Many companies have toyed with the concept of reverse auctions for procurement of materials, but Sun Microsystems, the $15.8bn Silicon Valley powerhouse, has made it a key strategic initiative. Last year Sun used online reverse auctions, which it calls Dynamic Bidding Events, or DBEs, to award about $2.7bn in business to suppliers of all kinds. This represents approximately 67 percent of Sun's $4bn total annual spend with suppliers and far outpaces the 5.4 percent of total spend awarded through reverse bidding that the Center for Advanced Purchasing Studies says is typical for companies that use e-sourcing.
Even more unusual is Sun's use of DBEs to procure not only materials but services as well, including logistics services. The company first used a DBE to award contracts for international airfreight a couple of years ago, with "fairly successful" results, says Jon Stafford, head of global supplier management under Sun's worldwide fulfillment group. This group manages all suppliers and capability requirements for logistics operations. "We basically manage all of Sun's finished goods distribution, from remote sites through our merge points and on out to our customers. Because Sun is heavily outsourced in terms of manufacturing, we don't get involved a lot in managing inbound raw materials," he says.
In 2006 the international airfreight business was up for renewal and the company decided to conduct a bidding event that also would include domestic transportation and operation of three distribution centers: one in Japan serving that country; one serving Europe, the Middle East and Africa from Schiphol Airport in The Netherlands; and one in Fremont, Calif., serving the Americas and the rest of Asia-Pacific. These facilities have robust cross-dock operations since one of their major functions is to marry Sun products with peripherals and accessories from other suppliers into combined units for sale. While some combinations are being merged in transit or shipped direct from suppliers, "we are still bringing the bulk of this business through our DCs," Stafford says.
Traditionally, awards for this business were handled by sending out formal requests for information, which were evaluated and followed by a smaller number of requests for proposals and quotes and by numerous site visits. "This approach could take several months," Stafford says. "We thought we could streamline things by using the reverse auction process that has been employed very successfully in other areas of Sun, particularly for direct materials spend."
The direct materials area is managed by Ken Leinweber, strategic sourcing manager for worldwide operations. "We introduced e-sourcing into Sun in 2001 and since then we have been building our dynamic bidding capabilities," says Leinweber. A key component of that capability was added three years ago when the company invested in Procuri software. Implementing Procuri "was part of an effort to expand adoption of the process throughout Sun and to focus on total cost of ownership," Leinweber says. This meant having a handle on all of the non-price factors that enter into a supplier contract, including the costs of switching to a new supplier. "Especially in a situation where you have an incumbent or multiple incumbents, you have to make sure that even if another supplier has a lower cost, you have incorporated all the switching costs that would be involved in making that change," he says.
While the impetus was to expand the DBE process to other areas of Sun's business, applying it to logistics went against conventional wisdom. "I have been on the logistics side of this world for about 20 years and the reverse auction process definitely goes against the typical way you would approach bidding out the business," says Stafford. "We wanted to be pioneers and to really challenge the perception that it couldn't be done."
General wisdom, he explains, holds that domestic transportation and warehousing have too many nuances and are too dynamic "to be adequately documented in a static environment for the purposes of a reverse auction." Also, there was concern that it would be difficult to get enough suppliers to bid on the business in a reverse auction or DBE format because of the perceived need to have interactive conversations around capabilities and transition issues, Stafford says. Another challenge was the timeline. "This was a process that typically would take three to six months from the time we sent out the first RFIs to the final awarding of the business," he says. "With this new process, we were going to have a much shorter time frame." This proved to be a blessing in disguise, however, because it "really forced us to take a look at our operations," says Stafford. "When you have to articulate all your process exceptions and get them out to suppliers in a bid, you have to start asking yourself how many of those exceptions should really be in there."
Stafford says there were no service issues with Sun's incumbent suppliers that contributed to its decision to move to a DBE model. "We have had long-standing relationships with most of our suppliers, but we did realize was that this had led to incremental improvements and we were not sure we were getting the best of what was available in the marketplace. We also felt that there were some gaps in the services we had contracted, so we wanted to challenge our existing suppliers to bring new services to the table and also look at the marketplace and see what else was out there."
