Managerial implications fromIndian case studies on e-reverse

auctionsSamir K. Srivastava

Operations Management Group, Indian Institute of Management,Lucknow, India

Abstract

Purpose – The purpose of this paper is to investigate e-reverse auctions (eRA) implementationexperiences across a diverse group of firms and sectors in the Indian context, to derive useful insightsfor theory and practice.

Design/methodology/approach – The paper takes the form of a qualitative multiple case studyfollowing direct observation of object reality. The data analysed include written documentation,archival records, physical artifacts and unstructured interviews with key eRA personnel.

Findings – eRA work best in a competitive, high capacity marketplace and are the dominant strategywhen the focus is on low search cost per supplier, when the percent reduction over time in the priceoffered by the current supplier is low and when the product is standardized. The optimum number ofbidders is five to ten. Most of the findings are in line with literature but some of them differ too. Thesewill add to academic discourse.

Research limitations/implications – The small sample size and case method approach limits theability to generalize the findings. The firms were selected as a convenience sample and so may not betruly cross-sectional. Only analytical generalisation is claimed rather than any statistical generalisation.

Practical implications – eRA improve effectiveness of the sourcing process and facilitate access tonew suppliers. They also lead to standardization of sourcing procedures, reduced order cycle, reducedprices and generally higher service levels. This paper will help firms in India and other countries todevelop policies, strategies and procedures while implementing eRA.

Originality/value – The paper is perhaps the first on eRA practices in India. The author describesthe practices in detail and based on this develops a framework for eRA process and provides detailedand concise guidelines for managers.

Keywords India, Electronic commerce, Auctions, Marketing strategy, Process management,Electronic reverse auctions, Managerial guidelines, Case studies, Three-stage framework

Paper type Research paper

1. IntroductionElectronic reverse auctions (eRA) enable suppliers to compete online in real time andare changing the way firms and their consortia select and behave with their suppliersworldwide. They have gained popularity with the advent of economical and efficientelectronic capabilities (Smeltzer and Carr, 2003). The term reverse emphasizes that

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The author thanks the middle and top managers of six firms for informal discussions andinterviews, as well as for allowing on-site observations and document perusal. The author alsothanks the suppliers’ managers who participated in informal discussions and interviews. Thiswork would not have been possible without their co-operation and sharing of experiences, visionand expertise. Finally, the author thanks the anonymous reviewers whose pertinent feedbackand useful inputs led to significant improvement in the manuscript.

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Business Process ManagementJournal

Vol. 18 No. 3, 2012pp. 513-531

q Emerald Group Publishing Limited1463-7154

DOI 10.1108/14637151211232687

competition among suppliers typically drives prices down, as opposed to the pricesbeing driven upward by competitive bidding in forward auctions. Further, location isnot a constraint. Firms are using eRA to drive purchase costs down to the lowestpossible price (Attaran and Attaran, 2004). Many firms report millions of dollars ofsavings through eRA vis-a-vis traditional sourcing methods (Emiliani and Stec, 2002;Smeltzer and Carr, 2002).

Presently, eRA account for around 10 percent of total corporate purchase spend inIndia. They are being carried out across items, industries and sectors since the beginningof the current decade. Some of the leading third party eRA vendors in India are01markets, Ariba, CommerceOne, Trade2gain, Metaljunction, Synise and IndiaMarkets. Most of them provide end-to-end services that include spend analysis,opportunity assessment, supplier identification, preparing request for quotation (RFQ),training suppliers, bid events execution and post-bid analysis. For this, they deploydiverse fee structures comprising various combinations of fixed start-up fee, transactionvolume-based fee, saving-based commission and consulting fee. Many firms like ApolloTyres, Arvind Clothing, Berger Paints, Carrier Aircon, Coal India Limited, Electrolux,Godrej & Boyce, HCL Infosystems, HDFC Bank, Hero Cycles, Hindalco Industries,Hindustan Motors, Hindustan Unilever Limited (HUL), Himalaya Drug Company,JK Corporation, Larsen & Toubro, Mahindra & Mahindra, Madura Garments, MarutiSuzuki Limited, Oil and Natural Gas Corporation (ONGC) and Tata McGraw-HillPublishing Company have reaped the benefits of eRA. These firms saved between 2 and22 percent on their purchases, with average savings of 10 percent across all itemcategories. Some segments where eRA have delivered substantial savings for buyers inthe Indian context are steel, automotive, commodities (starch and sugar), stationery,transportation freight, maintenance, repair and operations (MRO) items, advertisingspace, infrastructure items and hi-tech equipment.

The growing adoption of eRA in India motivated the present work wherein weinvestigate corporate experiences with eRA across a diverse group of firms and sectorsto study their impact on business policies and practices. For the purpose of this paper,we define eRA as:

[. . .] an online, real-time auction between a buyer firm or a consortium of firms and manyinvited suppliers, where the suppliers can submit multiple bids during the time-period of theauction, and where some degree of visibility exists among suppliers regarding the actions oftheir competitors.

We synthesise from review of the eRA literature and six case studies to develop aframework for carrying out eRA process effectively and provide step-wise detailedpractical guidelines for managers. This will ensure that the firms adopting andimplementing eRA are better prepared and need not reinvent the wheel.

2. Literature revieweRA offer dynamic pricing and enable the purchasing firm or consortia to buy goods andservices at the lowest price or a combination of lowest price and other conditions.Sufficient literature exists to highlight the benefits of eRA (Attaran and Attaran, 2004;Emiliani and Stec, 2002; Smeltzer and Carr, 2002; Kulp and Randall, 2005). Hawkins et al.(2010) find that expected savings, buyer confidence and prior eRA sourcing satisfactionlead sourcing managers to choose to source via eRA. A case study in the UK public sector

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finds that eRA can improve procurement processes, realize cost savings and reducedelivery times ( Jones et al., 2007). Bandyopadhyay et al. (2008) find lowered prices drivenby increased competition as the most notable benefit of eRA. However, the success ofeRA may not manifest just in price reductions but also in the reduction of costs of thepurchasing firm (Arnold et al., 2005). Sometimes, the buyer may experience an increasein realized costs of doing business with the winning supplier (Elmaghraby, 2007). eRAuse has been and will likely persist as an effective cost avoidance mechanism(Schoenherr and Mabert, 2007). One may refer to Wagner and Schwab (2004) for earlyliterature on eRA. They summarize in detail several sourcing management relatedconditions that influence the success of eRA. They find that eRA are applicable to a hostof items (products/services) such as stationery items, software licenses, insulators,personal computers, chemicals and plastics, billboards, etc. in sectors such astelecommunications, logistics services, engineering and transportation.

