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ARTICLE IN PRESS Journal of Purchasing & Supply Management 9 (2003) 257–268 Online reverse auctions and their role in buyer–supplier relationships A...

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ARTICLE IN PRESS

Journal of Purchasing & Supply Management 9 (2003) 257–268

Online reverse auctions and their role in buyer–supplier relationships Alan Smart, Alan Harrison* Cranfield School of Management, Cranfield University, Bedford MK43 OAL, UK Received 15 May 2002; received in revised form 17 July 2003; accepted 22 September 2003

Abstract Despite the move in recent years towards supplier partnerships, buying firms need at times to make use of competitive procurement strategies for certain purchases. This study examines the impact of reverse auctions on buyer–supplier relationships through six case studies, analysing primarily the supplier perspective through participant interviews. The authors identify that there are potential benefits for both parties in a reverse auction, which can offer tendering and transactional cost advantages. For buyers, it offers a competitive procurement process. The effect on relationships will depend on the extent to which buyers employ the auction as a price weapon, or whether it is used primarily as a process improvement tool. r 2003 Elsevier Ltd. All rights reserved. Keywords: Online reverse auctions; e-procurement; Buyer–supplier relationships

1. Introduction Increasingly within practitioner circles, the Internet is being recognised as the mechanism which will have the greatest impact on how companies operate in the next decade. Growth of Internet business through fast access to the World Wide Web has been exponential in the last few years, led by the USA, with Europe and the Asia Pacific region following close behind (Boston Consulting, 2000; Forrester, 2000a). Despite some recent, initial casualties in the ‘dot com’ economy, both Business to Consumer (B2C) and Business to Business (B2B) sectors continue to grow, with established industries and market sectors adopting new web-based channels to market. However, it is in the B2B sector that e-commerce has the greatest potential for growth and impact on company performance, through the opportunities it presents for: faster entry into new markets, expansion of global business models, lower transaction costs, and improved supply chain management (Kalakota and Robinson, 1999; Chopra and Van Mieghem, 2000). Within the B2B sector, many firms have recognised the opportunity to focus on cost reduction opportunities, in particular through the use of electronic *Corresponding author. Tel.: +44-1234-751122; fax: +44-1234751712. E-mail address: [email protected]field.ac.uk (A. Harrison). 1478-4092/$ - see front matter r 2003 Elsevier Ltd. All rights reserved. doi:10.1016/j.pursup.2003.09.005

procurement (eProcurement) mechanisms. The first eProcurement tools launched were designed to facilitate online search, requisition and ordering, through applications providing access for buyers to suppliers’ electronic catalogues. These applications had little initial impact on supplier relationships as they were set up in cooperation with an established supplier base who provided an electronic product catalogue linked to a price list. The eProcurement model forecast to have greater impact has been the electronic exchange or marketplace (Kaplan and Sawhney, 2000; Yankee Group, 2000). The early eMarketplaces established were either horizontals, such as mro.com offering one-stop shopping for commercial buyers across many industries through access to a wide variety of products, or verticals such as plasticsnet.com, with a specific industry offering designed to attract buyers and sellers from within the same sector. A further mechanism which has grown in use alongside these eMarketplaces has been the online reverse auction. Online reverse auctions (ORAs) are exactly the way they sound: traditional auctions in Reverse (Smart and Harrison, 2002). Instead of a seller offering a product for sale to the highest bidder, a buyer offers a tender or contract for the supply of specific goods or services. Suppliers compete for the right to the contract by bidding reducing prices, until a final price—the lowest— brings the auction to an end. Reverse auctions are hosted by many eMarketplaces as a means to enhance

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the site’s product offering. Auction software companies have appeared, such as Freemarkets, Moai Technologies and eBreviate, using examples of substantial price reductions achieved in recent auctions, to tempt industrial buyers. Forrester has predicted that the online B2B auction market would reach $52 billion in 2002 (Forrester Research, 2000b). This has produced a raft of media articles suggesting that huge cost savings are available if companies merely move their tenders into the auction model. Similar speculation has suggested that partnerships and long-term supplier relationships are a thing of the past and that buyers must move to a more aggressive price negotiation model in order to compete. This paper describes research that was commissioned by a major consulting firm into ORAs carried out in six case examples. It was possible to interview both buyer and seller parties to the auctions, and hence to develop conclusions about the role of ORAs in buyer–supplier relationships.

