Slide1: Julie Pease Julian Latham Understanding eAuctions May 2007


Slide2: We work with customers to reduce the costs of externally purchased goods and services by deploying a unique combination of specialist procurement expertise, advanced eProcurement technology and up to date market information. Our philosophy is to provide a seamless, consistent global service, delivered by local teams that enables customers to achieve process efficiencies, save time and extract maximum value from their procurement projects. TradingPartners – Strategic Procurement Services


Introduction: Introduction


Slide4: Introduction


Slide5: Global TradingPartners Chicago London Milan Munich New York Paris Shanghai Since opening in 2000, TradingPartners has worked with over 200 of the world’s leading companies Key offices


Slide6: Implementation Category Management Sourcing Specifications Spec development Supplier sourcing Supplier database RFI´s Multi-lingual supplier research capability Negotiation management Tenders eRFX Online auctions Scenario development Decision support Samples/testing Final supplier meetings Contract preparation Project management Change management Continuous review of non-contract spend Supply chain management and process efficiencies Optimisation Supplier – buyer communication facilitator Analysis/Strategy Opportunity assessment/ category selection Data management Collection Detailed analysis Verification Spend aggregation Market analysis Current market conditions Future market conditions Cost/contract benchmarking Strategy review/input TradingPartners can provide as much or as little of these services as you require Localisation Management Sourcing Factory Audit Supplier Development China sourcing Strategic Procurement Process An integral part of your strategic procurement team


Slide7: eAuctions: What Are They?


Slide8: eAuctions “provide an electronic forum in which a large number of buyers and sellers can meet and exchange information and bids online, greatly expanding sales opportunities for sellers, and often greatly reducing the purchase price for buyers of bulk or difficult-to-find items”. (‘eProcurement’ by Dale Neef) eAuctions: What Are They?


eAuctions: Why eAuctions?: eAuctions: Why eAuctions? TRADITIONAL PROCESS 2-3 iterations with 3-4 suppliers in 3-4 weeks


eAuctions: Why eAuctions?: eAuctions: Why eAuctions? TRADITIONAL PROCESS 2-3 iterations with 3-4 suppliers in 3-4 weeks ONLINE AUCTION More than 20 iterations with 10-20 suppliers in 2 hours ‘Open competition’


Slide11: eAuction Types


Slide12: English eAuctions rely on active competition among bidders and are usually best where there are four or more suppliers bidding. REVERSE ENGLISH These auctions are usually recommended in categories where there are only a small number of suppliers. Japanese eAuctions do not divulge market pricing and shift the balance of power away from incumbents to new entrants. REVERSE JAPANESE This type of eAuction should be used when the supplier has something else to offer the buyer, other than the product or service they are negotiating. For example, retail suppliers would generally compete on price, but they may also be able to offer the buyer more trade marketing money (to help promote the product) than other suppliers. MULTI-DIRECTIONAL eAuction Types


Slide13: eAuction Types With weighted eAuctions, high quality/high price suppliers can compete effectively on a value for money basis. The final price ends up being a truer fair market price than the final price in a price only eAuction. Allows buyers to emphasise their quality and service levels before the eAuction. WEIGHTED For complex categories this type of eAuction is most likely to deliver the buyer what the buyer really wants at a fair market price. Allows suppliers to bid on levels of quality and service as well as price during the eAuction. MULTI-ATTRIBUTE


Slide14: Auction Types Decision Tree Are there significant switching costs or other differences in value across qualifying suppliers? Is there significant flexibility for suppliers to offer alternative specifications (e.g. warranty, delivery terms, service level)? Is the supply base large enough to generate significant competition? Weighted eAuction Multi attribute eAuction Yes Yes No No Are some of the elements negotiable upwards, e.g. rebate percentages? Yes No Japanese eAuction English eAuction Multi-Directional eAuction Yes No


Slide15: eAuction Game


Game Background: Game Background ACME Plc is looking to renew its contract for plumbing fittings Plumbing fittings can have different quality levels – classified as Gold, Silver or Bronze. Gold is the highest quality level. Leading suppliers have been invited to tender for this contract. Suppliers have already been pre-qualified against a strict set of requirements. In particular, ACME Plc has specified that the quality of the plumbing fittings must be at least bronze standard.


English eAuction Rules: English eAuction Rules The auction will open at a price of £420,000 Each supplier must improve on their previous price by at least £1,000. There is no need to beat the leading bid Bids must be in round £1,000 You cannot match the current leading bid The auction will end when no new bids are received Raise your supplier card in the air to place a bid


Multi-Attribute eAuction Rules: Multi-Attribute eAuction Rules In addition to their price bid, each supplier may bid on quality. Quality bids are valued as follows: Gold 30,000 points Silver 12,000 points Bronze 3,000 points Price bids must be in round £1,000 Suppliers’ bids will be modified according to the added value presented by their quality. Non-incumbents bids are further modified by a £15,000 adjustment to reflect switching costs This modified bid is called a comparator score, e.g. if a non-incumbent bids £420,000 for a Quality level of Silver then the comparator score is 420,000 – 12,000 + 15,000 = 423,000 if the incumbent bids £420,000 for a Quality level of Bronze then the comparator score is 420,000 – 3,000 = 417,000 Prices can be increased or decreased during the auction, as long as the comparator score decreases with each bid Tied bids are allowed, however the supplier who places the bid first will be considered the winner.


Japanese eAuction Rules: Japanese eAuction Rules The auction will open at a price of £420,000 The auction manager will decrease the price level initially in £5,000 steps and then in £1,000 steps At each price level suppliers must accept to supply at that price level, or withdraw from the auction All suppliers place their bids simultaneously Raise your supplier card in the air if you are accepting the stated price level The auction manager will continue to decrease the price if one or more suppliers have bid at the current price level


Slide20: Questions? Comments? Thoughts?


Slide21: One South Dearborn Chicago, IL 60603 +1 312-857-3000 – Tel +1 312-857-1870 – Fax US Headquarters 54 Jermyn Street London SW1Y 6LX +44 20 7261 0000 – Tel +44 20 7261 0066 – Fax Europe Headquarters 31/F, Jin Mao Tower 88 Shi Ji Avenue Pudong, Shanghai, 200120 +86 21 28909057 – Tel +86 21 28909999 – Fax Asia Headquarters


Buyer Platform: Buyer Platform


Supplier Platform: Supplier Platform


Slide24: Supplier Activity Graph


Slide25: English eAuctions rely on active competition among bidders and are usually best where there are four or more suppliers bidding. REVERSE ENGLISH These auctions are usually recommended in categories where there are only a small number of suppliers. Japanese eAuctions do not divulge market pricing and shift the balance of power away from incumbents to new entrants. REVERSE JAPANESE This type of eAuction should be used when the supplier has something else to offer the buyer, other than the product or service they are negotiating. For example, retail suppliers would generally compete on price, but they may also be able to offer the buyer more trade marketing money (to help promote the product) than other suppliers. MULTI-DIRECTIONAL eAuction Types Benefits


Slide26: eAuction Types Benefits With weighted eAuctions, high quality/high price suppliers can compete effectively on a value for money basis. The final price ends up being a truer fair market price than the final price in a price only eAuction. Allows buyers to emphasise their quality and service levels before the eAuction. WEIGHTED For complex categories this type of eAuction is most likely to deliver the buyer what the buyer really wants at a fair market price. Allows suppliers to bid on levels of quality and service as well as price during the eAuction. MULTI-ATTRIBUTE