Electronic auctions have been an important business tool for a long time. They enable companies to optimize purchasing processes and lower procurement costs.
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Even Johann Wolfgang von Goethe once sold publishing rights in a process that contained elements of an auction. Back in 1797, the German writer made the following statement: “I am inclined to offer Mr. Vieweg in Berlin the publication rights to my manuscript Hermann and Dorothea. Concerning the royalty, I will hand over a sealed note containing my demands, and I will then wait for what Mr. Vieweg will suggest to offer for my work.”
The publisher was likely quite astonished by what came next: “If his offer is lower than my demand, then I will take my note back, unopened, and the negotiation is broken. If, however, his offer is higher, then I will not ask for more than what is written in the note, which is then to be opened.” This procedure more or less amounted to an auction – except that the publisher in question was the only bidder. In any case, Goethe’s tactic was successful, as the publisher’s offer of 1,000 talers was 20 times higher than what another writer, Hölderlin, received for his work Hyperion. The publisher also displayed business acumen; however, since Goethe’s epic poem became a bestseller.
Companies today have come to recognize the potential offered by electronic auctions. According to a study conducted by the German Association of Materials Management, Purchasing and Logistics and the Julius Maximilian University of Würzburg, some 40 percent of globally-operating companies headquartered in Germany utilize e-auctions for procurements. The main reasons for this include qualitative factors such as compliance and process stability and transparency, as well as quantifiable factors such as process cost reductions and low procurement prices. Strategic procurement specialists often use e-auctions to conduct price negotiations for everything from normal products to complex services.
Siemens has been participating in e-auctions since 1999, but the share of purchasing volume such auction account for has risen significantly over the last few years. In 2012, for example, Siemens procured 5.5 billion euros worth of supplies and materials through e-auctions and e-bidding events, as opposed to just 500 million euros in 2008. Anything that can be specified and compared monetarily can be auctioned. “Procurement managers can achieve very good results – such as double-digit percentage savings – if the competition between auction participants is sufficiently intense,” says Mark Helgemeier, an expert for online-based procurement auctions at Siemens’ Energy Sector.
Siemens utilizes auction formats such as English, Dutch, and sealed bid. In an English procurement auction, participants can underbid each other during a set period of time. Dutch auctions, however, begin with a low price that’s automatically raised in predefined steps, whereby the winner of the auction is the company that either agrees to the next highest price or stays in until the maximum – and unknown – price acceptable to the purchaser is reached.
Enabling Supplier Comparisons. Helgemeier is an e-auction pioneer. For more than ten years, he’s been studying their methodological foundations and continually refining concepts for carrying them out. “Comparing different suppliers is still one of the biggest challenges because no supplier is exactly the same as another in terms of what they can deliver,” Helgemeier says. In order to make it possible to compare suppliers, a Supplier Comparison Factor (SCF) is determined for every participant prior to an auction. The SCF takes into account technical, commercial, qualitative, and logistics criteria.
Each SCF is stored in a special auction tool and automatically taken into account during the auction through the application of a pro/con evaluation system. Individual bids are then added into the equation, resulting in a direct overall cost overview that enables the procurement manager to identify the bidder with the best price-performance ratio – and not, as many believe, the bidder with the cheapest prices. “This improves the efficiency and effectiveness of price negotiations,” Helgemeier explains.
Auction participants receive extensive training to ensure they completely understand the process and know how to use the tool. After an auction begins, participating suppliers start entering their bids. So is there a countdown at the end, like on eBay? Helgemeier grins. “There actually are some similarities. For example, we utilize a Web-based auction tool that operates with certain rules. However, where eBay only uses one format, the concepts we employ at Siemens are multifaceted. We adapt them to the requirements of a given project and adjust the rules as needed,” he says.