KAMandReverseAuction

KAM & Reverse Auction: Impossible co-existence?! Masters thesis by Abhijit Junnarkar, Amit Arya, 2006-2007
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Key Account Management and Reverse
Auction
‘Impossible co-existence?!’
A Masters thesis
Written by
Abhijit JUNNARKAR
Amit ARYA
Guided by
Robert SPENCER
Euromed Marseille
2006-2007

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Acknowledgement
Firstly, we would like to thanks to Mr. Robert Spencer who gave us an opportunity to
learn Key Account Management during the course and write this thesis and Mrs.
Catherine FABRE who motivated us to find out different research topic.
Mr. Simon Menard, Mr. Alexander, Mr. David Kiash, And all the team of Global Cargo
who contributed their valuable time with us and shown keen interest on this topic.
At last we would like to thanks to thanks to Elisabeth for guiding us for research and
finding the books in library.

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Abstract
Today, reverse auction is mostly used in B2B industry. The purpose of this thesis is
to examine the presence of coercion in the common use of reverse auctions for
industrial procurement activities and to maintain relations with each other. Here, we
are trying to find out the ways in which we can manage our key customers in reverse
auction by illustrating the problems that arise. Taking a strategic perspective with
regard to reverse auctions helps Buyers and Suppliers understand that the reverse
auction is a tool (technology is the enabler, not the driver of the sourcing decision)
that can lead to benefits for both sides. While the Buyer may benefit from reverse
auctions by speeding up the negotiation process and achieving breakthrough price
reductions, these benefits may be diminished by damaged supplier relationships.
Our thesis tries to give you an idea about the KAM and its implementation in
Reverse Auction. Here we have given emphasized more on the implementation
process of KAM. Here we have included both the buyer and seller to increase mutual
growth and to make stronger relationship.
We tried to explain that the account management would be more efficient in reverse
auctions if we follow certain precautions. We gave some real examples where some
professional treat all clients at same level and for some KAM is important and
practicing KAM in reverse auction.

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Table of contents
No. Title
1 Introduction
1.1 Background
1.2 Research Problem
1.2.1 Problem Definition
1.3 Purpose
1.4 Delimitations
1.5 Outline of the thesis
2 Methodology
2.1 Research Strategy
3 Theoretical Framework
3.1 Industrial Marketing
3.1.1 Inter Organizational Approach
3.1.2 The Interaction Model
3.1.3 Network strategies in product/service market
3.1.4 Network efficiency
3.1.5 Development of supplier-customer relationship
3.2 Organizational Buying Behaviour
3.2.1 Business buying process
3.3 Relationship Marketing
3.3.1 Focus on customers
3.4 Key Account Management
3.4.1 Relationship development model
3.4.2 KAM planning
3.4.3 How to identify key accounts?
3.4.4 Organisational positioning of KAM
4 Reverse Auction
4.1 Auction
4.2 Reverse Auction
4.2.1 History
4.2.2 Introduction
4.2.3 Issues and Opportunities
4.3 Safety Measures
4.3.1 Buyers subsidy
4.3.2 Post-auction negotiation
4.3.3 Payment to losing bidders
4.4 Online Reverse Auction
4.5 Customer Relationship

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5 Empirical Studies
Recommendations
5.1 Suppliers
5.2 Buyers
5.3 Business relationship management
6 Conclusion

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1 Introduction
This part, we would like to take an initiative to focus on thesis background with
overviews of the research problem and our aim to write thesis. Secondly we would
like to give the scope and limitations of this thesis. At the end of this topic you will find
the thesis outline.
1.1 Background
With the timeline and technological and media improvement, the competition in
business world is going higher and higher. Today, the world is becoming smaller and
smaller to find out the market. Many small firms, with the use of internet, are capable
to expand business around the world. The globalization and internationalisation turn
the business more profitable for customers and more competitive for competitors.
The competition forces the organisation to become more creative and to change the
traditional fashion of working. For an organisation there is always need for update
and change itself constantly.
Today, the global firms facing many challenge like increased buyer’s power, product
inventions, changing buying patterns. But because of difference in world trade,
privatization of firms and technological improvement results the firm to be global.
Since, the customers are different in buying behaviour and their complexity varies,
there is the demand from buyers for different suppliers who meets their needs. This
make the business more inter dependant.
Many multinational companies are developing their market in developing countries as
the cost is lower and the margin is higher. While, in the developed countries the
market is little bit saturated and hence the margin is vary low. In addition, the
competitors are also very high in developed countries. This is also one reason for a
firm to be globalized.
Today customers are more aware than before. The media have played a
considerable role to increase customer awareness. Thus customers are more

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challenging, and more conversant, thus they expect more from the suppliers and
matured in buying. These are the reasons today organizations need to develop new
strategies to turn customer into ‘loyal customer’.
To win these challenges, the suppliers are developing new sophisticated strategies to
match the growing and more demanding needs of the customers. The Key Account
Management (KAM) concept is about developing and building long-term relationships
with each of their major customers, resulting in a win-win situation for both parties.
As the use of information technology is getting widen and widen and because of
customers are more aware, now a days the reverse auction is getting known widely.
In this context, the implementation of KAM is necessary to pop up with this hi-tech
era. The Key Account Management helps the organization to provide batter service
to the most important customers to solve operational and strategic issues by
providing quality service and established stronger business relationship.
1.2 Research Problem
1.2.1 Problem Definition
After verifying the relevance of the questions with our central question her e, we are
focusing the construction of central research question and sub-questions.
Central research question:
Can we implement the Key Account in Reverse Auction?
1.3 Purpose
In this thesis we explain Key Accounts Management and Reverse Auction. The main
aim of this thesis is to find out the possibility to get KAM and Reverse Auction works
together.

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1.4 Delimitations
In practical life, as a professional, the issue I faced that developing relationship
internationally. As all of my customers are from different countries, it taking sometime
difficult for me to design customized offer.
The concept of KAM and its implementation that I learn and practicing is little
modified according to our organizational need.
We have selected some international customers having cosmetic business and
some in cargo industries, which might not possible, but as a student, we here like to
take initiative to learn little bit more.
We did not disclose the name of clients. We use the profiles and studied buying
behavior and problems as a base of our thesis.
1.5 Outline of the thesis
1. Introduction
2. Methodology
3. Key Account Management
4. Reverse Auction
5. Empirical Studies
6. Conclusion

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2 Methodology
Here, we would like to explanation of the method we conducted for the research. We
would like to describe on the method(s) we used in literature. In the next section you
will find the research strategies we used.
2.1 Research strategy
There are few types of research strategies: experimental, survey, archival analysis,
case studies, and history. The research strategy is depends on the research question
and the desired result.
On the based on our work experience, interviews with professionals internationally,
archival (clients profiles in our organization, course conducted during Masters
Degree, information available from white papers, history, and, we have select the
archival analysis (self reviews) as research strategy.

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3 Theoretical Framework
In this chapter we will see how theory of marketing was developed from the basic
concepts of industrial marketing, organizational buying behaviour and relationship
marketing theory to KAM theory. This approach will help us to show better the logical
structure of all the theories from which KAM theory was developed, and today it has
become as one of the business approaches that could create competitive
advantages for the global companies.
3.1 Industrial Marketing
The industrial market theory is based on difference between industrial and consumer
products. There is a major difference in market structure for both kind of products.
The market concentration is bigger for industrial products. We can assume that 20
percent buyers are responsible for 80 percent sellers turnover. The distribution
channels are direct in industrial markets than consumer. The demand in this industry
is very important to the extent, that it is often volatile and fluctuating in respect to the
general economic conditions of the industry. The competition in industrial markets is
so small and , as the industrial needs are so sophisticated , the organizations of
those markets differ from those of consumer ones, which are very organized in
professional manner.
3.1.1 Inter Organizational approach
The main focus in this approach to the industrial marketing is also on buyer and seller
relationships and business transactions taking place between the manufacturer and
the user. The main issue is how the links between industrial firms are organised. The
main goal in this approach is to create a bond, which enhance the dependencies
between the parties involved , which finally prepares them to interact.
Recently, the frame of reference has been extended from those relationships to
include networks of relationships, with term network serving mainly to refer to
environment in which the relationships take place.

3.1.2 The interaction model.
As mentioned the marketing and purchasing of industrial goods is seen as iteration
between buyer and seller in certain environment. The iteration approach is based on
three fundamental assumptions:
1) Both buyer and seller are actively participating.
2) The relationship between buyer and seller is long term.
3) Links between buyer and seller become dependent.
Interaction approach is constituted by four major elements, which are further
subdivided. These are:
• The interaction process which occur between two parties in form of product
,services, information exchange or a financial exchange develops a relationship
which is very important.
• The interacting parties who create this relationship, have their characteristics,
including both organizations and individuals representing them. Factors which
affect them are technology, organization size, strategy, and individuals involved in
relationship.

