reverse auction in procurement

8/3/2019 Reverse Auction in Procurement

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1Prentice Hall, 2002

Company-Centric B2B

Learning Objectives

Describe the B2B field

Describe the major types of B2B models

Describe the characteristics of the sell-sidemarketplace

Describe the sell-side intermediariesmodels

Describe the characteristics of the buy-side marketplace and e-procurement

Explain how forward and backward auctionswork in B2B

Describe B2B aggregation and grouppurchasing models

Describe collaborative e-commerce

Understand issues concerning theimplementation of company-centric B2B

Distinguish Internet-based EDI fromtraditional EDI

Learning Objectives (cont.)

General Motors’ B2B Initiatives

EC initiatives —build-to-order project to be inplace by 2005 reducing inventory of finished

carsSelling capital assets

TradeXchange online auctions of items likeused machines for manufacturing

Significantly decreases time for sales

Increases dollar amount of the sales

General Motors’ B2B Initiatives

EC initiatives at TradeXchangeBuying commodity products--$1 billion annual

expenditure for direct and indirect productsTraditional process

Length of time measured in weeks

Cost prohibited the number of bids

Reverse auction —automated process

Internet “open bid”—many suppliers takepart

Job is awarded quickly

Price to GM significantly lower

Concepts and Characteristics of B2B EC

B2B EC defined

Transaction conducted electronically betweenbusiness over the networks

Internet

Extranets

IntranetsPrivate networks (e.g., EDI)

Automated trading improves the process

Concepts and Characteristics

of B2B EC (cont.)

Market size and content

Expected to grow from $1.1 trillion in 2003to $10 trillion by 2005

Percentage of Internet-based B2B from2.1% in 2000 to 10% in 2005

Private and public e-marketplacePrivate —one-to-many mode

Public —many-to-many mode

of B2B EC (cont.)

How is B2B conducted?

Directly between buyer and seller

Via an online intermediary Along the supply chain

With or without intermediaries

Types of transactions

Spot buying —determined by dynamic supplyand demand

Strategic sourcing —long term contracts

Figure 6-1

B2B Supply Chain

of B2B EC (cont.)

Supply chain relationshipsInterrelated subprocesses and roles

Acquisition of materialsProcessing products and services

Moving to distributors

Purchase by consumer

Traditional process managed through papertransactions

B2B applications offer competitive advantagesfor supply chain management (SCM)

of B2B EC (cont.)

Entities of B2B ECSelling company —marketing managementperspective

Buying company —procurementmanagement perspective

Electronic intermediaries —optional thirdparty directory service provider (scope of

service may be extended to orderfulfillment)

Trading platforms —pricing and negotiationprotocol (auctions, reverse auctions)

of B2B EC (cont.)

Entities of B2B EC (cont.) Payment services —mechanism fortransferring money to sellers

Logistics providers —logistics to completetransaction (packaging, storage, delivery)

Network platforms —Internet, VAN, intranet,extranet

Protocols of communication —EDI or XML

Back-end integration —connecting to ERPsystems, databases, functional applications

of B2B EC (cont.)

ProductCustomer

Supplier

Product process

Transportation

InventorySupply chain

Competitor

Sales and marketing

Supply chain processand performance

Information processed in B2B

of B2B EC (cont.)

Electronic intermediaries in B2BConsumers and business may share intermediaries

Businesses may use different intermediaries with

different suppliers

Benefits of B2B modelsEliminate paper-based systems

Expedite cycle time

Reduce errorsIncrease employee productivity

Reduce costs

Increase customer service and partnershipmanagement

B2B Models

Company-centric models

Sell-side marketplace (one-to-many)

Buy-side marketplace (many-to-one)

Many-to-many marketplaces —the exchange

Buyers and sellers meet to trade

Trading communitiesTrading exchanges

Exchanges

B2B Models (cont.)

Other B2B models and servicesFor the purpose of selling

For the purpose of buying

Value chain integrators

Value chain service providers

Information brokers

Vertical vs. horizontal marketplaces Vertical —one industry or industry section

Horizontal —service or product used in severaltypes of industries

B2B Models (cont.)

Virtual service industries in B2B

Travel and tourism services

Real estate

Electronic payments

Online stock trading

Online financingOther online services

Figure 6-2

Sell-Side Marketplace Architecture

Sell-Side Marketplaces:One-to-Many

Virtual sellers —Bigboxx.com.hk of Hong Kong

B2B office supply retailer services

Large corporate clients

Medium corporate clients

Small offices

Goal —sell products in various SE Asian countriesOffers more than 10,000 items

Uses more than 300 suppliers

Sell-Side Marketplaces:

One-to-Many (cont.)

