SAP White Paper SAP Solutions for E-Sourcing REVERSE AUCTION BEST PRACTICES: PRACTICAL APPROACHES TO ENSURE SUCCESSFUL ELECTRONIC REVERSE AUCTION EVENTS © Copyright 2006 SAP AG. All rights reserved. Citrix, ICA, Program Neighborhood, MetaFrame, WinFrame, VideoFrame, and MultiWin are trademarks or registered No part of this publication may be reproduced or transmitted in trademarks of Citrix Systems, Inc. any form or for any purpose without the express permission of SAP AG. The information contained herein may be changed HTML, XML, XHTML and W3C are trademarks or registered without prior notice. trademarks of W3C®, World Wide Web Consortium, Massachusetts Institute of Technology. Some software products marketed by SAP AG and its distrib- utors contain proprietary software components of other Java is a registered trademark of Sun Microsystems, Inc. software vendors. 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Nothing herein should be construed as constituting an additional warranty. 2 CONTENTS Executive Summary. 4 The Strategic Sourcing Process and Reverse Auctions . 4 Supplier Selection Tools and Benefits . 4 When to Use Reverse Auctions . 6 Selling Auctions to Internal Stakeholders . 7 Ensuring Supplier Buy-In. 7 Choosing the Right Auction Settings . 8 Running an Auction . 10 Conclusion. 11 About SAP Solutions for E-Sourcing . 11 3 THE STRATEGIC SOURCING PROCESS AND REVERSE EXECUTIVE SUMMARY AUCTIONS Procurement organizations have been running electronic Strategic sourcing is a systematic process to formally select a reverse auctions for many years. However, the use of auctions supplier or suppliers to provide products or services. Organiza- has a long way to go to reach full potential. In fact, many tions should build a sourcing strategy with defined expecta- organizations have yet to explore the benefits of auctions. Most tions and benefits. For example, one expectation could be as others have yet to apply auctions to the full range of goods and follows: “Our organization will reduce the number of suppliers services for which auctions can deliver value. with whom we do business from 1,000 to 500.” Reverse auctions are hosted by a single buyer and feature two To achieve such goals, organizations can use a variety of or more suppliers competing for business. Such auctions are processes, such as the request for proposal (RFP) process and commonly used by organizations as a tactical way to achieve the reverse auction process. In the RFP process, a buyer creates, sourcing objectives. issues, collects, and analyzes one or more of the following doc- uments: request for information (RFI), request for quote We have all heard the objections: “Auctions don’t fit the catego- (RFQ), and RFP. Reverse auctions take the supplier selection ry we’re sourcing.” “Our suppliers would never participate.” process a step further, enabling a buyer to collect and compare “Our company does not do business this way.” Every objection price and bid information of two or more suppliers in a real- stems from valid concerns. However, if your organization’s goal time, open bidding environment. is to conduct fair and open competition among your supply base, reverse auctions can be a very effective tool in bringing These strategic sourcing processes are supported by electronic transparency to the sourcing process. tools, including RFx and reverse auction tools. RFx stands for RFI, RFQ, or RFP. Note that the process is referred to as RFP but This white paper provides information that will assist your that the electronic tool is called RFx. organization in driving the use of auctions and – most impor- tant – delivering bottom-line results for your procurement Electronic tools that support automated negotiation can be organization. important elements of a sound strategic process; however, these tools are not strategies in themselves but rather tactical ways to achieve sourcing objectives. Supplier Selection Tools and Benefits Many organizations use electronic RFx and reverse auction tools because of the significant benefits they provide. RFx tools often integrate with reverse auction tools to streamline the supplier selection process. An RFx tool is a Web-based application for defining supplier selection criteria, soliciting information and proposals from suppliers against those criteria, and analyzing suppliers’ propos- als in order to make the best award on a total cost of ownership basis. RFx tools can produce substantial benefits over tradition- al software such as e-mail, Microsoft Word, Microsoft Excel, and so forth. 4 An RFx tool offers the following benefits: When used appropriately, reverse auctions support the goal of • Consistent and streamlined use of RFPs, especially in highly strategic sourcing to significantly reduce the cost of purchases fragmented organizations without sacrificing quality and service. Buying organizations • Well-documented objectivity in the supplier selection can also realize the following benefits of auctions: process, especially for organizations governed by legal • Greater insight into current market pricing compliance • Superior savings as a result of the competitive dynamics • Speedier RFP cycle times by automation and simplification of • Less time spent negotiating best-and-final pricing the RFP response collection and analysis process • Cost savings associated with a paperless process There are virtually no limitations to what can be sourced via reverse auctions, including the following examples: Unlike the process that uses an RFx tool, in which suppliers • Raw materials (such as iron ore, crude oil, and natural gas) have no insight into bids from other suppliers, a reverse auction • Processed goods (such as steel, chemicals, and polymers) is a process in which suppliers participate in an openly competi- • Business services (such as travel, accounting, printing, and tive bidding event in real time, using a Web-based application. legal) Suppliers receive a login and use a Web browser to access the • Components and subassemblies (such as molded or application. Once they are logged in, the software gives them machined parts, electronic components, or finished the following tools to assist in their bidding: products) • An area to place bids • One-time capital buys (such as cell towers or laboratory • Summary information indicating the status of the auction, equipment such as freezers or centrifuges) details about the marketplace, and the supplier’s competitive position in the marketplace • Question-and-answer functionality, such as instant messaging • Online help Auctions generally occur in a compressed time frame, anywhere from 20 minutes to a couple of hours. Typically, the auction provider will also offer a telephone hotline for bidders to call if they have questions during the live auction. The role of an auction is an alternative to one-on-one negotia- tions with each supplier. Auctions are meant to obtain best- and-final bids from qualified bidders; they never eliminate the need to manage a sound sourcing process. 5 WHEN TO USE REVERSE AUCTIONS Guidelines for when and how to use RFP only, RFP plus reverse For companies that are just starting to conduct reverse auction, and reverse auction only, on the basis of spend charac- auctions, the best practice would be to use an RFP process plus teristics, can help you determine the right tool for your an auction. The buyer would use the RFP to prequalify suppliers electronic-sourcing (e-sourcing) strategy. (See Figure 1.) and obtain quotes before running the auction event. By obtain- For example, auctions are not recommended for a spend category ing quotes as part of an RFP process, the buyer gets a good sense with highly customized