Elemica- Authenticity of Auctions

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The Authenticity of Auctions

A Guide to Debunking Popular Misconceptions and Sharpening Your Competitive Edge

Capture market pricing.Maximize savings.

Sharpen your competitive edge.

The Authenticity of Auctions - A whitepaper by Elemica - Copyright © 2016 Elemica. All rights reserved.

Executive Summary

An auction, or an eAuction (its digital counterpart), is a business transaction between auctioneer and bidder, be it B2B, B2C, or C2C. Just so, eAuctions occur in an electronic marketplace, where all involved parties are welcome to participate in a timely manner in this transparent environment. Auctions are typically classified into two main types: the forward auction (in which an auctioneer offers products or services and interested parties submit their bids, causing the price to increase) and the reverse auction (in which several sellers bid for one buyer/host’s order, attracting the buyer by lowering the price).

Waging your personal battle to succeed in a competitive and globalized market, think of the auction as a weapon in your business’s armory. As any “weapon”, it is exactly as effective or as ineffective as the person wielding it; the usefulness or value of an auction expands or collapses in proportion to one’s own capabilities and knowledge. Many people refrain from dabbling in auctions, scarred by misinformation or past failures.

In this paper, we seek to debunk the most popular and harmful of these myths. We furthermore lay out a foundation for explaining and exploring the purpose, benefits, and authenticity of these business transactions. Conducted knowledgeably and ethically, auctions open the door to a plethora of opportunities, insights, and savings.

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The Authenticity of Auctions - A whitepaper by Elemica - Copyright © 2016 Elemica. All rights reserved. 3

Myth #1: Auctions Are Only About Price.

Perhaps the most common misperception about auctions is that they are exclusively obsessed about price. Auctions actually are very versatile; there are numerous types of auctions, and the direction you take depends on your goals and needs as much as it does on your market environment and communication style. Although it may be easier for bidders to compete chiefly on price and the coverage of items during a live auction, well-organized auctions discredit the myth that all auctions are solely price-driven. An auction can be ideal for buying or selling a spectrum of products and services, as long as it adheres to a couple key requirements:

Characterized by transparency and clear communication, the attractiveness of an offer in a well-rounded auction encompasses a number of factors: quality, lead time, on-time delivery, packaging, payment terms, perceived risks, and ROI —definitely not just price. The option of categorizing these constituents offers both bidders and sellers the insight on the competitiveness per cost competent. This would thereby allow a bidder to realize, for instance, that his bargaining power gained from lower prices or higher quality is harmed by his too-high packaging costs or too-late delivery timeframes.

Truth: Auctions Aren’t Only About Price.

Clear specifications

Everyone needs to be on the same page for such a transaction to be effective. All involved parties must know what the product specifications, terms, and conditions are. (This is why it’s easier and more popular to auction products instead of services; products are tangible, and thus easier to specify.)

Market Competition

There’s no real point in auctioning if you don’t have any competing bidders; if that’s the case, consider meeting up to negotiate with that one interested party instead. If you’ve got something worth fighting for and many people want it, however, you’ve got a better chance of securing market interest and justifying the resources spent during your transactions in an auction.

Total Cost of

Ownership

Regulatory & Compliance

Intellectual Property

Other Costs

Risk Management

Payment Terms& Financing

Service

Quality

Transportation & Distribution

Unit Price

Inventory

The Authenticity of Auctions - A whitepaper by Elemica - Copyright © 2016 Elemica. All rights reserved.4

Myth #2: Auctions Solely Benefit the Host, and Are Exclusively for Buying.

Auctions are one of the most beneficial sourcing tools — for all involved parties. There are several key advantages when compared to other transactions such as Request for Quotation (RfQ) or face-to-face negotiations.

Six Win-Win Characteristics of Auctions:

TransparencyWith real-time feedback provided by the auction system, bidders are aware of the commercial attractiveness (or unattractiveness) of their offers. This reassuringly compares them equally and simultaneously, without leeway for politics or games during the business negotiations.

ControlSuppliers enjoy the option to interact and improve their offers, thus improving their chances of securing the deal — whereas in an RfQ, for example, a bidder might be excused even while she is contemplating about improving the offer (very frustrating).

Focused CompetitionUnlike a face-to-face negotiation, bidders don't need to worry about being challenged by buyers; they can only be challenged by their competition.

Cost SavingsYou'll save time, energy, and money by scoping out the situation from the comfort of your own computer. Work smart!

Increased Outreach and InsightThis is a crucial characteristic of eAuctions, which can help expand a business's global reach by allowing it to touch markets that would have been unattainable through local marketing channels. With eAuctions, businesses can also quickly and informally gauge market interest and discover what the market is willing to pay, thereby garnering valuable market intelligence.

