Buy better

Citation

(2004), "Buy better", International Journal of Productivity and Performance Management, Vol. 53 No. 6. https://doi.org/10.1108/ijppm.2004.07953faf.001

Buy better

Despite the rise and fall of the dot.com era, e-procurement has continued to promise a way of improving the cost-efficiencies of purchasing and supplies management. Buyers’ Internet-based auctions – or electronic reverse auctions – came onto the purchasing scene in the late 1990s, and were made possible through the development of Internet-based applications. These auctions have subsequently grown almost tenfold each year. In fact, it is estimated that around 2,500 auctions took place in the UK last year. Part of their success is attributed to the ease with which they can be run and the rewards that they bring. In the last 100 auctions run by British Telecommunications (BT) and Oracle, for example, typical price savings were between 15 and 22 per cent.

Electronic reverse auctions place the bid phase of a tender exercise online, with suppliers competing anonymously against each other in real time. The buyer posts their requirement for a product or service on the e-auction Web site or via a request for tender document. The buyer then invites pre-selected suppliers to bid against each other.

A key difference between an Internet-enabled auction and a traditional purchasing process is that it is usually transparent – all suppliers can see their bid along with the current lowest bid of the competing bidders, as well as having the opportunity to re-bid as many times as they wish.

This means that electronic reverse auctions offer at least two major advantages over conventional purchasing processes: they can deliver value for money gains across a wide range of categories by ensuring the most competitive pricing across multiple suppliers and they reduce the time and effort required during the negotiation phase. The time saved can then be spent on more important, strategic procurement issues. The whole process is faster, simpler and more efficient for both suppliers and buyers. It is a win-win arrangement.

The recent UK Office of Government Computing auction framework, for which BT has been chosen as one of the preferred suppliers, recognises these advantages and offers government departments and public authorities a highly effective tool to improve procurement efficiency and demonstrably deliver better value-for-money from public services.

Critics claim that online reverse auctions are unfair, that they put too much pressure on suppliers to reduce prices and that other important factors such as customer service and supplier reliability are bound to suffer, thus damaging the buyer/supplier relationship.

Recent research refutes this. Research conducted by The University of the West of England and supported by the Chartered Institute of Purchasing and Supply, BT and Oracle, took place over a six-month period and surveyed 515 auctions run by 33 different UK private sector organisations.

The research (entitled I-ADAPT or Independent Assessment into the Development of Auctions as a Purchasing Tool) asked buyers how suppliers’ performance had changed since using an auction to establish a new contract. Five key performance indicators were used – flexibility, quality, delivery/reliability, dependability and customer support. The results showed improvements in every measure of between 8 and 22 per cent. Most significantly, the findings indicate that, far from damaging the buyer/suppler relationship, online auctions have the reverse effect. Suppliers should not underestimate the value of knowing the entire range of bids on price and other criteria that they can use when dealing with other customers. Both parties can be better off using e-auctions rather than by conducting tenders in the traditional way.

Aside from the potentially huge time and money savings that can come from electronic reverse auctions, these new technologies are enhancing the whole end-to-end procurement process by joining up tendering across departments and organisations and by improving contract management, purchasing and support. An important development in e-auction technology is in integrating tendering and transaction management into the online process. This enables buyers to more easily manage the procurement process and suppliers to benefit from consistent treatment, ensuring a level playing field.

Price should not be the sole criterion for selecting suppliers. The integration of additional criteria such as delivery and helpdesk support into the online bidding process helps to strengthen the quality of purchasing decisions. For example, BT’s suite of e-auction and e-procurement solutions uses software to allocate numerical values to different categories, attribute different weightings and then incorporates these into the auction process. This gives a representation of the suppliers’ offers which is not merely based on the cheapest bid.

Electronic reverse auctions may sound complicated and for most organisations, public or private, setting up and managing an online auction is not a core activity. To ensure successful auctions key questions should be addressed. Where do electronic reverse auctions fit in the procurement process? Which categories of spend are most suitable? And how do you develop a programme which is sustainable and will continue to offer the same returns in the long term?

Indeed, if the plan is to hold only one or two auctions each year, a do-it-yourself approach is unlikely to see a positive return on investment. There are cost implications in ensuring that the auction process is secure and reliable, for instance. A managed service with minimal up-front investment in hardware and software is likely to be quicker and more cost-effective to set up.

BT offers such a managed service, called BT Transact Source. BT has been providing e-auction services in both the private and public agency sectors for more that three years, with some notable success.

The opportunities are there for the public sector and the OGC auction framework now makes testing the water easier and less daunting. It ensures that a supplier of electronic reverse auctions can be selected who will work with the government agency or local authority to ensure that not only the technology is put in place but that the e-auction operations fit properly into the procurement processes and meet overall business needs.