The responses of buyers and suppliers to eRA have been found to be generallydifferent. The buyer firms that aim to compete on prices are very positive about eRAwhereas supplier firms that aim to differentiate on basis of their innovation capabilityreport bad experiences with eRA (Caniels and van Raaij, 2009). The buyers often usethe information gathered in eRA to renegotiate with their incumbent suppliers(Elmaghraby, 2007). Literature finds that eRA may be coercive (Giamietro andEmiliani, 2007) and also mentions unethical eRA practices, opaque contract awardingprocesses and changing item specifications after the auction. An exploratory study ofeRA outcomes based on an extensive literature review and multiple case studyresearch finds that sometimes, buyers merely use eRA to survey market prices andqualified suppliers are asked to unfairly compete against unqualified lower-costsuppliers (Amelinckx et al., 2008). Some studies report a small set of suppliers whoperceive eRA as an opportunity rather than a threat and have favorable opinions aboutthem (Caniels and van Raaij, 2009; Srivastava, 2009). Schoenherr and Mabert (2007)describe a few common myths versus evolving reality in eRA context and describetheir implications for managers. Elmaghraby (2007) defines various eRA formats andalso addresses issues related to constructing bidding lots, sequencing the lots’ auctions,types of feedback to provide to bidders during the auction and the type of bid format touse. She also discusses merits and demerits of rank versus full disclosure in eRA.Careful preparation of the event including strictly equal treatment of all participantsand effective communication are key factors for obtaining benefits from eRA (Loschand Lambert, 2007).

From supply chain perspective, Sehwail et al. (2008) carry out a detailed literaturereview of eRA and call for more supply chain management research within the field.Chopra and Sodhi (2004) suggest that acquiring redundant suppliers may be one of thestrategies for risk mitigation as eRA generally lead to higher number of potentialsuppliers. eRA create supply chain efficiencies by selecting the least costly bidder,while long-term relational contracts ensure the quality of the procured products orservices when these have non-verifiable attributes (Tunca and Zenios, 2006). Acquiringredundant suppliers may be one of the strategies for risk mitigation as eRA generallylead to higher number of potential suppliers (Chopra and Sodhi, 2004). Empiricalinvestigations about the role of firm size in the use of e-procurement applications andtheir ability to facilitate supply chain integration have been carried out. Analysisreveals a significant relationship between firm size and e-procurement application.

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Specifically, larger firms are more likely to use integrative types of e-procurement(Pearcy and Giunipero, 2008). So, literature suggests that eRA lead to accuratefulfillment and improved effectiveness of the procurement processes, achievement ofhigher service levels, access to new suppliers, improved control of supplierrelationships, reduced prices from the key suppliers, reduced inventory carryingcosts and reduction in the order cycle. The research in the area is exploratory in naturefocusing on defining criteria and rules for managing the actual event, chroniclingsuccess stories, examining the barriers to implementation and suggesting ways tosurmount them (Emiliani and Stec, 2004). Much of the research endeavour isfragmented and there is little in the literature that offers a holistic managementapproach that is underpinned by an empirical study. Corporate experiences basedstep-wise detailed practical guidelines for managers to ensure better preparedness offirms adopting and implementing eRA is missing. Concerns about supplier-buyerrelationships persist. Contingency approaches to eRA use also need to be exploredempirically. Another area of concern is the relative lack of security in eRA which too isgetting attention. There is not much published literature on eRA practices in India.Recently, Srivastava (2009) describes reactions and tactics of suppliers and suggestscountermeasures against them based on his study of Indian firms. Detailed studiesabout the implementation and use of eRA by Indian firms need to be carried out anddocumented along with their managerial implications.

3. Research methodologyA three-step research design was adopted. The first step comprised of an extensiveliterature review that has been summarized in the previous section. In the second step,a multiple case study analysis involving a set of six firms was carried out. Theempirical analysis explored a number of key issues concerning eRA. We used a seriesof event observations, interviews and perusal of written documentation such as reportsand memos, archival records and physical artifacts as the primary source of data.These were substantiated with data from secondary sources which included firms’ andvendors’ web sites and articles in business magazines. The findings from auction eventobservations were triangulated by analysis of documents and information fromsecondary sources. Our approach was not limited to description of the phenomena, butalso sought to develop theoretical concepts. In the last step, deductive analysis of thecase study findings was carried out to derive useful managerial guidelines.

Multiple cases are a powerful means to create theory because they permitreplication and extension among individual cases (Eisenhardt, 1991). Comparison oftwo or more case studies provides concepts that are relevant to an emerging theory andsupport explorative investigations. We used a cross-industry sample of six firms fromamong the firms carrying out eRA for at least last five years in India at the time of thestudy to derive a comprehensive set of findings. Care was taken to ensure that itrepresented a diverse group of industries and auction experiences. It was a conveniencesample whose managers were known personally and agreed for allowing on-site eventobservations and document perusal besides informal discussions and interviews.Yin (2003) argues that, in most situations, six to ten cases should provide evidences tosupport or reject propositions, while Eisenhardt (1989) recommends four to ten cases.Our selection of six cases falls within these recommended frames.

