E-Sourcing: Destroyer or Doyen of Value
Tim Cummins from the IACCM has questioned a recent Supply Excellence article on “E-Sourcing Activities & Supplier Relationships: A Match Made in Purchasing Heaven” asking “E-Sourcing: Does it destroy value?“
Tim’s objection is that buyers use auctions to impose terms on suppliers rather than engage in dialogue.
As a data guy, I’m a big fan of auctions because they provide a controlled environment to collect and disseminate information – sellers see what their competition is willing to do and buyers get an overview of the market.
Nevertheless, I agree with a lot of what Tim says because auctions create information flow in only 2 of the 3 possible directions. Data flows from supplier to supplier and from supplier to buyer but it does not flow from buyer to supplier.
This can create a situation that I will call the Incumbent’s Curse. It’s the other side of the coin from the Winner’s Curse. In the winner’s curse, the winning respondent in a tender finds that, in the heat of the auction, they have paid way too much. In the Incumbent’s Curse, the incumbent supplier cannot win the tender because they know how damn expensive this buyer is to service.
Imagine a supplier who delivers products to offices. In the spec in the tender, the buyer has not mentioned that it takes 30 minutes to get through security and that deliveries can only take place between 7:30am and 8:00am. The incumbent knows this and knows that this adds 1.5% to the cost of servicing the contract. The other respondents do not know this and have a 1.5% “advantage” in the auction. The incumbent loses the contract. The winner unwittingly shaves 1.5% from their margin.
Perhaps we need an auction facility that encourages a three-way dialogue.
Comments are closed.
Doug –
Specifically referring to the below comments:
“Nevertheless, I agree with a lot of what Tim says because auctions create information flow in only 2 of the 3 possible directions. Data flows from supplier to supplier and from supplier to buyer but it does not flow from buyer to supplier.”
While I agree that during the course of the event (the period of time in which the suppliers are providing competitive quotes) information is in a dual-directive flow, the buyer has full opportunity to provide information and actually increase communication with the suppliers prior and post the e-sourcing event. Allow me to expand –
It is strongly encouraged in most e-sourcing environments that suppliers still be technically capable and their product or service be sourcable in terms of quality. The foundation of quality is unwavering throughout the process. This supports the notion that the buyer-supplier communication line must be fully open prior to an e-sourcing event. The buyer may have already collected initial pricing from the suppliers as well, in which the buyer can give feedback prior to the event – so long as there is equal opportunity provided to all suppliers with this feedback. There are parameters within e-sourcing events that allow the buyer to communicate important factors, ask relevant questions, and encourage suppliers to drive to targets set from the buyer side – not simply compete against the natural market.
Really, the important takeaway from my commentary is that suppliers cannot be blindly subject to an e-sourcing event. It destroys both the integrity and honesty of the sourcing process, but can also destroy the validity of buyer communication to the suppliers. It’s also crucial on the opposite side of the coin that suppliers ask the right questions, at the same time with the expectation that the buyer is providing them with all relevant and necessary information to participate, fully knowledgeable of their obligation upon winning.
Thanks for the comments Allison. I agree that nothing in e-sourcing necessarily creates a reduction in the flow of information to the vendors but, like overly-restrictive tendering policies, e-sourcing can inhibit the free flow of information that may lead to suppliers providing the most innovative solutions to the buyer.
Ensuring this doesn’t happen is the responsibility of the buyer in the same way that not shooting your hunting partner is the responsibility of the hunter. Of course, Dick Cheney’s love of hunting is no reason to ban rifles.