How Low Can You Go?

How Low Can You Go?

To the end user, reverse online auctions represent procurement progress, but to many suppliers, the idea of business just being handed to the lowest bidder is a tormenting thought.

“My personal feeling is that it’s an absolutely disgusting way of doing business,” says Robert Bertuzzi, owner of Reliable Maintenance Solutions, Ontario, Canada. “You just watch your computer screen, and the price just keeps getting lower and lower. It gets so low sometimes, it makes you question if the other distributor is offering the same level of service.”

While there’s an element of pre-qualification, reverse online auctions are really all about end users looking to get the best deal possible. Through newsletters, advertisements, e-mails or word of mouth, customers contact a group of potential distributors and ask them to log onto a website at a specific time. Through the medium of the website, participants bid down (hence the term “reverse” auction) to determine what distributor is willing to sell products at the lowest price.

Large and In Charge
Not every end user has the power to pull it off. In order to pique the interest of distributors, the auction must offer a significant amount of business. Large universities, retail chains and large hotels are customers that would possibly draw enough interest to submit a reverse online auction.

Many distributors, who view their position in the supply chain as significant because it offers value-added services, fear that the auctions have diminished the role of the distributor and put too much control in the buyer’s hands.

“Really, the auctions have lowered the expectations of the vendor,” says Bertuzzi. “A customer may think he’s saving money because he’s buying products that are initially at a lower price, but in the end he may be filling out twice as many orders, or his facility may require extra maintenance because the cheaper products are inferior.”

Although it’s doubtful that reverse online auctions will be widespread in the jan/san industry, they are becoming more popular in certain markets.

They have become a popular way of doing business in commodity-driven industries such as coal, steel and paper, according to Laurie Sewell, supply division president of Pacifica, a distributor in Culver City, Calif.

“I think it makes more sense for some kinds of businesses than others, but if distributors in the cleaning supply industry keep a good relationship with their customers — especially the procurement people — the process can work out,” she says.

Knowledge is Power
The best course of action for distributors who find themselves participating in a reverse online auction is to clearly communicate with the customer about the pre-qualifying process, says Sewell.

“It can be very scary, as a distributor, if you don’t know what you’re getting into,” she adds. “The problem is when the expectations for the contract are vague, then it’s very difficult to know how to estimate the true price for supplying the facility.”

Ideally, a distributor should be able to walk through a customer’s facility and know exactly what the requirements would be if an agreement is reached on price. Too many times, however, customers fail to include the details of service that would be included in the contract before the reverse online auction takes place.

“I actually dissuaded a client from participating in a reverse online auction because the facility had too many specific requirements,” says Sewell. “They wanted the distributor to make deliveries to every individual room within the building, rather then just dropping off the products at a main location. I told them that if that’s what they expected, then they had to make that clear before the auction.”

Likewise, Bertuzzi, lost an account through a reverse online auction because the customer did not communicate his service expectations. “I just kept watching the price go down on my computer screen, and eventually it was below what I was paying for products at cost. I couldn’t believe it.” The customer now has a partnership with a distributor that delivers supplies only once per week, whereas Bertuzzi’s company had been providing service daily.

“If I would have known that they would have settled for more infrequent service, then I could have lowered my price, too,” he says.

Although the issue of price is a sensitive one for distributors, end users have every right to shop around for the best bargain, says Jim Wheeler, manager of sourcing projects for the National Broadcasting Company (NBC) headquarters in Burbank, Calif.

“We’ve used reverse online auctions for a variety of things: cleaning supplies, services, utilities and even advertising,” he says. “Sometimes the price goes really low and other times it doesn’t, but we’ve found it to be an effective way to keep our costs down.”

Two prices are involved when NBC organizes a reverse online auction for potential distributors: the starting price and the reserve price. Distributors can see the starting price on their computer screens when the auction begins, and they then have the opportunity to bid lower. The reserve price, or “target” price, is hidden from distributors, shown only to NBC’s auction administrators. If that reserve price is never reached, NBC has the right to cancel the auction and try to attain it through another auction at a later date.

“The distributors know if the target price has been met,” says Wheeler. “We make that clear to them on the Web site. Many times they just keep on bidding and we’re pleased to see offers go well below our reserve price.”

In response to distributors who rankle at reverse online auctions, Wheeler says that services are not being ignored. “We don’t ignore value-added services,” he says. “What we do is we make a great effort to pre-qualify the participants.”

Wheeler uses the analogy of buying a car when explaining his company’s perspective to distributors: “If we need a Volkswagen, then that’s what we need. Maybe the Cadillac dealer has more options and features — and we’d be happy to have that too — but that doesn’t mean that we need more than a Volkswagen.”

Stay Calm
It’s easy for distributors to get caught up in the exhilaration of trying to land the account when they participate in auctions. Distributors frequently get into trouble by bidding too low and losing money in the transaction. For that reason, it’s critical for participants to have a concrete idea of the lowest price they are willing to go to service a facility.

“You have to go into it with a price in mind,” says Bertuzzi. “The adrenaline-rush of seeing the price get lower can sweep a distributor away. I went in with an exact price in mind and, unfortunately, the end price was dramatically less than what I was willing to commit to.”

Some distributors call the actual process of the auction the longest hour of their lives; distributors can go through an emotional rollercoaster as they watch the price change, especially if it’s an account that they covet.

“Most reverse online auctions are scheduled to take about an hour, but all the activity happens in the last five minutes,” says Sewell.

Although end users can host their own reverse online auction, it is more common for a third party to be the administrator. Third party auction hosts vary greatly in how they do business. Some provide users with online pictures of the facility, while others simply provide the latest accepted bid.

“It’s still a new way of doing business for almost everyone,” says Wheeler. “There are going to be some bugs in the system and not everyone is going to be happy with it, but we’ve found it to be an efficient way to employ services and purchase products.”