L. Giunipero, Ph.D. copyright 2004 E-Procurement Tools and Reverse Auctions for Sourcing Services By...

L. Giunipero, Ph.D. copyright 2004

E-Procurement Tools and E-Procurement Tools and Reverse Auctions for Reverse Auctions for Sourcing ServicesSourcing Services

By Larry C. Giunipero, Ph.D., C.P.M. Florida State University

ISM Professor of Purchasing & Supply Chain Management

Northeast Supply Chain Conference

September 19-21, 2004


E Promise 1999-2000E Promise 1999-2000

►The Dot Com eraThe Dot Com era►Lots of HypeLots of Hype►Soaring equity prices value is deadSoaring equity prices value is dead►Lots of venture capital thrown at e-Lots of venture capital thrown at e-

Business Business ►Many new startupsMany new startups►All kinds of activitiesAll kinds of activities


Ebust 2001-2002Ebust 2001-2002►The Dot Gone or Dot Bomb eraThe Dot Gone or Dot Bomb era►How low can the stock price of your How low can the stock price of your

favorite go?favorite go?►Many have gone bankruptMany have gone bankrupt►Survivors are strugglingSurvivors are struggling►Prices are falling for more powerful Prices are falling for more powerful

solutions to generate cashsolutions to generate cash►Accounting scandals shake Accounting scandals shake

confidenceconfidence


Dot back 2003-2004 Dot back 2003-2004 ►Selective e purchasing practices Selective e purchasing practices

grow in usegrow in use►Survivors stronger and pricing Survivors stronger and pricing

competitive and promises more competitive and promises more realisticrealistic

►Selection standards are strict and Selection standards are strict and final selection very detailed require final selection very detailed require tangible returns tangible returns

►E Tools and systems continue to E Tools and systems continue to grow in sophistication grow in sophistication


There is Hope!There is Hope!

Organizations are moving to e PurchasingOrganizations are moving to e Purchasing

Forrester’s data and others show thisForrester’s data and others show this

There is a lot of internal work in There is a lot of internal work in developing buy side systems or internal developing buy side systems or internal portalsportals

Internal requisitioning systemsInternal requisitioning systems

Visibility into suppliers inventoryVisibility into suppliers inventory

Business rules to support the buyer Business rules to support the buyer


Technology is the Enabler of Technology is the Enabler of Change Change

►Moore’s Law – Every 18 months Moore’s Law – Every 18 months computing power doubles while cost computing power doubles while cost stays constant.stays constant.

►Metcalfe’s Law – The utility of a network Metcalfe’s Law – The utility of a network is equal to the square of the number of is equal to the square of the number of its users.its users.

►Coase’s Law- As costs decrease, the Coase’s Law- As costs decrease, the complexity of a firm diminishes. Size is complexity of a firm diminishes. Size is a function of the complexity of a function of the complexity of transactionstransactions


G’s Technology & System’s G’s Technology & System’s LawLaw

► It will always cost more than promisedIt will always cost more than promised► It will do less than promisedIt will do less than promised► It will take longer than promisedIt will take longer than promised►But it will still provide advantages if it But it will still provide advantages if it

is properly selected and implementedis properly selected and implemented► It will move supply management It will move supply management

forwardforward


Sourcing processes and technology have evolved Sourcing processes and technology have evolved considerably over the last two decades while considerably over the last two decades while

procurement has gained greater importance within procurement has gained greater importance within

corporationscorporations..

•eSourcing•eProcurement•Web Services

Purchasing•Manual•Fragmented & tactical•Project Management

•MRP, MRPII, EDI, ERP•Strategic Sourcing

Strategic Procurement

Electronic Procurement

1980s 1990s 2000s

Imp

ort

ance

wit

hin

C

orp

ora

tio

ns

Drivers behind the evolution from Purchasing to Electronic Procurement include:

•Lower Transaction Costs

•Lower Information & Searching Costs

•Shorter Cycle times

•Market Prices

Source: Global eProcure


Organizations have successfully used eSourcing for Organizations have successfully used eSourcing for the procurement of materials and operational goods the procurement of materials and operational goods

over the last few years.over the last few years.