2. Background and research questions The literature on supply chain management and buyer–supplier relationships has highlighted the two procurement strategies available to buyers, which a number of commentators have bracketed as either ‘competitive’ versus ‘collaborative’ or ‘adversarial’ versus ‘partnership’ (Leavy, 1994; Burton, 1995; Patterson et al., 1999). Despite the move within many industrial sectors towards closer, longer-term relationships with suppliers, a growing body of research has suggested that partnerships can create problems of their own, and that their success depended upon clear implementation criteria (Burnes and New, 1997; Krause, 1997). There has also been a tendency to consider partnerships as the most appropriate strategy without considering the difficulty of managing them, or to view them over-optimistically (Cousins, 1999; Burnes and New, 1997). Forker and Stannock (2000) have demonstrated that there can be a better understanding between buyer and supplier in the ‘competitive’ exchange and that market mechanisms may be a better method of satisfying the needs of contracting firms in many buying situations. Similarly, Parker and Hartley (1997) suggested that within the procurement continuum (ranging at one end from competitive purchasing on spot prices to fully integrated ownership of suppliers at the other) many different types of relationship are possible and illustrate that under partnership agreements, suppliers can end up with lower prices than in competitive bargaining. Olsen and Ellram (1997) have indicated the need for more specific research into the dangers of the partnership approach versus the benefits of opportunism. In the case of Marks & Spencer

in the UK retail market, many of the long standing partnership arrangements with UK suppliers were abandoned in favour of lower cost sourcing from overseas and a more flexible approach to supply sources. These changes have been driven by the need to adapt to changing market conditions and to improve competitiveness through diversified sourcing. Leavy (1994) has highlighted that firms need to be aware of the advantages of the different procurement strategies whilst Cox (1997) and Gibbs (1998) have suggested that buying firms should not pursue partnership relationships alone, but select the appropriate strategy, either competitive or collaborative, in accordance with industry and market conditions. It is possible therefore to pursue a composite strategy (Burton, 1995) taking the best from both approaches and applying them in accordance with the competitive needs of the buying firm. Furthermore, as the growth of Internetbased business creates the opportunity for lower transaction costs between firms, e-commerce will reduce the cost of integrating larger numbers of suppliers, allowing for a more versatile approach to supplier relations (Roberts and Mackay, 1998). One key aspect of partnership sourcing has been the reduction in supplier numbers (Lamming, 1993) and firms need to assess, in a world enabled by e-commerce, how and when supply sources can be extended by adding more competition, with no additional transaction cost to the buyer. This debate provides a context in which to examine and understand the role of reverse auctions in supply chain relationships and the questions our research sought to address are: In what ways do reverse auctions impact on price levels for suppliers? How do reverse auctions impact on buyer-supplier relationships?

3. Research design In emerging, new situations where an exploratory approach is required, case studies are one of the more attractive options available to researchers (Yin, 1993). The case study method was chosen by the authors for the following additional reasons: *

*

desk research indicated that there was virtually no literature on this subject apart from a small number of journal and media articles on USA online auctions (as at May 2000), no previous academic studies on the specific research subject could be found.

The project sponsor was able to provide access to two cases of reverse auctions which were active or at the planning stage. With their assistance, it was possible to

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Table 1 Auction research cases examined Company

Industry

Auction item

Value

No. of suppliers

1. 2. 3. 4. 5. 6.