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On-site observations were carried out for a period of about eight months. Thisincluded observation of a total of 18 auction events in the six firms. Unstructuredinterviews were conducted with managers of each of the six firms at several points intime (generally before and after auction events) to understand the processes as well asthe evolution of changes. Informal discussions and interviews with a few suppliers’managers were also carried out wherever possible. Related data and information for sixto ten years were analysed through a cross-case analysis comparing evidence from thesix firms. The cases were compared with each other in order to identify commonalitiesand potential patterns. The emerging patterns were then analysed and compared withthe existing literature findings to identify potential explanations to differences and alsoto provide directions for further research.

Two levels of analysis are embedded in this study. The first is the eRA instance,i.e. each individual instance where a firm conducted an auction. From this unit ofanalysis, we derive information about the process of conducting an eRA, including thesteps to follow the problems that are likely to occur and how to avoid/fix them.Multiple events helped to develop sound arguments. This also helped us in suggestingbest practice processes. The second level of analysis is the firm, i.e. the process a firmused to build eRA capability, use it, and refine it over time. From this level of analysis,we derive results about the process of initiating and adopting eRA as a businesspractice. Data at this level provided insights into organizational changes to supporteRA, finding conditions under which eRA is/is not effective, and in identifying stepsrequired to set up an eRA capability.

4. Case studiesWe explore how the six sample firms in five different sectors use eRA and how theseare integrated into their sourcing processes. All the six firms in our study used onlinee-procurement and reverse auction tools at their e-business platform either bythemselves or through third-party online reverse auction service providers. They hadbeen doing so for at least last five years and had carried out a number of auctions ondiverse items like third-party transportation, steel, advertising, computer peripherals,rubber, courier services, wire grills, wiring harnesses, auto components, capacitors,wire shelf, insurance policies, travel packages and packaging materials. Keyobservations related to actual implementation, the information revelation optionsavailable and exercised are drawn from the case studies. Our sample firms comprise ofa global travel, financial and network services provider (service sector), an automobilemanufacturer (auto sector), a computer equipment manufacturer and distributor(IT sector), an air-conditioner manufacturer (consumer durables sector) and two firmsmanufacturing and distributing fast moving consumer goods (FMCG sector).Managers and executives directly responsible for eRA implementation in these sixfirms participated in discussions and unstructured interviews. Corporate documentsand archival records were accessed for primary information. A brief profile of the firmsunder study describing nature of their business, year in which eRA were started,percentage purchase spend in turnover and percentage of eRA spend in overallpurchase spend for the year 2009-2010 are presented in Table I. Turnover means thetotal revenue arising from the principal activities of the firm and excludes those itemsof revenue and gains that arise incidentally. The purchase spend refers to the total

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amount spent by the firm on procurement of goods and services. For the reasons ofanonymity, we name the Firms A-F and disclose data in terms of percentages only.

From Table I, we see that the FMCG sector firms (Firms E and F) were thefirst-movers and started eRA during early part of the last decade. In fact, one of themserved as an example for its counterparts in Asia-Pacific to go for eRA. Themanufacturing-focused firms (Firms B-D) were slightly late to start eRA and althoughtheir purchase spends form high percentages of their turnovers, the sourcing througheRA is relatively lower. The service sector (Firm A) is reaping higher benefits as it hassignificantly higher percentage of eRA spend in purchase spend. Comparison of recordsbetween early, late and lagging adopter firms did not indicate any significant differencesin benefits accrued which were measured in terms of percentage cost savings, deliveryimprovements and larger supplier pool.

None of the firms in our study lost trust in the external service provider and all thesefirms are continuing with eRA and continue to source more items through them. In twocases, the firms subsequently joined a consortium of supply chain partners to conducteRA for certain items in order to capitalize on economies of scale. As one of the managersat Firm B stated:

We found that our item quantities for certain items were not large enough to leverage thebenefits of eRA; we could also not attract many suppliers [. . .] we then realised that we canachieve “critical mass” if we somehow combine our orders with our tier-2 and tier-3 suppliers[. . .] today this strategy is benefitting us as well as our tier-2 and tier-3 suppliers.

Initially, all the firms used eRA service providers but later two of them (Firms B and D)started carrying out the auctions in-house. It is worth sharing here is that for these twofirms, the absolute percentage spend on eRA was quite low and stagnant as evident fromTable I. So, shifting auction in-house worked out as a more effective option. Firm D,being a small firm was mainly facing supplier pool insufficiency. Once a sufficient pool

Firm Nature of business

YeareRA

started

Auctionprocesschoice

Percentage of purchasespend in turnover for

2009-2010

Percentage of eRAspend in purchase

spend for 2009-2010

A Global travel, financialand network servicesprovider

2002 Thirdparty

36 28

B Automobilemanufacturer

2003 In-housea 65 4

C Computermanufacturer anddistributor

2003 In-house 57 14

D Air-conditionermanufacturer

2004 In-housea 60 12

E FMCG Manufacturerand distributor

2000 Thirdparty

43 10

F FMCG manufacturerand distributor

2001 Thirdparty

45 9

Note: aStarted with third party and subsequently shifted to in-house

Table I.A brief profile of the firmsunder study

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of suppliers and mutual trust had developed, it started conducting eRA in-house. As oneof the managers at Firm D stated:

Initially, we were apprehensive in going for eRA for certain components where we had alimited number of suppliers. The eRA service provider helped us to increase the supplier pool[. . .] they helped us achieve low search cost per additional supplier [. . .] this also resulted inbetter delivery adherence besides cost savings.

Another manager at Firm D stated:

There was lot of initial resistance from incumbent suppliers; our relationships took adownswing [. . .] with time, our suppliers have got acquainted with the process and faith ineRA has firmed up [. . .] today we have a larger pool of suppliers and slowly but steadilymutual trust too has developed. Now, we seldom have to look beyond our existing supplierpool for conducting eRA.

