EProcurement Tools and Reverse Auctions for Sourcing Services

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

E Promise 1999 -2000 ► The Dot Com era ► Lots of Hype ► Soaring equity prices value is dead ► Lots of venture capital thrown at e-Business ► Many new startups ► All kinds of activities L. Giunipero, Ph. D. copyright 2004

Ebust 2001 -2002 ► The Dot Gone or Dot Bomb era ► How low can the stock price of your favorite go? ► Many have gone bankrupt ► Survivors are struggling ► Prices are falling for more powerful solutions to generate cash ► Accounting scandals shake confidence L. Giunipero, Ph. D. copyright 2004

Dot back 2003 -2004 ► Selective e purchasing practices grow in use ► Survivors stronger and pricing competitive and promises more realistic ► Selection standards are strict and final selection very detailed require tangible returns ► E Tools and systems continue to grow in sophistication L. Giunipero, Ph. D. copyright 2004

There is Hope! Organizations are moving to e Purchasing Forrester’s data and others show this There is a lot of internal work in developing buy side systems or internal portals Internal requisitioning systems Visibility into suppliers inventory Business rules to support the buyer L. Giunipero, Ph. D. copyright 2004

Technology is the Enabler of Change ► Moore’s Law – Every 18 months computing power doubles while cost stays constant. ► Metcalfe’s Law – The utility of a network is equal to the square of the number of its users. ► Coase’s Law- As costs decrease, the complexity of a firm diminishes. Size is a function of the complexity of transactions L. Giunipero, Ph. D. copyright 2004

G’s Technology & System’s Law ► It will always cost more than promised ► It will do less than promised ► It will take longer than promised ► But it will still provide advantages if it is properly selected and implemented ► It will move supply management forward L. Giunipero, Ph. D. copyright 2004

Sourcing processes and technology have evolved considerably over the last two decades while procurement has gained greater importance within corporations. Drivers behind the evolution from Purchasing to Electronic Procurement include: • Lower Transaction Costs • Lower Information & Searching Costs • Shorter Cycle times Importance within Corporations • Market Prices Strategic Procurement Purchasing • Manual • Fragmented & tactical • Project Management 1980 s Source: Global e. Procure Electronic Procurement • e. Sourcing • e. Procurement • Web Services • MRP, MRPII, EDI, ERP • Strategic Sourcing 1990 s 2000 s L. Giunipero, Ph. D. copyright 2004

Organizations have successfully used e. Sourcing for the procurement of materials and operational goods over the last few years. Price Reduction Open competition among bidders leads to an additional savings of 15% on average Sourcing Cycle Time Reduction Reverse Auction process reduces supplier negotiations time by 50 -75% (from weeks to hours) Standardize Sourcing Practice Across Organization All buyers use similar process and learn from best practices Improved Ability to Evaluate & Analyze Suppliers Automated evaluation of suppliers is done using online tools Source: Global e. Procure L. Giunipero, Ph. D. copyright 2004

Defining e Purchasing plus a process and set of tools that Purchasing/supply management professionals employ to streamline processes and leveraging technology in order to meet the needs of the organization. L. Giunipero, Ph. D. copyright 2004

What is e Purchasing plus? Process Change Technology Tools Integration Plus (strategy, skills) L. Giunipero, Ph. D. copyright 2004

Process and People ► “The crucial ingredient to B success isn’t technology it’s human” Andrew Brooks 2001 ► Our main finding put simply, is that the central issue is never strategy, structure, culture or systems. All those elements and others are important. But the core of the matter is always about changing the behavior of people, and behavior change happens in highly successful situations mostly by speaking to people’s feelings. Feelings then alter behavior sufficiently to overcome all the many barriers to sensible large-scale change John P Kotler, The Heart of Change L. Giunipero, Ph. D. copyright 2004

