Reversal of Fortune
Online reverse auctions are transactions where one buyer and many sellers auction over the Internet, and bids decrease ('reverse') over time.
Use of reverse auctions is growing. People are purchasing major printing services, under the false assumption that excess costs in the system are taken out, and that the traditional marketplace is inefficient.
The printing industry has seen margins erode significantly over the past few years. Implementing the use of online reverse auctions is, at best, spurring artificial competition.
Our data, compiled from two years of bidding online, indicates 50% of winning bidders are, ultimately, not awarded the work. The end result is a negative impact on the ability of printers to help clients save money the old fashioned way: by partnering to add value and drive costs down through consultation, technology, and cycle-time reduction.
A recent PIA/GATF white paper, titled Strategies for Reverse Auction Survival by J.K. Stoddard, cites statistics regarding the adoption of e-procurement by print-related product line.
It reports adoption rates of 36% for printing, 23% for packaging materials, and 21% for advertising (office supplies were the single highest B2B category, with an adoption rate of 82%).
According to 80% of respondents, printed marketing materials such as flyers, brochures, etc., were the products most frequently purchased via reverse auctions, followed by 72% for low-complexity products, such as one- and two-color printing and business stationery.
Recent data from the Institute for Supply Management (ISM) suggests the use of online B2B auctions was 27% in Q4 2002, up from 19% in Q3 2002. In addition, 68% of respondents said Internet-driven cost savings was one of their top strategic priorities this year.
But despite these trends, are online reverse auctions in the best long-term interest of print buyers and sellers? David Bovet and Joseph Martha sum up prevailing conditions well in Value Nets: Breaking the Supply Chain to Unlock Hidden Profits.
Ponder this excerpt: "Your managers view suppliers as enemies. Traditional supplier relationships are often adversarial. Beating up suppliers, or playing one off against another, can drive down purchasing costs and enforce deadlines in the short run, but in the long run, supplier distrust limits your ability to develop powerful new products and services. Could collaborative initiatives with your suppliers open up new opportunities for you?"
In fairness, there are tangible benefits to online reverse auctions for both sides of the transaction. Buyers can document and illustrate to upper management that they are using emerging technologies to meet strategic directives, electronic gathering, and organizing specifications and bids.
And some printers report that online reverse auctions have opened up opportunities to bid—but not necessarily develop a relationship—with customers previously unavailable to them.
Regardless, there is a marked lack of education and knowledge about online reverse auctions and their consequences to buyers and sellers. This leads to errors, misunderstandings, and miscommunication that can have devastating liability or cost implications for participants.
Some print buyers have even seen their price for a repeat project increase due to reverse auctions versus straight bidding, because they didn't understand market conditions, and tailored their auction to achieve the desired result.
Although the case has yet to be made that the current print market conditions are ideal to insure the long term viability of e-procurement via online reverse auctions, here are some suggestions to clarify and improve the quality of your participation in this process:
1. Establish and communicate to all participants the objectives and rules for the online reverse auction prior to the event.
2. Utilize a software vehicle that allows for online, real-time communication between buyer and sellers before, during, and after the auction.
3. Allow only pre-qualified, pre-categorized printers to bid on auctions suited to their capabilities and strengths.
4. To reduce input errors and speed bidding, minimize the number of line items required to enter a bid (a single, bottom-line price input box is best). If required, bidders can provide line item summaries at the auction's conclusion.
5. Use reasonable, whole number bid increments.
6. Provide a way for participants to electronically enter a bid, even if it's not lower than the winner. This automatically establishes a backup vendor position in the event of a bidding error or non-performance by the low bidder.
The question remains: do current print market conditions require the implementation of an impersonal bidding process that virtually eliminates, and potentially damages, the classic tenets of building mutually beneficial relationships between buyers and sellers; and minimizes a climate of consultative partnerships, where real, significant, long-term cost saving measures can be explored and implemented?
In examining this question for B2B markets in general, Charles C. Poirer and Michael J. Bauer write in E-Supply Chain Using the Internet to Revolutionize Your Business, define three attributes necessary for an auction market to both develop and make sense:
1. Indifference between buyer and seller must exist; that is, it should be a situation where the buyer is truly indifferent as to the source, so long as the commodity meets required specifications. All purchasers of the commodity come to the auction with equal desirability, so long as they can accept delivery and make payments within the prescribed time frame.
2. The price of the commodity should be the only variable left unspecified. If non-price elements (quality, delivery, lead-time, freight costs) are important, then partnering methods are more appropriate.
3. The auction has to produce some profit for the market maker. It must improve the efficiency of the market, producing value for both buyers and sellers so a portion of the added value can be extracted as earnings for the market number.
From my perspective, the answer is clear. Conditions don't exist for an online reverse auction market to make sense in print procurement today. There's a more effective way for print buyers to save money, and add value for their companies.
And it can be done without damaging valuable print supplier relationships. Despite attempts to make commoditize print, it remains a unique, made-to-order product that requires human interaction, creativity, and communication to be executed successfully, time after time.
While it's clear that buyers are being asked to do more with less, and that time, as always, is precious, I suggest buyers travel the more difficult path, and invest time reaching out to print partners.
Have them suggest ways they can help you and your company save time and money through process and product re-engineering. That's where buyers will find the sustainable, long-term savings they need, and where their print partners can provide the most value.
- Gary Pawlaczyk
Gary Pawlaczyk is VP of sales & marketing for Pictorial Offset Corp., in Carlstadt, N.J. He can be reached at GPawlaczyk@PictorialOffset.com.