• Market structure, dynamism, globalization, manufacturing channel, and social
environment in which relationship takes place are the different aspects of this
interactive environment.
• The two important aspects of the relationship are consist of the economic
dimension covering the cost-benefit analysis of the relationship and the control in
terms of powers of the parties involved in relationship.
3.1.3 Network Strategies in product/service markets.
The network strategy consists of three basic sub strategies: web strategy, contact
strategy and competitive strategy.

a) Web Strategy
The web strategy is how company relate itself to the whole market network inclusive
its buyers, distributors and competitors. It relates to how the company should make
use of the mapped network in its marketing efforts in the product/service network.
b) Contact Strategy
The contact strategy (sometimes refers as Linkage Strategy) relates to competition
and shows how to establish and run relationship with customers. It concerns how the
seller creates and maintains direct relationship with customers and distributors. By
using contact strategy, the seller can cooperate more successfully with the customers
and creates trust based relationship with them. The objective of this strategy is to
build long term and mutual beneficial relationships between the suppliers and
customers, dealers and distributors in order to create and add value to final product
through vertical product chain.
The contact strategy could be described using five keys:
- Product
- information and knowledge
- Social
- Financial
c) The competitive strategy
By competitive strategy we means that seller offering solution or services for buyers
problem, thus he creates a position for himself in competitors’ network. The solution
he offers is package consisting of many offers. The main elements of this strategy
are price, quality, service, delivery time and finance.

d) The competitive advantage
The competitive advantage is the crucial part for any company. It means making right
move at right time, above that it also means making a right move in order to find the
mix and sequence of web links over time. The one who makes first move is obvious
to take competitive advantage. It is a desired choice for every international enterprise
to establish itself in international markets. The fact that emerging markets are big and
profitable in future.
3.1.4 Network efficiency
The company aiming to develop the capability of offering total solution to its
customers must distinguish between two types of solution that can be offered:
1) The solutions offered that are satisfy specific customer needs- in which they
are adapted to the individual needs of each customer.
2) The solutions offered that specify general need of customer without any
customization.
In order to offer any kind of solution certain problem solving capabilities are
necessary to be developed. Customer specialist has capabilities for solving problems
and tailoring solutions for each individual customer, while a product specialist profile
has general capabilities.
The second thing to keep in mind is whether the links made with customers are
direct or through some intermediaries. The profiles of customer and product specialist
orient towards direct links. The distribution specialist acts as intermediary with their
own distribution network. If we see strategic profile of a distributor specialist, it is
focused on developing relationships with independent distributors thus keeping
indirect links with its customers through third party. Finally, a distinction can be made
between marketing and manufacturing capabilities, with a company possessing
former ones being purchasing specialist, and also as manufacture specialist
possessing manufacturing capabilities.

However, for a company it is impossible to have only one profile and to develop
capabilities only in one of the above mentioned areas. On the contrary, developing
different profiles, and to them related capabilities, are overlapping and supplementing
each other at different levels in company, in different business segments and
different geographical areas.
3.2 Organizational buying behavior
Researchers doing study on industrial marketing and B2B marketing have always
stressed the importance of having broad and deep understanding of organizational
(institutional and business) buying behavior, upon which to predict and forecast
organizational buying decisions and develop suitable marketing strategies.
The business buying behavior theory is directed towards answering issues such as :
1) What buying decisions does business buyers make?
2) Who participates in buying process?
3) What are major influences influencing buyers?
4) How business buyers make their buying decisions?
In order to understand better the buying behavior researchers tried to indentify who
are the actors that are involved in the business buying process. At the buyer side, the
buying center is usually the unit where most of decision making processes are done
and it involves all the individuals and units that participate in the business decision
making process. All the members of an organization that have any influence in the
buying process can be classified in five groups according to roles they are playing in
the purchase decision process:
1) Users: Members of the organization who use products or services. Usually
they are the ones who initiate the buying proposal and help defining products
specifications.
2) Influencers: Members in organizations buying center who affect the buying
decisions. Technical personnel are usually important influencer, and often help
in defining product specifications and also give information for evaluation.

3) Buyers: Person or a company that makes an actual purchase. They have right
to choose supplier and negotiate the terms of purchase. They may also get the
product altered as per their specifications. Their major role in the process is in
selecting vendors and negotiating. It depends from case to case, but generally
in more complex purchases top level officer also gets involved in negotiations.
4) Deciders: They are the people with the organization’s buying office who have
formal or informal authority to select or approve the final suppliers. When
talking about long term buyer supplier relationship, it’s buyers who act as
deciders.
5) Gatekeepers: They are the people with the organization’s buying center who
control the flow of information to other participants in the buying center and
within the organization. Usually purchasing officers are acting as gatekeepers
and they have an authority to prevent sales people see users and deciders.
It might often happen that the buying center is not defined as a fixed identified unit
within the buying department. Different people are assigned with different buying task
for different products or services. For example one person can take responsibility of
routine purchases for the whole organization and take all the buying decisions alone.
But in complex purchases, the buying may involve 20-30 people from different levels
and departments. For example, to buy capital equipment it involves CEO, CFO and
purchasing manager.

Influencing factors can again classified into four major groups:
1) Environmental
2) Organizational
3) Interpersonal
4) Individual
1) Environmental Factors
It includes factors such as economic, technological, political and cultural factors.
These factors affect the buying decision process. These factors vary from country to
country and needed to know for those countries which have global markets.
2) Organizational factors
If we know companies organizational structure we can make an idea how it can affect
the buying decisions and hence we can use specific approach to negotiate the deal.
This proves to be very important for companies being on global markets as they can
implement strategies towards different organizations with different organizational
management styles , background and culture. That is the reason why multinational
companies have local subsidiary in every country.
In industrial market selection of an appropriate strategy, we must aware of some
organizational trends in buying patterns. For example:
Upgraded purchasing- The most common trend in B2B marketing. Because of global
competitiveness forced the old and traditional purchasing departments to be replaced
with procurement departments which focus on an emphasis on buying at lower costs,
enabled buyer to reach at the best value from fewer and better suppliers.
It resulted in establishing strategic partnerships with fewer strategic suppliers.
Companies having centralized and decentralized purchasing systems are a bit
different in this context.

3) Interpersonal factors
Often buying center in company is informally organized. It becomes difficult to
approach with some strategy because we don’t know if he/she is the decision maker.
So business strategist must take into mind personal factors when approaching a
customer. The most common interpersonal factors influencing buying decisions are
authority and status within the organization.
4) Individual factors
The buying decision process is also based on individuals who are involved in buying
process. Some individuals are ready to take risk and some are not. In addition, some
individuals are seems moderate. This also includes some characteristics such as
participants’ age, education, position within the company, personality and risk
attitude.
3.2.1 Buying Process in Industrial Market
Normally, there are eight steps in any buying process they are explained below:
1) Problem identification:
This is the initial stage where buyer realised that he is in need for some goods or
service to run his business.
2) Problem definition:
After identifying the problem an organisation find out the solution and defines the
general characteristics of the goods or services (either qualitative or quantity)
needed.
3) Solution specification:
In this stage buyer undertake an analysis to meet specific need for the product. It
includes requirement analysis and value analysis about the product specification. In
this analysis buyer find out most appropriate technical product characteristics for a
needed item. Value analysis is done for reducing the product cost reduction.

4) Supplier Search:
Supplier search is one of the most important stages in the buying process. Selecting
the right supplier is essential due to the fact that it could either create huge benefits
and long-term competitive advantage for the company, or, if the wrong decision is
made, it could also be the cause of long-term instability, frustrations and financial
failure.
5) Proposal Evaluation:
After receiving the proposals from all suppliers, buyer evaluate according to his
specific needs for goods or services.
6) Selection:
A supplier is selected and final details are negotiated prior to the next step.

7) Agreement:
At this stage of the business buying process the buyer writes the final order with the
chosen supplier(s), listing the technical specifications, quantity needed, expected
time of delivery, return policies and warranties.
8) Observation and Verification:
Includes the measures of satisfaction with chosen suppliers, making decisions about
whether to continue, modify the agreement or to drop the chosen suppliers.
3.3 Relationship Marketing
In traditional marketing, much of emphasis was laid on market segments, attempting
to generate as many sales transactions as possible, across all group of customers.
Then came relationship marketing, which was having its origins from industrial
marketing theory. It was introduces in the beginning of 1980s, and is defined as
“marketing based on relationships, networks and interaction”. Relationship marketing
is the process of identifying and creating new values with the customer and then
sharing the benefits for lifetime by the mutual selling buying relationship. With the
use of modern technology any enterprise has so many opportunities to create new
business values.