Aerospace Aerospace Utility provision Oil & Gas Aerospace Leisure

Stationery PC consumables Metering equipment Industrial chemicals Courier services Frozen foods

d800,000 d1.6 m d4.2 m d130,000 d200,000 d1.5 m

9 9 4 6 10 7

Airco Airco Utilityco Oilco Airco Foodco

undertake four further case studies in short succession. Given that access would be provided directly to senior personnel in the firms selected, the authors chose to use interviews as the main method of data collection. Both buyers and suppliers were interviewed, although the research focussed primarily on the role and opinions of the supplier firms, as a larger sample was available and as it was considered that the attitude of suppliers represented a new area for research which was previously unexplored. A total of twenty-two supplier organisations were interviewed from the six auction case studies. The respondents were senior executives ranging in status from Managing Director to Sales Manager who were actively involved in managing the relationships with the buyers and who were engaged in the auction events as they took place. The names of the participating buying firms have been disguised at their request (Table 1). Note: ‘Airco’ held three separate auction events during the course of this study which are treated as individual cases. In order to illustrate the progress of a bidding sequence, Table 2 tracks bids in the auction of stationery at Airco, showing auction parameters and bidding history.

4. Analysis & results After transcription of the interviews, a qualitative analysis of the data collected from interviews was undertaken. Data was initially coded in order to identify themes, recurring comments and parameters which could be analysed in relation to the research questions using an iterative process (Miles and Huberman, 1994). Within specific interview questions, responses from suppliers were analysed in order to be able to create appropriate categories. For instance supplier attitudes towards the auction, prior to the event, were categorised as ‘positive’, ‘negative’ or ‘unsure’. This enabled the authors to create analysis of percentages of respondents in relation to some key questions. Data arrays of responses also were set up in order to identify common

threads or comments repeated by more than one respondent. 4.1. Supplier responses The interview questions were developed in conjunction with the sponsor, who had a particular interest in understanding attitudes of the suppliers towards aspects of the ORA process. The initial question set developed was piloted in the first case study and found to provide suitable responses and data for analysis, and was continued through the following five cases. The twenty-two suppliers were asked some specific questions which allowed analysis on the basis of percentage of respondents and these responses are illustrated in the numbered figures. Only 18%, or four respondents, had any previous experience of reverse auctions prior to these case study events and three of these were from within the office equipment business (as bidders on the first Airco auction). This particular industry, being within the MRO1 spend, has been one of the first to see auctions introduced as a means of tendering. For most of the suppliers, the auction was a new experience and many of those saw their participation as an opportunity to learn about this new approach by buyers. This attitude explains the result in Fig. 1 where 45% of suppliers were positive towards the events, a higher figure than had been expected. The suppliers who were strongly negative included the incumbent supplier in five out of the six auctions—only one of the incumbents considered the auction as an acceptable way to do business. This is unsurprising as the incumbents are those with most to lose, and in certain cases, the auction was held before the usual annual review period for the contract, so normal conditions with the buyer were under threat. A majority of 55% were either strongly negative or unsure of the suitability of the auction mechanism. The level of preparation of suppliers was tested, as shown in Fig. 2, which reveals the percentage who carried out a cost analysis based on the tender details. 1

Maintenance, repair and operating supplies.

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Suppliers: Pre-auction attitude

Table 2 Bidding history for Airco stationery auction Auction 1: Stationery supplies 70%

Nine suppliers were invited to bid (here named as Suppliers A to J) Start price: Historic price Bid decrement :

d820,000 d775,000 d5000 (minimum amount by which bids can be lowered)

Incumbent :

Supplier A

32%

50%

23%

40%

Auction opened at 12.00 with following bids placed:

30%

Amount (d 000’s)

Supplier

Time of bid

20%

810 805 800 795 795 790 790 785 785 770 750 745 700 695 675 650 630 625 610 600 600 590 590 580 575 570 565 560 555 550 550 550 545 545

C J D G A D G B D F D C B G F D B F B D C F C B C D F B F C D B D B

12.01 12.04 12.09 12.12 12.12 12.13 12.14 12.18 12.20 12.21 12.22 12.23 12.23 12.24 12.25 12.26 12.28 12.28 12.28 12.28 12.28 12.31 12.33 12.32 12.34 12.34 12.34 12.34 12.36 12.36 12.37 12.37 12.42 12.43

No further bids

45%

60%

10% 0% Positive

Negative

Unsure

n = 22 Fig. 1. Supplier attitude pre-auction.

Suppliers: Did you prepare a cost analysis in advance?

