FAQs
5 FREQUENTLY ASKED QUESTIONS - BASIC
1. My team currently is good at cutting Purchase Orders and is pretty good at chasing them down. I know there’s more to supply chain out there, where do I start?
This is extremely common in small teams: buyers cut POs quickly and accurately and know the ERP system but aren’t really doing “strategic sourcing.” If you’re looking to start really building value in your supply chain and purchasing teams, start by making sure you have a good category taxonomy in place (READ MORE). Then pick some key categories and run a Request for Proposal in categories where you have multiple competitive suppliers (READ MORE). From here, you can start working on building category strategies (https://passwallsolutions.com/its-not-category-management-without-a-category-strategy/) and working your way toward a more mature supply chain in order to build more value and reduce your bottom line (READ MORE). If you’d like help on this journey, let’s chat. You won’t become a supply chain like Unilever or Target overnight, but I guarantee there’s value to be had in your purchasing.
2. I’ve been tasked with a huge savings goal and in a world of global uncertainty, tariffs, natural disasters, and supply chain disruptions, it’s proving really hard to meet. What can I do?
My first response is to ask if you’re negotiating every bid or just taking the quotes and moving forward? Or when was the last time you really tested the market? We all have categories where there’s only one available or approved supplier. But there are lots of categories where we simply don’t have time to run a good negotiation. E-auctions are one option for negotiating bids after RFP, or a more time-intensive direct negotiation is also an option. We don’t want suppliers to go out of business, but we also don’t want to be paying well above market pricing while our competitors profit through lower costs. E-auctions drive pricing to the true market price when done correctly.
3. What is an e-auction?
An e-auction is when suppliers bid down (typically by reducing their price) to compete for business from a buyer. Supplier A might bid $5.00 per widget, and Supplier B might bid $4.95 per widget. Supplier A would see their own bid rank as 2 and their own bid, but usually no other information. They might lower their price to $4.90 and then see their rank change from 2 to 1. There are lots of options for what to show suppliers and how to set up e-auctions, but this is the simplest example. The auction continues until suppliers have reached their bottom value. While usually done for pricing, they could also be done for lead times or scope three emissions. Or a forward auction (where bids increase) could be run for rebates. They’re a flexible negotiation tool in a procurement toolbox, nothing more or less.
4. I’ve heard e-auctions destroy supplier relationships and that suppliers hate them. So why would I ever use e-auctions?
You’re right, e-auctions have done that. They still do in many places, it’s super easy to build an auction that becomes a race to the bottom and destroys your supplier relationships. That’s why they have to be used thoughtfully and done right. An e-auction for a complicated category that’s run without an RFP first, considers only cost (not total value), and doesn’t communicate well with suppliers will make a big mess. That’s why Passwall Solutions is here to help. People like to say e-auctions are a hammer, but I prefer to think of them as a chainsaw: Super effective and surprisingly flexible, but require careful training and special equipment to use correctly without hurting anyone (READ MORE)
5. What if I don’t have e-auction software?
There are lots of software-as-a-service options that can help you run an e-auction for a few key categories without going through a full implementation. Passwall Solutions has multiple options to help in this space that require no software purchase at all. If your goal is value for your business, there are multiple ways to make that happen.
6 COMMONLY ASKED QUESTIONS - TARGETED
1. When should we use an e-auction vs. a Request for Proposal (RFP)?
This is one of the most common questions, and everyone thinks the answer is different than it is. Yes, MRO or laptops can be easy and straightforward for auction. But really the best category is one that meets one of these three criteria:
The resources to fill the sourcing need vary: This means you’re asking, “who can meet this need this week?” It might be, “who has construction crews?” or “who caught a lot of fish this week or processed a lot of chicken for my cafeteria?” Both of those are real world examples where we’ve seen great value from an e-auction because it’s about finding the supplier who has the bandwidth to meet a need when those resources change frequently.
Suppliers are hungry for business: This is when suppliers are calling you after a bid and asking, “How was my proposal? What can I do to sweeten this deal for you? How can I earn more of your business?” Especially if multiple suppliers are calling, this is a great e-auction opportunity.
High margin suppliers: These are suppliers and categories with a lot of room to give before they reach true market price. Examples include software (and software implementation), financial investments, office furniture, and marketing.
