e-Sourcing equalizes online auctions

By Dana Bacciocco, Associate Editor

“There is a salient difference between a buyer’s simple spend and complex spend,” according to Max Scoular, director and general manager of the Energy and Process Industries Group at FreeMarkets Inc. “The experience, tools and resources to work on the complex spend are available in the marketplace now, and companies who take advantage are getting break-away results.”

While the boom in private trading exchanges is creating a paperless, automated platform for utilities to manage and control total procurement activities, the online auction coupled with Internet-based sourcing (e-sourcing) takes e-procurement a step farther. Sourcing alone is a subset of procurement focused on identification, evaluation, negotiation, and configuration of products, services and suppliers.

Although companies are purchasing myriad items on an ongoing basis, from the simplest office supplies to the most complex machinery to short-term and long-term services, it is dealing with the most costly and complex purchases-often a job for a full-time buyer-that can benefit most from process automation, said Scoular. If value were equal to price there would not be the opportunity to make significant gains from implementing an e-sourcing system.

Price not equal cost

For the company as buyer, it’s no longer simply a question of price vs. price, but rather price vs. cost-the total cost of doing business with a supplier. Online reverse auctions or “dynamic negotiation events”-initiated by buyers-are worthwhile and workable. And it is e-sourcing that lays the groundwork for the event that makes the buy.

Sourcing is a chain of events in itself involving supplier screening and request for proposal (RFP) prep at the minimum. To truly evaluate supplier offerings, companies must look at multiple criteria-like quality and delivery and timing-and make these a function of cost-give it a number and put it into the cost equation. This is what state-of-the-art e-sourcing is all about-quantifying the total cost of a supply relationship. The amount on the price tag gets put into the overall cost equation. Sophisticated technology puts the math into motion on the auction floor.

While simple purchasing benefits from the auction venue, complex and costly purchases can provide the greatest rewards. Classic auctions might touch on about 5 percent of the overall spend; more sophisticated dynamic e-negotiation tools and formats can find applicability to greater than 50 percent of what a company may spend, depending on the industry, said Scoular.

At auction

Price tag peripherals all have rank and weight in the true cost of doing business with a supplier. FreeMarkets’ platform allows the buyer to value those different variables and engage in dynamic interaction online through “multivariate negotiation.”

For example, for the energy company purchasing a transformer, a multivariate auction incorporates buyer pre-work such as valuation of operational efficiency and lifecycle energy consumption into the cost equation. For coal buyers, variables such as heat content, composition, transportation and disposal costs can be embedded in the bidding software.

Supplier understanding also drives dynamic online interaction, said Scoular. Suppliers can discover, in real-time, the fully evaluated results of their offers. In the process of the event, suppliers can bid based on what the market will bear and what they can do economically to drive the outcome.

Scoular explained that FreeMarkets addresses challenges with technology platform, sourcing information, commodity- specific domain knowledge and services. For example, FreeMarkets has addressed multi-year contracts with its “Net Present Value Bidding” format allowing variations, like progressive discounts. “Index bidding” ties to a specific commodity index.

FreeMarkets creates private marketplaces to support the unique requirements of individual buying organizations; the online markets are developed and dissolved based on buyer need. Scoular can be reached at mscoular@freemarkets.com.

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