Virtual sellers —Bigboxx.com.hk of Hong Kong(cont.)

Company portal attractive, easy to useBrowse online catalogs

Use search engines

Payments

Cash or check upon delivery Automatic payments

Credit card

Purchasing card

One-to-Many (cont.)

Virtual sellers —Bigboxx.com.hk of HongKong (cont.)

Delivery

Owns trucks and warehouses

Delivery scheduled online

Same day (within an hour)

Specifically scheduled time

Ordering system integrated with SAP-basedback-office system

One-to-Many (cont.)

Virtual sellers —Bigboxx.com.hk of HongKong (cont.)

Value-added services

Track status of order

Check stock availability

Promotions

Customized prices

Group accounts and central approval —forbusinesses with multiple branches

Standing orders automatically activated

Large number of reports and data available

One-to-Many (cont.)

Customer serviceGeneral Electric

20 million calls/year about appliances

Reduced cost of each call from $5 to $0.20

Milacron, Inc.

Site contains 55,000 products

Easy to use

Securely handles selection, purchase,application

Technical service —expanded to provide ahigher level of service than previously available

at the site

One-to-Many (cont.)

Direct sales from catalogs

Configuration and customization

Efficient customization for direct salesBusiness customers

Customize products

Receive price quote

Submit order

Successful cases

One-to-Many (cont.)

Direct sales from catalogs

BenefitsReduces costs (to buyers and sellers) anderrors during the process

Speeds up order cycle

Ability to customize productsOffer different prices to different customers

One-to-Many (cont.)

Direct sales from catalogs (cont.)

LimitationsChannel conflicts with distributionsystems

High cost when traditional EDI used

Large number of business partners isneeded to justify system

Selling Side: Auctions and Other Models

Forward auctions —quick disposal of itemsRevenue generation

Increased page views

Member acquisition and retention —biddingtransactions result in additional registeredmembers

Selling from own site when:Large companies that conduct auctions frequentlydon’t benefit from using intermediaries

E-marketplace already in use, cost of addingauction not too high

Selling Side:

Auctions and Other Models (cont.)

Using intermediaries when:No resources required

Own and control auction informationFast time to market

Searching and reportingSearch and report all auction activities

Standard reports available

Additional analysis of complex information

Selling Side:

Auctions and Other Models (cont.)

Billing and collection

Automatic calculation of shipping weights andcharges

Payment —encrypted credit card data

Billing information —easily downloaded intoexisting systems

Successful if:Sufficient number of loyal customers

Products well known

Price not major purchasing criteria

Sell-Side Case:

CISCO Connection Online (CCO)

Benefits —saves the company $363 million

per year in:Technical support

Human resources

Software distribution

Marketing material

Cisco Connection Online (CCO) (cont.)

Customer service —Cisco Connection online

Online ordering —Internet Product Center

builds virtually all products to order

Order status —customer tools for finding

answers to order status inquiries

Benefits to Cisco

Reduced operating costs for order taking

Enhanced technical support and customerservice

Reduced technical support staff cost

Reduced software distribution costsLead times reduced fro 4-10 days to 2-3 days

Benefits to customers

Quick order configurationImmediate cost determination

Collaboration with Cisco staff

Sell-Side Intermediaries

Marshall Industries —(a subsidiary of AvnetMarshall) multinational distributor of electronic components known for its innovative usesof IT and the Web

Products and servicesMarshallNet

Marshall on the Internet (portal)

Strategic European InternetElectronic Design Center

PartnerNet

NetSeminar

Education and News Portal

Sell-Side Intermediaries (cont.)

Marshall Industries —a subsidiary or

AvnetMarshall (cont.) Survival strategy

Continuous improvement programs andinnovations

Team-based organization, flat hierarchy,decentralized decision making

Profit sharing compensation for salespeople

Marshall Industries —a subsidiary of AvnetMarshall (cont.)

Survival strategyCRM highly promoted

Web-based services create value betweensuppliers and customers

EC initiatives supported by:Changing internal organization

Changing internal procedures

Boeing’s PART Acts as an intermediary between the airlines

and parts’ suppliers Provides a single point of online accessthrough which airlines and parts’ providers canaccess the data needed

Goal: provide its customers with one-stopshopping for online parts and maintenanceinformation and ordering capability

Boeing’s PART

Spare parts business using traditional EDI

Mechanic tells purchasing department parts are needed,purchase is approved, purchase is made

Large airlines connect to Boeing's VAN

Boeing finds part and delivers

Debut of PART on the InternetEncourages customers to order parts electronically —cheap, easy, fast

50% of customers using Internet within first year

Boeing’s PART

Benefits of PART onlineImproved customer service

Significant operating savings

New sales opportunities

Customer service online reducedPhone calls (purchasing, order status etc.)

