Buying and selling goods, is an age-old problem. From prehistoric times humans have thought of new and advantageous ways of buying and selling goods – from either side of the transaction.
From barters and bargaining to online shopping and bitcoin trading, we have always been creative with the way we buy and sell goods. Indeed, we have come a long way since the beginning of human history, and even more so in the last 100 years.
Trading, as we call this process, has been the topic of some serious debates especially in the business world, as businesses are always looking for advantageous ways to buy and sell goods. One heavily discussed way of doing this in the business world, is to utilise e-Auctions. We plan to make e-Auctions the topic of this blog, and look into the benefits and challenges this process can bring.
So, let’s start with a definition.
What are e-Auctions?
“eAuctions promote fair competition and transparency, driven by market dynamics”
An auction is a process of buying and selling goods or services by offering them up for a bid, taking the bid and selling them to the most competitive bidder. An e-Auction is an auction that takes place on an electronic marketplace, to negotiate terms of contract between suppliers and buyers mainly in the industrial sector.
e-Auctions are usually a way to accelerate the negotiation process between buyers and sellers, as it concludes a bidding process providing a dynamic alternative to final negotiations.
There is, of course, more than one option to this process, as there are multiple variations of e-Auctions that can be used in different situations. If you want to learn more about the types of e-Auctions available, and when you should use them, read our The Different Types of e-Auction article.
Why are businesses running e-Auctions?
For the Buyer
For the Buyer, the dynamic nature of auctions drives pricing to levels that cannot be achieved in one-on-one negotiations and saves a significant amount of time compared with these individual negotiations. Auctions also provide objectivity, transparency and auditability in the supplier selection process.
- Price: For most goods and services, e-Auctions can make about 5% difference on the final price you pay. For companies that run e-Auctions on a regular basis, it becomes easier to source more things compared to a more manual process, but they still need to consider the value and clearly set out their success criteria.
- Transparency: e-Auctions provide a transparent buying environment, as all information about suppliers and their products or services is stored in one central repository. Transparency extends to the availability of the procedure phases and its outcome to all interested parties, while also reducing the effort that goes into the process.
- Best total cost: e-Auctions can help the buyer obtain the best value for money, as, besides the costs, the bids also track contract terms and conditions, delivery dates etc.
- Zero negotiation costs: it removes the human factor from price negotiations and maintains objectivity. Which can be a real benefit, as not all buyers are good negotiators.
- Market information: e-Auctions are a good way to collect market information and receive market feedback, because it is mandatory for suppliers and buyers to be open and fair and it involves a great deal of communication between parties
With a reduction in manual processes more events can be run on a regular basis, providing increased sourcing opportunities across the organisation. It is always important to remember to clearly set out your success criteria, which may for some items, be much more than pricing alone.
For the Seller
For the Seller, Auctions can reduce the sales cycle time, as award decisions can be made very quickly upon the completion of the bidding event. These awards are made on the basis of more factors than just price, including quality and service levels. Overall, auctions promote fair competition and transparency, driven by market dynamics.
In addition to this, there are a few other benefits to engaging into e-Auctions, from the seller’s perspective:
- Insight into buyer organisation’s culture and structure, helping suppliers determine if they prefer to do business with the buying organisation in the long term
- Helps create discipline in the supplier’s organisation. In preparation for the e-Auction event suppliers need to make sure they present a one face structure to the customer.
- Suppliers can get a better understanding of their competition, helping them create their own competitive advantage.
What can go wrong?
As with any other business process, there are certain things that can go wrong in e-Auctions, and both the buyers and sellers need to keep an eye out for them. These are some of the challenges that we believe companies should consider when running or participating in e-Auctions:
- Supplier organisations are often hesitant to participate in an e-Auction because they feel a supplier may have already been selected, and they may just be a placeholder for the process
- The buyer organisation needs to make sure it provides the bidders detailed specifications that ensure clarity for the suppliers involved
- Some suppliers that could provide lower prices and better terms could be unaware of the procurement auction
- e-Auctions can put pressure on the bidders to outdo the competition. This might mean lowering their prices and adding in extra services, which in return can reduce profitability. The supplier may then reduce its quality or service to compensate.
So, are e-Auctions worth it? We believe so. If preparing beforehand and proceeding with caution e-Auctions can bring value both to the buyers and sellers. e-Auctions create a competitive environment that you just can’t emulate on paper and the dynamic nature of auctions drives pricing to levels that cannot be achieved in a one-on-one negotiation. In addition, it can be a great way to collect market feedback.
If you haven’t tried e-Auctions before, we recommend you give it a chance, as there are a great deal of cloud-based e-sourcing tools that are easy to use, and make the process more transparent and collaborative. Have a chat with our procurement experts to learn more about the process.