Process Analysis and Uncoupling ► What is the current process? ► Is there value by using third parties ► Can we reduce the amount of space or time in the process ► Most supply management processes involve at least three parties. (supplier, buyer and process owner) ► How can technology enable the process? L. Giunipero, Ph. D. copyright 2004

e. Sourcing Landscape Complex bid optimization ----- Value ---- “expressive” competition Reverse Auctions Strategic e RFX e document exchange “Buy side” e. VMI e settlement e exchanges and “hubs” e-catalogs portal e requisitioning Tactical Source: Combine. Net Intranet Resources p card / e p card Internal External ----- Reach ----L. Giunipero, Ph. D. copyright 2004

e-Tools Terminology ► Reverse Auctions ► Sourcing Optimization ► Collaboration § CRM § SRM ► Cataloguing and Content L. Giunipero, Ph. D. copyright 2004

Reverse Auction Definition ► Electronic bidding event held in a secure environment which allows buyer to simultaneously engage qualified sellers to bid their requirements in an interactive real time environment. The process creates a more efficient marketplace and shortens buyer’s cycle time from quote to award. L. Giunipero, Ph. D. copyright 2004

Reverse Auction Environment ► Costs are driving organizations ► On line competitive bidding format ► e Bay is a familiar auction site ► Buyer’s offer and seller’s respond ► Prices decline over the course of the auction ► Time duration varies ► Prices are transparent L. Giunipero, Ph. D. copyright 2004

Reverse Auctions ► Technology tool to streamline the bidding process ► Involves several phases of preparation ► Internet based technology ► Scheduled day and time ► Secure environment for suppliers ► Sellers don’t know who they are bidding against ► Sellers see the prices of their competitors ► Pricing occurs in a real time environment L. Giunipero, Ph. D. copyright 2004

Reverse Auction Activity ► $192 Billion in 2001 ► $350 Billion in 2002 ► Growth 84% 2002 over 2001 ► $600 Billion in 2003 ► Growth 312% 2003 over 2001 ► Savings Vary - one report 18% on $1. 5 billion spend 417 events 869 auctions Sources: IDC Research & Pantellos L. Giunipero, Ph. D. copyright 2004

Services for Reverse Auctions ► Janitorial ► Temporary Clerical Professional ► Security ► Cafeteria ► Information Tech ► Travel Services ► Transportation ► Logistics Services ► Express Mail ► Printing Services ► Consultants ► Disposal Scrap & Equip ► Insurance ► Medical L. Giunipero, Ph. D. copyright 2004

Questions to Ponder ► What is your Reverse Auction selection criteria? ► How good is your statement of work? ► How standard is the sourcing process? ► How competitive are the suppliers? ► What is the variation in your key selection criteria across the supply base? ► How important is the current relationship? L. Giunipero, Ph. D. copyright 2004

Provider Support ► Total Solution - consulting, software, training suppliers, conducting the auction ► Partial Solution - selected consulting, and software ► Stand alone - Lease or rent the software and conduct the auction L. Giunipero, Ph. D. copyright 2004

Payment for Provider Services ► Buyer ► Seller ► Both ► Percentage ► Flat fee L. Giunipero, Ph. D. copyright 2004

Rules of the Road ► Bidder selection ► Type of Auction reverse or rank ► Internet Explorer version ► Time Duration for the auction ► Handling price changes or mistakes ► Telephone contact during auction ► Freight L. Giunipero, Ph. D. copyright 2004

Rules of the Road ► Insurance, Liability, Certifications etc. ► Varying rules by different lots in the bid ► Right to split award to more than one supplier ► Costs and expense borne by supplier L. Giunipero, Ph. D. copyright 2004

Case Study 2: During the printing bidding event, the client achieved double the savings target – 25% or over $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 L. Giunipero, Ph. D. copyright 2004

