E-catalogues, e-auction and reverse auction
This section begins with a look at electronic online data storage, the infrastructure for e-sourcing. Then, we proceed to explore internet auctions and issues encountered with conducting reverse auction.
1. Online or electronic catalogue (e-catalogue)
Printed catalogues or product lists provide specifications, prices and frequently, illustration of the items that suppliers can provide. The disadvantages of hard copy catalogues are that they may be obsolete even before they are published and are too slow to provide information in a dynamic marketplace.
An online catalogue is a digitised version of a supplier’s catalogue. It benefits both buyers and suppliers in that they:
a. Facilitate real-time two way communication between buyers and sellers.
b. Allow for the development of closer buyer-supplier relationships due to improved vendor services and by informing buyers about products or services of which they might otherwise be unaware.
c. Enable suppliers to respond quickly to market conditions and requirements by adjusting prices and repackaging.
d. Virtually eliminate the time lag between the generation of a requisition by a catalogue user and the issue of the purchase order as:
i. Authorisation, where required, can be done online and notified and confirmed by email.
ii. Users are authorised to generate their own procurements (subject to value and item constraints), the order can be automatically generated without the intervention of the Procurement function.
There are three types of e-catalogue:
a. Sell-side catalogues: These provide potential buyers with access to the online catalogues of a particular supplier who provides an online procurement facility. Sell-side catalogues provide many benefits to suppliers, including ease of keeping the contents up to date, savings on advertising costs and the costs of processing a sale. The benefits to potential buyers include 24/7 access to information and ease of ordering.
However, they also have disadvantages. Buyers may not have sufficient time to surf all the available supplier websites. Buyers tend to be overly dependent on particular suppliers as training in the use of new software may be required if suppliers are changed.
b. Buy-side catalogues: These are catalogues created by the buying organisations. Normally, such catalogues are confined to goods covered by pre-negotiated prices, specifications and terms and run by a program that is integrated in the buying organisation’s intranet.
The benefits to buyers of such catalogues include reduced communication costs, increased security and many catalogues can be accessed via the same intranet application. However, the compilation and updating of buy-side catalogues does require a large investment in clerical resources that will be uneconomical for all but the largest organisations. Suppliers wishing to be included in the catalogue will also be required to furnish their content in a standard format. For suppliers dealing with a large number of buyers, the workload in terms of providing information in the form required by each online catalogue will be unsustainable.
Figure 2.7 shows an example of the operation of buy-side catalogues.
Figure 2.7 Buy-side catalogues
c. Third-party catalogues: The disadvantages of sell- and buy-side catalogues can be minimised by outsourcing the process to an electronic marketplace or buying consortium. This can be done by linking the in-house e-procurement catalogue to a master catalogue administered in the marketplace. Standard information for inclusion in the ‘market site’ or ‘master catalogue’ is provided by the suppliers. This information is then made available to the in-house catalogues of individual buying organisations. The responsibility of managing and updating product and other information rests with the suppliers. In this case, the suppliers have a good incentive to provide the information in the specified standard format as the master catalogue will be available to a large number of buying organisations.
Product information can be divided into two parts — public and encrypted. Public information will include a basic product description
and specification, often accompanied by an illustration or diagram, while encrypted information will provide details of prices, discounts and similar matters applicable to specific buyers that cannot be accessed by unauthorised users. Figure 2.8 shows an example of the third-party catalogues.
Figure 2.8 Third-party catalogues
2. Online auctions (e-auctions)
Auctions have been used for commercial transactions for centuries and there are many different types of auction methods. Generally, auctions can be classified on the basis of competition, between sellers or buyers; and forward or descending prices. For example, the online property and used cars auctions in Malaysia is a price auction with multiple buyers. Other examples are Lelong Malaysia Auction and Malaysia Free Auctions, which include multiple items. These various auction models have been married with internet technology to provide buyers with new techniques for determining price, quality, volume allocations and delivery schedules with suppliers.
The actual internet auction events can be conducted in a number of ways, including open offer auctions, private offer negotiations, posted prices and reverse auctions.
a. In open offer auctions, suppliers can select the items they want to place offers on, see the most competitive offers from other suppliers for each item, and enter as many offers as they want up until a specified closing time.
b. In private offer auctions, the buying organisation offers a target price and quantity. Suppliers select the item(s) they wish to bid on and enter an offer by a specific time. The buyer evaluates each supplier’s offer and enters a ‘status’ for each item. The levels of status are accepted: the supplier is awarded the contract, contingent on final qualification; closed: the supplier may no longer submit offers for the item in question; BAFO: the supplier who receives electronically the best and final offer status may submit one more offer for the item; or open: the supplier may submit another offer. Bidding may be continued for as many rounds as necessary to accept or close all items.
c. In posted price auctions, the buyer indicates the price that is acceptable and the first supplier that meets this price gets the award.
