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Uncommon and breakthrough purchasing savings levers - Series 2 (Lever - DA)

Objective of the series: Hi there. I plan to share some very interesting avenues through an exciting series of at least 5 blogposts (Depending upon the response, I can consider sharing more). In each of the posts, I will share a few highly impactful savings levers that generate very high level of annualized savings across many industry verticals. These levers are still not widely used just because they are hardly covered in the common Sourcing & Procurement literature or practices. Hope you will find them useful, apply them somewhere and come out with flying colors. Wish you good luck and enjoy the read.


DA - What is DA? I am sure this is an obvious first question in every reader's mind. DA stands for DUTCH AUCTIONS, and here I am talking about the electronic Dutch Auctions used in B2B/business to business purchasing transactions. Let's understand both -- the electronic as well as the manual Dutch Auctions. Dutch Auction as a business process dates back to the 19th century, and was established in Holland where tulips were sold in the flower market. There is a lot of internet material available on this. It was a manual system where the sellers used to put up a flower lot size for sale announcing a price at any point in time. If some supplier used to accept that price, the lot used to get sold to him and no other supplier's price (even if lower) was entertained after that. This auction method was made available in electronic form for usage in B2B sourcing by procurement application majors like Ariba/Freemarkets during the late 90's. For example, Ariba Sourcing Pro offers this auction format along with various electronic auction formats.

However, this auction feature continues to be sub-optimally utilized by sourcing professionals  even while it offers certain additional savings levers for buyers for those commodities, where it is the toughest to get sourcing savings. The reason for sub-optimal usage of this auction format is primarily that sourcing managers themselves need to know fully about choosing the right auction format (e.g. classic reverse auction or reverse auction with lead bid disclosure or reverse auction which is rank based only or Dutch Auction). That is quite a science and art in itself. However, through this post, I want to highlight how to choose Dutch Auctions and how it provides breakthrough savings levers (the second portion of the theme).

At times a buyer is faced with obtaining savings when the number of approved suppliers with whom to conduct an auction or negotiate prices are very few.  At other times, the price differential between suppliers who submitted quotes is very high with no visibility on cost break-down (mostly due to the nature of commodity). In these cases a reverse auction format does not work and Dutch auction is the suggested way out. A few years ago, I helped an automotive client in getting additional savings for a turnkey project (materials plus design plus installation services for setting up a warehouse). Only two suppliers were approved and qualified and their prices varied greatly with no break up and also both the prices were far higher than the budgeted price. Both were not willing to provide the break up too (suppliers for many niche commodities knowing very well that there are only very few other suppliers in the market and that the buyer has limited say, exploit this situation well). So we set up something called a floor price (~30% lower than budget and 60% lower than lowest RFQ round quote). A price called as ceiling price was also decided which was the maximum price we were willing to pay. The entire project was offered through Ariba Sourcing Pro as one lot for sale. The Dutch Auction started (after suppliers were trained) from floor price set and the price used to increase by 5% after every 5 minutes. At the third increase, one of the supplier (being under pressure that other supplier might accept the price offered before they did), accepted the price offered. Obviously, huge savings were obtained. Unlike reverse auctions where suppliers quote the prices and lowers them, in Dutch Auctions, buyer offers suppliers prices options and any supplier who accepts any price point, wins the deal.

This format can also be applied very well to sell a share of business equivalent lot quantities (e.g. 60% of annual volumes) for direct materials (e.g. automotive components and raw materials). So DA is a very effective auction format for all spend categories - Indirect, Direct, Capital, MRO etc. though there do exist some challenges which should be kept in mind while planning, so that auction results are favorable. Take an experts' help if in doubt.

Found this post useful and want me to write the rest of the 3 posts? Then send me your comments please. The first post in the series got some great comments. Thank you all.

Comments

Excellent overview on Dutch Auctions.

CK- Thank you for the write up. This is very insightful informative.

Dutch Auction held over the web can be an excellent mode of realizing cost savings as they give access to a global market with large number of suppliers
However, I was thinking about the type of products that will be more suitable for a DA, perishable products and those with a short shelf life will lend themselves better to Dutch Auction because they can be moved through the supply chain in real time.
Also all suppliers should have exact & full information on products/services being procured. If there is information asymmetry the winner may not have full information on all aspects of the job and therefore may not be able to complete the contract. Hence extensive pre-qualification of all suppliers before the actual auction is extremely important which may be both labor-intensive and costly.
Finally Suppliers could be uneasy with the Web auction model in the sense that they are seeing the prices that they get for their products go down due to greater competition. Hence Buyer should be able to exert a great influence on the supplier for this kind of auction to be successful.

DAs - a great yet under-utilised tool. They can even be used where there are fewer suppliers and is the best solution in cases where suppliers are sitting on their bids, especially in 'limited supply' markets.

DAs in many cases also prevent the failure of auctions with no or a single-high bid situation.

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