Open competition among bidders leads to an additional savings of 15%on average

Price Reduction

Reverse Auction process reduces supplier negotiations time by 50-75% (from weeks to hours)

Sourcing Cycle Time Reduction

Automated evaluation of suppliers is done using online tools

Improved Ability to Evaluate & Analyze Suppliers

All buyers use similar process and learn from best practices

Standardize Sourcing Practice Across Organization



Defining e Purchasing plusDefining e Purchasing plus

a a processprocess and and set of toolsset of tools that that Purchasing/supply management Purchasing/supply management professionals employ to professionals employ to streamlinestreamline processesprocesses and and leveraging leveraging technologytechnology in order to meet the in order to meet the needs of the organizationneeds of the organization. .


What is e Purchasing plus?What is e Purchasing plus?

Process ChangeTechnology Tools

IntegrationPlus (strategy,skills)


Process and PeopleProcess and People► ““The crucial ingredient to B to B success The crucial ingredient to B to B success

isn’t technology it’s human”isn’t technology it’s human” Andrew Andrew Brooks Brooks 20012001

► Our main finding put simply, is that the Our main finding put simply, is that the central issue is central issue is never strategy, structure, never strategy, structure, cultureculture or or systemssystems. All those elements . All those elements and others are important. But the and others are important. But the core core of of the matter is always about the matter is always about changing thechanging the behavior of peoplebehavior of people, and behavior change , and behavior change happens in highly successful situations happens in highly successful situations mostly by speaking to people’s feelings. mostly by speaking to people’s feelings. Feelings then alter behavior sufficiently Feelings then alter behavior sufficiently to overcome all the many barriers to to overcome all the many barriers to sensible large-scale change sensible large-scale change John P Kotler, John P Kotler, The The Heart of ChangeHeart of Change


Process Analysis and Process Analysis and UncouplingUncoupling

►What is the current process?What is the current process?► Is there value by using third partiesIs there value by using third parties►Can we reduce the amount of space or Can we reduce the amount of space or

time in the process time in the process ►Most supply management processes Most supply management processes

involve at least three parties. (supplier, involve at least three parties. (supplier, buyer and process owner)buyer and process owner)

►How can technology enable the process?How can technology enable the process?


eSourcing LandscapeeSourcing Landscape

Strategic

Tactical

Internal External ----- Reach -----

----

- V

alu

e --

--

e document exchange

Reverse Auctions

IntranetResources

e settlement

e-catalogs

eVMIe requisitioning

e exchanges and “hubs”

“Buy side”

portal

Complex bid optimization

p card / e p card

“expressive” competition

e RFX

Source: CombineNet


e-Tools Terminologye-Tools Terminology

►Reverse AuctionsReverse Auctions►Sourcing OptimizationSourcing Optimization►CollaborationCollaboration

CRMCRM SRMSRM

►Cataloguing and ContentCataloguing and Content


Reverse Auction DefinitionReverse Auction Definition

►Electronic bidding event held in a Electronic bidding event held in a secure environment which allows secure environment which allows buyer to simultaneously engage buyer to simultaneously engage qualified sellers to bid their qualified sellers to bid their requirements in an interactive real requirements in an interactive real time environment. The process time environment. The process creates a more efficient marketplace creates a more efficient marketplace and shortens buyer’s cycle time from and shortens buyer’s cycle time from quote to award. quote to award.


Reverse Auction EnvironmentReverse Auction Environment

►Costs are driving organizationsCosts are driving organizations►On line competitive bidding formatOn line competitive bidding format►e Bay is a familiar auction sitee Bay is a familiar auction site►Buyer’s offer and seller’s respondBuyer’s offer and seller’s respond►Prices decline over the course of the Prices decline over the course of the

auctionauction►Time duration variesTime duration varies►Prices are transparent Prices are transparent


Reverse AuctionsReverse Auctions

► Technology tool to streamline the bidding Technology tool to streamline the bidding processprocess

► Involves several phases of preparationInvolves several phases of preparation► Internet based technologyInternet based technology► Scheduled day and timeScheduled day and time► Secure environment for suppliersSecure environment for suppliers► Sellers don’t know who they are bidding Sellers don’t know who they are bidding

againstagainst► Sellers see the prices of their competitorsSellers see the prices of their competitors► Pricing occurs in a real time environmentPricing occurs in a real time environment