Company which is adopting relationship marketing has to identify key customers,
define the value each wants and expects over its lifetime and, in order to deliver has
to design and align its strategies, structure, business processes, technology. It also
has to build a chain of relationships within and outside the organization.
The company must create offers to the customers in the form of both products and
services of the company itself, and it can also source from other companies.
By adopting relationship marketing approach firms leave the seller buyer dimension
and become partners exchanging resources. All activities of the company are
directed towards establishing, developing and maintaining exchange in order to
achieve higher customer satisfaction and accelerate value creation.
3.3.1 Focus on customer
Customer focus is the primary goal of the relationship marketing. It is not just a
decision, but it needs thorough planning and complete change in the way of thinking
and company has to adopt a new culture and values, change its strategies, structures
and its processes. All this involves three steps:

• In the first step company has to evaluate all the customers and decide the
customer mix. Accordingly it can commit appropriate level of resources to each
customer.
• Secondly specific strategies and objectives will be developed for each individual
customer.
• Finally, strategic capabilities of the company must be assessed and developed in
order to achieve above mentioned objectives.
In order to launch successful relationship marketing companies must know the “cost
to serve” amount for each customer and create an integrated way of measuring
customer profitability, which includes not only the cost of products and services
delivered, but also cost required to attract, sell and retain customer. By doing all this
assessment we can know which client is profitable today but also will stay in future.
The customers who are profitable today, and will be profitable in future, need to be
rewarded by investments and commitments made to serve them better. They are so
called priority accounts. The accounts which are profitable today but are
unpredictable for future should be managed and helped by the company in order to
enhance the business prospect for both supplier and customer.
There is also a possibility that certain customers are not profitable currently, but they
can be made profitable by either reducing the costs of their services or by charging
them fee for not following the company’s direction in certain aspects of mutual
relations.

3.4 Key Account Management (KAM)
The globalization trends, as well as more needs in demand from the customers all
around the world have forced the businesses to focus deeper on strategies and
practices that could assure long term mutual relation between suppliers and buyers.
How KAM concept emerged?
The KAM was introduced because of following reasons:
1. The characteristics of the customers buying volume.
2. High degree of geographically dispersed sites of accounts around the world
3. Details of supplier organization
4. The complexity of supplier offer.
When we discuss the issue of KAM , it is very important to notice that terminology of
KAM differs between European and American researchers. The European
researchers use Key Customer account management, while Americans use National
account management/marketing. The main reason for this difference is the size of the
domestics market.
KAM or National Account Marketing consists of targeting the major customers of the
company, by providing them with special treatment in the field of marketing, sales,
administration and service.
3.4.1 Relationship development model
The rrelationship development model that proposes stages of KAM process that
match transitions from transactional to collaborative relationship. By using this model
it is possible to assess the position of selling companies at various stages of key
account development.

The model demonstrates the progression of the relationship between supplier and
buyer:
1) Pre KAM
2) Early KAM
3) Mid KAM
4) Partnership KAM and
5) Synergistic KAM.
The sixth stages, the uncoupling KAM could happen at any stage in the development
of relationship, if because of any reason the relationship cannot be build or have to
be broken up.
1) Pre KAM
At this stage no transactions exists but the selling company is trying to establish
interaction. The selling company selects a potential buyer at this stage and tries to
win some business. If buying company is already buying from other company, then
the seller tries to take some business of its competitors. This can be done by making
better terms with customers and by providing them services when competitors make
mistake.

2) Early KAM
At this stage the transactions between supplier and customer are established. The
seller must put efforts to fulfill the demands of customers and in order to convince the
buyer must provide the services that matches the needs of buyer. This drive the
relationship towards deeper long lasting commitment.
3) Mid KAM
At the mid stage of KAM, the selling company is classified as preferred supplier
winning more than 50 percent of customer’s orders. The relation has evolved from
single point level to reach closer interaction between KA manager and purchasing
manager, supported by other KA members from both buyer and seller company.
4) Partnership KAM
When this level is reached, the supplier becomes a strategies source for buying
company. All the information and ideas are exchanged hence forming a strategic
long lasting collaboration between the buyer and supplier. The prices are fixed for
long term.
5) Synergistic KAM

It is the ultimate stage of relation development model. Here selling company and
buying company establish a joined team in process of value creation. Members from
both organizations are involved with responsibility to manage all aspects of the
partnership. Information is shared between partners at all levels in this stage.
As shown in above figure KAM pyramid which represents the whole KAM
development process as a mutual profitability for both supplier and customer. This
relationship that enhances profitability for both supplier and customer is sustainable
in long run , with commitment of both parties involved.
3.4.2 KAM planning as a part of strategic marketing planning
As we all know that KAM offers the firms with efficient and effective tools enabling
them to improve their international competitiveness. That is why more and more
international firms take KAM approach as a success of their business worldwide. In
order to implement successful KAM concept, the KAM planning process should be
developed with having clear concept in mind. It is important part of firm’s overall
marketing strategies and is incorporated into its strategic marketing plans. Strategic

planning defines clear company’s mission and helps setting supporting objectives,
designing a sound business portfolio and coordinating functional strategies. It is a
part of firm’s corporate plan, reflecting the importance of KAM for overall firms
strategies.
It is very important to note that strategic marketing plans are based not only on
sales/profit targets, but on firm’s competencies arising from its resources and
capabilities. The important point to remember about marketing objectives is that they
are about products and markets only.
The clear and effective marketing strategy is the foundation for KAM. If the markets
are segmented geographically, e.g., country or continent segments, but the KAs are
international or global, the conflict between the KA goals and the segment goals may
arise. Therefore, the marketing strategy must provide the KAM with a solid foundation
for development, including KA selection, key account goal setting, account strategy
development and implementation. The second foundation layer for KAM is the
developed delivery strategy. Under this, the clear and effective ownership of the
relationship with the customer should be stated, meaning that everybody within the
organization know which customers are served by whom.
3.4.3 How to identify and select Key Accounts?
The selection of KA’s has to be done taking into consideration many criteria. They
are selected keeping in mind the potential of each customer in different segments for
growth in profit over specific period of time, but also according to organizations ability
to meet customers needs.
When identifying and selecting KA’s, a two level analysis has to be performed. First
step is to be taken on a more general level, with the consideration of the complete
customer portfolio of the selling company. It starts with the identification of key
customers, based on a specified set of criteria, followed by their grouping in the two-
dimensional matrix showing the strategic importance of the account, and the
difficulty in managing it. The second step focuses on each KA, again analyzed in the
two-dimensional matrix, with customer’s business attractiveness (size, growth,

competition and barriers to entry/exit) and the relative stage of the current buyer-
seller relationships, as the main parameters.
KA strategy has a long term objective, and not only short term operational goals.
Before selecting KA’s and analyzing their needs and setting objectives, the
knowledge about understanding market is very important. It is a tool from which
companies can gain knowledge. The main aim of market segmentation is to enable
the firm focus on its customers.
Market segments consist of customers with the same broad characteristics. These
segments virtually form separate markets and can be of considerable size. The
following criteria constitutes the viable market segment:
• Segments should be of an adequate size to provide the company with the desired
return for its effort.
• Members of each segment should have a high degree of similarity, yet be distinct
from the rest of the market.
• Criteria for describing segments must be relevant to the purchase situation
• Segments must be reachable

As a result of the segmentation process, the firm should come up with a clear
segmentation matrix that will be used as a basis for selecting and targeting KAs,
grouped in different market segments.
3.4.4 Positioning of KAM in an organization
As market segmentation is becoming increasingly used as a marketing tool, the
organization of the sales by the customer became its neutral consequence. The only
disadvantage of this concept is that when the customers have different departments
or divisions operating in different industries, the two or more sales people might end
up calling same customer and it result to additional duplicate administrative costs and
creates confusion in minds of customer. When large customers are globalized there
is a need to serve them on global basis, to provide the same type and level of service
wherever they are present, has put additional pressure on suppliers firm’s operational
and organizational structure which causes problems between product and regional
divisions. It became impossible for the person that is responsible for the customers,
that take the major part of the company’s turnover, that have strategic importance for
the future development and indeed its very survival, not to have direct access to high-
level management and broad decision-making authorities.
On the other hand, the high position of the KA managers was also necessary in order
to boost the authority of the account managers within the organization, and to show
the customers that they have significant importance for the company, and are treated
as such. In order to resolve all these problems, particularly in relation to large
customers with global presence and operations, a specific form of customer-oriented
organization has emerged, where the company designates its largest and most
important customers or potential customers to special high-level sales managers or
sales teams. In the beginning, when the KAM concept started to emerge, the
positions of KA managers were put inside the sales and marketing.

