Like many manufacturers in America, BOCE is in the midst of a major slowdown, according to Tom Connelly, North American supply manager for the Wilmington, Massachusetts, company. Demand in the semi-conductor industry for its vacuum pumps, turbo molecular pumps and temperature control units is down.
Connelly says he uses slow periods to get to projects that he’s too busy to get to when the business “is in the midst of a feeding frenzy.” One of the things on that list is to obtain better quality, price and delivery on sheet metal that must be customized. He decided to try a reverse auction to achieve that goal.
Reverse auctions are good for buyers because they put all suppliers on a level playing field. “They are all looking at the same part, packaging and delivery terms,” says Connelly.
Connelly emailed the blueprints of the sheet metal items to ThreeCore Inc., a Danvers, Massachusetts, supply chain management supplier that specializes in creating competitive bidding events. BOCE had three suppliers it wanted to include in its auction. But it outsourced the auction to ThreeCore because it wanted to reach other suppliers in ThreeCore’s audited supplier base.
“We don’t have and don’t want a large purchasing group,” says Connelly. He says the company doesn’t want to bear of the cost of the personnel needed to continually visit suppliers. “ThreeCore has done the supplier homework for us,” says Connelly.
Tapping Into an Audited Supplier Base
ThreeCore CEO Tom Petersen says the auction process itself “is very mechanical.” Companies can purchase the software and “run auctions all day long.” The reason companies like BOCE outsource their auctions is the ability to tap into ThreeCore’s extensive and audited supplier base.
“Who can afford to check out 200 machine shops?” asks Petersen rhetorically. “We do it because it’s our business.” Petersen says ThreeCore can afford to physically visit these shops and produce written evaluations because it uses the information to help a long list of buyers, not just one.
After receiving the requirements from BOCE, ThreeCore emailed the plans to the suppliers it felt were appropriate for the assignment. Six companies chose to participate in the reverse auction.
The Mechanics of a Reverse Auction
The auction, which takes place online, lasts 20 minutes. If a bid arrives during the last two minutes, the auction is extended for another 10 minutes. “We love it when we can put suppliers in a time sensitive, competition situation,” says Connelly. Petersen says the winning bidders can make lower yet still profitable bids because “they have better equipment to make the parts.” He points out that “it’s the selection process that ultimately delivered the savings, not the bid collection technique alone.”
Every participant can see the bids as they come in by staying tuned to the ThreeCore Web site. Each supplier is given a number, so nobody knows who is bidding what.
The BOCE auction, which took place on August 28, 2001, lasted 40 minutes. When the dust cleared, the price of the parts dropped 32 percent. “We said, ‘Wow,’” reports Connelly. Petersen says TreeCore customers’ average reduction in price has been 38 percent.
“Reverse auctions are clearly the most efficient way to get market price on custom goods because, by their very nature, there is no market price,” says Petersen. Most people think commodity items like light bulbs are the best candidates for reverse auctions. Not so, says the TreeCore expert. Commodity items are sold with very thin margins, so there’s not much room for the price to change. Petersen says a good price on commodity goods would be just five percent lower.
Reverse auctions also wring such savings from the procurement process because they erase all relationship issues. Companies work with their suppliers day in, day out. “Relationships get in the way when you’re trying to have an objective negotiation process,” Petersen observes. Buyers tell their suppliers they want objective input from an outsourcing company during the selection and negotiation process. “Then the suppliers can’t use their personal relationships to defend their pricing,” he explains.
The ThreeCore CEO points out the lowest bidder doesn’t always win the contract. There are times when a company has developed a relationship with a supplier and has been happy with its service. When the auction is over, this supplier is just four percent higher than the lowest bidder. Often the buyer will select its long time supplier if the price savings are insignificant. The winner is always the supplier who provides the most value, Petersen notes.
The auction cost BOCE a fixed price of $10,000. BOCE was so happy with the results of its reverse auction it plans to install an umbrella auction program. ThreeCore will allow the company to conduct an unlimited number of auctions for a specific fee each quarter, says Connelly.
Lessons from the Outsourcing Primer:
- There is no market price on custom goods. Reverse auctions can wring as much as one-third off the price of custom parts.
- Buyers use outsourcing suppliers for reverse auctions because they can tap into their extensive audited supplier database.
- Outsourcing adds objectivity to supplier negotiations.