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What’s Beyond Price Driven Auctions?

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Learn about the importance of factors beyond price to both the success of your sourcing events, and to the long-term value you receive from your suppliers. ...

Learn about the importance of factors beyond price to both the success of your sourcing events, and to the long-term value you receive from your suppliers.

For more information, please visit:
Emptoris website: http://www.emptoris.com/
Emptoris blog: http://emptorisinc.blogspot.com/
YouTube channel : http://www.youtube.com/emptoris

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    What’s Beyond Price Driven Auctions? What’s Beyond Price Driven Auctions? Document Transcript

    • What’s Beyond Price Driven Auctions? By Dr. Olga raskina, EmptOris Emptoris, Inc. www.emptoris.com WBPDA-1/09
    • What’s Beyond price Driven auctions? Recently I came across a news article describing the changes to eBay policy regarding the buyer and seller rating system. One of the changes is to remove the ability to leave negative feedback for the buyers. The notorious eye for an eye rating system will soon be a history. At first I was surprised by this development. I don’t sell often on eBay, but for anyone who does, the rating system was the only way to know anything about your buyer. Then I realized that in reality this just didn’t matter. The rules of any eBay auction are such that the only criterion to select the winner is price. A seller who offered the best price, with a few simple restrictions like being above the buyer’s reserve price, or having a valid shipping address, wins the auction, regardless of rating or any other qualities. While the rating might mean something to the seller, the policy is just not built to accommodate it. Granted, price-only auction is the best choice for a one-time sale of those barely used pair of skates. Such auctions are small and low in complexity. At the other end of the spectrum there are events with quite a bit more at play; where things like participant ratings could make a difference. These include large procurement events, with thousands of items, and a large number of complex parameters far beyond simple price. Transportation procurement events are a perfect example. Companies will procure services for tens of thousands of lanes and evaluate the providers based on dozens of factors, from carriers’ capacity and shipment time, to fuel surcharges, insurance costs and container types. The sheer amount of data to be collected in these events excludes the possibility of conducting them in a real-time auction manner. Such events are usually sealed and multi-round, stretched over weeks or even months. Typical cycle involves suppliers analyzing the requirements and putting together a proposal; buyers collecting and analyzing these proposals, and then potentially repeating the cycle (possibly with some feedback or recommendations to the participants). These two extremes – low complexity auctions and high complexity multi-round events are usually the only two options that are considered for the majority of actual procurement events, leaving everything in the middle to the mercy of fate. The events that I find particularly interesting from this perspective are small size high complexity auctions, with only a few items, and a multitude of interrelated factors affecting the final event outcome. These could be auctions for a complex commodity, for example, bulk quantities of computer hardware, where one would need to account for factors like material, labor, and overhead prices, transportation and storage costs, as well as reliability, performance, and service levels. Events of this type would usually include not more than five to ten items and half a dozen participants. The size of these events allows the advantage of fast-paced real-time auctions. Open competition -- © 001 - 009 Emptoris, Inc.
    • and bidding frenzy can yield multiple attractive offers. Yet the complexity of the items and requirement calls for involved analysis of the offers. Decisions are (or should be) made considering the combination of all the factors. With only two options available to them, many buyers opt for either price-driven competition or an analysis-driven multi-round event. Both approaches will not realize the full potential of the event and the buyers will still leave money on the table. Price-only auctions ignore all other factors, and the outcome, while low on price, could be very high on the utility costs like quality, item specifics, or supplier performance. Sealed multi-round events, on the other hand, will not encourage fierce competition. More savvy buyers try to combine the better of the two worlds, first collecting the bids through the (price-driven) auction, and then conducting the analysis of all other factors. At the first glance this strategy seems to be a perfect solution. More thorough study, however, reveals two major shortcomings of this approach. First, price-only competition does leave out all other factors, even though these factors are still part of the bids and subsequent analysis. The absence of the competition leaves all other elements unchanged. The analysis will select the best combination of bids for the buyer’s policy, but the buyer will miss the opportunity to get better overall deals. Second, the participants