Firm B had reasonable potential to conduct eRA in-house. This comes out clearly fromstatement of a manager at Firm B:

We have a full-fledged IT department employing competent professionals [. . .] the eRAconcept having been internalised, we found paying the service provider an unnecessary andavoidable expense; from 2006 onwards, we are carrying out auctions using in-housedeveloped eRA platform [. . .] after a few successful auctions we have been able to arrive at aright auction designs which are robust and flexible establishing trust in the tool.

eRA helped our sample firms to reduce the cost by 15-20 percent in first year ofimplementation. The additional savings in the subsequent years varied from 3 to8 percent. The number of participating suppliers also generally increased. Themulti-year change in data for a particular item in one of the FMCG firms (Firm E) issummarized in Table II. The base order value is taken as 100. Savings in the first yearwere 15.2 percent and then hovered around 3-4 percent in subsequent years.

Table III summarizes the 18 auction events that we observed in the six firms. All ofthem were planned eRA and none had to be cancelled. The items were found to be routineand leveraged types as per Kraljic’s (1983) framework. Most bid events were single-lot,single-price auctions. A few were for multiple lots too (bundled). Bundling was done forprocedural convenience or when the volume for individual items was low. The supplymarket was either competitive or oligopolistic. In most occasions, the overall supplycapacity was much more than the auction bid requirements. The number of participantsin each eRA varied and was found to be dependent on the type of item, volume of orderand a host of other factors. Generally, service levels increased marginally in eRA.Further, there was significant reduction in order cycle times in certain instances,specially when eRA was being conducted for a particular item for the first time(S. No. 16 and 17 in Table III).

Year of eRA No of suppliers Order value Percentage savings

Base year 10 (sealed bid) 100 Not applicableFirst year 8 (eRA) 109 15.2Second year 10 (eRA) 120 3.4Third year 12 (eRA) 135 4.2Fourth year 12 (eRA) 140 3.1

Table II.Subsequent savings ineRA for a third-party

transportation in a Firm E

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In all these instances, specific identities and passwords were provided to bidders foronline bidding after providing sufficient training. The practice of charging an earnestmoney deposit (EMD) was followed. The EMD ranged between INR 50,000 to INR1 million. This eliminated non-serious suppliers and left little scope to variousstakeholders for tinkering with the system. The software solution in all instances hadbuilt in security checks and balances to ensure that no unauthorized bidder couldparticipate in the bidding process. Further, data encryption was used to ensure that datatraveled safely.

Table IV summarizes the savings in a particular eRA instance (S. No. 8 in Table III)for wire harness at the air-conditioner manufacturer. The potential savings rangedfrom 20.2 to 3.6 percent over the previous year. These are on the lower side as theauction was being conducted for the sixth time and the item material prices too had risenmarginally over the previous year. One noteworthy feature was that the final awardwent to the firm which had quoted second lowest as it was an incumbent reliable supplierwhile the lowest quoting supplier was a non-incumbent supplier. The criterion forcertain additional weightage to incumbent reliable suppliers had already been specified

S.No. FirmType ofitem(s)

Supply marketcharacteristics

Reductionin price

(%)Supplier

participationPercent changein service level

Percentchange in

order cycle

1 A Leveraged Competitive 6 10 Up 1.5 2202 A Routine High capacity 7 15 No change 2103 C Bundled Competitive 5 9 Down 1 2104 B Bundled Oligopolistic 3 5 Up 2 285 A Routine Competitive 4 18 Up 1.8 No change6 E Leveraged Oligopolistic 3 7 No change No change7 F Bundled High capacity 8 10 Up 1 2108 D Leveraged Competitive 3 5 No change No change9 F Bundled Competitive 8 15 Down 2 25

10 E Leveraged High capacity 5 14 Up 2 No change11 A Leveraged Competitive 6 9 No change No change12 F Bundled Oligopolistic 4 6 Down 1.5 21513 C Leveraged Competitive 5 7 No change No change14 D Routine High capacity 4 14 Up 2 No change15 E Bundled High capacity 3 11 No change No change16 C Leveraged Oligopolistic 10 7 Up 1 25017 E Bundled Competitive 16 13 Up 3 23018 B Leveraged Oligopolistic 4 8 No change 220

Table III.Summary for observedauction events

Supplier Firm X Firm Y Firm Z Firm V Firm W

Finalprice

124,000,000INR 120,000,000 INR 124,750,000 INR 123,457,750 INR 121,000,000 INR

Savings500,000 INR

(0.4%)4,500,000 INR

(3.6%)2250,000 INR

(20.2%)1,292,250 INR

(1.0%)3,500,000 INR

(2.8%)Rank 4 1 5 3 2a

Notes: aFinal bid winner; INR – Indian national rupee (1US $ < 47 INR in January 2010)

Table IV.Summary of savings inan eRA at Firm D

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clearly in the RFQ. Similarly, in few cases of eRA involving different lots, more than asingle party was awarded the contracts as per the pre-stated criteria in RFQ in four of thefirms studied (Firms B, C, E and F).

Going back to adoption of eRA, the first auction event in our sample firms was carriedout by one of the FMCG manufacturer and distributor (Firm E) in the year 2000. Themanagers of the firm shared that this was more incidental than being innovation driven.This firm used third parties for transporation from its five contract manufacturing sitesand had reasonably good service delivery experience with the incumbent vendors. Therise in gasoline (diesel) prices led to a demand for 10 percent hike and negotiations withthe incumbent vendors were not yielding results. Around the same time two eRA serviceproviders, Freemarkets.com (now acquired by Ariba) and 01markets.com (an eRA armestablished by Wipro in April 2000) approached the supply chain head with the conceptof eRA. Both these eRA service providers were keen to establish themselves in the Indianmarket and saw great opportunity in proving service to this reputed FMCG firm. Themanagers of this FMCG firm were thus exposed sufficiently to the eRA concept,technique and technology. They decided to give eRA a try for transportation as thepotential benefits seemed promising and one of the eRA service providers (01markets)offered very enticing terms of contract. It was charging negligible fixed cost and verysmall percentage of savings accrued, if any as additional charge. It was also willing totake responsibility for training the vendors and taking care of most of other technicalrequirements for hosting eRA. So, the push to adopt eRA was circumstantial. This firmworked in close co-operation with 01markets to conduct eRA for the first time.