The DBE was run in two parts. The first part was the equivalent of an RFI, where all providers were required to answer preliminary questions about their capabilities and basic approaches to the business. "There were a lot of pre-qualifying items to enable a supplier to get to the actual live bidding event," says Stafford. Keeping track of this information was another area where Procuri proved very useful. "The Procuri tools make it very easy to post all of that information, review it and store it in a central source to which all the team has access. That's a strong benefit," he says.
David Kassel, who manages e-sourcing projects within Leinweber's group, added that Procuri also played an important role in helping Sun ensure that there was a level playing field among suppliers, which is an important aspect of bidding events for Sun. "Ever since we started the e-sourcing program at Sun, we have worked hard to make sure that our suppliers have confidence in our ability to conduct an event fairly and accurately and with as much transparency as possible," he says. "When they are confident that we award business based on the very clear guidelines and the rules of engagement we set out, they will come back and participate with us in the future."
In the traditional procurement process, he explains, a lot of information was handled manually. "We would collect responses and print out huge documents that we would then have to lay out side by side to try and make an accurate analysis, which introduced a good deal of operator error and interviewer bias," he says. "The great thing about Procuri is that it puts all participants on a level playing field because they all receive the exact same set of information from the get-go. All communications are monitored and conducted through the Procuri communications center, so if one supplier has a question or concern, once it is answered or responded to, we can broadcast that correspondence out to all participants."
Additionally, Stafford says, Procuri made it easy to keep track of the status of communications and deadlines. "All participants had to agree with the terms and conditions of the way the event was going to be run and they had to acknowledge receipt of all documents. Procuri consolidated that and provided a centralized reporting place for supplier agreements and data," he says.
For this event, RFIs went out in October 2006 and the online bidding event was held in December. The event itself lasted about three hours. "We had 13 total lots that suppliers could bid on," explains Stafford. Each lot consisted of a specific range of business - air transport in specific lanes or management of a designated DC, for example. Each lot was given about 20 minutes for bidding, but bidding was not ended until two minutes had elapsed without a new bid.
"A DBE is more than a simple reverse auction, which is over when the regulation time ends," says Kassel. "There are timing parameters that we can change. We can create different levels of overtime or extension periods if people continue to bid." Also, he says, Procuri allows Sun to build in certain price factors, such as the cost of switching from incumbent suppliers. "All these things rolled together are why we think of this more as a dynamic bidding event rather than a straight-up reverse auction," he says.
The apparent low bidder at the end of the DBE was not automatically the winner. "Once we received all the bids, we had to go through a process where bidders submitted all the worksheets behind their bids so we could make absolutely sure that we had an apples-to-apples comparison," says Leinweber. "We actually came back to them with our final decision in early January 2007."
When the awards were made, most of Sun's incumbents remained, though there were "significant shifts" in the percentage of business that went to each of those providers, says Stafford. One new supplier was introduced: a freight forwarder that was awarded a "significant portion" of Sun's airfreight business. "One of the big advantages to bringing in a new supplier was that their new, objective view of our operations resulted in a lot of process improvements," says Stafford. "This is not something we can quantify, but the transition process forced a rigorous review of our processes and streamlined existing export compliance efforts."
The shift in business among incumbent suppliers was done to benefit them as well as Sun, says Stafford. "The perception is that DBEs are all for the benefit of the company procuring the services and that it is all a cost play, but in reality, especially with regards to airfreight, this allowed our suppliers to look at each lane and balance Sun's business against their overall business. So, providers with an imbalance in certain lanes could be more aggressive in their bidding for that particular lane. Certainly the result was beneficial to Sun, but it also helped the providers get better synergies in their own operations."
Stating an overall savings is difficult in such a dynamic cost environment, says Stafford, but Sun estimates its cost savings to be approximately 5 percent. "The additional value was derived from achieving a higher level of 'base' services as part of the cost," says Stafford.
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