Reverse Auction ActivityReverse Auction Activity

►$192 Billion in 2001$192 Billion in 2001►$350 Billion in 2002$350 Billion in 2002►Growth 84% 2002 over 2001Growth 84% 2002 over 2001►$600 Billion in 2003$600 Billion in 2003►Growth 312% 2003 over 2001Growth 312% 2003 over 2001►Savings Vary - one report 18% on Savings Vary - one report 18% on

$1.5 billion spend 417 events 869 $1.5 billion spend 417 events 869 auctionsauctions

Sources: IDC Research & PantellosSources: IDC Research & Pantellos


Services for Reverse AuctionsServices for Reverse Auctions

► JanitorialJanitorial► Temporary ClericalTemporary Clerical► Temporary Temporary

ProfessionalProfessional► SecuritySecurity► CafeteriaCafeteria► Information TechInformation Tech► Travel ServicesTravel Services► TransportationTransportation

► Logistics ServicesLogistics Services► Express MailExpress Mail► Printing ServicesPrinting Services► ConsultantsConsultants► Disposal Scrap & Disposal Scrap &

EquipEquip► InsuranceInsurance► MedicalMedical


Questions to PonderQuestions to Ponder

►What is your Reverse Auction selection What is your Reverse Auction selection criteria?criteria?

►How good is your statement of work?How good is your statement of work?►How standard is the sourcing process?How standard is the sourcing process?►How competitive are the suppliers?How competitive are the suppliers?►What is the variation in your key selection What is the variation in your key selection

criteria across the supply base?criteria across the supply base?►How important is the current relationship?How important is the current relationship?


Provider SupportProvider Support

►Total Solution - consulting, software, Total Solution - consulting, software, training suppliers, conducting the training suppliers, conducting the auctionauction

►Partial Solution - selected consulting, Partial Solution - selected consulting, and softwareand software

►Stand alone - Lease or rent the Stand alone - Lease or rent the software and conduct the auction software and conduct the auction


Payment for Provider Payment for Provider Services Services

►BuyerBuyer►SellerSeller►BothBoth►PercentagePercentage►Flat feeFlat fee


Rules of the RoadRules of the Road

►Bidder selectionBidder selection►Type of Auction reverse or rankType of Auction reverse or rank► Internet Explorer versionInternet Explorer version►Time Duration for the auctionTime Duration for the auction►Handling price changes or mistakesHandling price changes or mistakes►Telephone contact during auctionTelephone contact during auction►Freight Freight


Rules of the RoadRules of the Road

► Insurance, Liability, Certifications etc.Insurance, Liability, Certifications etc.►Varying rules by different lots in the Varying rules by different lots in the

bidbid►Right to split award to more than one Right to split award to more than one

supplier supplier ►Costs and expense borne by supplier Costs and expense borne by supplier


Case Study 2: During the printing Case Study 2: During the printing bidding event, the client achieved bidding event, the client achieved

double the savings target – 25% or over double the savings target – 25% or over $3 million.$3 million.

•6 suppliers invited to bid on various direct mail pieces

•Over 75 bids were placed during the online auction

•The lowest bidders provided 25% savings to the client


..

1.Conduct Supply Market Analysis

2.Develop eRFP

3.Evaluate Suppliers

4.Conduct Online

Negotiation

5.Conduct Total

Cost of OwnershipAnalysis

ConductAutomated

Spend/ Opportunity Analysis

eSourcing Tools

•Develop detailed RFP with specs and functional requirements

•Develop supplier evaluation criteria

•Provide Q&A support to suppliers

•Identify current and past suppliers

•Identify additional suppliers from databases and market research

•Review and analyze RFP based on evaluation criteria

•Rank various suppliers based on qualitative (non-price) criteria

•Train suppliers on web based tool and conduct practice sessions

•Provide operational support to conduct bidding events including surrogate bidding if necessary

•Rank Suppliers based on Price and non-price criteria

•Analyze total costs including service costs, supplier qualification costs etc

•Assist in final supplier selection and develop performance metrics and saving and performance tracking mechanism

Spend Analysis Tools

•Identify operating and sourceable expenses

•Identify suitable candidates for eSourcing

•Estimate savings

•Develop implementation plan – program timeline, project team, cash flows from savings



