Tuesday, 25 September 2012

Bidding for produce

Editors note:  Featured in FPJ Freshinfo, story  published: Fri 27 Jul 12 by David Burrows

Little hard data exists over the method of retailprocurement via e-auction, but the practice is known to go on. David Burrows asks how widespread it is and what impact it has on the supply base

Online shopping may well have increased 14 per cent and passed the £50 billion mark last year, but buying groceries online remains a turn-off: nearly half of all adults have never bought food online, while over a quarter say they never would, according to a survey this year by YouGov and VoucherCodes.co.uk. But while supermarkets work to get more people shopping ‘.com’, their procurement teams are apparently embracing online buying in a bid to source cheaper products.

There is mounting concern that supermarkets are becoming more and more reliant on theuse of e-auctions to buy fresh produce. In its Catalyst for Change report, published last week, the NFU exposed several examples of “poor business practice”. The list, based on first-hand discussions with its member growers and intermediaries operating across all sectors of the horticulture industry, included reports of verbal margin agreements and late payments, as well as an increase in frequency, length and depth of promotions. Intriguingly, it also identified a rise in the number of online auctions as part of a culture ofshort-term trading that “still prevails because of the inherent level of competition that existsto supply products to retailers”. The increasing popularity of e-auctions, said the NFU, is “compromising the ability to establish meaningful business partnerships in the fresh produce sector”.

Indeed, an insider told FPJ recently that e-auctions are just one of the methods retailers adopt at certain times to get the lowest price. “They switch from one supplier to another and try to get them cutting each other’s throats, then they will maybe put an order for 5,000 trays up for e-auction and invite their regular suppliers each to bid for it in addition to their regular order and often add in a wildcard – a different supplier – just to test them out.”

But are e-auctions rising in popularity as the NFU suggests? Are they bad for business and bad for fresh produce? And do they damage supplier-buyer relationships?

Online auctions have been around for over a decade now and their functionality and complexity have similarities with eBay: they allow people to bid against competitors. But, unlike eBay, the longer the auction goes on, the lower the price falls. This is why the NFU has raised concerns.

Indeed, much of the supermarket PR spiel focuses on ‘strong relationships with growers and suppliers’ and a fair deal for farmers. The British Retail Consortium, for instance, says its members are committed to “working positively” with all parts of their supply chains, including farmers. “It makes sound business sense to have quality suppliers who are efficient and successful,” says a spokesman. “There’s a place for ‘spot’ markets in some products but what retailers and their customers rely on are long-term sustainable relationships that guarantee reliable supplies of high-quality, safe food. We don’t think our members are making much use of this sort of auction,” he adds.

Others disagree. “Auctions are rising in popularity in almost every sector,” contends Alun Rafique, co-founder of Market Dojo, an e-sourcing software provider. “A big retailer has been using our software to run auctions covering a wide variety of commodities. Retailers are already one of the most advanced and prolific users of auctions so there will be a limit to how many auctions they can run in conjunction with other negotiation methods.”

Others also say that retailers have long been frequent users of e-auctions, albeit for certain types of products. However, there is no data on the frequency of use, or who is using them.

Daniel Ball is business development director at e-procurement specialist Wax Digital. He doesn’t feel there has been an uprising in e-auctions but retailers have used the tool for many years now and “their activity is higher than other organisations of equivalent size in other sectors”.

But that isn’t necessarily a bad thing, he adds. “There are a lot of accusations levied against these auctions – that they are just about price and are damaging to [supply chain] relationships – but that doesn’t stand up in our experience; it’s just one element of a much wider engagement.”

Supermarket buyers rely on key suppliers to help them in periods of short supply or high demand – and provide discounts when supply is high. As John Abkes, vice president ofiTradeNetwork explains, if a buyer gave business away a few weeks ago based on price, loyal suppliers may be less likely to go that extra mile in the future. “The buyer might save a few pence, but he might not be confident of the quality of the product or the service levels, which in the long run could cost more money.”

Running an e-auction badly can also be “disastrous”, according to Rafique. “If an auction has less well-defined specifications the suppliers will all be bidding to different criteria on an uneven playing field and the buyer might award the contract to a supplier who has not understood the desired service levels, resulting in suppliers possibly reneging on thecontract. This ends up as bad press for the tool when the process is in fact to blame.”

There is no doubt e-auctions have got bad press. However, there is evidence that they can help matchmake suppliers and buyers. Pete James, from the University of the West ofEngland, has been leading the i-ADAPT project – an Independent Assessment into theDevelopment of Auctions as a Purchasing Tool. This year, James published the results of a survey among buyers from a range of sectors, including retail and food manufacturing.

Some of the results were “astounding”, not only refuting the claim that buyers’ auctions are adversarial but that they actually show improvements in the buyer-supplier relationships.Nine out of 10 of the buyers quizzed said developing supplier relationships was a major objective of the auctions. Just 33 per cent said they chose price as a primary factor in supplier selection. Supplier performance was also enhanced following an auction, according to James.

“E-auctions are shifting the way you manage the negotiation process,” says Wax Digital’s Ball. “There is a lot of prep work required [for suppliers], which creates a level playing field for all of them to work to. They also ensure retailers [involve a handful] of suppliers they believe in. Pitching them against one another on price alone will just expose [retailers] to risk.”

And it’s not only supply risk that retailers could expose themselves to. “These are economically challenging times and cost is a big factor for consumers, but they don’t want to compromise on availability or quality,” adds Ashley Clarkson, associate director and fresh produce specialist in Grant Thornton’s food and beverage team. “Retailers are looking for quality, sustainability of supply, NPD, service levels and price management from their suppliers.”

As a result, Clarkson believes e-auctions will remain on the fringes for buyers of fresh produce. The discounters may well use them as a price-led spot-buying procurementmechanism – and with more of them supplying food, 99p Stores for example, this could see a few more auctions taking place.

However, the main grocery retailers don’t look like they will ramp up their activities any time soon. Morrisons and Tesco wouldn’t comment on their policies, but Marks & Spencer and Asda “do not use e-auctions”. Sainsbury’s says e-auctions are “an option open to our buyers when negotiating our supply terms but we tend to have long-term relationships with a lot of our growers and suppliers, meaning that they are rarely used in fresh produce”. 

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