There were large resistance from incumbent vendors to participate in eRA but finallythe firm was able to convince most of them to participate. Total 22 Vendors agreed toparticipate. This included a few additional vendors identified by 01markets in suppliersearch. In pre-bid qualification, 17 of these qualified for the bidding. A lot of effort wentinto electronic document preparation and training. 01markets trained the vendors foronline bidding and conducted a few mock runs. Some technological glitches weredetected and corrected during mock runs (like even larger bid prices being accepted ortypological errors like additional or skipped number entries in bid values). Finally,online eRA was conducted. Archival records show that three vendors won the bid foroverall seven lots. These comprised two new and one incumbent vendor. This eRAresulted in savings of about 9 percent from the base year for the firm rather than itpaying additional 10 percent as per incumbent vendors’ demand. Since then, this firmhas been conducting eRA for these services and has also been adding other items in theeRA fold. Experiences of the other five firms in our study have been similar. However,rather than co-incidence, benchmarking and top management dictates have been theprime drivers for eRA adoption for them,

The initial response of most incumbent suppliers in first instance of eRA proposal inall case studies was not very positive. Archival records, incidence recalls and our ownobservations reveal incumbent vendor’s statements like, “You’re focusing only on costsand trying to squeeze us [. . .]. It will lead to compromise on quality!” [. . .] “We alwaysserved you well; we feel betrayed!” They expressed unequivocally that there was noupside for them. On the other hand, reactions from new potential vendors were generallypositive like, “We would love to supply to you!”. In all our observed eRA events, we didnot observe any instance of coalition and collusion nor was this reported by any of thestakeholders we interviewed. We also did not observe or hear about unethical

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eRA practices, opaque contract awarding processes and change of item specificationsafter the auction by the buyer. The complete process generally took as long as fourmonths for certain items, where vendor development along with design inputs wasrequired to be undertaken. On the other extreme, the process took only two to four weeksfor certain items. The actual auction (online bidding) was usually open for2-6 h depending on factors such as lots, participating community, bid transactionvalue and competition amongst bidders. All planned bid events did not alwaystake place, particularly in the initial few years and some of them had to becancelled/postponed due to reasons like inadequate number of bidders, lack of onlinebidding exposure, etc. We found only two incidences of cancellation in records. The firmsand the service providers shared losses as per their pre-agreed terms. In firstinstance, few incumbent suppliers of Firm F backed out at the last minute. The losseswere made up by the EMD deposits lost by the four incumbent suppliers. In the secondinstance, Firm C had to pay the service provider the upfront charge of INR 150,000. Theservice provider too had to bear the burden as the effort gone waste was much greater.We did not observe any renegotiations with the suppliers and none of the firms reportedany concern in relation to the supplier performance level once the contract had beensigned. This was quite different from the concerns in extant literature. The supplierparticipation increased in subsequent years in most of the firms studied. All the six firmscarried out post-bid reviews to make sure bidders completely understood the scope andschedule a well as all the associated costs.

Sourcing managers in all six case studies analysed the advantages, disadvantages,opportunities and risks of eRA sourcing for each specific procurement action. Most ofmiddle and top managers of the sample firms saw both potential benefits as well asrisks in eRA. We reproduce below statement of a manager of Firm A:

eRA improve control of supplier relationships, lead to accurate fulfillments and improvedeffectiveness of the procurement process. Access to new suppliers helped us to mitigatesupply chain risk by having more potential suppliers [. . .] eRA also lead to reduction in theduration of the order cycle, reduce prices from the key suppliers, reduce inventory carryingcosts and generally lead to higher service levels.

Commenting on the pre-requisites and benefits of eRA, a manager of Firm E stated:

It is vitally important as a buyer to have clear item specification and contract terms. Auctionvolumes must me reasonably high to attract potential suppliers; so rather than having manyvariants of the item, it is better to have a standardized one [. . .]. A big advantage of eRA isthat participant location is not a constraint [. . .] eRA may provide opportunity forharmonization and standardization of suppliers’ terms and conditions and thereby align thefirm’s business processes. Our payment terms were standardized to 30 days from earlierrange of 15-90 days that we had for different vendors.

Our study reveals that eRA are the dominating strategy when the focus is on lowsearch cost per supplier, when the percent reduction over time in the price offered bythe current supplier is low, when the item falls under routine and leveraged categoriesand when there are not many variants of the item. The buyers select items for eRA onthe basis of various parameters like the market characteristics, supply-demandanalysis, commodity price trends, current contracts, number of suppliers available,procurement and technical team requirements, etc. The buyers reveal selectiveinformation to the potential suppliers at the time of online bidding. The suppliers are

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told the historic prices and the reservation price, if any. They invariably get aliasnames to prevent cartelization. The computer screens visible to the buyer and thebidders are also different. The buyer gets to see the overall comprehensive information,while the bidders can see only selective information. Bidders see their own rank in theleast transparent mode. In more transparent mode, they also see the competitors’ bids.These may again be available for the whole time elapsed or for the last few bids.

Our findings reveal that the buyers go for eRA if they minimize their total cost ofsourcing. They consider switching and procedural costs besides the bid price todetermine the impacts of eRA, although no firm in the study had a comprehensiveapproach to eRA costing recording and reporting. Expenses other than supplierswitching cost are generally not considered in RFQ documentation. Most firms had a listof preferred suppliers and preferences to incumbent suppliers in RFQ served as asurrogate for switching costs. A key observation across all eRA was that the incumbentsupplier generally knows the distribution of buyer’s switching cost. It participates andchooses either one of the two bidding strategies: submits the lowest bid or offers the bidprice that is greater than the lowest bid price but less than the lowest bid price plusexpected buyer’s switching cost. Mostly, high switching costs inhibit the readiness offirms to invite a large enough number of suppliers to participate in eRA. Most successfuleRA in our study suggest that the optimum number of bidders is five to ten.