3. Reverse auctions
A reverse auction is an online, real-time, declining-price auction between one buying organisation and a group of pre-qualified suppliers. The bidding process is dynamic, where the suppliers compete for business by bidding against each other online using specialised software. Suppliers are given information concerning the status of their bids in real time and the supplier with the lowest bid or lowest total cost bid is usually awarded the business. An example of this auction could be a Penang multinational company selecting several local suppliers to participate in the e-auctions or e-bidding of its packaging items. The company, which offers with lowest price, would be invited to submit its sample product for quality approval. The contract will be awarded later subject to this sample approval. However, this e-auctions is still not popular among the smaller companies as the system implementation is quite costly.
There are various issues to consider when using reverse auctions for sourcing goods and services:
a. When to use reverse auctions? Most reverse auctions are used for spot buying and to eliminate the time-consuming offline process of selecting suppliers, requesting quotations and comparing quotes received. Reverse auctions are particularly useful in the following circumstances:
i. When there are clearly defined specifications for the goods or services, including technological, logistical and commercial requirements.
ii. Existence of a competitive market and a sufficient number of qualified suppliers willing to participate in the auction.
iii. When there is an understanding of the market conditions in order to set appropriate expectations for a reserve price.
iv. When buyer and seller are familiar and competent in using the auction technology.
v. When there are clear rules concerning how the auction will be conducted, such as conditions for extending the length of the auction and award criteria.
vi. When the buyer believes that the current price is sufficiently high so that the savings justify the use of a reverse auction.
In general, reverse auctions were not considered appropriate for complicated products or projects requiring collaboration or considerable negotiation.
b. Advantages of reverse auctions: Reverse auctions provide benefits to both buyers and sellers. The benefits to buyers include:
i. Savings over and above those obtained from normal negotiations as a result of competition.
ii. Reductions in acquisition lead times.
iii. Access to a wider range of suppliers.
iv. A global supply base can be achieved relatively quickly.
v. Sources of market information are enhanced.
vi. More efficient administration of requests for quotations (RFQ) and proposals.
vii. Auctions conducted on the internet generally provide total anonymity so time is not wasted on seeing suppliers’ representatives.
The benefits for suppliers include:
i. An opportunity to enter previously closed markets, which is particularly important for smaller firms.
ii. Reduced negotiation timescales.
iii. Provision of a good source of market pricing information.
iv. Clear indications of what must be done to win the business.
c. Disadvantages of reverse auctions: Some objections to reverse auction are that they:
i. Are based on a win-lose approach — the seller is trying to get the most money while the buyer is after the best deal and the goal is to screw your opponent to win either a good deal or a profitable deal at the other person’s expense, so that logical progression is always towards cheating and, therefore, such a system cannot be sustained without burdensome watchdogs and regulators.
ii. Can cause an adverse shift in buyer-seller relationships as the supplier may feel exploited and become less trustful of buyers.
iii. Can have long-term adverse effects on the economic performance of both suppliers and buyers. First, some suppliers may not be able to sustain sharp price reductions in the long term. Second, buyers will eventually have reduced supplier base as suppliers that cannot
compete at the lower price levels may be removed from the buyer’s approved supplier list. Moreover, in order to ensure that the exact goods and services required are obtained, considerable time may be needed to complete details specification sheets, when time can be ill-afforded in a fast-paced world.
d. Ethical issues with reverse auctions: There are a number of ethical issues that buyers and sellers need to be concerned with when participating in reverse auctions.
Potential ethical transgressions on behalf of buyers are:
i. Buyer knowingly accepts bids from suppliers with unreasonably low prices.
ii. Buying firm submits phantom bids during the event to increase the competition artificially.
iii. Buyer includes unqualified suppliers to increase price competitions.
Some potential ethical issues involving suppliers are:
i. Suppliers act in collusion.
ii. Suppliers bid unrealistically low prices and attempt to renegotiate afterwards.
iii. Suppliers participate in the event but do not bid. This behaviour is referred to as ‘bird watching’ and is a strategy designed to collect market intelligence. Some reverse auction events have participation rules where suppliers must enter bids before gaining access to the results.
Buyers should always behave in an ethical manner and avoid the appearance of ethical conflicts in order to protect the reputation and integrity of their firm and individuals involved. Communicating clearly defined rules of the reverse auction upfront helps avoid ethical misconceptions.
|Please read about ‘the benefits of e-procurement’ on pages 396 – 401 and about ‘electronic auctions’ on pages 407 – 415 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).|
|Question to activity 2.5
||Suggested answer to activity 2.5