Welcome to this week’s installment of Whitepaper Wednesday here on the Purchasing Certification Blog. In this post, I’ll be reviewing the whitepaper entitled “Moving Beyond Reverse Auctions for Scalable, Sustainable Value” from Emptoris. Though this whitepaper is about four years old, I still think that its content has value today.
The whitepaper pays a little homage to the reverse auction, saying “Companies have saved hundreds of millions of dollars using online auctions, often in categories where they thought they had already achieved substantial savings and rock-bottom prices through traditional negotiations.” But a major premise of the whitepaper is that a reverse auction-only strategy is not sustainable for continued savings.
The whitepaper posits that a major reason why companies see diminishing returns with reverse auctions is that they adhere to a “buyer-knows-best” mentality when determining lots and combinations of items being bid upon. The whitepaper notes that a sourcing optimization solution will break down this barrier to additional savings.
One of the core aspects of an optimization system is “expressive bidding,” according to the whitepaper. Expressive bidding allows suppliers “to offer discounts and bundled pricing, and flexibly address other non-price factors such as quantity, item specifications, delivery terms, etc. As a result, the buyer will have better insight into the supplier’s capabilities and be able to better leverage their innovation.”
Combining expressive bidding with other aspects of sourcing optimization such as a flexible bidding model, supplier ratings, and business constraints would make bid analysis tough to accomplish manually, but optimization technology automates the analysis, allowing buyers to “create multiple ‘what-if’ scenarios to conduct cost-benefit comparisons among various business constraints.”
But the benefits of optimization are not strictly for the buyer. There are benefits to the suppliers as well.
The whitepaper introduces the concept of optimization-based supplier bid recommendations. This feature gives the supplier “feedback that recommends alternate pricing and bundling scenarios based on the overall negotiation dynamics and competitive bids. This benefits suppliers by providing them with additional insight into how they might bid more competitively, in ways they may not have considered,” while also doing the buyer’s work of enticing the supplier to make its offering more attractive.
According to the whitepaper, procurement organizations using optimization tools are able to save an additional 7% after already exhausting the savings realized from using reverse auctions year after year on a certain category of goods or services.
While this whitepaper may not cover as many of the nuts-and-bolts of optimization as myself and Michael Lamoureux did in our podcast entitled “Supply Chain Optimization Simplified” and is one of the older whitepapers I’ve reviewed (consider that one of the analysts quoted in the whitepaper is now the Chief Marketing Officer for one of Emptoris’ competitors), I still think it is a worthy read. You can download your own copy of the whitepaper from Emptoris’ Web site (registration is required).
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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