As in literature (Bartezzaghi and Ronchi, 2005), our interactions indicate that mostincumbent suppliers do not like reverse auctions and offered resistance as eRA restraintheir contractual power and reduce their margins. They also used various tactics likethreat, deal, circumventing, collusion and bird watching as reported by Srivastava(2009) which are reproduced in Table V.

Besides the barriers to eRA from external stakeholders, the firms under study alsoexperienced barriers from within – from purchasing and other departments. The barrierswere generally related to entrenched practices (resistance to change), uncertainty aboutrisk versus returns, technology/software related apprehensions, market and businessenvironment/practices and internal resources/competencies. The same can be broadlyclassified into “adoption” and “implementation” barriers and are similar to the onessuggested by Srivastava (2007) in Indian retail scenario. These barriers may be presentelsewhere too but have not been reported explicitly in extant literature. The most

Tactic Countermeasure

Threat – try to sway the buyer by claiming theywill not participate

Make it clear that the buyer is totally committedto the eRA process and there is no alternative

Deal – offer lower pricing in return for not goingthrough eRA

Buyer should not be tempted since such an offerindicates that there is “money on the table”

Circumventing – submitting bid outside (e.g. anoral or paper bid before, during or after the onlinebidding process)

Make it clear that no bids will be consideredoutside of the online sourcing process

Collusion – attempt to collude with othersuppliers during the online bidding

Issue prior warning that supplier collusion isillegal and will be dealt with accordingly

Bird watching – participating in eRA but notbidding; goal of gaining market intelligence

Make pre-bid qualifications stringent so as togenerally address this issue

Source: Srivastava (2009)

Table V.Countermeasures for

tactics of suppliers

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common means of overcoming these barriers followed by these firms was througheducation and training of purchasing and other department personnel, obtaining theinput of employees in the development of the eRA process, and by providing internalperformance incentives including making eRA use and performance a part of theemployees’ formal performance appraisal. At one firm, over 50 personnel were trained inthe use of eRA, and each of these individuals received over 15 h of training. In thesetraining sessions, the key attributes of an auction, programming an auction, and runningand rerunning the auction were addressed. Another technique used by some firms is thesharing of success stories to provide motivation and evidence of the effectiveness of eRA.

On the basis of the above case studies, we develop a framework for carrying outeRA process effectively the first time itself. We break the entire eRA process into threemajor stages or sub-processes: pre-bid, online bidding and post-bid processes. Thesame is shown in Figure 1. Actually, the pre-bid and post-bid processes are asimportant as the online bidding process. In the pre-bid process all the necessaryspadework needs to be carried out meticulously. This includes collecting methodicaland detailed item specifications, collecting detailed information about potentialsuppliers and collecting performance information about third-party online reverseauction service providers. Next, a decision needs to be made whether a third party is tobe hired or the eRA activity is to be conducted in-house. Accordingly, a third party hasto be selected or the process of hosting the auction site has to be started. Detailed RFQand pre-bid qualifications needs to be prepared before suppliers are invited. Theselection of potential suppliers after screening through pre-bid criteria and theirtraining for online bidding form the last stages of the pre-bid process. Now, thepotential suppliers have to be informed of the date, time and duration of the biddingand the same needs to be carried out. It is advisable to provide alias names to thepotential suppliers in order to maintain anonymity during the online bidding process.Pre-agreed selective information may be continuously provided to them during theonline bidding process. In the post-bid process, the bid-awards, as per pre-definedcriteria need to be transparently communicated to all the bidders. The detaileddocumentation with the suppliers who win the order has to be carried out as in normal

Figure 1.Three-stage frameworkfor electronic reverseauction process

Pre-Bid Process

Collect SupplyRequirements

Collect Third-PartyExptirse Data

and Supplier's Data

Select the Third Partyor Develop own Web-site

PrepareRFQ

TrainPotentialSuppliers

Select PotentialSuppliers

Define Pre-BidQualifications

InviteSuppliers

On-Line Bidding Process

Inform Date &Time of Bidding

Give alias Names toPrevent Cartelisation

Carry outOn-line Bidding

Reveal Pre-agreedSelective Information

Post-Bid Process

Communicate Bid Award(s)

Carry out Detailed Documentation(as in Normal Bidding Process)

Continuously MonitorSupplier(s)Performance

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bidding process. A very important aspect of post-bid process may be continuousmonitoring and feedback of supplier(s) performance.

5. Discussions and managerial recommendationsAlthough, the focus of eRA is on attaining process and cost efficiencies, they help firmsnot just in cutting costs or lowering investment but also provide more opportunities tostay focused on core competencies. They reduce the possibility of production disruptiondue to problems of a single supplier. Often, the advantages of an online auction formatcould be secondary to the more critical issue of getting more suppliers. eRA work best ina competitive, high capacity marketplace. They reduce paperwork as well as review andaward times. Everything is captured electronically, eliminating confusion and potentialdisputes. The process is transparent and everyone gets the same pre-bid package andwalk-through. Besides, all questions may be addressed and answered electronically andshared with all bidders at the same time. Buyers’ decision to use eRA depends on itemspecifications, supplier relationships, the current supply and demand environment,indirect costs and several other factors which vary for each item and for each buyer.Similarly, suppliers may consider the opportunity to benchmark their cost structureswith competitors to improve their supply chain efficiencies.

Managers must understand how eRA fit in the broader context of effective supplychain management. It is only a pricing tool a means to an end – not the end itself. ThougheRA offer several benefits for both buyers and suppliers, managers must carefully weightheir pros and cons. When a firm is looking at eRA as a sourcing option, it should firstand foremost consider some key factors like thorough understanding of theiradvantages other than one-off transactional cost savings, resource investments, timeinvolved in the process and the likely cultural and organizational barriers. In addition toevaluating the need for transparency in the award decision, there is also a need tounderstand which auction format is best for a particular market. Issues related tosequencing the auction bundles and rank versus full disclosure need to be resolvedbeforehand. Further, higher the supply market fragmentation and competition amongpotential suppliers higher likely is the item auctionability. Similarly, greater thecentralization of decision-making in buying centers, higher likely is the possibility ofusing eRA. In case of bidders from overseas, in addition to the entire legal structure, carehas to be taken of the differences in the cost stack up, the duty structure, the freight costsand the currency differences during market making process which includes the RFQpreparation and compliance from the suppliers so that the suppliers are clear what stackup they have to put.

