Online auctions are quickly becoming a standard sourcing tool. According to industry analysts, total auction spending has been growing annually at a rate of more than 50 percent since 2001.
Increasingly, utilities are using auctions as part of a broader e-sourcing solution that automates and streamlines all aspects of the sourcing process, from bidding to demand aggregation to contract management. The new Pantellos e-sourcing solution powered by Frictionless Commerce includes an electronic auction module.
To use auctions to their greatest advantage, both buyers and suppliers need an understanding of how online auctions fit into an overall strategic sourcing plan. Strategic sourcing is a multi-step process that begins with a supply chain strategy and extends through contract management. One step of this process is sourcing, which may take the form of traditional bidding, negotiation or an online auction.
In other words, the online auction is one more tool in the sourcing tool box—in some cases, the best tool to quickly understand and capitalize on the most current market conditions. Online auctions are most suitable for well-defined goods or services with multiple supply sources. The buyer must be able to clearly specify the requirements so that all bidders compete on a level playing field.
Many goods and services meet these criteria. In fact, studies have found that 50 percent of a utility's spend is suitable for auctioning. In recent months, Pantellos has conducted online auctions for capital projects such as transmission line construction, boiler work and underground construction, as well as auctions for products and services such as guard services, janitorial supplies and services, capacitors and many other categories. Customer-reported savings for these auctions averages approximately 18 percent.
Does this mean an online auction is always the best sourcing option? Of course not. Auctions may not make sense for commodities with a limited supply base or little marketplace competition, for products or services involving too many variables to be clearly specified, or for bundles of marketplace services.
When online auctions are the right sourcing method, they provide multiple benefits for both buyers and suppliers. Auctions enable buyers to rapidly identify current market conditions and obtain the most competitive price. Auctions shorten the overall procurement cycle by reducing negotiation time. They introduce new, quality suppliers and transform internal processes through greater efficiency and improved decision making.
Suppliers also obtain market intelligence as a result of auction participation. Suppliers can gauge their competitive position in real time and adjust their bids to increase the opportunity of winning. For a low cost of entry, suppliers can gain exposure to a new buyer and improve their visibility with both the buyer and the auction service provider.
The bottom line—reverse online auctions can be a win for both buyers and suppliers. Auctions are about more than low prices; they offer opportunities for expanding business and transforming traditional markets into more efficient markets.
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