Data entry

Boeing’s PART Portable access to technical drawings/support

Boeing On Line Data (BOLD) providesavailability to:

Engineering drawings

Manuals

CatalogsOther technical information

Portable Maintenance Aid (PMA) —solvesmaintenance problems

Boeing’s PART

Benefits to Boeing’s customers Increased productivity —less time searchingfor information

Reduced costs —delays at gate reduced

because all information is availableIncreased revenues —faster service providestime savings

Buy Side: One-from-Many,

E-Procurement

Purchasing agents (buyers)Direct purchasing

Use of material is scheduledNot a shelf item

Indirect purchasing

Nonproduction materialsInefficiencies in procurement managementof indirect materials

Fi 6 3

Figure 6-3

A Traditional Purchasing Process Flow

Source: ariba.com, February 2001.

E-Procurement (cont.)

Innovative procurement managementInnovative purchasing as strategic approach to

increase profit marginsWeb facilitation includes:

Electronic tendering

Volume purchasing

Aggregating supplier catalogs at buyer’ssite

Group purchasing

Others

Goals of procurement reengineering

Increase purchasing agent productivity

Lower purchasing prices of items

Improve information flow and management

Minimize maverick (unplanned) buying

Improve payment processStreamline purchasing process to make it:

Simple

B Sid O f M

Goals of procurement reengineering (cont.)

Reduce administrative processing cost per order

Find new suppliers and vendors to providefaster/cheaper goods and services

Integrate procurement process with budgetary

control in an efficient and effective wayMinimize human errors in buying or shippingprocess

Figure 6 4

Figure 6-4

Buy-Side B2BMarketplace Architecture

B Sid O f M

Direct vs. indirect sourcingTools to automate purchasing goods

Direct or mission critical80% of manufacturer’s expenditure

Long-term relationship with vendor of known quality goods

Tight integration with suppliers alongsupply chain

Indirect —use of public exchanges forindirect sourcing

Buy Side: Reverse Auctions

Pre-Internet Reverse auction processPrepare description of product to be produced

Announce project via ads, mail, telephone

Send detailed information to interested vendors Vendors prepare proposals

Bidders submit document proposals

Proposals evaluated

Problems:Laws

Expensive

Errors

Buy Side: Reverse Auctions (cont.)

Web-based reverse auction processBuyers prepare bidding project information

Buyers post project on portal

Identify potential suppliers

Invite suppliers to bid

Suppliers download project information

Suppliers submit electronic bidReverse auction in real-time, or it can take a fewdays

Buyers evaluate and award contract

Buy Side: Reverse Auctions (cont.)

Web-based reverse auction process

Benefits:Electronic process is faster

Administratively much less expensive

Enables location of cheapest possibleproducts

Procurement Revolution at GE

TPN at GE Lighting DivisionPurchasing was inefficient —too many administrativetransactions

Process for each requisition took 7 daysComplex and time-consuming

Could only send out bids for 2 or 3 suppliers

Trading Process Network (TPN) —electronic bids

Entire process takes 7 days (for suppliers tobid)

2 hours to send information to suppliers

Evaluate and award bids same day

Procurement Revolution at GE (cont.)

Benefits to GE

Involvement in procurement process

Labor declined 30%Material costs declined 5%-20%--widerbase of suppliers online

Redeployment

60% of the staff Sourcing department concentrates onstrategic activities instead of paperwork,etc.

Benefits to GE

Time to identify suppliers, prepare a request forbid, negotiate a price, and award the contract

Was 18-23 days

Now 9-11 days

Invoices automatically reconciled reflecting

modificationsGE procurement departments share informationabout their best suppliers across the world

Benefits to buyers

Worldwide supplier partnerships

Current business partnersStrengthen relationships

Streamline sourcing process

Rapid distribution of information

Transmit electronic drawings to multiple suppliers

Decrease sourcing cycle time

Quick receipt and comparison of pricing bids

Benefits to suppliers

Increased sales volume

Expanded market reach, finding new buyersLowered administration costs for sales andmarketing activities

Shortened requisition cycle time

Improved sales staff productivity

Streamlined bidding process

Deployment strategies

Start EC in one division and slowly go to alldivisions

Use the site as public bidding marketplace togenerate commission income to GE

Aggregating Catalogs

Aggregating suppliers’ catalogs: an internalmarketplace

Maverick buying to save time leads to high prices Aggregating all approved suppliers’ catalogs inone place