100% 82% 90% 80% Auction extended

70% 60% 50% 40% Auction extended

14%

30% 4%

20% Auction extended Lowest accepted bid Auction extended

Auction closed at 12.48

10% 0% Yes

No

Costing problems

n = 22 Fig. 2. Supplier approach to cost analysis.

This reveals that 82% did such a cost analysis, some of which, from the information given in interviews, were highly sophisticated. The supplier preparation varied in accordance with the tender or contract details—some bids were for a specific product only, whilst others covered a complicated basket of goods. Those suppliers who experienced costing problems were new bidders in

those tenders and said they did not fully understand the costs involved. All three of these suppliers advised they would have done a complete costing if more time or information had been available. The only supplier (4% of respondents) who did not prepare a costing for the auction was an incumbent who assumed he knew the market price for this product tender and

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who proved to be complacent about the impact of the auction. Some respondents were concerned before the event that it might turn into a ‘free for all’ with suppliers aggressively cutting prices to see off their competitors. However the overall level of supplier preparation suggests that fear was unfounded. Most suppliers went into the event with a clear understanding of their costs. Furthermore, most suppliers advised they approached the auction in the same way as any other tender opportunity. This response raises questions about the precise role of the auction and whether the auction event genuinely contributed to the cost savings achieved, or whether those were the effect of other causes. Some of the supplier interview comments illustrate the level of realism in the attitude of the majority: ‘we had a walk away priceyy.’ (quoted by two suppliers); ‘everyone has a bottom line and if you go below it you have blown it’; ‘we could have been more aggressive in pricing the contract but decided against it’. Attitudes to the bidding process were tested, with respondents asked to confirm if they had clear tactics before the auction, and whether these changed during the event itself. There is a relationship between Figs. 3 and 4 where 68% of suppliers polled had established an approach to bidding for the auction and did not alter their tactics. Similarly 23% did not start with a pre-conceived idea of

Fig. 4. Did suppliers alter bid tactics during the auction?

how to bid, and decided to follow events on the day. Only 9% (two respondents) had no clear tactics. Some of the 82% of suppliers who prepared a cost analysis decided to see what unfolded in the bidding events, even though they knew their bottom line. The bid tactics of suppliers varied and include: *

*

Suppliers: Did you have a pre-auction bid strategy? *

*

100% 90% 80%

68%

70% 60% 50% 23%

40% 9%

30% 20% 10% 0% Yes

No

On the day

n = 22 Fig. 3. Pre-auction bid strategy.

setting one price and bidding it at the appropriate level in the auction, working down to their bottom line via a number of reducing bids, watching what competitors would do before placing their own bid(s), entering an early bid to test the system and to set a marker for others to follow.

These results demonstrate that over two-thirds of the suppliers took a detached view of the events in the auction and entered into it with a clear idea of when and how much they would bid. Two suppliers volunteered that they went very marginally below their bottom line figure but stopped bidding when competitors’ prices continued to drop. More interestingly, two different winning bidders in Airco auctions advised that they did not have to bid their lowest calculated price as the bidding did not reach that level. In effect they had lower bids in reserve which were not offered once they were in a winning position. This evidence suggests that wild, uncontrolled bidding by suppliers was not a feature of these events. Only two respondents went below their pre-auction bottom line, and those two suppliers did not affect the final price level in either of the auctions in which they were bidders.

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Fig. 5. Are auctions an opportunity or a threat?

events, particularly where the buyer invites new suppliers to bid for the business for the first time. A supplier response given more than once is that auctions create a new sales channel and as such must be seen as creating opportunities, particularly for those companies who participate regularly and understand the process. Two suppliers who expected auctions to become more commonplace within their industry, suggested they would create a bid department within their sales structure to specialise in auctions to become experts in dealing with them. Other issues mentioned were that auctions might lower the cost of sales if more widespread, and that sales people would need to adopt new skills in order to handle tender by auction, or perhaps become redundant. When suppliers were asked after each auction about their attitude to participating in further events, 64% were certain they would take part if invited. Several suppliers advised that the reason they had participated in these specific bids was to learn how the process worked and to understand the technology and were now more confident in the mechanism and its usage. However, over one-third were more guarded in their response suggesting there were some hidden disadvantages and that participation would depend on issues such as the identity of the buyer, length of the contract, the value of the tender and how interested they were in the business on offer. Many suppliers elaborated on their experiences by describing what they saw as the risks of auctioning, although a majority of suppliers also freely observed some benefits to the process. Overall, the incumbent suppliers were broadly negative to the auction process. In Table 3 the authors have summarised the benefits and disadvantages of reverse auctions for suppliers, based on experiences and supplier comments from the case studies and observations from literature sources (Appel et al., 1999). The table demonstrates the issues suppliers need to consider when approaching ORA participation, and the supplier interpretation of these issues will almost certainly influence their participation over the longer term.

