Executive Briefings

Price Isn't Everything, But Supplier Auctions Still Make Sense

I've spent the last couple of posts urging procurement executives not to focus solely on price when they're choosing suppliers. Service, product quality, financial health, social responsibility and exposure to natural disasters and other potential disruptions are all elements that need to be factored into the mix. So you'd think this enlightened attitude would pretty much rule out the use of auctions for selecting vendors, right?

Not so fast. The running of sourcing "events" isn't going away anytime soon - especially for industries that operate on perilously tight margins.

Take the restaurant business. Its procurement needs break down into an ungainly combination of high-end food and commoditized supplies. Players range from huge, nationwide chains to mom-and-pop operations, but they all share the need to minimize costs wherever possible.

For smaller businesses, the challenge lies in getting the best price for supplies when their spend is relatively modest. McDonald's, Burger King and Applebee's can essentially dictate prices for basic items such as paper goods, flatware and takeout boxes. That little Szechuan place on the corner can't.

The trick lies in spending enough within a given category "to get your incumbent supplier concerned, and potential suppliers excited about the opportunity to get your business," says Len Kaplan, vice president of sales with Intesource, a spend-management company. Individual restaurants rarely meet that standard.

What to do? Larger operations form buying cooperatives which consolidate their already-formidable purchasing power into an even stronger bloc. But small entities can get in the game, too. They can combine volumes in collaborative sourcing events - or auctions, in non-buzzword parlance. Say half a dozen small restaurant chains pool their volumes for the purpose of approaching a given supplier. Suddenly, says Kaplan, "they can have a million-dollar category."

Simply publishing a request for proposals on the internet won't cut it. Prospective buyers need to band together, then specify in detail what they want to acquire. "Suppliers need to understand what they're being asked to deliver pricing on," Kaplan says. It's equally important to do one's homework with regard to a given supplier's past performance within that category.

A competitive bidding event doesn't lock the buyer into selecting a particular supplier, even one who is clearly offering the lowest price. Maybe you value a long-term relationship and are willing to pay a few dollars more to keep it going. The goal, says Kaplan, is "to set up a level playing field [for suppliers] to compete."

Kaplan admits that the word "auction" has a negative connotation, evoking the old attitude of considering price, price and nothing but price. Nevertheless, he sees the tool as providing buyers with savings that can't be obtained any other way, particularly for small business. It can prove especially valuable for the purchase of services that are typically provided by an outside company - window washing, floor care, landscaping. But for small restaurants participating in a group buying effort, it can also bring down the cost of the most basic items - cups, straws, lids - that tend to be acquired in small amounts.

Collaborative sourcing events can even take place among direct rivals, although in such cases they are usually limited to basic supplies. Beyond that, restaurants, which tend to function in highly competitive environments, see a distinct advantage in saving a few pennies on transportation and distribution, computers, facilities maintenance and even purchases for human resources support.

The most competitive category of all is, of course, food, but there are opportunities to purchase through auctions there as well. Many food items are market-driven in their pricing - chicken, beef, flour, sugar - and can potentially be sourced through this process. Auctions are even possible in the retail grocery arena, which is increasingly becoming dominated by prepared foods.

The bottom line? A supplier auction is worthless if it doesn't deliver on its one driving element: price. Kaplan claims it can lead to savings of between 16 and 25 percent, depending on the item. (That can add up to millions of dollars for larger organizations.) But there are dangers to keep in mind. A strict focus on the lowest bidder can cause a buyer to think exclusively about dollars and cents. An organization might feel obligated to award its business to the cheapest supplier, even if that entity sends up red flags on the service side.

"If you can get a better price but performance is terrible, you've won nothing," Kaplan warns. Companies need to engage in due diligence for each supplier being considered, making sure that all vendors are certified and will adhere to strict standards of conduct long after the bid is awarded.

As compelling as the business case for collaborative sourcing might seem, there are many small entities, especially in the restaurant business, who are slow to try it. The biggest hurdle, says Kaplan, is culture. Long-time category managers can be set in their ways, accustomed as they are to dealing with the same vendors year after year. Any suggestion of an alternative supplier that might lead to a lower price is viewed as a personal threat. In such cases, Intesource appeals to senior management to consider a new way of thinking.

Suppliers, too, are known to push back. Who wants to be thrown into the ring against one's competitors on a head-to-head basis? It's typical for an incumbent supplier to offer the buyer a discount of, say, 10 percent to call off an auction. But a truly competitive purchasing environment, involving multiple buying organizations, is in a position to save much more than that. Price isn't everything, but there's still value in the old-fashion way of doing business.