4 Reverse Auction
4.1 Auction
It’s a long time auctions have been practiced in the world. Every day people do
business by auction. Buying and selling goods and services is done by auctions.
Business firms and individuals regularly use auctions to purchase goods and services
from seller. We can see auctions in our daily life in markets. With the use of
information technology auctions are made globally over internet.
The English auction and sealed bid auctions are most commonly used auctions. The
Table 1 below describes various types of auctions which are designed for business
transactions. Every type of auctions have their merits and demerits and used
according to the situations. But sealed-bid and English auctions are well practiced in
usual life because of the concept, rules and regulations are well defined. In this
section we discuss the types of auctions most likely used in business acquisition,
sealed-offer and reverse auctions, and draw inferences for these auctions from the
substantial literature for the complementary sealed-bid and English auctions.

Types of auctions
Auction Type Bidding/Offer
Process
Description
English Bid Increase Many buyer, single seller,
seller put the product to sell
and receives higher and
higher price for his product.
Reverse Offers decrease Single buyer, many sellers.
Buyer receives more and
more chipper price and
offers from sellers.
Sealed-bid Sealed bids Single seller receives price
offer from buyers. But offer
from all buyers is not open
for buyers. One buyer can
not know the offer of other.
Sealed-offer Sealed offers Single buyer receives price
from sellers. But offer from
all the sellers is not open for
sellers. One seller can not
know the offer of other.
In reverse auction and sealed offer auction the risk for the price that supplier offers
remain same but the bidding strategies are totally different. Here, as number of
sellers increased the selling prices decrease. Even though the strategies are
different, in both auctions the ultimate outcome which called as an expenditure
equivalence result, remain the same. Expenditure-equivalence depends heavily on
the risk-neutrality assumption. In reverse auction risk aversion does not affect the
outcome (price) but, in sealed-offer, if the sellers are risk averse then it would
decrease the seller’s offered price.

Even though English auctions are widely practiced, the sealed-offer and reverse
auctions make us enable to derive conclusion from all the documents and data we
received from sellers.
4.2 Reverse Auction
In industrial business (B2B) reverse auction is used mainly as a tool to get lowest
price quote. The primary objective of reverse auction is to drive purchase prices
downward hence the COGS. In an ordinary auction, buyers compete for the right to
obtain a good. In a reverse auction, sellers compete for the right to obtain money (by
providing a good or service).
Companies today need to shave expenses wherever possible and that includes the
purchase of goods and services needed to keep their businesses running smoothly
and efficiently. In the old days, the process of finding vendors was extremely limited
and was very time-consuming. Many businesses simply found it easier to pick one
company and continue doing business with them indefinitely instead of hunting
around for the best provider for each new project. Today, technology has changed
that completely thanks to reverse auctions and the Internet.
For those unfamiliar with the concept, reverse auctions simply are auctions where the
bidder is the seller not the buyer. The bid reflects how much the buyer is being asked
to pay, not how much the good or service is being sold for. Web-based reverse
auctions have become extremely popular for purchasing everything from accounting
services to securing raw materials. The reasons for the popularity may not be
immediately clear, but there are a number of benefits for both buyers and sellers.
Buyers' benefits involve cutting costs and time expenditures. In the past, buyers who
needed work done had to send out a complete project description to potential sellers.
Each seller submitted a detailed RFP, and the buyer had to go through each RFP in
order to determine which offered the best deal. Comparisons between RFPs were
easy based on numbers alone, but numbers never tell the whole story. With reverse
auctions, buyers create a project description and post it online. Invitations are then
sent out to potential vendors who place a bid and briefly describe their qualifications

and the details of what their bid includes. Because all of the bids are lined up beside
each other in a chart formation, comparing them is simpler for the buyer. Additionally,
buyers can eliminate certain bids based on criteria such as price or deadlines, which
makes the final selecting even easier. Most reverse auction software also allows
buyers to communicate with bidders so that they can refine their bids or offer
clarifications. All of these features combined allow the buyer to pick a quality vendor
who can fulfill the needs at a good price and in less time.
Sellers also reap benefits from reverse auctions if they use them effectively. One of
the benefits is that it makes projects more open to a wider number of sellers.
Technology provides vendors from all around with the globe with equal access to the
invitation and an equal shot at winning the work. While this is a benefit, particularly to
offshore and/or small vendors, it can also be a drawback and has resulted in many
sellers bidding too low on projects just to try to win the auction. The competition may
seem negative, but it does provide an incentive for sellers to add value to their fees
by providing a variety of other services, which will benefit buyers who are willing to
look beyond price alone.
Buyers who are interested in using reverse auctions need to understand a few main
points if they hope to use them effectively. As mentioned before, the buyer needs to
think beyond simply the quoted price. Price may be an important factor in the
decision but other elements, such as added services, must also be taken into
consideration. Additionally, some projects are just not designed to work with reverse
auctions. Goods and services that can only be provided by a limited number of
suppliers will not be effective with reverse auctions since the vendor, not the buyer,
will have all of the power in the situation and can actually drive the price up instead of
down. Many buyers new to reverse auctions have failed to read the proverbial fine
print involved in the bids. Some bidders will cut out normal services, use less quality
materials, or extend deadline just to make it possible for them to place a more
competitive initial bid even though the final bill may end up being much higher.
Buyers need to be aware of this and also need to realize that treating with vendors
with respect now can secure them a trustworthy supplier in the future.

4.2.1 History
Reverse auctions got popular in the second half of 1990's as a result of the booming
of Internet. FreeMarkets Online Inc., later FreeMarkets Inc., was the pioneer of online
reverse auction. FreeMarkets was founded in 1995 by former McKinsey consultant
and GE executive Glen Meakem. Meakem hired McKinsey colleague Sam Kinney
who developed much of the intellectual property behind FreeMarkets. Headquartered
in Pittsburgh, PA, FreeMarkets built teams of "market makers" and "commodity
managers" to manage to the process of running the online tender process and set up
market operations to manage auctions on a global basis.
The company's growth was aided greatly by the hype of the dot-com boom era.
FreeMarkets customers included BP plc, United Technologies, Visteon, Heinz, Exxon
Mobil, and Royal-Dutch Shell, to name a few. Dozens of competing start-up reverse
auction service providers such as Procuri and CommerceOne, and established
companies such as General Motors (an early FreeMarkets customer) and SAP,
rushed join the reverse auction market space. Although FreeMarkets survived the
winding down of the dot-com boom, by the early 2000s it was apparent that its
business model was really like an old-economy consulting firm with some
sophisticated proprietary software. Online reverse auctions started to become
mainstream and the prices that FreeMarkets had commanded for its services
dropped significantly. This led to a consolidation of the reverse auction service
marketplace. FreeMarkets was acquired by its former competitor, California-based
Ariba Inc., in 2004. Fortune magazine article (March 2000) describing the early days
of reverse auctions.
(Source: http://money.cnn.com/magazines/fortune/fortune_archive/2000/03/20/276391/index.htm)
4.2.2 Introduction
Many organizations use reverse auction as a tool to manage their purchasing and
hence to control operating cost. Normally, in auction, the seller announce product for
sale and many buyers quote price for the item and most highest bidders buy the
product. While reverse auction is exact opposite of this concept , a buyer contracts

with an agent which in terms of auction called market maker to help make the
necessary preparations to conduct the reverse auction.
This includes: finding new sellers, training new and existing sellers, organizing the
auction, managing the auction event, and providing auction data to buyers to
facilitate decision making. The market maker, on behalf of the buyer, issues a
request for quotation (RFQ) to purchase a particular item or group of items.
On the fixed date and time, sellers log on to the website and quote for the product(s).
These quotes reflect the prices at which they are willing to supply the requested good
or service. Quoting performed in real-time via the Internet results in active bidding.
This system forces to the seller to downward the selling price and gives nice offers to
the buyer.
During the auction the market for the buyer gets narrow and narrow and helps buyer
to make perfect and simple decision. Thus, it is possible that better value - i.e. lower
prices, as well as better quality, delivery performance, technical capabilities, etc. -
could be obtained from suppliers not engaged in the bidding or by other means such
as collaborative cost management and joint process improvement.