4.2. Case study analysis

Fig. 6. Supplier attitude to future auction participation.

As shown in Figs. 5 and 6, suppliers interviewed after the event are equally in the majority in seeing auctions as more of an opportunity than a threat, with 68% responding ‘opportunity’. Incumbent suppliers either see the auction as a threat or both threat and opportunity, as they recognise they have the most to lose from these

The discussion of results indicated that the auction bidding events were not the sole factor in determining the outcomes. In order to understand the issues that influenced and shaped the outcomes, we have selected three of the auctions to analyse in detail. Only three cases were selected for space reasons, but more specifically they provide useful insights into the dynamics of ORAs and highlight key issues for both suppliers and buyers when entering into preparation for online bidding events (see Fig. 7).

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Table 3 Benefits & disadvantages of ORAs for suppliers Benefits for suppliers

Disadvantages for suppliers

New opportunities Potential access to new buyersa More open tender process

Price Market prices likely to decreasea Reduced profit marginsa Price becomes the only differentiator Some business may become unprofitable or non-viable Contract periods may be shortened Some products become commodities

Price Visibility of competitor pricing Information Knowledge of competing bidders Overview of market activitya Learning opportunity for suppliers invited to tender—can apply to own purchasing

Risk Exposure to new competitiona Non-participation may mean exclusion from future tendersa Pressure on time—no second chance Uncertainty of demand creates instability in business plans Payment issues for unknown buyersa Trust and reliability of new, unknown buyersa

Administration Compresses time for dealing with RFQa Reduces manual/paper based effort Reduces costs of handling tenders Creates new low cost sales channela Potential reduction in existing sales costs Lower overall transaction costs with buyers

Relationships Potential new relations with buyers based only on price Sidelines personal interface with customers Sales personnel may become redundant or need to acquire new skill sets Difficult to maintain partnership commitment if price likely to lead to regular supply changes

Decision making Sales order cycle time is compressed Faster knowledge of contract awards a

Identified by Appel et al. (1999).

ORAs : % saving for buyers versus historic cost

PC consumables

37%

Stationery

30%

Foodstuffs

22%

Couriers

6%

Chemicals

5%

Metering equip. 0%

3% 10%

20%

30%

40%

50%

Fig. 7. Savings achieved in the auction case studies.

Case 1. Airco: stationery. The auction achieved a reduction against historic price for the buyer of 30%, which was far in excess of their expectations (a subsequent event for different products with the same suppliers bidding realised a 37% cost saving). However, there are some important contributing factors to this result which arise from the previous contract conditions, and were highlighted in the supplier interviews:

*

*

*

The contract had been with the same supplier for 10 years and had not been put out to tender during that period. Several new suppliers have entered the UK market during recent years and it is possible that Airco was paying more than the current market price for a contract of this size. Within the online auction, four suppliers (not the incumbent) stayed in the bidding virtually until the

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*

*

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close; it seems highly improbable that all four suppliers had miscalculated their costs. The winning supplier advised during an interview that he had an additional lower bid in reserve, and did not actually go to his bottom line price. Airco conducted a detailed strategic sourcing exercise before the auction in order to invite in the major suppliers of this product. This exercise created significant competition for the business.

