One of the more controversial ways the Internet has impacted relations between retailers and suppliers has been the advent of Web-based reverse auctions. These auctions pit suppliers against each other in a contest to win over retailers with the lowest price -- a kind of reverse eBay.
For retailers, the auctions represent an easy way to find low-cost sources of supply. For suppliers, though, the auctions may be shifting the balance of power a little too much in the retailer's favor, depersonalizing the relationship and reducing it to a numbers game, say industry observers.
Still, use of Web-based reverse auctions appears to be trending upward among grocery retailers, both as a percentage of overall purchasing and in the breadth of supplies, commodities and nonbranded merchandise being purchased. The bidding-down process is enabling them to reach a wider audience of potential suppliers, reduce costs, slash time from the purchasing process, and take advantage of unique procurement opportunities.
"We tend to use the auctions for products and services that have a good deal of competition and where supplier conversion costs are minimized," said Rob Borella, director of corporate communications for Giant Eagle, Pittsburgh. Conversion costs refer to the cost of changing from an incumbent supplier to a new one, which is often not factored into the bidding process, he added. "When you factor that in, it's not always the lowest bid that wins."
Borella lists transportation, fuel, paper and office supplies, and such commodities as diapers, applesauce and cheese among the products Giant Eagle regularly procures via auction, and private label is emphasized. "We have not used reverse auctions for any branded merchandise besides the Giant Eagle brand," he said. Reverse auctions represent less than 1% of the chain's overall purchasing, but that's growing, he said. Private-label goods are clearly the most commonly purchased products among grocery retailers. Items mentioned most frequently include produce, meat, poultry, seafood, pasta, cheese and bakery ingredients. A rich diversity of indirect products and services is also being auctioned, including store supplies, transportation, computers, construction, machinery, landscaping, legal services, hotel room rentals, janitorial services -- even fuel and electricity.
While Forrester Research reports a slower-than-expected overall adoption of e-sourcing, in a recent survey conducted by Forrester and the Institute for Supply Management, 23% of 360 companies purchased products or services via an online auction in the last three months of 2001, compared to 17% in the preceding three-month period.
"Adoption really kicked in at the end of Q1, 2001," said James Williams, negotiations and auctions director for the WorldWide Retail Exchange (WWRE), a Web-based business-to-business exchange. "End of Q2, 2001, is when we started seeing an extreme spike in the amount of usage." Initially, he added, users were heavily into the indirect products such as paper and office supplies, but now more than half of WWRE's auctions are for direct products sold in stores.
Reverse auctions are essentially bidding events backed by a buyer. Working with a group of qualified suppliers, the buyer details the product or service it needs, and conducts an auction where suppliers make dynamic bids to win the business. This is accomplished using an online auction platform, where buyers and suppliers hook up, exchange information and negotiate -- all in real time.
There are three main auction platforms to choose from: Web-based, e-sourcing service providers; Web-based B2B exchanges; and e-sourcing enterprise software providers (see "Auction Options" on this page).
At Giant Eagle, the ultimate purchasing decision is based on everything from quality and terms to cycle time, and, again, conversion costs. "How much these factors weigh in the decision-making process varies widely depending upon the product. But I can't think of any product where price is the only factor," Borella said.
Giant Eagle works primarily with FreeMarkets, a Web-based, e-sourcing service provider, and to a lesser extent, WWRE. "The advantages of working with FreeMarkets are their coordination of events, good sourcing capabilities and the level of integrity they bring to the process. All of the suppliers and buyers sign an agreement which ensures everyone is on a level playing field, abiding by the same parameters and set of rules," Borella said.
Of WWRE, he said: "The cost is a little lower, but they offer a less structured environment. The onus is on you as auction holder to coordinate a lot more of the efforts, i.e., bring suppliers together and go through with the auction process."
Improved quality is another possible byproduct of using reverse auctions. "If we were accepting bids for, say, bottled water," explained Borella, "we historically may not have detailed the specifications behind the purity grade because we had an existing relationship with one supplier. When you open the bidding process to other suppliers, by nature of the process you are exposed to how the competitors detail their offerings. You would then refine your specifications because you are now seeing a broader product offering, hence leading to a higher-grade product at a better price point."
Bashas', Phoenix, started doing reverse auctions three years ago with Intesource, another Web-based, e-sourcing service provider. Two percent of the company's purchasing, primarily meat and poultry, is done through reverse auctions, said Mark Barnett, senior vice president of merchandising and marketing for Bashas', adding, "There is a bit of an upward trend."
In pursuing auctions, retailers need to be aware of the pitfalls, observers said. For example, "There can be trouble when the initiatives for procurement are not run by the head merchant, whom we recommend be the senior champion," said Joe Laughlin, CEO of GlobalNetXchange, another major B2B exchange. "You also have to organize internally, and set measurable goals."
This concern is echoed on the retailer side. "Doing the pre-work is essential," said Barnett. "You have to make sure everyone understands the ground rules ahead of time."
Borella concurred: "Culturally, you have to institute a change in the buying process. And, outside the company, there can be reluctance among your supplier base -- that depends on either how commoditized that particular product is, or how many potential suppliers there are. If you have only one or two potential suppliers for a particular product, chances are it's going to be difficult to implement a reverse auction and you won't get the most value out of it. If there are five or six suppliers out there with comparable products in terms of quality, it's going to incent the incumbent to participate in a reverse auction."