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Keywords: supply chain, supply chain management, inventory control, supply chain planning, supply chain services, retail supply chain, food and beverage supply chain, sourcing solutions

Not so fast. The running of sourcing "events" isn't going away anytime soon - especially for industries that operate on perilously tight margins.

Take the restaurant business. Its procurement needs break down into an ungainly combination of high-end food and commoditized supplies. Players range from huge, nationwide chains to mom-and-pop operations, but they all share the need to minimize costs wherever possible.

For smaller businesses, the challenge lies in getting the best price for supplies when their spend is relatively modest. McDonald's, Burger King and Applebee's can essentially dictate prices for basic items such as paper goods, flatware and takeout boxes. That little Szechuan place on the corner can't.

The trick lies in spending enough within a given category "to get your incumbent supplier concerned, and potential suppliers excited about the opportunity to get your business," says Len Kaplan, vice president of sales with Intesource, a spend-management company. Individual restaurants rarely meet that standard.

What to do? Larger operations form buying cooperatives which consolidate their already-formidable purchasing power into an even stronger bloc. But small entities can get in the game, too. They can combine volumes in collaborative sourcing events - or auctions, in non-buzzword parlance. Say half a dozen small restaurant chains pool their volumes for the purpose of approaching a given supplier. Suddenly, says Kaplan, "they can have a million-dollar category."

Simply publishing a request for proposals on the internet won't cut it. Prospective buyers need to band together, then specify in detail what they want to acquire. "Suppliers need to understand what they're being asked to deliver pricing on," Kaplan says. It's equally important to do one's homework with regard to a given supplier's past performance within that category.

A competitive bidding event doesn't lock the buyer into selecting a particular supplier, even one who is clearly offering the lowest price. Maybe you value a long-term relationship and are willing to pay a few dollars more to keep it going. The goal, says Kaplan, is "to set up a level playing field [for suppliers] to compete."

Kaplan admits that the word "auction" has a negative connotation, evoking the old attitude of considering price, price and nothing but price. Nevertheless, he sees the tool as providing buyers with savings that can't be obtained any other way, particularly for small business. It can prove especially valuable for the purchase of services that are typically provided by an outside company - window washing, floor care, landscaping. But for small restaurants participating in a group buying effort, it can also bring down the cost of the most basic items - cups, straws, lids - that tend to be acquired in small amounts.

Collaborative sourcing events can even take place among direct rivals, although in such cases they are usually limited to basic supplies. Beyond that, restaurants, which tend to function in highly competitive environments, see a distinct advantage in saving a few pennies on transportation and distribution, computers, facilities maintenance and even purchases for human resources support.

The most competitive category of all is, of course, food, but there are opportunities to purchase through auctions there as well. Many food items are market-driven in their pricing - chicken, beef, flour, sugar - and can potentially be sourced through this process. Auctions are even possible in the retail grocery arena, which is increasingly becoming dominated by prepared foods.

The bottom line? A supplier auction is worthless if it doesn't deliver on its one driving element: price. Kaplan claims it can lead to savings of between 16 and 25 percent, depending on the item. (That can add up to millions of dollars for larger organizations.) But there are dangers to keep in mind. A strict focus on the lowest bidder can cause a buyer to think exclusively about dollars and cents. An organization might feel obligated to award its business to the cheapest supplier, even if that entity sends up red flags on the service side.

"If you can get a better price but performance is terrible, you've won nothing," Kaplan warns. Companies need to engage in due diligence for each supplier being considered, making sure that all vendors are certified and will adhere to strict standards of conduct long after the bid is awarded.

As compelling as the business case for collaborative sourcing might seem, there are many small entities, especially in the restaurant business, who are slow to try it. The biggest hurdle, says Kaplan, is culture. Long-time category managers can be set in their ways, accustomed as they are to dealing with the same vendors year after year. Any suggestion of an alternative supplier that might lead to a lower price is viewed as a personal threat. In such cases, Intesource appeals to senior management to consider a new way of thinking.

Suppliers, too, are known to push back. Who wants to be thrown into the ring against one's competitors on a head-to-head basis? It's typical for an incumbent supplier to offer the buyer a discount of, say, 10 percent to call off an auction. But a truly competitive purchasing environment, involving multiple buying organizations, is in a position to save much more than that. Price isn't everything, but there's still value in the old-fashion way of doing business.

Comment on This Article


Keywords: supply chain, supply chain management, inventory control, supply chain planning, supply chain services, retail supply chain, food and beverage supply chain, sourcing solutions