In the light of these facts it can be reasoned that the auction itself was not the main contributing factor in the resulting price reduction. Indeed, more than one supplier advised that they would have quoted the same price in a sealed bid tender. The auction may have contributed to the competitive element, but clearly the major factor in the substantially reduced price is that a number of new suppliers were bidding for the first time on a valuable piece of business, which was almost certainly being charged at well above the market price (or at least what a major industry supplier was prepared to offer). Under such circumstances it may have been possible to achieve a similar outcome through traditional methods. Case 2. Utilityco: metering equipment. The product in this auction had a value (based on the historic contract supply price) of d4.2 million which is considerably higher than in the other auctions. Only four companies, all previous suppliers to Utilityco, were invited to bid. Two of them were competing divisions of the same organisation. The principal issues surrounding this event were: *

*

*

*

*

The price reduction achieved in the auction of 2.7% was below the buyer’s expectations. The suppliers in this bid were sceptical about the benefit of the auction approach, and remained the most negative after the event. Two of the suppliers attempted to influence the outcome of the tender by submitting written quotations in advance of the auction. There was no strategic sourcing exercise by the buyer and no new supplier competition was introduced. Interviews with the suppliers revealed that they had calculated before the auction, based on market intelligence, what their competitors were likely to bid, which limited the bidding activity.

Considering the above points, it is evident that this auction lacked an element of genuine competition. The suppliers treated the auction in the same way as a traditional tender and the lack of new suppliers or ‘wild cards’ permitted an existing supplier to retain the business with only a modest discount. The auction was not considered a success by the buyers who believed they could have achieved the same result, or

perhaps better, through a round of traditional negotiations. Case 3. Foodco: foodstuffs. This auction was more unusual as the buyer decided in advance to join together with an industry competitor to create a combined tender. The contracts were for the supply of frozen foods which had an identical specification and so were easy to place together. Several other factors resulted from this situation which influenced the auction outcome: *

*

*

*

*

*

The joint action by two buyers doubled the usual value of the contract. The product was a genuine commodity such as is often bought and sold on the commodity markets. Two incumbent suppliers were bidding against each other. New suppliers were invited to bid on the business for the first time. Some new suppliers had foreign sources of supply (within continental Europe) and consequently had rate of exchange benefits against UK-based suppliers. Five separate bids were run consecutively in one day for different products and the suppliers had varying strengths in relation to supply of these items.

These elements combined together to create a highly competitive environment within the auctions. The result was that the average price reduction over the five bids was 22% against a target set by the joint buyers of 10–12%. This auction was considered to be highly successful and the unusual, competitive supply conditions which the buyers managed to create within this tender directly influenced the outcome. These three cases were selected in order to illustrate the highly varying market and competitive conditions which pertained in the auctions investigated. Given the significant differences in products auctioned and the industry sectors in which these events took place, it is inappropriate to make broad claims of generalisability for these results. This study has attempted to understand some of the dynamics of ORAs which are certainly influenced by conditions in which buying and supplying firms operate at a point in time. The following section considers the implications of our findings and discusses the impact of this new mechanism in the context of the research questions.

5. Discussion The cases analysed here have helped to identify that several factors can have a major influence on the outcome of auctions. How these are employed by buyers can determine the result of an auction, its

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use in various buying situations, and the impact it is likely to have on relationships in the future. We first return to the research questions posed earlier in this paper, and end with other observations based on this study. 5.1. The impact on price levels It is apparent from the three case studies examined in detail that the auction alone is not necessarily a mechanism for reducing price. The key influencing factor in each case was whether competition was introduced through including new suppliers, or a larger sample of suppliers than would usually bid for the business. Other factors such as joint tendering and removing the opportunity for differentiation played a part, but the price visibility in the bidding process allowed genuine market prices to be revealed. It is significant that supplier bidding tactics were usually established before the event and in most instances did not change. In effect buyers should not expect the bidding event alone to be a guarantee of lower prices. However, a critical factor in the cases examined is that they were all ‘first strike’ auctions. It would seem highly improbable that Airco will achieve another 30% reduction on its stationery when the contract next goes to tender. Indeed, the price may need to rise if the supplier has been unable to provide the required service levels—an issue mentioned by some suppliers during interviews. Looking forward, a key question to ask therefore is: what happens to prices the second time around in a reverse auction? The answer to this question may determine whether online auctions are a short or long-term phenomenon. This study demonstrates so far that reverse auctions can have an impact on price, subject to certain conditions being introduced, but they may not be repeatable nor sustainable over the longer term. 5.2. The impact on buyer–supplier relationships Many firms have moved towards closer ties with a smaller supply base, but the literature suggests that in many instances partnerships or long-term relationships are not appropriate. The assumed or predicted benefits for both parties have not always materialised and there is evidence the firms continue in the old adversarial mode when it comes to discussions about price (Burnes and New, 1997). A number of authors (Cox, 1997; Roberts and Mackay, 1998; Burton, 1995) have suggested that a portfolio approach is necessary within a firm’s procurement strategy, not least to take advantage of the fluctuating supply conditions which apply in different market sectors.

