Get Prepared for Reverse Auctions, AAFA Group Told

Reverse auctions, the e-procurement process whereby a buyer (such as a retailer) sources specific product (such as apparel) through a live bidding process designed to drive down prices, apparently are here to stay - whether the apparel industry is ready or not. As such, it's time to prepare for the process.

That was the message delivered to a group of apparel executives at a recent meeting of the Technical Advisory Committee (TAC) of the American Apparel and Footwear Association (AAFA) in Aguascalientes, Mexico.

Speakers from the management consulting firm A.T. Kearney, Coats PLC, and Russell Corporation talked about the growing interest in reverse auctions from a buyer's standpoint, and the inevitability that auctions will significantly impact how retailers will source commodity, and perhaps even branded goods.

Peter Young, a principal with A.T. Kearney Inc. who has helped companies prepare for reverse auctions, drew on results of four annual Assessment of Excellence in Procurement surveys his consultancy firm has conducted. Young noted that those buyers using e-sourcing procurement tools are saving an average of 10 percent on the cost of goods sold versus 7 percent using traditional sourcing methods, reducing order cycle time by 41 percent and reducing procurement head count by 10 percent. A.T. Kearney estimates those using e-procurement tools can expect to see a return of savings to investment at a factor of 13 to 1.

Young said the benefits to the buyer of a reverse auction include: reduced sourcing costs; a reduced buying timeline of two to four weeks; increased transparency and competition in the buying process; and confidence in getting the lowest price.

On the flip side, while the seller can walk away with repeat business, it's likely to be at a lower margin. Still, Young said, there are benefits to the seller, which might include increased business with a current customer and reduced selling costs as a result of shortening the sales cycle.

Because of the intensity and pressure of the bidding process, each of the speakers stressed the need for thorough cost analysis before entering a reverse auction.

"If you don't know your cost down to each SKU, you could find yourself in trouble quickly," said Young.

It's also important to remember that the lowest bid doesn't always win the business. Some reverse auctions take additional factors such as quality and service levels and delivery times into consideration. Moreover, each bidder has to assess the bidding pool. The "incumbent" who already owns the business, for example, Young advised, might want a bid to be in the "hunt" at the end of the auction, but not necessarily be the lowest bid, based on the potential switching costs a buyer would face in changing vendors. In other words, a well thought through strategy is important. The same considerations that you would make in face-to-face negotiations apply in a reverse auction. The auction is just an on-line negotiation, compressed into a shorter time frame, not bound by geography or place.

Moreover, bidders should be aware that even "winning" a reverse auction doesn't signal the end of the negotiation process. Final face-to-face negotiations typically round out the process. Wise sellers are advised to negotiate their own final terms at this stage, perhaps, for example, having staggered price levels dependent on the actual volume placed during the contract period.

What are some basic guidelines for participating in reverse auctions? Wayne Clewis, vice president of sales and marketing for DeSoto Mills Inc. of Russell Corp., offers these tips:

Stay in constant contact with the sellers regarding key dates and any RFP changes.

Try to be ready with pricing analysis 60 days in advance of the auction.

Start assembling your prices and costs by SKU as soon as you know about the auction (and don't rely on standard costs - dig down to find real costs).

Make sure you have all spec sheets.

Include key players on the auction team and make sure they all clear their calendars to attend the auction. These include the CFO; president of the division; and heads of sales and marketing staff, IT, sourcing and production.

Run numerous pricing scenarios and have everyone agree in advance what the "walk-away" price will be.

Run at least two auction tests with the buying account to make sure all systems work.

If possible, hire a source from outside your company to validate the cost of sourcing/producing the item(s) you're bidding on.

Bring your own suppliers into the loop regarding best pricing on their materials.

Read the fine print. For example, it's likely that the buyer is not obligated to give the business to the company with the winning bid. But conversely, the seller is accountable for delivering product at the price it bids.

Based on the high level of interest in reverse auctions, the TAC again will give a presentation on the subject at its next meeting May 28 - June 1 in San Diego, CA. The meeting, which is open to the industry, will be held in conjunction with three other AAFA committee meetings and will feature a full day of presentations on numerous subjects.

SUSAN S. BLACK is publisher of Apparel, and may be reached at tel.: 800-845-8820, ext. 3020; e-mail: [email protected].

Editor's Note: For more on exchanges and reverse auctions, see "Major Retailers Usher in Era of Exchanges, Reverse Auctions" in the September 2002 issue or online in the archives section of apparelmag.com.