Tuesday, 1 August 2017

Kraljic Matrix for Evaluation of e-Auction Opportunities

Andrey Matveev offered to write a guest blog for Market Dojo. Andrey has pioneered fully-managed eAuctions in Russian retail. Andrey’s expertise comes from both sides of the negotiation table, after years in sales and procurement in technology, oil and gas upstream, manufacturing and retail sectors.  


Use e-Auctions to negotiate with suppliers in your Leverage quadrant:

Your buying power enables more suppliers to be attracted and pooled into hard competition as e-Auction makes it easier to manage multiple simultaneous negotiations. More suppliers = more competition = lower bids. 
eAuction can be easily repeated. This allows the creation of a pipeline of scheduled price reviews every 3, 6 or 12 months (again, without applying additional pressure on the buyer). This supports the implementation of medium-term contracts.
All participating suppliers can see the winning bid. This motivates them to reduce costs and prepare improved offers for the next event.
Suppliers who compromise delivery can be suspended from the next event. This helps to reduce supply risks.

Avoid e-Auctions for irregular procurements, even when the contract value is relatively high. The fear of being suspended from the next event is a powerful feature that restrains suppliers from making doubtful commitments. Without this feature, e-Auction becomes a risky tool to use.

Use e-Auctions in the Strategic quadrant to perform random reality checks of your strategic partners. Position this as an inevitable ‘standard’ procedure in order to avoid damaging relationships. The existence of such policy would by itself motivate your partners into following the market situation.

Use e-Auctions in the Routine quadrant. Once developed, the template of e-Auction can be copied and repeated an unlimited number of times. Therefore, e-Auctions are an effective cost saving tool for sourcing highly-volatile commodities when seeking a regular price review under specific volume and terms (e.g. weekly fuel e-Auction).

The cost of managing and running templated events is relatively low when the buyer pays for software on a subscription basis (e.g. Market Dojo offers an unlimited number of events per month for just £500). Additional costs can be saved when e-Auction is used for sourcing multiple categories (subject to suppliers availability) – modern e-Auction tools allow simultaneous negotiation of up to at least 100 items.

Implementation

Before trying e-auction on categories selected by Kraljic Matrix, filter them against the conventional checklist:

Specs do not contain specific models and brands
Category is already sourced centrally or this change is easy to implement
Annual spend and anticipated savings are sufficient to cover e-Auction software and management costs (use 5% of improvement as a safe estimation)
Multiple purchases over a period of 12 months
Some price volatility over this time (incl. logistics)
Opportunity to implement nationwide price by assigning logistics to a supplier.

However, when you perform the trials of e-Auction in your organisation (which are aimed at demonstrating the potential of the e-Auction tool to your procurement team) it is worth paying extra attention to the industry in which the suppliers of shortlisted categories operate. (I also suggest hiring an independent e-auction expert to ensure an unbiased approach to category selection and management of the first trials)  

Tony Cram (2006) suggests in his book 'Smarter Pricing' industry conditions that are likely to lead to price wars. He suggests that these conditions may occur in almost any market or industry. 


This can be used as a checklist to identify categories in which suppliers are very likely to roll off into a price battle on your e-Auction, ensuring outstanding and illustrative improvement for your pilot trial. 

Market Dojo helps procurement professionals negotiate better with our on-demand eSourcing tools. If you’d like to find out more, get in touch or register for free and play around with our software for yourself!

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