I have recently had a number of conversations with sourcing managers asking how they can drive continuous cost reductions in categories they have already negotiated either through e-RFx or reverse auctions. On the surface, one would assume a "law of diminishing returns" in which the total percentage of potential savings for a specific commodity would naturally dimish each subsequent time it was auctioned.
However, I was reminded of a meeting a few years back with the then head of e-supply chain initiatives at ITT Industries, Jessica Dunlop, who revealed the flaw in this logic. During three subsequent auctions for machined parts, ITT was able drive double-digit cost reductions above and beyond what was achieved in each previous auction. “We thought we would never be able to repeat the savings,” said Dunlop. ”But the lessons we learned with each event, helped us achieve better savings with each new auction.” ITT’s lessons’ learned, include:
- Lotting makes all the difference: “We realized we don’t have to bundle all our business into a single auction to get the best price,” said Dunlop. “The vendors will identify what meets their capabilities and provide the best price.” It is important to note that, regardless of the lot structure, ITT does not typically require vendors to bid on all items.
- Four is the magic number: In its first reverse auction for machined parts, ITT included only three vendors. Dunlop said this number didn’t provide sufficient competition to encourage aggressive bidding.
- Better trained suppliers, make more competitive offers: Dunlop also said that, early on, many suppliers were confused about the auction approach, bidding aggressively to be the lowest price, even though ITT had said it would award the business on multiple factors to get the lowest total cost. ”One vendor bid away all his margin, which is not a sustainable or preferable business for him or us,” said Dunlop. ITT has since placed a strong emphasis on educating suppliers on the selection criteria and award strategy to ensure competitive (and sustainable) bids.
- Clearly define the rules of engagement — before the auction begins: In one auction, a winning supplier later tried to place conditions on its offered pricing after the event closed. To guard against such post-event bartering, ITT now uses prerequiste gateways and knockout questions to ensure that suppliers agree to all conditions prior to the auction and to avoid any surprises or disputes after award.
- Beware of sour grapes: After its second auction, ITT noticed that one supplier that was well out of the running kept placing bids to trigger extension periods and force other more qualified and competitive vendors to continue to bid down their price. ITT eventually closed out the auction and later revoked this disgruntled vendor’s auction privlidges. Dunlop advises constant monitoring of auction events to discourage such antics.
- Spending time with losers, can create great winners: ITT discovered telling vendors why they did not win the business can provide much-needed motivation (and insight) for self improvement. “We’ve had vendors go out and buy new machinery or do joint-ventures in Asia and come back much more competitive and win our business,” said Dunlop.
- Involve Asian vendors, whenever possible: ITT has also tracked a correlation between bidding activity and the participation of Asian suppliers, particularly those from China. “Involving Asian vendors in an auction can help force local vendors to be more aggressive competitive.”
[Author's note: Parts of this post were excerpted from my original post on www.supplyexcellence.com]