Depending upon the requirement (qualitative, quantitative, services, special offers,
image of the seller in market) and strategy the buyer may deal with the seller with
lowest price or the seller with higher prices. Normally buyers deals with the existing
suppliers only , even if prices are higher than the lowest bids, because switching
costs are zero. This outcome, while very attractive to buyers, is often strongly
criticized by both new and incumbent suppliers. Reverse auctions are used to fill both
large and small value contracts for public and private commercial organizations. In
addition to items traditionally thought of as commodities, reverse auctions are also
used to source buyer-designed goods and services, and has even been used to
source reverse auction providers.
The majority of purchasing spend subject to reverse auctions over the years has
been in the category of buyer designed goods, followed by services, and then
commodity items.
4.2.3 Issues and Opportunities
Buyers and sellers should carefully consider if reverse auctions are appropriate, as
there are many issues and problems that can occur. Importantly, the issues and
problems are not generally known to new users of reverse auctions. Buyers, sellers,
and market makers should bounded to auction rules and industry codes of conduct
for the use of reverse auctions, if they exist. Problems arise when one or more
parties fail to accept to auction rules. This can range from simple cries of "foul" to
rules. It is not sure that in every case buyers can save deliver cost. It can cost the
buyer.
A true representation of savings can not be achieved if unit price-focused purchasing
metrics such as "purchase price variance," "purchase order variance," or "material
price variance" are used. Instead, total cost savings must be calculated, inclusive of
direct and indirect losses associated with using reverse actions, implementing
reverse auction results, subsequent procurement activity, and related activities such
as customer returns, defective goods or services, warranty expense, rules, etc.

Buyers are advised to carefully fact-check reverse auction market-maker claims,
which in the past have been inflated. Suppliers are advised to determine if a value
proposition exists for them that would warrant their participation. Historically, the
value proposition for suppliers has been missing. Some have characterized reverse
auctions as a technologically-assisted form of zero-sum power-based bargaining, or
as "going in reverse" with respect to developing buyer-seller relationships,
collaboration, and purchasing process improvement. Reverse auctions have also
been criticized as "bid shopping" - when a buyer uses a supplier's bid to obtain lower
prices from other suppliers. Suppliers seeking to avoid reverse auctions can create
unique intellectual property, expand the value propositions for its customers by
creating new products and services, or seek to extend or improve collaborative
activities with their customers.
Reverse auctions used in industrial business-to-business procurement and spend
management activities remains controversial, both within buying organizations,
among suppliers, and among the academics who study them. As such, buyers
considering the use reverse auctions should carefully evaluate all available
information, both favorable and unfavorable, to ensure that informed business
decisions are made.
Competitive Bidding
The term reverse auction has been used a great deal in procurement circles and has
been touted as the biggest and best way for companies to reduce purchasing
expenses. Yet, many companies are still reluctant to get involved in the hoopla
because they do not understand exactly how the process works nor do they
understand all of the potential benefits. Reverse auctions and the competitive bidding
that comes with it are not difficult to understand once a person sees or experiences
them firsthand. This article will attempt to provide some insight into the dynamics of
the competitive bidding process for reverse auctions.
For example, lets assume Buyer A has a new project coming up and that project is
going to require him to purchase 500 rolls of wire. He may already have a supplier he
uses for the purchase of wire but perhaps that supplier charges $100 a roll and he

wants to see if he can get a better deal with another vendor. Buyer A decides to use
a reverse auction. The first step in the reverse auction competitive bidding process is
for Buyer A to explain in writing his particular project needs. He needs to be clear, of
course, so that potential vendors will understand his requirements and will be able to
bid accurately. Buyer A can then send this description, along with an invitation to bid,
to as many possible vendors as he would like. He can also include his current vendor
as well.
Once vendors receive the information that can then decide how much to charge
Buyer A for the 500 rolls of wire. They then place a bid that includes that amount as
well as some details about other services they may add or other useful information
that the buyer may need to make a final decision. The vendors are able to see and
compare the other bids available, although they usually are not able to see the
names of the companies, which have placed them. Because they can see the
competing bids, vendors realize that to be in the running for the project they must
offer a competitive price and this may mean going back to the drawing board to
determine just how low they can go without sacrificing their profit margin completely.
Bidders can also ask Buyer A questions regarding the project and Buyer A can do
the same. He can also ask vendors with whom he is most interested in doing
business to lower their bids. Furthermore, bidders can elect to be notified if their bid
has been beaten by a lower one so that they can place a new bid if necessary.
Buyer A can review the bids, streamline them based on certain categories like budget
or deadlines, and can compare them based on other elements as well, such as any
value-added services that have been included in the bid and past performance
indications. Based on all of the data at his disposal, Buyer A can then choose the
vendor he believes can best supply his rolls of wire at an affordable price without
jeopardizing the quality of the goods. This type of competitive bidding scenario is
much different than the way many businesses today select a vendor. Companies no
longer need to request complex RFPs nor do they need to limit their bid invitations to
local businesses. Vendors from around the globe can equally participate in the
reverse auctions and, in many cases; these bidders can win the project.

Obviously, the greatest benefits of this approach to vendor selection are reserved for
the buyer. Not only does he get more options than he normally would, but he is
almost always guaranteed a significantly lower price. Some businesses, in fact, have
reported cost reductions of up to 30% thanks to competitive bidding. Vendors can
also benefit from reverse auctions because it allows them to compete on equal terms.
In the past, businesses would send their projects out to only a select number of
vendors who they had worked with in the past. It was difficult for new vendors or
smaller sellers to get their feet in the door. Today, those problems are no longer as
relevant due to the introduction of reverse auctions.
Of course, not everyone thinks reverse auctions are wonderful. Some vendors
complain that focusing solely on price and not on quantity is a mistake while some
buyers have been burned too-good-to-be-true bids. However, despite what the critics
say, the bottom line though is that reverse auctions usually do save money.
Pricing benefits
On the surface, the primary benefit of reverse auctions for buyers is substantially
reduced prices. Unfortunately, it is not that simple. Reverse auctions measure the
reduction in unit prices, despite efforts to characterize total costs in the request for
quote. Digging deeper, one finds that reverse auctions often lead to higher costs in
budget categories owned by purchasing or by other departments. For example, new
suppliers that are unable to meet quality or delivery performance targets will lead to
unanticipated costs incurred by the buyer, including:
- Returns
- Warranty costs
- Litigation expenses
- Overnight freight charges
- Increased supplier oversight as well as lost sales and dissatisfied customers.
These outcomes are common particularly when the item is complex, or when the
buyer owns the design of the goods or services.

Existing suppliers view reverse auctions as opportunistic behavior among buyers to
achieve lower prices. This often results in changing pricing behaviors, where existing
sellers that have been exposed to reverse auctions wait sometimes years for
opportunities to charge buyers higher prices for goods or services, including one-time
charges such as expediting fees or new tooling. This adds to the total cost of
procurement, especially since incumbent suppliers rarely lose all the work. Instead,
they typically lose some of the work and continue doing business with the buyer, all
the while seeking higher prices. Other outcomes that are not accounted for in the so-
called total, cost RFQ’s include less cooperative relationships and sourcing work
back to the original supplier sometimes at prices higher than what the buyer originally
paid.
While unit cost savings is the key measure of success, it is not an accurate measure,
nor is it an appropriate measure because it is easily gamed and leads to higher costs.
When total costs increase, reverse auction results become compromised. Not
surprisingly, buyers eventually turn their attention to collaborative approaches with
established long term suppliers for managing costs.
Further more, there are often many factors that make it difficult for the buyer to
secure the savings identified at the conclusion of the reverse auction. Percentage of

savings based on the commodity sourced. In the worst cases, the use of reverse
auctions could cost buyers more money than they appear to be saving.
4.3 Safety measures
4.3.1 Buyer subsidies
The capabilities that buyers seek, whether related to equipment, R&D capabilities,
etc., will have been evaluated at the time suppliers were selected to participate in
reverse auctions, thus negating the need for buyers to subsidize suppliers’
investments. Also, given the overcapacity that exists in most manufacturing and
service sectors, it is unlikely that buyers would need to make relationship-specific
investment in winning seller’s operations other than small investments in information
technology to facilitate secure communication between buyer and seller. Further,
buyers that have historically relied on power-based bargaining routines to manage
suppliers generally do not have the organizational capability to fulfill obligations
related to making relationship-specific investments.
4.3.2 Post-auction negotiation
Reverse auction service providers have long held that one of the benefits of reverse
auctions for suppliers is the creation of a level playing field among the suppliers
invited to bid. Post-auction price negotiation with selected suppliers e.g., the few with
the best prices ,up levels the playing field. Thus, most reverse auction service
provides do not allow post-auction price negotiation. From the buyer’s perspective,
they likely achieved what they perceive to be a good result. That’s a big win, and
most purchasing managers would decline efforts to achieve a few percent additional
savings. The more pressing matter is to implement the reverse auction results and to
begin accruing the savings.
This is often an activity that requires significant resources from the buyer, especially if
the supplier that won the work is new and the good or services are complex. If the
range between bids is high, then it is likely that buyers made mistakes with respect to

