Going, Going, Gone! The advent of reverse auctions led Greg Gartner to completely rethink his approach to business.
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Reverse Auctions
Published May 2007
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BUY A REPRINTFor Gartner, winning reverse auctions has meant focusing less on good product design, which he previously considered his company's greatest strength, and more on production. Because he assumed that sharp price cuts would be inevitable, he started looking for factories in Asia to replace the American manufacturers that he had worked with in the past. He sent his No. 2 to Hong Kong to open an office. That office, which manages sourcing, has grown to 30 employees, a quarter of Gartner's work force. Today the company imports 90 percent of its products, up from 25 percent before it started to bid in reverse auctions.
It's crucial, says Gartner, to figure out how any single adjustment to the supply chain can improve profitability. To prepare for an auction, he starts by asking his factories how much they pay for raw materials such as wood pulp and ink in order to determine if they might be able to shave their costs--and, consequently, to lower the price he pays. (During a live auction, he talks frequently by phone with the factory owners in case the bidding gets close. Gartner is sometimes able to exact a last-second concession, lowering production costs by, say, a quarter of a percentage point.)
Gartner also makes sure that he knows, well ahead of time, the answer to a range of thorny what-ifs: How much does it cost to deliver a pallet of paper to a logistics center in Asia versus delivering to a facility in the United States? Can you cut costs by selling paper in units of four cases versus two? If you switch to packs of four, will the new dimensions affect your ability to fit the same amount of paper per shipping container? By poring over these variables, Gartner better understands the financial implications of even the tiniest change in contract terms that he may feel compelled to offer during a reverse auction. "As easy as these things sound, the more you dig into them, the more difficult they become," he says.
Because reverse auctions are typically won or lost during the preparation that precedes them, actual tactics (see "Game-Day Strategies" ) are less important than keeping calm and playing by the numbers. Knowing the competition is also helpful. Mark Lilien, a consultant who advises retailers and their suppliers on procurement strategy, says companies should do some detective work to find out who is bidding, what their cost structure is, and how far they are likely to go.
If, for instance, you know you're bidding against a low-margin supplier with a history of quality problems, you may chose to aim for second place because the purchaser is apt to shy away from your opponent. If you're bidding against a supplier that already has the account, assume that you'll have to beat the supplier substantially on price to offset the cost to the customer of switching vendors.
