HIGHLIGHTS: E-Auction -- Procurement’s Best Friend
Jacob Gorm Larsen, the Head of Digital Procurement at Maersk Group, is an expert in e-auction. His team conducts over 600 auctions a year using cutting edge Robotic Process Automation. Jacob believes that through E-auction, procurement can deliver utmost value to the stakeholders. This belief in the goodness of auction propelled Jacob to write a book titled “A Practical Guide to E-Auctions” that was released recently.
Here are the excerpts from the recently concluded Espresso LiVE event on e-auctions featuring Jacob. The text was slightly edited for clarity.
To watch the entire recording, please click here E-Auction -- Procurement's Best Friend
Importance of E-Auctions – why should Procurement use it more often than not?
I truly believe that any procurement organization in the world can save a lot of money, time, can get better data, which they can use for analytics, if they increase the usage of the auctions. So I think cost savings is a very important argument for using it and that's where most business cases are built around. But as you get more maturity, you will also see that there's also process related savings, and there are other sort of insights that you can extract from the auction program.
Should e-auctions be Centralized vs Decentralized?
In my many years of working with e-auctions, I've never seen a company being truly successful if they didn't have some kind of Center of Excellence (CoE). So I consider it a prerequisite for being successful.
You don't need a global team doing 1,000 auctions per year. It can be one person or couple of people doing it if it is a relatively small company. However, you need some kind of central ownership.
Another reason for having some kind of centralized setup is this point about being strategic when it comes to auction design. It's important for category managers to know how to design an auction, just as they receive training in negotiation. But they don't have to be experts, because that’ll be with the CoE in a centralized set up. It’s important that both the CoE and Category Managers speak the same language.
Use of RPA in E-Auctions: Training the robot to conduct e-auctions
The RPA system does tedious admin work that we don't want to do. So we are using the robot on a little more than 100 different processes across procurement. It has access to 26 different internal systems -- from operations to finance, E-sourcing and E-auction platform.
You require a fairly stable process to run a successful auction program, a fairly mature procurement process i.e., it needs to be clear for both the suppliers as well as for procurement what are the items that are being negotiated. It’s heavy work load for both the auction team as well as for the category team.
Each quarter, Category Managers have to extract all the item information and hand it over to the sourcing team who would then set up the auction, invite suppliers, train them, etc. And then run the auction, download reports, upload it into the catalog-based solution. The robot helps us with all this, which justified the time spent in training the system.
On common perception that E-Auction can damage Supplier Relationship
This is actually one of the myths that motivated me to write the book. If we look at it overall, the research on the impact of relationship to auctions shows a clear correlation between the concept called “procedural fairness” and the quality of your vendor relationships.
The concept deals with things like equal access to information for vendors. It's about ensuring that everybody receives the proper training that they're comfortable with using the system, but it's also about being committed to the process. So to translate that concept into plain English, what the research says is that it's not the auction that will damage the relationships. Rather, it's how you conduct the auctions -- and I think that you can apply 100 percent to traditional negotiations as well. There are certain tactics, which can have a very negative impact on relationships. And of course, if you conduct traditional negotiations in a maybe direct, but in a good way, they will also not damage the relationships. And so will e-auctions if you do it right. That is what the research says. And that's also my experience after working with it for more than a decade.
Below are the excerpts from audience Q&A. Nearly 50 questions were posed to Jacob and about dozen were answered during the event. The rest of them were replied by email.
Is it necessary to conduct one more negotiation round after the auction? Or can we skip the negotiation?
It's absolutely to skip it. About 95-98 percent of the auctions we do, there's no negotiation afterwards. And if you have negotiations afterwards, it's basically a waste of time to do the auction because you won't get the best possible price coming from it. If suppliers know this is the last and final -- there won’t be any further negotiation -- then they will give you their best possible price in the auction, and then there's no need for more negotiations afterwards.
Auctioning payment terms together with price. Have you used the net present value concept?
Yeah, we have actually done that in some cases -- what you bid on as a vendor is not only the price, but you can also change, for example, payment terms. So instead of bidding for 30 days, you can change it to 60 days. And that will then have a positive impact on your position in the auction. So you can actually improve your position without lowering your price if you change the terms. So this kind of transformational bidding is also part of having a strategic approach.
What are some of the most important change management tips to implement your e-auction solution in teams or business units?
I would say the number one thing is to ensure that you have executive support. You need support from the CPO or even further up the organization. If they're not on board and actively supporting the use of auctions, then it’ll be impossible to get any real traction with it. Even after ten or twelve years, I still push our CPO to include updates on auctions in his monthly newsletter, town hall speeches, or business plan presentations.
The second thing is that I think it's extremely important to create this common understanding across the procurement community of what an auction is, how they work, and how they can be applied in a more strategic manner. So back to the reason why I wrote the book is because I've seen it so many times: because if the category management teams don't understand the concept, then you will end up in an emotional discussion. So that would be my second advice, to ensure that everybody has that common understanding of what an auction is. And we have done that by conducting training session. Now, of course, I'm circulating the book, internally as well through a number of my colleagues -- but training sessions, workshops and communication, in general, is very important for building that understanding.
Does the auction process assume or require that the participants accept your contractual terms and conditions prior to the auction? If not, how do you manage the contractual negotiation?
In nine out of ten cases, yes, but then you would have to state it upfront because that's how you ensure that you have an Apple-to-Apple comparison. So if you have some suppliers that are bidding, just for the sake of simplicity, payment terms of 30 days, and others are bidding with payment terms of 90 days then it's not an equal, fair competition. So you have to have that alignment where everybody's bidding on the same terms, which is crucial for the fairness of the process -- and also for getting the best result.
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