supplier selection. The fact is, most buyers do not understand the true cost of the
goods or services that they purchase. Evidence for this is found in the dominant
metric used to gage the success of purchasing activities the purchase price variance
metric which tell buyers nothing about supplier’s costs. Additionally, buyers’ use of
online reverse auctions is a tacit admission that they do not understand the true cost
of what they are procuring. From the supplier’s perspective, post-auction price
negotiation will deepen the pressure they face with respect to margin erosion. This
will not make them happier. But it could give suppliers a reason to invalidate their
bids if post-auction price negotiation is a violation of the reverse auction rules. The
threat of margin erosion will discourage suppliers from making relationship-specific
investments.
4.3.3 Payment to losing bidders
If compensating suppliers for the time taken to prepare for reverse auctions has any
merit, then a method must be devised to track the costs and the payments made to
them. The cost will vary widely from supplier to supplier, driven by overhead rates.
Suppliers in low-wage countries will have low overhead rates, while suppliers in
developed countries will have higher overhead rates. Some suppliers will make
earnest efforts to prepare their bids and spend a lot of time reviewing specifications.
Others will spend little or no time preparing their bids, preferring instead to simply
estimate prices. Some will seek to get compensated for preparing bids that they
spent little time preparing for, knowing that they have no intention of being a
competitive bidder. For some suppliers, this solution will become a profit
improvement program at the seller’s expense and thus actively seek to participate in
many reverse auctions. The potential for gaming is large. Determining how much to
pay the suppliers for their actual efforts quickly becomes complicated and would
likely lead some buyers to impose region-specific flat fees.
Again, the main idea behind reverse auctions is to reduce purchase price and not to
increase costs by paying possibly dozens of losing suppliers to prepare for bidding.
This would simply increase the total cost of the items purchased.

Remember, the traditional sealed bid method of procurement is an activity for which
suppliers are not compensated. This proposed solution is an ineffective way to
increase the number of suppliers participating in reverse auctions.
The fact that most suppliers do not voluntarily flock to reverse auctions speaks
volumes as to what they think of them. Clearly, it is a zero-sum tool designed
principally to benefit buyers at suppliers’ expense. Lastly, it is unlikely that losing
suppliers receiving payment would enjoy a renewed sense of respect for the buyer.
Instead, it is more likely that suppliers would view buyers making payments to losing
bidders with less respect because of their single minded efforts to reduce costs no
matter what the cost and consistently failing to understand value (i.e., price plus non-
price factors) a common occurrence among buyers focused on price and that rely on
power-based bargaining. Here we can not identify is the codes of conduct or trade
association guidelines designed to improve trust, fairness, and confidence in reverse
auctions. However, careful examination reveals that these have had little or no
favorable impact with regard to improving buyer–seller relationships.
4.4 Online Reverse Auction: Inside the Industry Market
Reverse Auctions are generally done on Web. The Internet has brought a number of
changes to the field of procurement. Companies can now place orders with vendors
through virtual catalogs in real-time, for example. However, none of these changes
seems capable of saving companies as much money as reverse auctions. Since they
began to take off online, more businesses have jumped on board the reverse auction
bandwagon from government agencies to national publishers to small family-owned
businesses.
Reverse auctions, as the name implies, are not run like traditional auctions. In most
auctions, a seller offers a good or service. Bidders offer prices and compete with one
another in a way that drives the price up. At the end of the auction, the highest bidder
wins the item. With reverse auctions, things are different. First, the buyer is the one
who starts the auction. The buyer creates a description of his particular needs. Next,
the sellers are the ones who place bids during the auction. Their bid is based on how

much they would charge to fulfill the buyer's needs. Then, the competition between
the sellers ends up driving the prices down, instead of up, so the buyer pays less.
Finally, the buyer chooses the winning bidder. The winner is not necessarily the
highest or the lowest bidder but is selected by the buyer on the basis of a number of
factors. Price is often an important one.
Reverse auctions provide a number of benefits for buyers. Obviously, since sellers
are competing against one another openly, prices will be lower. Businesses that have
used reverse auctions for raw material purchases have seen cost decreases.
However, price reductions are not the only benefit of reverse auctions to buyers.
These auctions also save time. In the past, the vendor selection was incredibly time-
consuming. Businesses would send out requests for proposals to all potential
vendors, wait for them to respond with their proposals, sift through all of them, then
make a decision.
Because of the format of the delivered proposals, direct comparisons between the
vendors were often more difficult to make which meant the process often went on
even longer. With reverse auctions, the buyer simply posts his request online,
invitations to pre-selected vendors are distributed automatically by email, interested
sellers place their bids, and the buyer can compare prices, qualifications, and other
factors at a glance. As a result, the time between creating the request and choosing
the vendor is considerably shortened.
Even though, reverse auctions have been successfully used by businesses to make
purchases in a number of industries, not all procurement activities can equally benefit
from the cost and time savings. Bulk purchases, for example, work very well with
reverse auctions. Purchases of goods that are manufactured based upon an agreed
upon standard also work well for reverse auctions because buyers do not have to be
as concerned about the quality of the goods since they should all be created equal.
Reverse auctions also work better when a buyer will be dealing with a foundation of
familiar vendors. When this is the case, the buyer can have more confidence in his
buying decision because he will be well acquainted with the reputation and the
craftsmanship of each potential supplier.

While the situations above work well with reverse auctions, some situations work less
effectively. For example, if the buyer's needs can only be supplied by a small number
of firms, then reverse auctions will not be the best idea. The price in reverse auctions
is driven down by competition, so if only limited competition exists, then the price will
not decrease enough to save the buyer a substantial amount of money. Not to
mention that the buyer runs the risks of alienating his only potential sources for the
goods or services he requires. Additionally, reverse auctions don't work as well when
large numbers of extra services, such a warranty, are necessary as an important part
of the purchasing agreement.
4.5 Customer Relationship
Over the years, reverse auction service providers, also called market makers, have
made various qualitative claims regarding the benefits of participating in reverse
auctions for new and incumbent suppliers, including:
- Reduce operating, selling, or customer acquisition costs
- Improve buyer–seller relationships
- Compete on a level playing field
- Access to new customers
- Increase sales
- Access to new markets
Most suppliers fail to realize these key benefits. The value proposition for both new
and existing suppliers is narrow and largely unchanged since reverse auctions were
first deployed: new suppliers may gain new business, while existing suppliers risk
losing the business. The purpose of reverse auctions is short-term unit price
reduction by benefit of buyers have over sellers particularly when buyers own the
technical specifications of the goods or services.
The likelihood of improved relationship between buyers and incumbent sellers is low
given current reverse auction designs and undertaking practices.

In most cases, reverse auctions simply extend power-based bargaining routines long
used by buyers that possess leverage in the marketplace over incumbent sellers’
interests. Buyers that use reverse auctions know this, and so, they do not want their
customers to use reverse auctions for the goods or services that they supply.
New suppliers that win business may in a few cases experience improved relations,
but this can be easily undercut by the buyer’s inability to meet suppliers’ needs or by
the seller’s inability to meet the buyer’s needs in the execution of the contract. A
common result is unanticipated demands made by sellers or buyers that later seek
alternate sources of supply due to supplier nonperformance outcomes which will
damage relationships.
A few winning incumbent suppliers may also experience good relations. However, the
more common outcome is deterioration of the business relationship caused by rapid
margin erosion. This is a significant threat to sellers, and losing work to new suppliers
with unproven track records of quality, delivery, and service performance will also
damage buyer–seller relationships. New or existing suppliers, whose bids were not
selected, despite low prices, will complain of their loss and lament the time they spent
preparing for the reverse auction. They may also take legal action against the market
maker or buyer for bidding rule violations, which will introduce additional costs to the
seller, market maker, and buyer. This will damage potential future relationships, and
may also give buyers a poor image in their industry. While improved buyer–seller
relationships have been cited among first-time bidders, this outcome is rare among
bidders that have experience with reverse auctions. Also, relationship-specific
investments made by sellers do not constitute clear evidence of relationship building.