On the basis of our study, we provide step-wise detailed flowchart to help managersin conducting eRA, first time or subsequently. The same is shown in Figure 2. The firstand foremost step is the identification of a sourcing opportunity. Some of the primedrivers that lead to a potential eRA sourcing opportunity are: cost reduction initiativeswithin the firm/industry; requirements of new parts/components/material; routine,non-critical and/or leverage items; contract, pricing agreement or blanket order expiringin less than few months; poor incumbent supplier performance and likely price increase.

The next step is related to the fact whether the firm has conducted any eRA earlier ornot. It is related to the soft aspect of cultural readiness and the hard aspect of eRAsoftware related capability. If a firm is contemplating to conduct eRA for the first time, itneeds to make its internal stakeholders change-ready. For this, it needs to start with eRA

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Figure 2.Flowchart for conductingelectronic reverse auctions

Going foreRA first

time?

Conduct an eRA Kickoff Meetingwith Key Internal Stakeholders

Perform Data Collectionand Data Formatting

Draft Comprehensive RFQDocument and Assemble Other

Related Documents

Identify an eRA Sourcing Opportunity

Increase Supply Base andDevelop Supplier Invite List

Manage Suppliers to Bid Day

Yes

Is theopportunitysuitable?

Are internalstakeholdersconvinced?

TestSoftware

Conduct Online Reverse Auction

Notify Suppliers of OutcomeConduct Post-Bid Award Meeting

Implementation withAwarded Supplier(s)

Build / SourceeRA Software

Yes

Yes

No

No

OK

Not OK

Car

ry o

ut n

eces

sary

cha

nges

No

Pre-Bid qualification TestFinalise Supplier List

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kickoff meeting with key internal stakeholders such as personnel from purchasing andactual user departments. Many times other stakeholders such as personnel from qualityassurance and marketing could also be involved. Detailed discussions and concertedefforts are required to convince most of them about the likely benefits of the initiative.Further, at least some of them should be enthusiastic about it; otherwise, they may not beable to convince the external stakeholders, particularly the incumbent suppliers toparticipate first time. To actually conduct eRA, software capabilities are required. A firmhas the option of doing it in-house or sourcing from outside. The more successfulstrategy observed has been to engage third party eRA hosts. With experience andgrowing volumes/value, the firm always has the option of developing the capabilityin-house. The software needs to be tested and necessary changes need to be carried out tomake it appropriate to the particular requirements. An inherent requirement in thesoftware is that it should be robust and reasonably flexible.

Once the software capability is established, it has to be followed by data collectionand data formatting. The data collection should focus on the unique characteristics,detailed specifications, last price (if any), extended cost, current requirements, etc. Thesources could be archival records, drawings and prints, computer databases and inputsfrom internal stakeholders. Data formatting entails storing the collected meaningfulinformation in a standard format in a computer spreadsheet/database. This facilitatesanalysis and updating. As eRA may not be suitable for all types of purchases,managers need to decide whether the opportunity is suitable or not for eRA. Theformatted information along with factors like availability and readiness of sufficientnumber of suppliers, reestimation of benefits and software capability provide theinstance-related inputs to take a decision. If the decision is yes, the next step is draftinga comprehensive RFQ document and developing a supplier invite list. The detailedRFQ document should contain starting and reservation bid prices, lot listing/bundling,detailed cost breakdown and service level expectations, a non-disclosure agreement,the bidder agreement, quality documents and the terms and conditions document. It isadvisable to have a list of preferred suppliers as well. The focus should always be onincreasing the supply base (number of potential suppliers). Finally, a supplier invite listshould be arrived at.

The pre-bid qualification test for potential suppliers is a defining step. Here,historical data and market sourcing may be carried out. Site visits of personnel frombuying firm to suppliers’ works may be carried out selectively to ascertain suppliers’credentials. Those who qualify make it to the final supplier list. RFQ should be postedduring this step. Now, rules for the auction are frozen and potential suppliers (onlythose who qualify pre-bid qualifications and are willing to participate) are to beformally invited. These auction participants need to be managed to the bid day. Ampletime should be allowed for them to prepare for the actual online auction. They need tobe trained for online bidding through a series of mock runs.

Conducting the actual online reverse auction as per agreed upon visibility comesnext. Necessary actions should be taken to prevent any eRA abuse. Suppliers may begiven an alias name for bidding to avoid “cartelization”. Sufficient preparedness shouldbe there for real-time interventions and clarifications, if any to ensure success of theevent. This is followed by the post-bid process wherein a post-bid award meeting isconducted to notify the outcome to the suppliers after analysis of the results. Evennon-awarded suppliers should be communicated the result properly. A good practice

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is to flash the results within minutes of the conclusion of the online auction. Thisensures transparency and mutual trust. The parties should enter into a written contractas in any purchasing process. The last step is related to implementation with awardedsupplier(s). Suitable pre-agreed metrics should be used. Further, noting down criticalincidences may also be useful. Continuous auditing and monitoring of performancedata is helpful in both good implementation and future use.