Sourcing EvolutionSourcing Evolution

Traditional Bids

ReverseAuctions

SourcingOptimization

Simple

Type

ComplexParameters Simple


Sourcing OptimizationSourcing Optimization

► Sourcing team can evaluate an unlimited Sourcing team can evaluate an unlimited number of alternativesnumber of alternatives

► Move to a more optimal solutionMove to a more optimal solution► Suppliers like the process better than R.A.Suppliers like the process better than R.A.► Implementable allocationsImplementable allocations► Permits negotiationsPermits negotiations► Fast analysis, decision making and Fast analysis, decision making and

implementationimplementation


Optimization defined…Optimization defined…

Item level bidding Item level bidding ► Suppliers can bid Suppliers can bid

individually on items in a individually on items in a lot and see a real-time lot and see a real-time ranking at item, lot and ranking at item, lot and overall event leveloverall event level

Bundling Bundling ► Suppliers can group Suppliers can group

together items as a together items as a ‘package’ price and give a ‘package’ price and give a % or $ discount% or $ discount

Business volume discounts Business volume discounts ► Suppliers can give a % or Suppliers can give a % or

$ rebate for volume $ rebate for volume (units/$) in a given (units/$) in a given category or categories category or categories

Supplier count Supplier count ► Evaluate single, dual, Evaluate single, dual,

triple sourcing triple sourcing strategies strategies

Supplier volume Supplier volume ► Guarantee suppliers Guarantee suppliers

(e.g., minority) a (e.g., minority) a certain % of businesscertain % of business

Supplier performanceSupplier performance► Incorporate Incorporate

performance costs performance costs into decisions into decisions

Split allocations Split allocations ► Can be done at item Can be done at item

level to ensure supplylevel to ensure supply

Supplier bidding Buyer analysis

Source: Emptoris


Flexible AlternativeFlexible Alternative

► Item-level volume discountsItem-level volume discounts►Total volume discounts and rebatesTotal volume discounts and rebates►Conditional discountsConditional discounts►Price plus terms biddingPrice plus terms bidding►Bundled biddingBundled bidding►Capacity limitationsCapacity limitations


Outcome ConstraintsOutcome Constraints

►Supplier preferencesSupplier preferences National/InternationalNational/International LocalLocal RegionalRegional

►Cost & Unit constraintsCost & Unit constraints Distribution of businessDistribution of business Volume requirementsVolume requirements

► Item ConformityItem Conformity


Supplier Bids

Purchasing Policies Supplier Ratings

Flexible Requirements

The Awarding Process- The Awarding Process- Role of OptimizationRole of Optimization

MinimizeMinimizetotal cost oftotal cost ofownershipownership

(TCO)(TCO)

• Bundling• Multiple price breaks• Rebates• Substitutions• Quality and quantity ranges• Multiple delivery locations and times

• Supplier, category and item level

• Qualification• Quality• On-time delivery• Item attributes (e.g., tolerance)

• Item• Spec• Quantity• Due date• Proprietary attributes (bid fields)• Total cost formula

• Budget limits• Award splits • Switching costs• Contractual obligation• Preferred suppliers

Source: Emptoris


Evaluating Optimization Evaluating Optimization SoftwareSoftware

► Modeling capability to support numerous Modeling capability to support numerous alternativesalternatives

► Ability to capture creative supplier ideas Ability to capture creative supplier ideas such as volume rebatessuch as volume rebates

► Well developed user friendly analysis tools Well developed user friendly analysis tools with reports and outcomeswith reports and outcomes

► Performance and scalability that allows Performance and scalability that allows evaluation by the sourcing team in houseevaluation by the sourcing team in house


Key BenefitsKey Benefits

Source: CombineNet


plusplus

► Skills will need to changeSkills will need to change►Strategy needs developed which Strategy needs developed which

focuses on external and internal focuses on external and internal processesprocesses

►Some ePurchasing doesn’t need a Some ePurchasing doesn’t need a strategystrategy


The Ideal IntegrationThe Ideal Integration

SRM ERP CRM


Drivers of TransformationDrivers of Transformation

Knowledge

Strategy

Organization

Process


Thank You!Thank You!

Questions and or CommentsQuestions and or Comments

L. Giunipero, Ph.D. copyright 2004 E-Procurement Tools and Reverse Auctions for Sourcing Services By...

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