Response Team after the event has been       published.

Second Five Features…

• RFx Print Feature Enhancements    
  • Ability       for the buyer to generate the RFx print for all suppliers in that       responded and download them.  Also,       for the supplier to be able to generate theirs no matter the event       status.  Currently, the event has       to be in Pending Selection.
• OK Processor for outgoing emails
  • Currently,       we provide a message if a message to a supplier that fails to reach the       supplier because of a bad email address.        This would provide the ability to tell if an outgoing email has       arrived successfully at the destination site.
• Messaging Improvements - package 01
  • 1.       Show a replied to message as “replied to” for all the buyers
  • 2.       Ability to Export all messages
  • 3.       Search in Message Board on both headers and content
  • 4.       Add a message filter for all messages from participants and related       responses
  • 5.       “Question” and “Question Answered” tick
• Messaging Improvements - package 03
  • 1.       Ability to message what was updated during a RTE
  • 2.       Team members receiving messages when events change status
  • 3.       Ability to resend event invitation from within event
  • 4.       Ability to control which messages are going via email or popup       notification
• Grading and Scoring Improvements -      Package 01  
  • 1.       Ability to display an Event Scorecard
  • 2.       Show a rank for participants based upon Score
  • 3.       Multiple Scoring Scenarios/Scorecards per event"
• Grading and Scoring Improvements -      Package 03  
  • 1.       Grading Excel Report/Export - provide a nice report that summarizes the       grading and scores for the event
  • 2.       Grading of Autoscore Values

If you have an opinion on these features and want to influence their final prioritization, start a discussion in the Sourcing Community and let us all know what you think!

Thank you!

David Morel

Senior Solution Manager

Updated: Added the second top 5 features. (8/4/2010)

All,

It is that time again; time to start the planning and prioritization of the features to be included in the next Upstream Release.  We have identified the top candidates for the next release after 10s2 and we would like feedback from the user base on which features are the most important.

This year, we will be conducting the survey with the aid of Ariba Exchange to allow for discussions about the proposed functionality.  If you have not yet joined, please do so as we will distribute the survey within the solution specific communities:

Sourcing: http://exchange.ariba.com/community/solutions/sourcing

The survey will be available on June 28^th, and we will be accepting responses until July 9^th.  Check the above sites for instructions on how to request the survey.

This survey is not limited to OnDemand customers only. We would like to hear from all users of Ariba’s Upstream Solutions.  We will institute cumulative voting so customers can provide value to their votes.  Each submitter of a response will have a number of votes that they can distribute across the features anyway they choose. For example, each submitter could put one vote on each feature, or the submitter could put more votes on fewer features to give those features greater importance.

We will use these responses to help us narrow down the list of features to build a release plan for the next release.  Your opinion on where we go with the Solution is very important in this process.

If you have any issues or questions, please don’t hesitate to contact me at dmorel@ariba.com.

Thank you!

David Morel    

Managing Dashboard Templates

For Sourcing, Contract Management, and Spend Visibility

The dashboard for new users is created from a dashboard template, which determines the dashboard tabs, content items, and layout of the dashboard.
Following is an example of a typical dashboard:

The default configuration includes a default dashboard template, and all  user dashboards are initially based on this template. Users can customize their own dashboards. Members of  the Customer Administrator group and the Customer Dashboard Administrator group can use the Dashboard  Templates task in the Dashboard Manager workspace to modify the default dashboard template and create  new dashboard templates.

Dashboard Template Rankings

Each dashboard template has an associated rank. New users get the dashboard template with the highest rank. Rank determines which dashboard template a new user gets when:
• A template is associated with the user’s group and the user belongs to multiple groups
• More than one dashboard template is associated with the same group

The Dashboard Templates page also contains the following buttons:
• New Template — Creates a new dashboard template.
• Update Rank — Updates dashboard template rankings.

Link to part two of this post below:

Managing Dashboard Templates Part 2

This has been another Knowledge Nugget post brought to you by Beverly Dunn.

For more information or details please feel free to contact me!

This week's Knowledge Nuggets topic is eCatalog management. This is again another multi-segment post with this, the second post, being about quantity and types of Online Catalogs. Links to the rest of the segments of  this post can be found at the bottom of this page. Enjoy!

Ariba Knowledge Nuggets - eCatalog Management Part 2

How Many and Which Catalogs Should Be Online?