ConvenienceGiven internet connection, you can buy or sell an item from anywhere in the world at the click of a button. With full access to a product's information, testimonials, ratings, terms of payment, and delivery options, it's never been easier or faster to secure a deal. On the other hand, both buyers and sellers can more easily fall prey to abounding scams, fakes, and fraud, so it's important to ensure that you're dealing with verified partners in a credible environment. Another disadvantage is that people sometimes become so immersed in the bidding contest that they're willing to overpay or undersell in order to "win", which results in losses instead of savings.

Auctions

Transparency Control

Focused Competition

Increased Outreach and Insight

Convenience

Cost Savings


Benefits for All Involved Parties:

Market, Process, and Competitor Transparency; attracting multiple qualified participants can help illuminate an item’s true market price (and serve as a benchmark for future sourcing projects as well). Buyers benefit by learning true costs; suppliers benefit by learning the market rate; all are welcome to participate in a healthily competitive environment.

Minimized Error Rates and Streamlined Processes, due to upfront and thorough planning. Preliminary price rounds and immediate online editing further help to revise and clarify requirements and interactions.

Simplified Comparisons: immediate and straightforward feedback thanks to bids being submitted and shared in a common format on a single platform.

Increased Buying Reach: geographically, as well as across multiple businesses, fields, and industries; a global scope is possible.

Process Improvement: better communication and data accuracy.

Cycle Time Reductions: eAuctions can be coordinated in days, typically conducted within the hour, and will provide accelerated rewards and benefits. This encourages participants to focus and make timely decisions, shaving off weeks from the old timelines of traditional offline methods.

Gained Resources: eAuctions are less time-consuming and provide a quicker return-on-investment; this results in more time for high-value activities (such as spend analysis and strategy selection), as well as lower acquisition costs, lower cost of sales, etc.

Truth: Auctions Do Function With a Win-Win Mindset —And Aren’t Just About Buying.


Myth #3: Auctions Are Unethical and Undesirable.

As in any business, there will be people who try to fool you, dupe you, misinform you, and manipulate you. Then there will be savvy, professional, honest folks who are authentic and genuine and wonderful to do business with. It takes all kinds. It is in your power to find and choose environments based upon the highest standards of ethics.

People sometimes mistake going under the table as the fastest or easiest way to make money. Which might seem to be the case, sure, until you accidentally light yourself on fire, so to speak (and you always will, eventually, or you’ll be discovered/humiliated/fired by someone else). Dishonesty works until it doesn’t. Honesty, however, compounds. You reap what you sow, exponentially and in the long-term. The honest route is the true fast-track to sustainable success. It is paved with respect, integrity, equitability, and trustworthiness; it attracts like-minded people. Once you realize that this fusion exists, it becomes the most desirable path of all.

Here are the most common barriers to a successful auction — and the respective ways to overcome them.

Challenge #1:Bad Intentions and Miscommunications.

Beware of buyers who don’t award their businesses to the participating suppliers (or don’t award them at all) or who don’t respect non-disclosure agreements.

Beware of bidders who misrepresent themselves, submit invalid bids, or don’t stand by their bids.

Misunderstandings matter. While a buyer might set up an auction as a basis for fair competition, his suppliers might perceive it as a tactic to unreasonably lower prices; this could easily evoke other bidders’ distrust and unwillingness to participate.

SolutionEffective Communication, Consistent Policies, and Clear Intentions.

In order for sourcing projects to succeed, participating parties must have clean agendas and good intentions.

Communicate. Ensure that everyone is on the same page to avoid misunderstandings, confusion, and loopholes.

Standardize. We strongly recommend drawing up a code of ethics if one doesn’t already exist; ensure that everyone involved has received, read, and signed it.

Follow Ethical Best Practices. This should be part of the business’s culture, without second thoughts or exceptions. To avoid misunderstandings, auctions must be conducted ethically, with consistency and transparency.• Use a pre-established forum for communication.• Follow up on all issues, concerns, and award/contract negotiations

with consistency and integrity.• Ensure everyone is accountable to (and has access to) the code of

ethics at all times.• Communicate clearly, especially in regards to the award criteria

(i.e. what factors determine who wins the business, how those factors are taken into account, etc.).


Challenge #2:Personal Politics and Misperceptions.

Biases. Beware of stakeholder biases (i.e., some internal customers may be attached to suppliers, or some suppliers may be talking with each other to avoid competing against each other).

