13414_Cover 4/11/03 10:11 AM Page 3 The Role of Reverse Auctions in Strategic Sourcing . by Stewart Beall CAPS Research Craig Carter, Ph.D. Robert H. Smith School of Business University of Maryland Phillip L. Carter, D.B.A. CAPS Research W.P. Carey School of Business Arizona State University Thomas Germer Graduate School of Management WHU, Otto Beisheim University Thomas Hendrick, Ph.D. W.P. Carey School of Business Arizona State University Sandy Jap, Ph.D. Goizueta Business School Emory University Lutz Kaufmann, Ph.D. Graduate School of Management WHU, Otto Beisheim University Debbie Maciejewski CAPS Research W.P. Carey School of Business Arizona State University Robert Monczka, Ph.D. CAPS Research W.P. Carey School of Business Arizona State University Ken Petersen, Ph.D. W.P. Carey School of Business Arizona State University CAPS RESEARCH 2003 13414_Text 4/11/03 8:28 AM Page 1 The Role of Reverse Auctions in Strategic Sourcing . by Stewart Beall CAPS Research Craig Carter, Ph.D. Robert H. Smith School of Business University of Maryland Phillip L. Carter, D.B.A. CAPS Research W.P. Carey School of Business Arizona State University Thomas Germer Graduate School of Management WHU, Otto Beisheim University Thomas Hendrick, Ph.D. W.P. Carey School of Business Arizona State University Sandy Jap, Ph.D. Goizueta Business School Emory University Lutz Kaufmann, Ph.D. Graduate School of Management WHU, Otto Beisheim University Debbie Maciejewski CAPS Research W.P. Carey School of Business Arizona State University Robert Monczka, Ph.D. CAPS Research W.P. Carey School of Business Arizona State University Ken Petersen, Ph.D. W.P. Carey School of Business Arizona State University Copyright © 2003 by CAPS Research. All rights reserved. Contents may not be reproduced in whole or in part without the express permission of CAPS. 13414_Text 4/11/03 8:28 AM Page 2 2 The Role of Reverse Auctions in Strategic Sourcing 13414_Text 4/11/03 8:28 AM Page 3 Table of Contents Executive Summary . 7 Defining E-RAs. 7 Overview of the Study’s Methodology . 7 Why E-RAs?. 7 E-RAs Are Controversial . 7 Beneficial Aspects of E-RAs. 8 Dysfunctional Aspects of E-RAs . 9 Benefits to Suppliers . 9 Actual vs. Potential Applications of e-RAs . 9 E-RA Spend Dollars, Percentages, and Trends . 9 Sustainability of the Use and Economic Value Add of E-RAs . 10 Non-User Observations and Issues . 11 Ethical Issues Related to E-RA Use . 12 Conclusions . 13 Executive Overview . 14 Introduction . 22 Defining E-RAs. 22 Reverse vs. Forward Auctions . 22 Objectives of the Study . 23 Overview of the Study’s Methodology . 23 Why E-RAs? . 24 Top Management’s Expectations and Support of E-RA Use. 25 Benefits/Dysfunctional Aspects of E-RAs . 26 Direct Cost Reductions . 26 Biddable Attributes . 26 E-RAs Can Create Markets . 26 Cycle-Time Savings for Buyers and Suppliers . 27 Increased Buyers’ Reach . 27 Total Cost Analysis . 27 Price Visibility . 27 Transparency of the Purchasing and Supplying Processes. 28 Overall Process Efficiency/Productivity . 28 Other/Indirect Savings . 28 Benefit/Cost Justification . 28 Dysfunctional Aspects of E-RAs. 28 CAPS Research 3 13414_Text 4/11/03 8:28 AM Page 4 Benefits to Suppliers . 29 Actual vs. Potential Application of E-RAs. 29 The Strategic Context of E-RAs. 30 The E-Oriented Strategic Sourcing Process . 30 Spend Analysis and Opportunity Assessment . 30 Develop E-Sourcing Strategy . 32 Identify Potential Suppliers . 32 Issue and Evaluate Returned RFxs. 32 Develop Reverse Auction Strategy . 32 Hold the Reverse Auction . 33 Award Business If Conditions Are Met. 33 Follow-Up and Re-Sourcing . 34 The Interaction of E-RAs and the Other Components of the Strategic Sourcing Process . 34 Spend Dollars, Percentages, and Trends . 35 E-RA Event Experience. 35 Experience across the Global Economy . 35 Experience across Industries . 37 Experience across Commodity Types. 37 Sustainability of the Use of E-RAs. 39 Sustainability of E-RAs As a Tool. 39 Sustainability of E-RA Results . 40 Sustainability of Supplier Performance . 40 E-RA Implementation Strategies . 42 Implementation of E-RAs in Buyer Organizations . 42 Implementation of E-RAs in Supplier Organizations . 42 E-RA Training for Buyers and Suppliers. 43 Planning and Managing the E-RA Event . 44 The E-RA Sourcing Decision . 44 Preparation for the E-RA Event . 44 Observations from Interviews Regarding Preparation . 45 Role of Cross-Functional Teams in E-RAs . 45 Buyer-Supplier Communication . 45 Buyer-Supplier Communication during an E-RA Event . 46 Role of RFxs in E-RAs. 46 Test Runs, Contingency Planning, and Supplier Training . 47 Non-Participation Rules . 48 Lotting Strategies by Buying Firms . 48 Closing Strategies . 48 Bid Commitment Duration . 49 E-Tool Suite Development. 49 Successful vs. Unsuccessful E-RA Events. 50 Defining Success. ..