According to the Aberdeen Group, best-in-class performers have enabled 64 percent of their suppliers, which places 80 percent of their spend under management. This is in contrast to the industry average of only 29 percent of suppliers enabled and 15 percent for the bottom 30 percent performers. While catalogs are not the only element of supplier enablement, they are an initial component to connecting supplier information to their systems. The Aberdeen Group has found that best-in-class organizations do at least 74 percent of their buying through an eCatalog.

All purchases that have a “part number” to “price” relationship are candidates for an eCatalog. With the proper set-up and technology, services such as temp labor, consulting, marketing and print can also be ordered from a type of catalog—further increasing the percentage of catalog-based purchasing. A better way to address this question, however, is not necessarily done by setting a number or percentage target, but to ensure that at a minimum the following two conditions are met:

1. All contracted items are contained in the eCatalog
2. All suppliers who are sent 150 orders or more per year and can provide an eCatalog

By having all contracted items as a catalog item, an organization can ensure that the savings identified during the sourcing process are being realized in the procurement process as outlined earlier. eCatalogs from frequently used suppliers will save the organization time and money by reducing the time needed for the requisitioner to create an order, the time for a buyer to place an order, and the process required for accounts payable to reconcile the invoices (You’re also keeping your suppliers’ costs down by increasing their efficiency). Doing a keyword search to find and select the item is much faster than using a traditional paper catalog or parts list and filling out the required information in a requisition. The risk of ordering an incorrect item is also reduced as information about the item is readily available and displayed to the end user in the catalog.

Part 3 will consider the different types of eCatalogs.

eCatalog Management Part 1

eCatalog Management Part 3

This   has been another Knowledge Nugget post brought to you by Beverly Dunn.

For   more information or details please feel free to contact me!

Hello Aribians! Today's Knowledge Nugget is on effective  auction  practices. I've broken this nugget into three essential parts.  This is  part 3 - Example use of an Auction and Forward Auction Templates. For parts 1 and 2  please follow the links at  the bottom of this post. Enjoy!

1) Example use of an Auction

Suppose your computer manufacturing business knows of several participants that are capable of providing, at competitive prices, the specific goods or services that you want to purchase. Use an auction to bring the participants into competition for your business. Create line items for everything that you want to buy. You can group line items into lots to create a package of goods or services to bid on. Specify ceiling and reserve prices, timing rules, and other strategic rules, to maximize competition. Train the invited participants in advance so that they are comfortable using the Ariba Sourcing interface. On bid day, participants log in to Ariba Sourcing and submit bids. Optionally, a real-time graph shows them how they compare to other participants. You, or someone in your organization, administers the auction, changing the timing of lots, deleting erroneous bids, and responding to participants’ questions.

Reverse Auction

This is the standard auction. In a reverse auction, suppliers submit bids, offering progressively lower prices in an effort to outdo their competition and offer you the best price. You configure rules to determine the timing of the auction, the amount of market information communicated to participants, and bidding rules, such as, “Is the lead bid protected by a buffer?”

Extended Reverse Auction

This is the same as a reverse auction, except that it also includes the bundle lot “Bid discounted value at item level, compete at lot level (collect item pricing during bidding).

Reverse Auction with Bid Transformation

Sometimes suppliers’ prices are very different, but when your costs are taken into account, your total cost for their goods or services is very similar.

For example, you need to buy raw materials for a plant in the United States and are considering two suppliers: one is local and one overseas. The overseas material is less expensive, but you must ship it much further. The price of the overseas material, plus the extra shipping costs, equals the cost of buying it locally. The Reverse Auction with Bid Transformation template allows you to design an auction to bring the two suppliers into competition. You set up Ariba Sourcing automatically include the shipping costs of the material in the prices that the participants bid.

Total Cost Auction

Use this auction type to create a competitive bidding event for line items and/or lots, including factors other than price, such as shipping cost, taxes, and the cost of changing supplier, which would apply to all the suppliers except the incumbent. The total cost can expressed in a formula, such as:

Price * quantity + shipping + taxes + switching.

You determine whether the values for these factors are to be provided by the suppliers during the event, whether you want suppliers to see only their own rank, their own rank and the lead bid, or all supplier responses. Supplier ranks are based on the unit cost. Suppliers see their total cost and unit cost. They also see the cost terms that you made visible for them.

Dutch Reverse Auction

Use this auction type to create a Dutch-style competitive bidding event for line items or basket lots. In a Dutch reverse auction the buyer sets a very low initial price and raises it periodically until a supplier accepts the price or a predetermined ceiling price is reached. Suppliers are motivated to accept the listed price as soon as they can or risk losing the business altogether.