. e. Sourcing Tools Spend Analysis Tools Conduct Automated Spend/ Opportunity Analysis • Identify operating and sourceable expenses • Identify suitable candidates for e. Sourcing • Estimate savings • Develop implementation plan – program timeline, project team, cash flows from savings Source: Global e. Procure 1. 2. Conduct Supply Develop e. RFP Market Analysis • Identify current and • Develop past suppliers detailed RFP with specs and • Identify additional functional suppliers from requirements databases and market research • Develop supplier evaluation criteria 3. Evaluate Suppliers 4. Conduct Online Negotiation • Review and analyze RFP based on evaluation criteria • Train suppliers on web based tool and conduct practice sessions • Rank various suppliers based on qualitative (nonprice) criteria • Provide operational support to conduct bidding events including surrogate bidding if necessary • Provide Q&A support to suppliers L. Giunipero, Ph. D. copyright 2004 5. Conduct Total Cost of Ownership Analysis • 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

Sourcing Evolution Type Traditional Bids Reverse Auctions Parameters Simple L. Giunipero, Ph. D. copyright 2004 Sourcing Optimization Complex

Sourcing Optimization ► Sourcing team can evaluate an unlimited number of alternatives ► Move to a more optimal solution ► Suppliers like the process better than R. A. ► Implementable allocations ► Permits negotiations ► Fast analysis, decision making and implementation L. Giunipero, Ph. D. copyright 2004

Optimization defined… Supplier bidding § Item level bidding ► Suppliers can bid individually on items in a lot and see a real-time ranking at item, lot and overall event level § Bundling ► Suppliers can group together items as a ‘package’ price and give a % or $ discount § Business volume discounts ► Suppliers can give a % or $ rebate for volume (units/$) in a given category or categories Buyer analysis § Supplier count ► Evaluate single, dual, triple sourcing strategies § Supplier volume ► Guarantee suppliers (e. g. , minority) a certain % of business § Supplier performance ► Incorporate performance costs into decisions § Split allocations ► Can be done at item level to ensure supply Source: Emptoris L. Giunipero, Ph. D. copyright 2004

Flexible Alternative ► Item-level volume discounts ► Total volume discounts and rebates ► Conditional discounts ► Price plus terms bidding ► Bundled bidding ► Capacity limitations L. Giunipero, Ph. D. copyright 2004

Outcome Constraints ► Supplier preferences § National/International § Local § Regional ► Cost & Unit constraints § Distribution of business § Volume requirements ► Item Conformity L. Giunipero, Ph. D. copyright 2004

The Awarding Process. Role of Optimization Flexible Requirements Supplier Bids • Item • Spec • Quantity • Due date • Proprietary attributes (bid fields) • Total cost formula Purchasing Policies • Budget limits • Award splits • Switching costs • Contractual obligation • Preferred suppliers Source: Emptoris • Bundling • Multiple price breaks • Rebates • Substitutions • Quality and quantity ranges • Multiple delivery locations and times Minimize total cost of ownership (TCO) L. Giunipero, Ph. D. copyright 2004 Supplier Ratings • Supplier, category and item level • Qualification • Quality • On-time delivery • Item attributes (e. g. , tolerance)

Evaluating Optimization Software ► Modeling capability to support numerous alternatives ► Ability to capture creative supplier ideas such as volume rebates ► Well developed user friendly analysis tools with reports and outcomes ► Performance and scalability that allows evaluation by the sourcing team in house L. Giunipero, Ph. D. copyright 2004

Key Benefits Source: Combine. Net L. Giunipero, Ph. D. copyright 2004

plus Skills will need to change ► Strategy needs developed which focuses on external and internal processes ► Some e. Purchasing doesn’t need a strategy ► L. Giunipero, Ph. D. copyright 2004

The Ideal Integration SRM ERP L. Giunipero, Ph. D. copyright 2004 CRM

Drivers of Transformation Knowledge Strategy Organization Process L. Giunipero, Ph. D. copyright 2004

Thank You! Questions and or Comments L. Giunipero, Ph. D. copyright 2004