PITTSBURGH (Aug. 10, 5:20 p.m. EDT) — The bell goes off, the price goes down.
A major bidding battle for injection molded parts ensued in May on the glass-enclosed trading floor of FreeMarkets Center in Pittsburgh. More than a dozen brokers — FreeMarkets Inc.'s term for those supervising its almost-daily parts auctions — manned their stations, telephones in hand and laptop computers at the ready.
At 10 a.m. sharp, the bids commenced on the first of seven lots of clustered parts.
By 10:20, when the lot auction was scheduled to conclude, bells were ringing as if it were Christmas at St. Mary's Cathedral.
Each time the bell rang, a bid was recorded, and the auction price sank lower and lower. On a series of projection screens in the room, the results of each bid were noted for that parts lot — 14.76 percent cost savings over the previous contract price, then 16.59 percent, then 19.49 percent, then beyond 20 percent.
All the while, graphical price curves on several screens tailed downward like a fighter jet heading for home base.
FreeMarkets has adopted that plummeting price line as part of its official logo. Since 1995, and escalating during the past year, FreeMarkets has made its living by putting downward pressure on contract prices for a variety of goods through its online, reverse-auction model.
FreeMarkets' trading center has spawned about $4.1 billion in contracts in that span. That attention to fluttering prices has made parts buyers revel and some plastics processors rebel.
Parts suppliers, especially those with existing business up for auction, have been rocked by the machete-cutting approach of online trading, said Cliff Shannon, president of SMC Business Councils, an association representing 5,200 small manufacturing and service companies in the Pittsburgh area.
"When our members (go through an auction), their eyes roll around in their sockets a little bit," Shannon said. "The younger ones think this gives them more access and opportunity in the marketplace. But the older ones start thinking about retirement when they see their business renewals go up for bid."
Nevertheless, it seems online parts auctions are here to stay. A host of other companies are getting into the game, including Burlington, Mass.-based SupplierMarket.com Inc., and software-development companies such as Commerce One Inc. in Pleasanton, Calif.
Automakers and retailers are setting up their own online marketplaces, although it is unclear how they will play out. General Motors Corp. dropped FreeMarkets last year to help form a trading site consortium, called Covisint, with its Big 3 automaking rivals.
Troy, Mich.-based Delphi Automotive Systems joined Covisint on June 7 as a potential parts seller. But Delphi also has a contract with FreeMarkets, where it made $460 million of online buys last year, said Bill Lloyd, Delphi global purchasing director.
During that period, the company saved about $70 million in purchases, Lloyd said in a June 9 telephone interview. And about a third of the time, Delphi has moved parts to a more competitive supplier after an auction, Lloyd said.
"Some (auction) events only confirm that our existing processes are very successful and where the market is," Lloyd said. "Others show significant savings in some areas, especially for commodities where there is consolidation at a market price or below it."
Negotiations are finished in weeks instead of months, eliminating the faxing, paperwork and other mundane tasks, Lloyd said.
The brass-tacks work at both FreeMarkets and SupplierMarket.com starts about eight weeks before a parts auction. The Web auction companies help parts buyers create requests for quotes and identify suppliers that have the ability to handle the work.
At FreeMarkets, products first are parceled into lots. For injection molded parts, they can be grouped according to press size, by type of material, by process, by cycle times or by some other means, said Jim Zuffoletti, FreeMarkets' director of market-making for diversified manufacturing.
Then, FreeMarkets goes to its data bank, a grouping of more than 4,000 suppliers across 50 countries. The buyer selects those it wants that best fit its quality or location needs.
"When people say it's just a price game, it's not exactly true," said Kent Brittan, vice president for supply management with Hartford, Conn.-based United Technologies Corp. "In advance, we have to have drawings, know quality specs, delivery and payment terms, state and local taxes.
"By the time we get to the auction, the only thing left to bid is price. We've done all the rest."
At SupplierMarket.com, ISO and QS 9000 certification frequently are used as a means of distinguishing among suppliers, said Iain Michel, director of business development. The company lines up suppliers — at a flat fee per event — and uses a "smart match" program to marry them to the right buyers, Michel said.
Rules also are important. Suppliers at FreeMarkets must bid on the entire lot, Zuffoletti said. Once a buyer approves the winning bid, the contract must be awarded to that supplier.
That can consume time. Michael Brooks, marketing and sales director at injection molder NYX Inc. in Livonia, Mich., said he must spend hours pricing a cluster of parts to prepare for an auction.
Each lot can have five to 20 parts in it, with some auctions featuring as many as 100 different parts bunched into 10 lots.
"It's more efficient when you're not trying to quote 100 parts at once," Brooks said. "In the long run, the work is still going to go to the most able supplier with the best price."
FreeMarkets claims it has dispelled any initial concerns about being a flash-in-the-pan company. It recorded $20.9 million in sales last year, higher than many of the suppliers now vying for a slice of the auction business.
"Buyers haven't retained us to run a little auction and test this out," Zuffoletti said. "They've retained us to create a market for millions of dollars' worth of parts."
The company calls its list of major corporate clients "market makers," as in those setting the price bar for a particular industry.
They offer a new purchasing model: parts bidding as Internet day trading. FreeMarkets and others recreate the high-tension floor of the New York Stock Exchange. Companies have taken the gambit to heart.