Index Based Auction by Amount or Percentage

If you are sourcing a commodity product that is subject to frequent price fluctuations, use an index auction to cause participants to bid in discounts or premiums relative to a market index. There are two templates, one causes participants to bid in a currency amount added or subtracted from the index, and other that causes participants to bid in a percentage value added or subtracted from the index.

2) Forward Auction Templates

There are two templates that allow you to create forward auctions:

1. Forward Auction

This is the standard Forward Auction. In a Forward Auction, participants submit bids, offering progressively higher prices in an effort to outdo their competition.

2. Forward Aution with Bid Transformation

Sometimes participants’ prices are very different, but when your costs are taken into account, your total cost for their goods or services is very similar.

For example, you might have negotiated with participants and agreed to pay the costs to ship their purchases to them. Suppose that one of the participants is based in the United States, and the other is based in France. Since you have agreed to pay the shipping costs, the participants based in France must offer a higher bid if you are to earn the same profit by selling to them. The Forward Auction with Bid Transformation template allows you to design an auction to bring the two participants into competition. You set up Ariba Sourcing to automatically include the shipping costs in the prices that the participants bid.

This has been part 3 of a 3 part post. I hope it has been informative and helpful. For posts 1 and 2 please follow the links below.

Post 1: Knowledge Nuggets: eSourcing Part 9: Auctions (1 of 3)

Post 2: Knowledge Nuggets: eSourcing Part 9: Auctions (2 of 3)

This has been another Knowledge Nugget post brought to you by Beverly Dunn.

For more information or details please feel free to contact me!

Hello Aribians! Today's Knowledge Nugget is on effective auction practices. I've broken this nugget into three essential parts. This is part 1 - Supplier base training best practices and buyers & suppliers bilateral rules for auctions. For parts 2 and 3 please follow the links at the bottom of this post. Enjoy!

1) Supplier Base Training Best Practices

• One on one introductory phone call - take time to reach out and connect with your suppliers
• Practice Event (require in all Open RFQ's)
  • Takes little effort to conduct but benefits are huge
  • Use a copy of the existing event
  • Require participation
  • Familiarize vendors with the bidding environment
  • Forces vendors to encounter event issues before event day
• Supplier Training Sessions
  • Recorded Web Based Training 
    • Script the training
    • Record it
    • Require a viewing
• Supplier User Guide
• Online Help and Toggle Tips
• Customized Hints and Instructions
• Ariba Help Desk Support

2) Buyers & Suppliers Bilateral Rules for Auctions

(You must respect these Rules for eSourcing Credibility & Market Integrity)

This has been part 1 of a 3 part post. I hope it has been informative   and helpful. For posts 1 and 2 please follow the links below.

Post 2: Knowledge Nuggets: eSourcing Part 9: Auctions (2 of 3)

Post 3: Knowledge Nuggets: eSourcing Part 9: Auctions (3 of 3)

This has been another Knowledge  Nugget post brought to you by Beverly Dunn.

This is part 4 of a 4 part guide to setting up eAuctions. To view parts 1, 2, and 3 please use the links at bottom.

Supplier Visibility Formats

What type of Visibility Options are used and why?

FULL VISIBILITY

• All bids can be viewed by all suppliers during open bidding, not their identities.
• Used typically in commodities or with large supply base suppliers.
• Used when bids are not compressed in same value range (bids are spread)

RANKING

• Suppliers will see only their position and the one of their competitors, not their values neither identities.
• Used when few suppliers participate , or buyer wants to give suppliers impression or larger market
• Used when one or few bids have a big spread compared with most bid received.

RANKING WITH LOWEST BID VISIBILITY

• Same as Ranking, but showing only lowest bid.
• Used when buyer does not want to communicate reserve price
• Used when buyer knows there are very competitive bids but possible to match buy other bidders

Starting/Reserve Price Guidelines

If suppliers are unable to meet the starting or reserve prices that were set for them, examine how you quantified your factors. Were they based on real hard costs or perception? If you cannot quantify the costs fairly for suppliers, you might have set them too high, which prohibits participation and
competition.

If you feel that your factors were quantified in a true cost manner and the supplier cannot adhere to your prices, perhaps you should not invite that supplier to participate in the auction. You need to ensure that you are working with qualified suppliers who can meet your business needs.

We have changed the approach to setting variable starting prices, so that these can be set by supplier, by line item, before an event launches. For example, this is helpful when pulling offline contract pricing into events as starting ceiling prices.

4 Elements to an eAuction setup parts 1, 2, and 3

Part 1: Pre-Bids

Part 2: Bidding and Timing Rules

Part 3: Event Testing, Setting Ceiling and Reserve Prices