Misperceptions. Many stakeholders dislike head-to-head competitions, misinterpreting them as mean-spirited or disloyal, especially towards faithful and high-quality suppliers.

Confusion. Stakeholders may be unaware of the auction’s rules, purpose, or process. Imagine finalizing an auction as the first ranked bidder, but not (yet) getting the allocation, as your product first has to be homologated — a process which can take months — and the outcome is unsure. Ignorance easily translates to avoidance, which is the main reason that people avoid auctions. Misunderstandings lead to failure.

SolutionEducated, Updated Stakeholders.

As with any situation, ignorance also breeds fear. Many stakeholders have never stopped to contemplate how to use auctions in their favour — or recognize them as a significant business asset and tool — because no one actually shared that information with them. It’s essential to ensure that everyone is on the same page to avoid misunderstandings, confusion, and loopholes. The sourcing team must invest in educating their bidders on the process, benefits, and proper decorum of the auction.

Education. Stakeholders are more likely to be interested and accepting if they are knowledgeable of the process.

Communication. Use one channel of communication (i.e. an online forum or webinar) to which all parties have access to, that includes the equal sharing of all relevant information to everyone involved. This helps to ensure their equal involvement, neutralizes potential feelings of disloyalty, discomfort, or jealousy between competing participants, and minimizes misunderstandings (especially between incumbent and new suppliers, who have less information).

Organization. Bidders should be given a detailed overview of the process, with an outlet (i.e. online forum) where everyone can express questions, concerns, suggestions, and reviews. Plans, schedules, and training are of the essence. Strategize ahead of time.


Challenge #3:Monetary, Technical, and Market Factors.

Hidden Costs. Have a strong grasp of the market context — especially the supply-and-demand equation. Overlooked expenses could crop up in situations of supplier diversification or change, or with varying utilization costs based on differences in quality across the supply base.

Technical Difficulties. While you can choose sophisticated and cutting-edge online platforms to conduct eAuctions, there are always possible factors of human error and technical fallacy. Platforms fail, suppliers lose connectivity, and computers break down.

Market Conditions. Maybe demand exceeds supply (or vice versa), or prices are unstable, or suppliers aren’t communicative or interested enough. There will be things you can’t control and must accommodate; remember, too, that such conditions are susceptible to change at all times.

SolutionMarket Research, Backup Plans, and Commodity Evaluation.

Encourage stakeholder participation and conduct RFIs to uncover hidden costs and key concerns. Ask separate suppliers for their own specifications and prices to check if you’re on the same page.

Backup plans will minimize disruptions. Online, choose platforms that detect when a supplier loses connectivity. Enable supplier bids via a proxy bidding process. Have technical support available before and during auctions.

Enforce buyer credibility by standardizing buyer rules. Buyers must communicate new processes, uphold their code of ethics, and maintain constant communication with their suppliers and participants to build trust and understanding.

Evaluate each commodity. Evaluate auctions constantly, as the only constant thing in a marketplace is change. Consult with commodity experts and sourcing professionals. Conduct a spend analysis initiative that includes a project strategy.

A preliminary bid phase can help identify inconsistencies (i.e. unsustainable bids — supplier bids that are far too high or low in regards to the market average, usually placed by a supplier who misinterpreted the specifications and actual costs/requirements). This can also help to ensure an adequate pre-qualified market of interest for a commodity, with healthy competition, in order to avoid supplier collusion or even refusal to participate.

Truth: Conducted Authentically and Ethically, Auctions Can Produce Very Desirable Results.


Setting the Stage for Success

Before reaping the rewards, however, it is essential to set the stage. What makes for an excellent auction? Given their basic requirements and multiple benefits, auctions can be suitable for both buying and selling, as well as for collecting invaluable market information. Auctions are a very favorable option when:

• Requirements and product/service descriptions are specific and clearly definable.

• The product/service is commercially attractive and there are multiple, qualified suppliers who are interested. (At least two participants are on equal, contestable footing.)

• Predictions of using an auction indicate high savings, cost-avoidance opportunities, and relatively low risk.

Five Fundamental Requirements for Successful Auctions:

1. Knowledge and Expertise. You must be aware of the current situation, the sourcing process, and how your own goals and needs fit into this. If you’re not aware, enlist the support of sourcing experts who are.

a) What is the current sourcing strategy, how is it organized, and how can you reframe or change it to your advantage?

b) How many suppliers are there/could there be? What are their special capabilities (premium spec, lead times, capacity, innovation, etc.)? How are they affected by feedstock price movements?

c) What is the power balance, the market trend, the cycle for the supply-and-demand ratio? How competitive is the supply base, and how scalable is the production?

d) What volume slots lead to the best value risk ratio? How will you arrange allocations and homologations?

