Once spending is properly segmented per Figure 1, four focal points determine the price paid. A company's strategy affects
its ability to pay less, to use less, to use something else, or not to use at all. Take a close look at specifications and
carefully review the requirements. In many cases, a company will find individual requirements that are "over spec'd" or not
needed at all, which lead to significant and unnecessary costs. Additionally, consumption can often be reduced by making the
user community aware of the total costs involved and by policies that control overall usage, particularly for indirect items
Online reverse marketplaces
. Think about how a company buys. It is probably one of the following scenarios. The simplest is calling the supplier and
accepting the price being quoted. Then there is the "haggle" method, same as the first method, but with some pressure applied
to get a lower price. Then more sophistication with the "competitive bid policy," in which the buyer typically gets three
bids before making a selection. Another method is to do additional negotiation after getting the three bids, an interesting
approach, but it still may fall short in securing the best possible terms.
A reverse auction, a transparent and dynamic bidding model, is different. All sellers are bidding on the exact same item or
service. When using this method, the buyer must have good specifications or requirement documents available to all sellers
as opposed to the haphazard way requirements are given using some of the other traditional methods. Because the buying event
has great transparency, sellers can see if their pricing leads or lags. The buyer does not have to select the lowest bidder
and may weigh other factors in the purchasing decision. Reverse auctions drive pricing to what the market will bear at any
given time against various seller independent variables.
Until recently, the technology required to conduct reverse auctions was costly, required considerable employee training, and
presented certain internal and some external barriers for implementation. These barriers, however, are eroding. The premier
reverse auction marketplace, FedBid, used by the federal government for 10 years, is now available for commercial use and
offers a procurement model for commodity products and basic services. The marketplace has over 50,000 qualified suppliers.
More than 50,000 "buys" were conducted in 2010 with savings ranging between 5 and greater than 50%. There is no cost to the
buyer for using the technology, which is web-browser-based. The winning seller pays a modest 3% transaction fee and is billed
by the marketplace operator 60 days after the buying award is made. If the product is not currently in the marketplace, the
marketplace operator will at, no charge, find the right sellers and even train a company's existing suppliers so they can
compete on a regular basis in the marketplace. Reverse auctions can be good for buyers and sellers. Buyers save money, and
sellers gain more opportunities to win business. Reserve auctions, along with the other sourcing practices discussed, are
potential drivers for value creation.
Gregg Brandyberry is CEO of Wildfire Commerce, and senior advisor for A.T. Kearney Procurement and Analytic Solutions, tel. 215.327.5739, firstname.lastname@example.org
1. E. Teichert, "Top 10 Pharma Layoffs for 2010," FiercePharma, Dec. 7, 2010.