could feel deceived, as they were forced to lower their prices, yet some or all of the business was awarded on other criteria and they were not given an opportunity to provide counter-offers on other elements. Had they known about other bidding dimensions, they would have had a chance to provide different competitive offers, which might not always require reducing price, but could for example mean better quality, or faster delivery. Another example could be a buyer’s policy to single-source a group of items. The most favorable response for the suppliers would be to focus on bidding on all items in the group, rather than further squeezing the prices on one or two items. Information on where they stand with respect to price only is not nearly enough to make these types of decisions. Such events require an entirely new strategy; one that will allow a real-time competition on multiple dimensions, and will provide real-time analysis of all aspects of the buyer’s awarding policy. Such a strategy offers the participants the most up-to-date information about the current status of their bids with respect to such policy. If in addition the buyer will choose to share some of the policy details, the suppliers will be equipped with a wealth of information on what factors affect the buyer’s decision making. They will be able to see immediately where they stand in the event and respond with various complex offers along their strength points. Implementation of a new auction strategy of this kind will, of course, demand a commitment from all players. -- © 001 - 009 Emptoris, Inc.
    • Buyers will need a deeper understanding of the structure and driving factors for each event and will have to be able to develop an appropriate strategy in each case. They will also need to think ahead and narrow down the awarding policy as a part of the event set-up. The set-up will have to be thorough and realistic. For example, if the buyer decides to dual- source a group of items, they will need to ensure an adequate number of suppliers are invited to bid on these items. If an item quality is a decision factor, the suppliers should be required to provide the quality description. Buyers will need better, more extensive communication with their suppliers to explain the bidding rules and the awarding policy for each event. Suppliers will also need to think ahead about what values and combinations of bidding elements are acceptable for them, as there will not be much time to collect and analyze this information during the real-time auction bidding. They will have to implement new or different revenue management policies and modules, and possibly integrate them with the auction tools for fast evaluation and response. Last, but not least, the sourcing software solution providers need to develop adequate real-time auction analysis tools. And this is a hard task to tackle. Current analytic modules are rarely built with an instantaneous response in mind, both in terms of the science and the implementation. These types of analytic tools require novel approaches in many areas, from front-end consistent multidimensional presentation to back-end scientific machinery. Off-line auction analysis is hard in itself, but on-line analysis is an order of magnitude harder. While there has been a significant research and technology creation effort devoted to standard off-line auction analysis and optimization, investigations into these topics, but the scientific community is yet to embrace the necessity of business-driven real-time auction analytics. Unlike at eBay, changes in all of this will not come quickly. Buyers, suppliers and technology will have to graduate to a new level of sophistication. Yet, we already observe the procurement leaders starting to realize real benefit from efforts in [advanced optimization]. And technology leaders continue to invest in developing cutting-edge tools to facilitate growing and ever more complex demand. -- © 001 - 009 Emptoris, Inc.
    • about Dr. Olga raskina lead scientist, Emptoris As Lead Scientist of Emptoris Olga has responsibility for advanced science projects for all of Emptoris’ products – Sourcing, ECM, and Spend Analysis. Olga has been with Emptoris for 6 years, developing the innovation and scientific methods that power many of Emptoris’ analytical capabilities across the product suite. Her responsibilities include assessing market needs and opportunities for advanced science and working closely with the Product Management team to define advanced technology solutions. She also works very closely with the engineering organization on technical assessments, scientific prototyping, and implementation of the advanced science modules. Olga has Ph.D. degree in Operations Research from Columbia University. about Emptoris Emptoris is a world leader in innovative supply and contract management software solutions that empower enterprises to realize best value and accelerate profitable growth. Emptoris solutions are used by successful Global 000 companies in every industry. Customers include Boeing, ConocoPhillips, GlaxoSmithKline, Kraft, Motorola, Owens Corning and Syngenta. -- © 001 - 009 Emptoris, Inc.
    • For more information about Emptoris, visit: www.emptoris.com, call 1.781.993.9212, or email sales@emptoris.com. Emptoris, Inc. 00 Wheeler Road, Burlington, MA 0180 tel 781-99-91 • fax 781-99-91 • www.emptoris.com © 001 - 009 Emptoris, Inc.