265

This study leads us to the conclusion that reverse auctions have the potential to be used in both the collaborative and competitive relationship as a means of tendering contracts. Firms who have established longterm relationships with key suppliers still require to check on market prices from time to time, or to invite new or alternative sources of supply to bid, particularly in areas of continuous technological development. This is generally done through a competitive tender or by RFQ to a range of suppliers. A majority of both buyers and suppliers interviewed in this research believed that the auction is an efficient method for conducting tenders which can save time, cost and resources. From this perspective, the buyer could consider using the reverse auction as a process improvement tool. Online auctions may simply prove to be a more efficient way of conducting business, even if price reductions are not the main objective. 5.3. Other observations Similarly, reverse auctions have an important role as a price revealing mechanism. The Airco tender for stationery demonstrated that the buyer did not know the current market price for supply on this product, and the invitation of new suppliers to bid revealed a price difference of 30% against their current supplier. Both buyer and incumbent supplier in this contract believed they had operated in a ‘partnership’ (although both were very unclear about precisely what that term meant in reality). Partnerships and close, long-term relationships may lead to insulation from market forces, and it has been seen that some suppliers may be able to increase prices more easily within such relationships over time (Cousins, 1999). Auction events can provide insight into how costs in an existing relationship have been managed. In the Airco example, the company had become trapped in a high cost relationship, without being aware of it; with Utilityco there was little opportunity for price reduction from the known sources of supply; Foodco used volume and new supply sources to uncover a lower price for its purchases. Once a true market price has been revealed, buyers still have the option to choose whether to adopt a competitive approach by tendering regularly for cheaper prices, or to enter into a partnership with the new, lower price supplier. Hence, these changes of supply may prove to be oneoff occurrences. A major question, already posed, concerns whether the reverse auction is a long or short-term phenomenon. If it acts to reveal market prices, as in the Airco stationery case, then unless there is a dramatic change in market conditions from year to year, further price gains are limited for the buyer. Interestingly, after its courier services auction, Airco decided to change suppliers, and the buyers advised that

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they expected to develop a new, ongoing relationship with that supplier. Conversely, Foodco concluded that the savings achieved through combining volumes with another buyer had been so successful that they would increase their auction foodstuffs contract the following year from 5000 to 20,000 tons of product. They were also prepared to change supplier again if a lower price could be obtained though this method. Of the six case studies reported by the authors, five resulted in a change of supply source, as a result of the auction. It would be interesting to see how many of them are changed again at the next round of tendering. An issue which may affect this is of course the ongoing attitude of suppliers to ORAs. In these early events, some of the first held in the UK, suppliers were still feeling their way and the majority demonstrated a willingness to participate in the future. However, some were either reluctant or even antagonistic to the process and if key suppliers in certain industries develop a resistance to such events, then their viability for certain product categories will be questionable.

6. Future directions The significant cost savings in MRO purchases seen in this study suggest that more indirect purchases are likely to move into auctions. This may have the effect of commoditising more products and services, a challenge many suppliers in the office products industry are already addressing, as they are targeted for reverse auctions by buyers. Within the MRO sector, there may be a push towards the short term by buyers if large scale, first strike, price cuts become widespread. Where suppliers are pushed beyond what may have been considered reasonable prices in the past, they will need to develop competitive responses, such as reducing sales costs, or actively managing the online bidding process through specialist auction bid managers. Further moves towards the use of e-commerce across the business will create the opportunity to lower operating costs further. A number of suppliers suggested they would need to address these issues in the immediate future. Buyers need to employ a tendering process in many procurement situations and the arrival of reverse auctions may not of necessity lead to a fundamental change in purchasing practice. This research has illustrated that ORAs are capable of producing benefits for both sides, particularly in terms of the process improvements this tool offers (Emiliani, 2000; Wyld, 2000). This subject needs to be examined further in the wider context of the opportunities created by e-commerce. Firms are utilising e-commerce in order to lower the cost of transactions and improve control over elements of their supply chain such as procurement. The tools to do this are becoming widely available and software is being