6. ConclusionThis paper examines and describes the actual experiences in conducting eRA across adiverse group of firms and sectors in the Indian context. The process is applicable tosourcing of many types of goods and services across most sectors and industries.However, eRA seem more appropriate and suitable in industries and sectors likeadvertising, auto components, bulk chemicals, consumer durables, computers andperipherals, contract manufacturing, courier, FMCG, healthcare, hospitality, insurance,leasing, logistics, maritime shipping, MRO, retail, software licensing, textiles, tourism,transport and warehousing. Through review of the literature and our multiple casestudy research, we show that buying firms can achieve multiple, combined eRAoutcomes and that eRA success may be more than mere price savings. eRA allowprocurement cost reduction by increasing market efficiency in terms of suppliers’search and selection, contract negotiation and purchase price. They provide theopportunity to increase the efficiency of the supply process by automating andfacilitating the procurement process; they may also increase the effectiveness ofthe supply process in terms of quality, degree of innovation, time-to-market, expandingthe supplier base, creating competition among suppliers and increasing servicelevel to the end consumer. Proper security checks and transparency in RFQ cansuccessfully stop unethical practices. Issues related to lot-sizing, information revelationand the type of items are also covered briefly. Our case studies suggest thatexperienced eRA firms have moved beyond the hype and have embraced them as partof their normal sourcing processes. eRA have led to decreased cycle times for suppliersand a significant decreased buyer cycle times for repeat auctions. Location not being aconstraint was found very convenient by all the stakeholders. The success of the eRAin general depends on the application of the right conditions for eRA and a rightauction design. These need a strong process awareness and knowledge. Missingknowledge may lead to wrong decisions along the sourcing process.

Methodologically, our work provides empirical evidence obtained through aqualitative grounded theory approach. In some areas, practice leads theory andtherefore the findings will add to academic discourse. They will help firms in India andother countries to develop policies, strategies and procedures while implementing eRA.Our major contribution lies in defining a framework for eRA process on the basis of ourcase studies. The adoption of the framework will have impact on practitioners. Tosuccessfully implement eRA firms should:

. provide clear and comprehensive item (product or service) specifications,including lot size, weightages to other criteria besides price, etc. in RFQ;

. ensure that the purchase quantity/value is large enough to provide an incentivefor the supplier to participate;

. build technical eRA competencies or find suitable third parties;

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. work for gaining potential suppliers’ confidence through transparenttrustworthy ethical practices; and

. continuously experiment with improved eRA designs.

Presently, eRA account for around 10 percent of total corporate purchases in Indiawhich is slightly lower than found in existing literature. The reasons could be lessereconomies of scale and higher buyer’s switching inertia. We find that high switchingcosts inhibit the readiness of firms to invite a large enough number of suppliers toparticipate in eRA. This is in agreement with Wagner and Schwab (2004). However, thedeclining level of supplier participation reported in literature was not observed in ourstudy. The reasons could be attributed to the present market and business conditionsin an emerging economy. Our findings that the supply market competition, supplierand buyer e-readiness and e-sourcing tools and expertise act as moderators are inagreement with Amelinckx et al. (2008). Hur et al. (2007) find that full-service (thirdparty) eRA are as effective as in-house eRA. However, our study finds that this maynot always be true and effectiveness is actually context-dependent.

To succeed today and to pave the way for a better future, firms in India need tocreate strong linkages with their supply chain partners. Based on our study, someemerging trends can be discerned. Technology, which was earlier taken to be a driverfor doing business in a particular fashion, has now become a necessary enabler foraligning business in both government and corporate sectors. Web-based tools nowexist allowing businesses to host their own eRA on a “pay as you go” basis to procuregoods and services. Indian government has large monoliths in sectors such as armedforces, railways and oil and gas. By adopting eRA (as recently done in ONGC pilots),the government can save money in a big way. The government of India should take acue from the US and Singapore governments which have adopted e-sourcing in a majorway. However, labor costs being lower in India, the potential for cutting down costs inlabor is less than a market like the USA and Singapore.

Our study reveals a few areas of concern as well. With the emergence of web-basedtools, online transaction security has become an important area of concern. Codes ofconduct and guidelines for eRA need to be formulated by concerned stakeholders andput into practice. The small sample size and case method approach limits the ability togeneralize the findings. The firms were selected as a convenience sample and so maynot be truly cross-sectional. We have also not looked into eRA as a technologicallyassisted form of power-based bargaining in supply chains subject to abuse by buyersand market makers. This is an inductive piece of research and it is important torecognise that only analytical generalisation is claimed rather than any statisticalgeneralisation.

This research opens the way for in-depth studies of some of the above areas ofconcern. Research may be carried out using specific cases to study eRA practices atfirm level in detail. It may be worthwhile to investigate on pattern of Pearcy andGiunipero (2008) about how eRA practices differ across firm size in the Indian context.Using a third party or conducting eRA in-house may also be studied in detail. Further,comparative work may be undertaken in different international contexts. Another areato explore is the supplier perspective as they are often negatively inclined toward eRA,it will be interesting to investigate how their opinion changes over time, i.e. whethersuppliers of an early adopter, having been exposed to this type of sourcing for

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a longer time, possess different attitudes toward online bidding events than suppliersof a late-adopting buyer. A promising research avenue is exploring how early adopterfirms will evolve as consecutive cost savings become more difficult to achieve. There isalso scope for research in auction analytics, a systematic formal analysis of auctionsthat entails:

. the development of standardized metrics to communicate information before,during and after the bidding event; and

. the use of data mining techniques to learn from previous auction events thesuitability of various auction formats under different market settings.

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About the authorSamir K. Srivastava is an Associate Professor in the area of Operations Management at theIndian Institute of Management, Lucknow (India). He is a Graduate in Electrical Engineeringfrom the Institute of Technology, BHU, has an MBA in Finance and is a Fellow of the IndianInstitute of Management, Lucknow. He has about two decades of experience in teaching, researchand industry and has published extensively in reputed refereed journals such as Omega,IJPDLM, IJMTM, TQM&BE, IJMR, etc. His papers have received “Best Student Paper Award”and “McGraw Hill Publishing Best Paper Award”. He is also on the scientific advisory board ofJournal of Remanufacturing. His major areas of interest are operations strategy, manufacturingexcellence, HR-operations interface, retail operations, management of technopreneur-ownedfirms, reverse logistics and sustainable supply chains. Further details are available at: http://ganga.iiml.ac.in/,samir/. Samir K. Srivastava can be contacted at: samir@iiml.ac.in

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