5 Empirical Studies
So far we have look into KAM and Reverse Auction, now we will do the empirical
study of KAM and Reverse auction together i.e. if it is possible to implement KAM in
Reverse Auction i.e. possible co-existence and for that we will do one investigation
which is based on few interviews with a cargo company and another with an
packaging organization. We have tried to ask these questions to group of
professionals who are working for freight forwarding company in Canada.
Our questions are:
1) What do you think about KAM and reverse auction?
2) Do you see scope of Reverse auction in your work?
3) Does your sales increase by using reverse auction approach?
The research Question
4) Is it possible that we can implement KAM in reverse auction? (i.e.
possibility of coexistence.) –
Company #1 Global Cargo and Logistics
The name of the company is Global Cargo and Logistics and they have sister
companies named as Global Cargo Asia and Africa Logistique for Asia and Africa
respectively. We explained them in brief the terms KAM and reverse auction.
Mr. Joseph Vella (CEO, Canada)
The name of CEO is Mr. Joseph Vella who has experience of 40 plus years in
airlines. When we asked him the above mentioned questions his points of views
were:
1) Mr. Vella says that we are practicing both KAM and Reverse auction in any of
the ways. Our suppliers include all the air cargo, shipping and transport
companies. Then we also have our clients whom we are serving. For us these
clients are our key accounts. We have classified these clients according to the

business volumes. Once this KA’s come with some requirements then we ask
our sales to team to contact airlines or shipping companies to give us rates. In
transport industry we don’t have stable rates and it changes from one
commodity to another. So we compare rates from at least 3 suppliers to be
competitive. In this way we are maintaining good supplier buyer relationship
with the air shipping companies and also become good vendor for our client.
2) In our job we need to practice both KAM and reverse auction. KAM to identify
key accounts and give them special services and reverse auction to ask for
the best rates from our suppliers. Reverse auction gives us opportunity to be
competitive, so for us there is always a good scope.
3) As we are always competitive using reverse auction approach we are able to
make more sales. We mainly use reverse auction approach for getting rates
from shipping lines and road transport companies.
4) In Logistics we have to implement KAM in Reverse Auction on order to get
more business. We need to take care of accounts which give us business on
regular basis. For one time customer we don’t really implement Reverse
Auction as we know that we have to earn most this time only.
According to Mr.Vella all the customers who gave us regular shipments and are good
in payment are our Key Accounts. We always give them special preference in terms
of price and service. These customers are the corporate accounts we handle. Some
of our Key accounts are Terpac, Bombardier, Alchemy and Nutri Fresh. They are
companies based in Canada and having offices in all parts of world.
Sophie Ma (Global cargo Asia, Business Coordinator, China)
1) According to Sophie practicing reverse auction is always fruitful to be more
competitive. For her every customer has same importance and she treats it as
KA. For her KAM doesn’t mean much as she handles every customer as her
KA. She thinks that for our clients we are not the vendors who are serving
them, when they ask for some rates to us , they must be asking to other
forwarders also. In that case she thinks that we must provide them good
services at very competitive price regardless if they are our KA’s or no.

2) We have lot of scope for Reverse auction in our job. We have lot of imports in
Canada from China, in this case we don’t get good rates from shipping
companies as there is lot of volume flow from China to Canada. When we
have a client who has to export to China, then we can ask for good rates
because from here the vessels are not fully loaded. In this case often we get
spot rates from shipping companies which are very interesting and it gives us
opportunity to earn more staying very competitive.
3) Certainly Reverse auction plays a very vital role in our sales increase. If we
don’t have comparative rates from different shipping or transport companies,
our existence in this competition is almost impossible.
4) KAM and Reverse auction are 2 different identities. We can’t implement them
together. According to her reverse auction is always vital, every customer
wants the best service at best price whether its KA or not. We can only provide
these services if we have option of reverse auction.
Siaka Cissoko ( Business Coordinator, Africa Logistiques, Guinea, Senegal, Ivory
Coast and Ghana)
1) His ideologies are totally different from Mme Sophie. He thinks that KAM is
very important and doesn’t give lot of stress on reverse auction because of
limited choices. For e.g. From Canada there is OTL which is part of CMA CGM
which is very competitive in terms of services and rates, so he never look for
other quotes. He has lot of clients who have less than container load
shipments so he prefers to work with Confreight which accepts shipments less
than container load. He has limited number of customers so he prefers
keeping them as KA’s.
2) For my part of job reverse auction is important when we have a shipment by
air or ground. In that case we consult many companies of course to be
competitive. He realizes that reverse auction plays a very crucial role in terms
of service industry.
3) So far he doesn’t use lot of reverse auction approach.

4) We can certainly implement KAM in reverse auction. They both have vital role
to play in any industry. In our industry which is service industry we need both
for sure.
Company #2 Europackaging
Europackaging is owned by two Malaysians and based in UK. It is 31 year old firm.
The company started life as a paper bag merchant in 1974 and has grown via
increased sales, acquisitions and investments to become a £249m business in 2005.
The current strategic position as global procurer, distributor, manufacturer and
innovator places the business in a unique position to challenge our key markets from
a multitude of directions.
Mr. Alexandre Miniere (Sales Director Europe)
Europackaging regularly excercise reverse auction. Europackaging is one of
Europe's leading suppliers of plastic and paper packaging for the retail industry.
They provide our customers with the highest level of service & product integrity.
Europackaging have own production facilities in the UK, USA, Malaysia, China &
Turkey as well as numerous long-term specialist partner suppliers throughout the
world. Each one of our manufacturing sites specialize in a product category,
producing the highest quality products at the lowest price possible.
Whether it's high volume carrier bags, fresh produce bags, value enhancing gift
boxes for luxury purchases, fashion carriers or just simple trash sacks, they have a
cost efficient factory ready to supply.
According to Mr. Alexandre, Carrefour (France), Coop (Swiss), and UPIM (Italy) are
KAM. Europackaging is always involved in reverse auction with them.
Mr. Alexandre mentioned that in reverse auction both the parties, if decide rules at
the beginning and if follow them with the precautions then it is possible that you have
coexistence of Key Account Management in Reverse auction.

From above all discussion we find out the following point to be consider in reverse
auction.
Recommendations
As we already suggested some measures in section 4.3, here we would like to
recommend some strategies for both supplier an buyer.
5.1 Suppliers
With reverse auctions becoming so popular, it is highly unlikely that any large
supplier of commodities can continue to do business successfully without
participating in one. Generally, participation is either met with excitement because of
the potential for new work or with apprehension because of the possibility of losing
existing work. Regardless of the way a vendor feels about the reverse auction itself, if
the vendor wants to come out ahead, then he or she must have a firm strategy in
place before the event even begins.
Before planning a strategy, a seller must know two key things:
1) They must understand exactly how they fit into their current industry and
2) They must fully understand how the reverse auction is going to work.
Both of these points are extremely important. First, if a business does not understand
how they stand apart from their peers, then they can not effectively communicate that
to a potential client. Plus, if the seller does not fully understand the reverse auction
process, he or she may make mistakes that leave them out of the running, such as
not asking appropriate questions, providing enough information, or failing to rebid if
necessary.
Additionally, the vendor must be well aware of some differences between reverse
auctions and traditional purchasing negotiations. First, buyers may request a quote
on a large quantity of goods, then request only a small number of them from the
selected vendor. While this may seem unfair because the buyer may be receiving a

bulk discount on those items when his quantity did not entitle him to one, the vendor
must be prepared to either follow through or refuse to take the work. Also, the vendor
must be prepared to provide extensive information about their business, their annual
sales, their quality assurance standing, and more. All of this information is vital to the
reverse auction process, because these qualifications factor into the buyer's final
decision.
In addition to the above guidelines, there are a few more things suppliers should
keep in mind, particularly during the reverse auction. For instance, when a business
decides to switch from using an incumbent vendor to using a reverse auction, the
business generally invites the incumbent to participate. While the supplier may feel
obligated to fulfill this request or may feel the need to do whatever is necessary to
keep the work, he should not agree unless he is seriously ready to bid against
himself. The likelihood of an incumbent vendor winning in a reverse auction without
significantly cutting their costs or adding additional services to the package are
extremely slim, even though they do have an advantage over the other bidders.
Besides refusing invitations, suppliers need to realize that they should never deviate
from their normal pricing structure, even if it means landing a new contract. The
temptation to bid lower and lower is, of course, one of the things that makes reverse
auctions popular among buyers, but it is also one of the things that has driven many
vendors out of business. When a company continually charges less than the
company’s pricing structure dictates, the result is a dwindling of profits and,
eventually, more money goes out of the business than comes in.
Furthermore, vendors must be aware that as the auction's end draws near, they may
feel compelled to place a lower bid to improve their chances of winning. Again, they
are only hurting themselves with these practices. Unless the buyer has specifically
asked for a lower bid there is no point in a vendor reducing his or her price. The
vendor may, in fact, actually cheat himself out of money or of a project with such
activities.
The bottom line for vendors who participate in reverse auctions is that they need to
carefully weigh the benefits of bringing in new benefits with the costs of charging