Reduced number of suppliers

Buyers at multiple corporate locations

Fewer and remote suppliers

Larger quantity/lower costs

Group Purchasing

Group purchasing —orders from severalbuyers are aggregated

Internal aggregationEconomy of scale

Reduced transaction processing cost

External aggregation

Aggregating demand online

Putting together orders from multiplebuyers to make large volumes/lower costs

Electronic Bartering

Electronic barteringExchange of goods or services without the use of

moneyExchange a surplus for other need

Bartering exchange

Submit surplus to exchange for points

Points used to buy what company needsBenefits:

Faster than manually

Easier to match

Collaborative Commerce (C-Commerce)

Web-based systems used betweenand among suppliers for:

Communication

Design

Planning

Information sharingInformation discovery

Collaborative Commerce

(C-Commerce) (cont.)

Webcore construction goes online with itspartners

Figure 6-6

Suppliers Extranet: Hudson Dayton Case

Reduce design cycle time by connectingsuppliers: Adaptec, Inc.

Microchip manufacturer supplying electronic

equipment makersOutsources manufacturing tasks

Delivery times exceeded their competitors

Solution to the problem

Extranet and enterprise-level supply chainintegrated software

Significantly reduced order-to-productdelivery time

Suppliers

Distributors

Overseas

Factories

Customers

Reduce product development time by connectingsuppliers: Caterpillar, Inc.

Heavy machinery manufacturer uses extranetRequest for customized component directly to

designers and suppliers ship to buyers

Connect engineering and manufacturing division with

worldwide

Other examples of c-commerce

Tricon Restaurant International —global brand

marketing managementRE/MAX —real estate franchiser improvedcommunication and collaboration betweenindependent owners

Marriott International —links corporations,franchising partners, suppliers, customers

Nygard of Canada —interorganizational collaboration

B2B Infrastructure

Server to host database and applications

Software for executing sell-side (catalogs)

Software for conducting auctions and reverseauctions

Software for e-procurement (buy-side)

B2B Infrastructure (cont.)

Software for CRM

Security hardware and software

Software for building a storefront

Telecommunications networks and

protocols

Extranet and EDI

Secure interorganizational networks

Traditional EDI limits accessibility of smallcompanies

Internet-based EDI offers wide accessibilityto companies around the world

Integration

ERP software

Customer, supplier, and other databases

Legacy systemsCatalog (product) information

Inventory systems

Sales statisticsDecision support systems (DSS) and SCMapplications

Integration (cont.)

Integration with existing information systems

Issues in integrating with back-end information

systems:Intranet-based work flow

Database management systems (DMBS)

Application packages

Back-end sell-side integration works forsellers but not buyers and vice versa

Integration (cont.)

Integration with business partners

Easy integration with one company-centric side

Not easy to integrate for many buyers or sellers

Need buyer owned shopping cart that can

interface with back-end information systems

Figure 6-7

B2B Agents

Figure 6 7

Intelligent Agent-Based Commerce

Source: J. K. Lee and W. Lee (1997).

Implementation Issues

Justification and prioritization

Must conduct cost benefit analysis of proposedprojects

Include organizational impacts

Possible channel conflicts

Dealing with resistance to change due toprocesses reengineering

Cost-benefit analysis related to:

Finding B2B opportunities

Prioritizing potential initiatives

Implementation Issues (cont.)

Vendor selection

Primary vendor uses its software and procedures,

adds partners as neededIntegrator mixes and matches existing productsand vendors to create “best of the breed”

Affiliate programs

Referral program

Useful for B2B intermediaries

Implementation Issues (cont.)

Implementing e-procurement

Fit e-procurement into EC strategyReview and change procurement process itself

If ERP or SCM is in place —integrate e-procurement,If not in place —BPR before implementation

Coordinate buyer’s information system with seller’s

Managerial Issues

B2B marketing —sell-side marketplaces requireadvertisement and incentives

Which models to use and when —need forimplementation strategies and prioritization

Purchase process reengineering (BPR)

Establish buy-side marketplace on its server if volume is big enough to attract major vendors

Join third-party intermediary-oriented marketplace if volume is small

Managerial Issues (cont.)

Integration —trading in e-marketplaces isinterrelated with logistics

Particularly true in many-to-many exchanges

Company-centric marketplaces must integrate:

Logistics

Other support services

Business ethics

Accessing unauthorized areas in the tracingsystem should not be allowed

Privacy of partners should be protectedtechnically and legally

Auctions —both forward and reverse

Benefits are substantialImplementation is relatively simple

Considerable flexibility in implementation

E-procurement —critical success factors

Need to cut down number of routinetasks

Reduce overall procurement cycle usingappropriate information technologies

Workflow

GroupwareERP software

B2B models

reverse auction in procurement

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