"I believe that in the future, deal makers will be day traders," said John Gellatly, e-procurement leader for Toledo, Ohio-based Owens Corning. "We'll have multiple screens, with data flying back and forth.
"After all, stockbrokers aren't people who know pork bellies, but (who) know how to run markets. We need to start looking at purchasing through the world of desktops."
Owens Corning wants to conduct $1.5 billion in purchases online by year's end, Gellatly said. Right now, the company has met about 40 percent of its goal.
Just like day trading, some danger lurks in online bidding. A supplier could get carried away during a live event, making a bid that eats away profit on a high-volume contract, said Clifford Croley, president and chief executive officer of Blackhawk Automotive Plastics Inc. in Salem, Ohio.
"The fact is that you're sometimes bidding for your own contract," Croley said. "It's easy to go a little crazy and bid lower than you should."
Suppliers need to take some responsibility too, said analyst Michael Steinberg of Pittsburgh-based Emerald Research Inc. They must know their break points and not venture farther, he said.
On May 22 at FreeMarkets Center, the bids kept colliding like bumper cars during an injection molding parts auction for a contract worth more than $2 million.
Whenever a supplier bid during the last minute of the 20-minute-long period, a minute-long overtime would begin.
"We want to give all suppliers an opportunity to participate," said FreeMarkets spokeswoman Karen Kovatch. "The extra time gives them that cushion."
Overtimes can last and last. If another supplier makes a bid during the initial overtime period, another minute-long overtime automatically begins. FreeMarkets has held as many as 60 overtime periods for one lot, Kovatch said.
Meanwhile, on the screen, the action is chronicled. The historic price — the price the lot previously sold for — flashes, as does the reserve price.
That latter price reflects the figure at which it makes the most sense for a buyer to switch from the "incumbent," or the current supplier, to a new supplier, Kovatch said.
In about half the auctions the incumbent does not win the business, according to FreeMarkets plastics specialist Patrick Furey.
"I sympathize with those who have contracts taken away," said Furey, a former injection molding engineer. "But we perceive it more as an opportunity for a good supplier. We're not attempting to drive suppliers out of business, but get them some more work."
Hitting the radar screen can be a major reason to bid online, said Steve Heutlinger, director of supplier management at SupplierMarket.com. During one auction for disposable medical products, a maker of plastic baby bottles placed a winning bid, he said.
"The buyer would not have known the company existed or could compete in that market without the (online) process," Heutlinger said.
Yet, suppliers were not certain the proposition is always a win for them. Taking the time to prepare a bid does not necessarily mean a sale.
Blackhawk Automotive Plastics was a low bidder in one recent FreeMarkets auction. But a company with which the buyer had worked previously still won the contract, Croley said.
"You've got to do it, as a supplier," Croley said. "But the integrity of the process is not always maintained."
Other processors say they have benefited from reverse auctions. Models Inc., a custom injection molder based in Lebanon, Ind., has forged relationships with two new customers in the past six months through auctions at SupplierMarket.com, said Models President Chip McMann.
Yet, McMann also wondered what would happen if prices dropped so low that no supplier could profit by bidding.
"They can only fall to a certain point," McMann said. "If nobody makes any money at it, or margins drop to an unrealistic level, (parts) suppliers will lose interest."
If the economy cools, auction sites could be victims, added Kevin Wagner, an analyst with Boston-based Adams Harkness & Hill. Companies will not want to retain excess inventory when demand slows, he said.
At some point, parts suppliers might be less interested to join too, he added.
"A lot of (buyers) are saving 25-40 percent over prenegotiated contract prices," Wagner said. "But the margins are squeezing the life out of some suppliers. The attrition rate of suppliers could be high, and the ones remaining might not be as eager to keep lowering their prices."
For now, watching the price go down on a screen can be tremendously motivating to a buyer, said Brittan at United Technologies. And so can finding new customers and suppliers, he said.
"New suppliers who have never bid before are not unhappy when they win business," Brittan said. "Everybody gets an equal shot here."
At the FreeMarkets auction in May, the event finished after a cauldron of suppliers competed from around the globe. Three interpreters sat in an enclosed room, communicating to suppliers in South Korea who were bidding.
Meanwhile, some brokers were "surrogating," or placing bids for those suppliers having difficulty accessing the FreeMarkets Web site or BidWare software. Other brokers answered parts-supplier company questions by telephone.
One asked the room whether the currency exchange will be made in U.S. dollars. The answer was affirmative.
Meanwhile, trainers in another section of the building walked suppliers for future auctions through the BidWare software. One feature is the bid guardian, which stops a supplier from placing a bid that is either too high or too low.
Trainer John Thomas explained that a supplier can see the auction's progress on a Web-based screen. A supplier's last bid appears as a circle on the sloping bid graph, while those of other suppliers are diamonds.
Meanwhile, FreeMarkets' bank of 50 file servers works without pause on a separate floor.
Groups such as the SMC Business Councils and the Fort Washington, Md.-based National Tooling & Machining Association are attempting to help suppliers understand the process. Both are launching educational sessions.
"None of our members are too enthralled about online bidding, but they recognize it may be a fact of life," said Tom Garcia, marketing director of NTMA, which just signed FreeMarkets as an associate member. "There will be some kicking and screaming in the process, but it's bound to continue."