developed which eventually will allow firms to integrate their ERP systems with other Internet-based applications through generic software solutions known as middleware. In turn, connections to electronic marketplaces may increase the use of networked systems within industry sectors. The purpose of this networking effect is to be able to create a seamless flow of information with other firms in the supply chain which previously has been inhibited by cost and communications infrastructure. At the centre of this approach there is a serious contradiction, however. In the past, firms have sought to work with a smaller number of suppliers for a host of reasons based on partnership arguments, and often because the cost of networking with larger numbers, through available IT systems, was prohibitive (Kalakota and Whinston, 1996). The Internet, and new e-Procurement applications, allow companies to trade with an almost infinite number of suppliers online at very low cost. Equally the Internet is becoming an important tool in identifying new sources of supply. Tucker and Jones (2000) have explored how Internet search engines can be used for optimal supplier sourcing. Similarly it has been observed that for many industries, e-Procurement tools remove the traditional geographical constraints between buyers and suppliers for the first time (Appel et al., 1999). These developments suggest that buyers in many industries will be able to identify and trade with, rich new supply sources, which were previously unknown or unexplored. The logical consequence of these changes is that it will be possible, perhaps necessary, for firms to locate and deal with new sources of supply as a means of improving, or even maintaining, their competitive position in the market. By using the new e-Procurement tools, transaction costs can be reduced, even with a much larger supply base. The contradiction then, is that whilst firms are using the Internet for greater networking effects and closer collaboration through sharing information, they may also, in some procurement situations, be able to take advantage of a more competitive approach, involving the use of many more suppliers, at no additional cost. This will mark a movement away from the partnership strategy, which has been widely adopted in recent years, for some types of procurement. Conversely, companies who need to check on the success of their collaborative arrangements can use auctions to verify market prices, and depending on the outcome, choose either to remain with the long-term partner, or switch source of supply. We envisage this as a trend to increase the attractiveness of short-term, arm’s length relationships as a result of the low transaction and market price visibility offered by reverse auctions. This trend is illustrated in Fig. 8. Furthermore, in the world of Internet commerce, firms need to give more thought to the form which their

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Partnership: strategic few suppliers

Long term Duration Short term

Commodity: non-critical many suppliers Arm’s length low transaction cost

Collaborative high transaction cost

Style Fig. 8. Trend offered by reverse auctions in MRO.

relationships with suppliers will take in the future. The literature suggests that both collaborative and competitive supplier relationships have a place within the procurement strategy of the firm, and may co-exist within a portfolio. Firms following a largely collaborative supplier strategy will find that reverse auctions provide a means of creating greater diversity in supplier relations. In this respect, a composite relationship strategy—supported by e-procurement tools—will create a mechanism for buyers to achieve better prices and lower transaction costs from a potentially much broader supplier portfolio.

7. Further research This paper has taken a largely exploratory view of an emerging phenomenon—the online reverse auction. It suggests that the true impact of this mechanism will only be seen over time, as firms are able to assess the success of auctions either as price weapons or as process improvement tools. Various scenarios can be envisaged, such as increasing enthusiasm and deployment of reverse auctions by buyers—yet increasing concerns on the part of suppliers who have to cope with the price and relationship impacts of global price transparencies. Since this research took place, many more firms have begun to use auctions in their procurement operations, often within the context of e-marketplace participation. Further studies are required to understand which areas of procurement are most suited to reverse auctions, what additional, new success criteria will emerge and how, if at all, firms are employing this mechanism to adapt to the use of competitive strategies, alongside their existing partnership arrangements.

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