2. Alignment and Commitment to the sourcing process and the awarding rule; which participant will be awarded which volume when achieving which objective.

3. Strong Incentives. Entice your suppliers in order to facilitate supplier dynamics. Know the supplier landscape and cater to it accordingly.

4. Clear Communication. Thorough explanations, transparent dealings, sufficient supplier training, and deployment of test events will help keep everyone on the same page.

5. Clean Organization. Allow and prepare for the participation of all commercial decision makers.

There’s no one-size-fits-all solution for every personal or professional transaction; why would that apply to your business dealings? Remember that a successful auction is a custom-made auction.


Conclusion

Auctions are certainly flexible enough to accommodate more than a price comparison. They can be set up with a win-win framework; the auction is actually the only sourcing tool where the bidder has the last word about attaining the business. Auctions aren’t only for buying, either; many forward auctions are conducted, as when a business sells obsolete, scrap, or production waste to recover some costs. Furthermore, these transactions are conducted best when managed with a clear code of ethics, delivering top-of-the-line results.

When strategizing for successful auctions, be aware of the risks and barriers involved. Be attune to the shifting context of the market and the key competitors and players so you can seek sourcing solutions that best suit your own business. Protect yourself from scams and frauds by learning to recognize them and avoid them — without letting one rotten apple spoil the entire barrel. Under the right conditions, an auction can prove to be one of the most invaluable strategic and successful sourcing processes.

By setting standard purchasing formats and adhering to ethical high-quality standards, sourcing teams may streamline their interactions and transactions, simplifying and centralizing data and processes. Auctions are meant to drastically reduce cycle time, decrease risks and the expenditure of resources, and provide a concrete platform for award analysis and optimization. With simple regulations and multi-faceted benefits, auctions can serve as the perfect avenue for channeling your business towards sustainable success.

Leverage market competition.

Reduce time to savings.

Achieve sourcing process transparency.

North America

Global HeadquartersElemica | Philadelphia, PA550 E Swedesford RoadSuite 310Wayne, PA 19087, USAPhone: +1 484 253 4674

Elemica | Atlanta, Georgia780 Johnson Ferry RoadSuite 400Atlanta, Georgia 30342, USAPhone: +1 678 514 3700

Europe

Elemica | Frankfurt, Germany5th floorHerriotstraße 160528Frankfurt am Main, GermanyPhone: +49 69 66123 0

Elemica | Amsterdam, The NetherlandsBuilding Officia IDe Boelelaan 7, 7th Floor1083 HJ AmsterdamThe NetherlandsPhone: +31 20 504 1500

Elemica | London, United Kingdom180 PiccadillyLondon, UKW1J9HFPhone: +44 20 7917 2816

Asia Pacific

Elemica | Tokyo, JapanKY Kojimachi Building 1F5 Chome-4 Kōjimachi Chiyoda-kuTokyo, Japan 102-0083Phone: +81 3 3238 5721

Elemica | Singapore9 Battery Road11/F, Straits Trading BuildingSingapore 049910Republic of SingaporePhone: +65 6597 0964

Elemica | Seoul, KoreaFloor 12, Gongdeok BuildingSaechang-ro 11, Mapo-guSeoul 121-812KoreaPhone: +82 2 561 0825

Copyright © 2016 ELEMICA, All Rights Reserved

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Elemica | Bringing the Supply Chain to Your Enterprise

Elemica is the leading Supply Chain Operating Network for the process industries. Launched in 2000, we drive bottom line results by promoting reduced cost operations, faster process execution, automation of key business processes, removal of transactional barriers, and seamless information flow between trading partners. We transform supply chains by replacing manual and complex approaches with efficient, effective, and reliable ones. Our clients process nearly $400 billion in commerce value annually on our networking, including rockstarcompanies like BASF, BP, Continental, The Dow Chemical Company, DuPont, Exxon Mobil, The Goodyear Tire & Rubber Company, Michelin, Shell, Sumitomo Chemical, Wacker, and many more.

Access our free knowledge resources at http://resources.elemica.com

About Author

Wouter Stegenga, Msc, APICS CSCP, Green Belt Purchasing & Supply Mgmt.

Wouter Stegenga is a Director of Sourcing Development at Elemica where he focuses on driving supply chain cost savings and value creation for some of the world’s largest process industry manufacturers. He has deep experience in developing and leading strategic sourcing strategies, both external consulting and in-house capacities, in Direct Materials, Capital Equipment, Industrial Procurement and Business Services in Industrial Manufacturing as well as a wide spectrum of other industries.

http://resources.elemica.com/

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