them less for the goods and services they require. To combat the lower prices,
vendors must be aware of their niche in the industry and must be able to prove that
they have the reputation and qualifications to meet the buyer's specific needs.
5.2 Buyers
All successful companies build strong relationships with their suppliers. Companies
are not isolated entities that simply purchase goods and services from individuals
who happen to be able to supply them at that particular time. Companies typically
make larger purchases. In reality, successful companies recognize the need to build
bridges between their organization and the vendors that they work with by
establishing strong buyer/seller relationships.
Supplier relationships are different from simple purchasing transactions in several
ways. First, there can be a sense of commitment to the supplier. For example, if a
vendor sells light bulbs, he can feel confident that the buyer will come to him the next
time the company he represents requires a new shipment of light bulbs. Another
element of these supplier relationships is advanced planning. Buyers don't just
communicate with suppliers when a procurement need arises; they also contact them
in order to discuss their future needs and to determine how best to satisfy those
needs by working together.
While both of those distinguishing features are easy to spot, a third element is also
important. The company's attitude and view of its suppliers matters a lot for business
success. Companies that forge supplier relationships think of these vendors as
partners and not just simple commodity providers. This difference in orientation can
have a profound affect on the way an organization communicates and works with its
suppliers. This in turn into efficiency an profitability.
One ramification is a vendor’s knowledge of the buyer's business. When vendors are
viewed as commodity providers, they generally don't take the time or are not given
the opportunity to learn the details of the business or its vision for the future.
However, vendors that are deemed to be partners are encouraged to become

knowledgeable about the company, its processes, its products, and its goals. The
result is greater buyer satisfaction with the services provided by the supplier. A study
of IT directors found that vendors who were considered commodity providers
delivered unsatisfactory service almost half of the time while suppliers who were
thought of as partners delivered excellent service some of the time and good service
most of the time.
Another result of this attitude of partnership and difference in knowledge level has to
do with handovers, which is a top priority among most IT directors. After all, if the
handover is unsuccessful or is poorly handled, it minimizes the benefits the business
hoped to achieve with the project. Businesses that viewed their suppliers as
commodity partners, according to the poll, viewed the way their vendors handled this
critical process as unsatisfactory nearly half of the time. On the other hand, vendors
who were considered partners handled handovers excellently nearly some of the time
and good most of the time. Clearly, the change in attitude does make a significant
difference.
Obviously, these two examples illustrate how important it is to have strong supplier
relationships, but many businesses simply don't know how to foster an environment
where purchasing personnel have an attitude of partnership with vendors. The
change is not as difficult as they may think. It does not have to cost them the savings
they achieve by shopping around either. First, businesses need to find a small
number of suppliers to work with. Companies should carefully evaluate potential
vendors and their backgrounds in order to select the suppliers from the group that will
best fit the needs of the business.
After they pick these vendors, companies need to negotiate contracts with the
vendors and to sit down with them in order to engage in some forward planning. Both
of these steps are critical in establishing the stability in the supplier relationship that is
necessary for both parties to feel comfortable. Furthermore, the future planning
makes it more likely that the vendor will have the resources and qualified staff
available when the buying company requires them.

Overall, vendors and buyers are both better served when they come together to form
strong, mutually beneficial, and secure business relationships for non-commodity
type goods and services. When these relationships exist, they can drive the growth
and profitability of both organization and prevent purchasing and execution problems.
5.3 Business Relationship Management
For all the talk about supply chains and e-procurement, many companies still have
not seen the real benefits of either of these business approaches. The reason is not
the technology. The reason is that dealing with suppliers and managing that
relationship can be tricky even under the best of circumstances but when they add in
more technology and major changes, things might become even trickier. However,
that doesn't mean companies should switch to more modern methods of handling
procurement and working with vendors, it just means they need to become more
knowledgeable about how to effectively manage their supplier relationships.
Up until recently, many buyers weren't looking at things in those terms and were
simply focused on the quoted price. Many of those buyers also found out the hard
way that low price sometimes equals low quality. Off shoring, for instance, has
occasionally resulted in defective products rates just below 10%; which is much too
high. When these disillusioned buyers switched to slightly more expensive suppliers,
there was a lot of resentment toward suppliers in general already. Supplier
resentment does not create a firm foundation for a new supplier relationship. Buyers
need to remember that how they treat suppliers today is how suppliers will treat them
in the future, and for many buyers this might be a frightening thought.
Another way to boost supplier relationships is through technology. Setting up a
strong communication network that allows for the real-time transfer of information in
both directions helps create a feeling of partnership that is normally missing from
these relationships. Explaining to suppliers how they will be helped and how
important they are to the big picture can also help make them feel more comfortable
in the relationship. Opening up communication to allow suppliers to view forecasts,
inventory, and performance ratings further builds on the foundation and makes the

relationship more secure.
Furthermore, companies can do more to ensure that their suppliers are receiving
their business. When businesses establish e-procurement arrangements, suppliers
assume that they will receive the orders for all of the products needed by that
company from their catalog. An office supply store, for example, anticipates that the
company will order their pens, envelopes, and office furniture through them.
However, many companies have found that employees who are resistant to the new
technology continue to go out and make purchases outside of the system. This
problem can hurt the vendor/buyer relationship because it is taking away profits from
the supplier. Businesses, therefore, need to take steps to ensure that those types of
purchases do not occur.
Finally, both sides of the relationship need to realize that things won't also be perfect.
Some products won't live up to buyer expectations; some invoices won't be paid
correctly. However, those types of problems can be minimized simply by ensuring
that a four-way inspection process is in effect on the buyer's side so that the goods
are checked according to the order form and that the invoices are paid promptly.
Additionally, buyers and sellers should decide in advance on how to settle problems
with defective goods or overall buyer dissatisfaction. Knowing how to handle
difficulties helps rectify the problems easier and makes the relationship move more
smoothly in the long run.

6 Conclusion
This chapter outlines our general conclusions that we came up while conducting this
research. The conclusions are primarily based on the analysis of the empirical
results, as well as on the overall learning experiences we had while selecting the
appropriate theoretical framework for this study, and the field studies, and interviews
conducted in Canada, France and Swiss.
The most common criteria used by the companies for identification and selection of
KAs were the:
1. Size and scope of customer’s business
2. Future earning/profit
3. Strategic fit from the prospective relationship
4. Customer is set up to allocate supplier same values
5. Substantial revenue, market share and competitive advantage could be
obtained through use of KAM.
Across all interviewed companies, KA managers have similar responsibilities,
acting as a single point of contact with KA, formulating and implementing global
strategy towards KAs, communicating information and coordinating activities
throughout the organization and across markets and increasing sales and long-term
bonding through account investments. In all organizations senior executives were
directly included in the KAM activities and acted as sponsors for those processes.
Apart from operational issues, their task is also to perform high level bonding with
their counterparts in the buying organizations. Some of the most often mentioned
skills and abilities that KA manager should possess are planning skills, solution
selling skills, leadership and advisory skills, people management and industry
knowledge.
KAM is an offensive strategy in terms of supplier’s strengthened efforts for creation
and delivery of more competitive offer for it customers that has in purpose to acquire
higher customer’s share of mind. Analyzed from that aspect, KAM could be
characterized as a purely offensive business approach. KAM implementation has in

purpose to provide the supplier with effective tool for establishment and maintenance
of deeper supplier-buyer relationships with its customers. The established
relationship that creates benefits for both partners decreases the possibility for new
competitors’ penetrating and acquiring their customer’s share of mind. Analyzed from
this aspect the KAM approach is clearly defensive and protective strategy and it
would be implemented and exercise nicely in reverse auction if precautions would be
taken time to time.

References
McDonald, M. and Rogers, B. (1998),”Key Account Management - Learning
From Supplier and Customer Perspectives”, Butterworth-Heinemann
“Managing Business Relationships”, John Wiley &
Sons, Chichester
Robert Spencer, “Strategic Customer Account Management “,Euromed Marseille
2005-2006
Research Paper on “Wood pallet suppliers’ reaction to online reverse auctions”, M.L.
Emiliani and D.J. Stec School of Technology, Central Connecticut State University,
New Britain, Connecticut, USA
www.cat.com
www.ft.com
www.komatsu.com
www.economist.com
www.money.cnn.com
www.hindu.com
www.getpedia.com
www.sciencedirect.com
www.sail.co.in

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