The
MBA program in Supply Chain Management
at NC State University is unique among business
schools. With the support of the Supply Chain
Resource Consortium, an industry/university
partnership, the program brings the industry into
the classroom, involving students, faculty and supply
chain professionals in finding solutions to the
real industry problems. This project-based approach
to education reflects the new model for business
schools described by Peter Drucker.
For
more information...
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Peter
Drucker...
"Management is a practice, like medicine;
and the model should have been the medical school,
where the bulk of the teaching, especially the most
important teaching of the M.D. in his or her residency,
is performed by practitioners. Unlike medicine,
where you can bring sick patients into the classroom,
business education does not allow you to bring an
organization into the classroom. You can, however,
bring experience in through your faculty and students.
Business educators should be out as practitioners
where the problems and results are."
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5/22/03
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Response
to a Proponent
of Reverse Auctions
by
Rob Handfield
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A
recent reader of the results of our study
published in Inside Supply Management
took issue with our results, and noted
the following:
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As
an experienced sourcing professional
and current manager of a global e-sourcing
program which has, as one goal, promoting
the usage of reverse auctions, I wanted
to respond to the article, "Reverse
Auctions: How Do Supply Managers Really
Feel About Them?" in your November,
2002 magazine.
After reading the article, I was dismayed
by the lack of balanced, in-depth
coverage the Reverse Auction approach,
an approach that most large and progressive
companies now regard as a best practice
in procurement, received. Overall,
apart from the authors seeming to
lend too much of a sympathetic ear
to the suppliers vs. discussing the
advantages which rev. auctions give
sourcing professionals, I found that
the article failed to accurately address
the subject of reverse auctions in
a variety of ways.
I look forward to reading further
about reverse auctions in future ISM
Articles. There are many aspects to
reverse auctions that are intriguing
both from a purchasing and a supplier
standpoint.
Best Regards,
Brad J. DeHart, C.P.M.
UNISYS
Global Procurement |
Our response to this letter is as follows:
We believe that this reader has an interesting,
if somewhat naïve, perspective on reverse
auctions. We respectfully disagree with
his views, and base our insights purely
on empirical evidence from our study.
Additional empirical evidence also supports
the results of our study. While attending
a meeting of over 130 executives at a joint
meeting of the members of the Drug, Chemical,
and Allied Trades (DCAT) group and the Institute
for Supply Management (ISM) Pharmaceutical
Forum in September, 2002, the results of
the study were
presented to executives who were involved
on both sides of the issue. Many of the
members of the DCAT group were direct suppliers
to the ISM Pharmaceutical companies represented
(including GlaxoSmithKline, Roche, Bristol
Meyers Squibb, Bayer, Merck, and many others).
Another presenter at the meeting
was a senior executive representing a minority
business enterprise packaging supplier to
the pharmaceutical industry. This representative
presented the “Voice of the Supplier”,
and described his recent experiences in
participating in reverse auctions.
The supplier presentation at the meeting
reflected a perspective on reverse auctions
from the standpoint of a minority business
supplier. Although the presentation of our
results and those of the supplier were prepared
independently, it was remarkable how well
our results were validated. The supplier
began describing the nature of their business,
which specializes in the procurement and
distribution of over 10,000 supply chain
items associated with indirect packaging
materials and packaging equipment. The executive
also noted the important business case associated
with using a minority supplier. Given the
changing demographics, need to use a minority
business enterprise (MBE) for federal and
government contracts, and for other business
reasons, buying from an MBE makes good business
sense. [See my 1/13/03 column on minority
supplier contracts.] Within the context
of a reverse auction, however, these issues
often become overlooked.
The executive then went on to describe his
recent experiences in participating in reverse
auctions as a supplier:
Experience 1 – In 2000, the
company (Bi-State Packaging) bid on a multi-item,
multi-location requirement. They met the
reserve price, and were awarded the bid.
To date, however, they have received no
business. Why? The company simply turned
around and asked the incumbent supplier
to match Bi-State’s price (which they
of course did, and retained the business.)
Experience 2 – In 2001, Bi-State
Packaging bid on a stretch film product
used in packaging, with delivery to multiple
locations. The buying company failed to
provide detailed specifications – and
although Bi-State met the reserve price
and beat out seven other manufacturers,
one company came in lower than they did:
Bi-State’s vendor! This vendor is a
manufacturer of film, but does not understand
how the original buyer is using their product.
Thus, although their price beat out Bi-State’s
bid, the buying company is using 300% more
product because it is not running correctly
in their machines and is resulting in more
waste! In effect, Bi-State was not only
providing the film – but was helping
the buyer to use it properly in their machines
– so instead of using 250,000 pounds
of film per year – the buyer was now
using 1 million pounds of film per year
at a substantially higher total cost.
Experience 3 – In 2002, Bi-State
Packaging bid on a paper product used in
multi-locations. Again, the buyer provided
incomplete specifications. Bi-State met
the reserved price, but was not awarded
the business and was not told why. When
they asked to receive the cost breakdowns
provided by other suppliers, they were told
this would be forthcoming. Although the
auction took place in May, it was not until
September that the cost breakdowns were
finally sent.
Experience 4 – In 2002, Bi-State
Packaging bid on a tape used in multiple
locations. The specification provided by
the buyer asked for “scotch tape”
– and specified that they would be
using 20,000 rolls! This seemed a bit odd
– so the sales person asked the buyer
to provide more detailed specifications
and requirements, as this seemed like an
erroneous specification. The buyer, after
two or three weeks, called back and told
the sales person that the cost of gathering
the specifications and alternative product
testing were too high! Although the salesperson
offered to carry out and determine the specification
data collection and test the items for use
in the facility, no bid opportunity was
offered.
It was clear from both of our presentations
that there are many concerns for buyers
and sellers in using reverse auctions. One
person attending the meeting was extremely
upset with our presentations – a sales
representative from a consulting company
exhibiting at the meeting, selling their
reverse auction software!
Follow-up discussions with heads of procurement
from Bristol Myers Squibb, Schering Plough,
Alcon Laboratories/Nestle, GlaxoSmithKline,
Pfizer, Pharmacia, Merck, Alkermes, and
Hoffmann LaRoche presented additional insights.
There was major agreement with the two presenters,
that reverse auctions can be a valuable
tool, however, it cannot be a universal
answer to today's needs in supply management.
Used properly and ethically it is extremely
valuable in arriving at true market pricing
for commodities and services as they are
specified. However, only select items lend
themselves to auctioning. The confidentiality
of data shared between the auction provider
and the buyer is of the utmost concern to
the sell side. The awarding of the contract
to other than the low bidder is a major
concern to the sell side. The lack of dedication
to an account, the lack of additional service,
and lack of focused quality improvement
after award is of serious concern to the
buy side.
Uptake of this tool in this industry has
only been a recent supply strategy, and
not enough time has elapsed to determine
whether a second round of reverse auctions
can be valuable. However, there was consensus
that the second time around was not as productive
for the buyers, unless there had been a
major shift in market dynamics. In most
cases there hadn't and the return to the
buying organization was a mere fraction
of what had been achieved the first time
around. And the sellers suspect that the
return didn't cover the cost of the entire
process for the buyers.
Sincerely,
Rob Handfield
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