CLEVELAND (June 29, 12:50 p.m. EDT) — Electronic bidding, either made privately through companies or via public online sites such as FreeMarkets Inc., once were considered the future of purchasing. But for processors, e-bidding has become a process fraught with land mines and without much benefit, said Jeffrey Mengel, a partner in consulting firm Plante & Moran PLLC in Auburn Hills, Mich.
Processors' customers, however, have a different view of electronic purchasing, one that has kept the practice viable despite occasional disinterest on the part of key suppliers, he said.
“[For suppliers], e-bidding is not about time savings, and it's not a management tool for efficiency,” said Mengel, speaking June 23 at Plastics News' Plastics Encounter Midwest in Cleveland. “It's a leveraging tool for their customers to drive the price down, leveraged against a [customer's] supply chain.”
While Mengel quoted results from a recent Plante & Moran study of Internet bidding, Lou Gaviglia offered real-world examples that confirmed Mengel's conclusions. Gaviglia, corporate vice president for contract manufacturing with injection molder Nypro Inc., said on the same panel that e-bids are not always what they appear to be.
Frequently, customers ask a few companies that have no realistic chance of winning a bid to participate in an online auction, Gaviglia said. Those companies essentially help lower the final price before an existing supplier wins the project, he said.
“There's an assumption that all suppliers are equal,” Gaviglia said. “But while five or six suppliers might be in on a bid, only three have a chance of getting the business. The others would have to walk away because they can't compete.”
In other instances, Nypro has been the company walking away when the bid price sinks too low, Gaviglia said. He has been involved in more than 50 Internet reverse auctions, primarily involving telecommunications products, he said.
Nypro, one of the world's largest molders, has fairly strict rules on when to play in Internet auctions, Gaviglia said. If the auction turns into one for a low-cost commodity business, Nypro executives frequently get out of the running quickly. But if it is one that matches well with Nypro's technology or high-value skill set, the company might linger longer, he said.
Still, those type of projects are not the ones that typically come up at auction, he said. “The projects with less value are the ones more likely to be auctioned,” he said. “And those are the ones we don't want to play in.”
Customers do not always accept Nypro's decision to drop out of auctions. On one occasion, Gaviglia said he was contacted by a customer who expressed surprise and disappointment that Nypro had chosen not to continue. The inference was that Nypro would end up getting the project at its price, no matter the auction's outcome, he said.
One danger is allowing top executives to get involved in the bidding process, Gaviglia said. A company president or owner can get caught up in the emotional flow of the auction, he said. Top leaders do not always like to lose those bids due to pride, while more-seasoned purchasing managers know when to stop bidding, he said.
“We have to keep the [top executives] out of the room,” Gaviglia said. “They'll tell us we can find a way to do the project. Sometimes, they have no idea what they're talking about.”
The game has other rules. While e-bids assume that all suppliers have little differentiation, the truth is that an existing supplier seldom loses an important project through an Internet bid, he said.
That observation matched the Plante & Moran study, taken from a survey of 148 automotive-based companies. “Lost business [from e-bidding] is few and far between on a supplier's own products,” Mengel said. About 91 percent of the time, an existing customer retains a contract after the e-bidding procedure, he said.
Yet, automotive customers sometimes like to play the online purchasing game to see how far the price can drop, Mengel said. As an assessment tool, online bidding helps them decide which suppliers can give them the highest value for the lowest cost.
On average, online bidding lowers a contract price by 6 percent, a huge amount that represents about a third of a supplier's gross margin, Mengel said.
Possibly because of the distaste of suppliers, reverse auctions have not captured the fancy of automotive customers as much as was once assumed. A few years ago, automotive researchers expected reverse auctions to account for as much as 34 percent of project awards by this year, Mengel said.
Instead, the Plante & Moran study showed that nearly 70 percent of suppliers still have had no exposure to reverse auctions, he said.
Suppliers need to understand total costs going into an auction, Mengel said. Those include the cost of retaining warranty responsibility, a process that falls more heavily on a supplier's shoulders than in the past, he said.
“Quotes can go up after an auction, and that's part of the negotiations,” Mengel said. “Almost every [contract] ends up different that the bid outcome.”