Untouched low $ spend: This is that dreaded tail spend or purchasing card spend. It’s unruly, not worth a lot of money, and costs more than the business realizes to purchase one item from one supplier each year. Pull the tail spend together, find some good distributor partners, and auction the markup they will charge to manage the mess. Cutting 100 suppliers to 3, even with a 15% markup, will save you money and headaches every time. With an auction, you might be able to get that markup down to 10-12%, and you can reduce the inventory in your warehouse at the same time.
2. What’s the best category for e-auction?
This is one of the most common questions, and everyone thinks the answer is different than it is. Yes, MRO or laptops can be easy and straightforward for auction. But really the best category is one that meets one of these three criteria:
- The resources to fill the sourcing need vary: This means you’re asking, “who can meet this need this week?” It might be, “who has construction crews?” or “who caught a lot of fish this week or processed a lot of chicken for my cafeteria?” Both of those are real world examples where we’ve seen great value from an e-auction because it’s about finding the supplier who has the bandwidth to meet a need when those resources change frequently.
- Suppliers are hungry for business: This is when suppliers are calling you after a bid and asking, “How was my proposal? What can I do to sweeten this deal for you? How can I earn more of your business?” Especially if multiple suppliers are calling, this is a great e-auction opportunity.
- High margin suppliers: These are suppliers and categories with a lot of room to give before they reach true market price. Examples include software (and software implementation), financial investments, office furniture, and marketing.
- Untouched low $ spend: This is that dreaded tail spend or purchasing card spend. It’s unruly, not worth a lot of money, and costs more than the business realizes to purchase one item from one supplier each year. Pull the tail spend together, find some good distributor partners, and auction the markup they will charge to manage the mess. Cutting 100 suppliers to 3, even with a 15% markup, will save you money and headaches every time. With an auction, you might be able to get that markup down to 10-12%, and you can reduce the inventory in your warehouse at the same time.
3. How much can e-auctions save, realistically?
We’ve definitely seen as much as 20% reduction in a “standard” auction, and as much as 40%. But those results aren’t typical and so we don’t oversell it. In a full e-auction program, e-auctions typically save another 3% in addition to anything gained from the RFP process. This is that “sharpen your pencil” effect and is true even though many e-auctions will have no reduction at all. No reduction after an RFP is not a failure, it’s an indicator that your RFP already got to market price. That’s great! The supplier said they put their best foot forward from the beginning, you used the auction to make sure you both understood their pricing and value proposition, and now you can move forward with a contract. E-auctions are a quick tool to make sure you’re not leaving anything on the table.
4. What if my suppliers refuse to participate in the e-auction?
Non-participating suppliers is a big part of why we prefer to run an RFP first. This gives the buyer a BATNA (Best Alternative To a Negotiated Agreement) and a fallback position if the e-auction has no reduction. Remember, an e-auction that has no reduction is not a failure: it’s confirmation that the best value was achieved in the RFP.
Make sure you’re actually capturing the value of what the supplier is offering and that you’re not just creating a race to the bottom for price without consideration of service, shipping, tariff, etc. Then focus on the value of e-auctions to suppliers:
Transparency - Suppliers get information about where they are in the marketplace (without revealing confidential data) and can use that information to refine future bids (or this one).
Clarity - The interactive bid process allows a company to be perfectly clear about which items are driving the award decision, lets the buying company refine the right items so we have a true apples-to-apples comparison, and makes sure that a supplier’s understanding of the specs and pricing matches the company’s understanding of the specs and pricing.
Speed - Suppliers know immediately on conclusion of the event if they were competitive and likely to win the business. There is no delay of weeks of waiting for analysis, approvals, or notification.
5. What’s the right e-auction type for our bid (English/Dynamic, Dutch, Japanese)?
Typically in the US, start with English/Dynamic e-auctions. These provide the suppliers the most information and benefit and are the most familiar, and are what practitioners are usually describing when they describe an e-auction or reverse auction. Reverse Dutch auctions are when the price increases over time and the first supplier who jumps in wins the auction. Japanese auctions are where the price decreases over time and the suppliers have to decide at each price interval whether they are still willing to sell for that price or not. Both Dutch and Japanese are more useful when there are few suppliers in a market, when speed is particularly important, or when suppliers are trying to “game” the typical e-auction system in some way.
6. Can suppliers see who else is invited/participating?
No, suppliers cannot see who else is in an e-auction. Unless chosen by the buyer settings, they also cannot see other supplier bids. The most common exception is if the buyer chooses to show the lead bid in order to let suppliers know what they have to bid to win the business.
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