When preparing strategies for a B2B Online Reverse Auction, or when deciding if your organization should spend the time and effort to participate, the most critical question to ask is this: How likely is the sourcing group to actually change suppliers?
Changing suppliers can be a tedious, costly, and risk-laden endeavor, but if the perceived benefits of switching exceed the perceived risks, the likelihood of a vendor change can be very high.
What is the probability the organization hosting your Reverse Auction will actually bring in a new supplier? Here’s our guide to understanding your opportunities (as the Challenger) or risks (as the Incumbent Supplier).
Question 1: Do the potential savings outweigh the hard costs of conversion?
The true costs of conversion are often difficult to pinpoint, as soft costs are both hard to calculate and frequently ignored altogether by procurement teams. The primary points on which to focus are the quantifiable hard costs. For example, let’s say the low bidder’s pricing offers annualized savings of $10,000. If the costs to qualify the new material are $12,000 (or even $5,000) a change is typically unlikely.
Question 2: How difficult will the conversion be to implement?
Difficult conversions require significant savings to justify implementation. For example, will the product need to be evaluated in 20 different facilities, or only one? Will there be training required? Does the new material require any operational adjustments, or the supplier location necessitate logistical changes?
Question 3: Will a new material need to be approved by anyone other than the purchasing organization, internally or externally?
Any additional hurdles to approval minimize the probability of change. In some cases the very knowledge that approvals are required will bring a reluctance to change from procurement.
Many materials will require sign-offs from the companies commercial and/or operational groups. Products may also require the approval of retail channels or acceptance by end consumers.
Question 4: What is the perceived risk of failure resulting from a product / vendor change?
The perceived risk of failure may be the strongest determining factor of all, and must be addressed in two ways:
- Firstly, how likely is it that the new material / vendor will fail to meet expectations?
- Secondly, what are the potential consequences if expectations are not met?
To show how these align we have built the VENDOR CHANGE PROBABILITY MATRIX to highlight the relationship between the two areas of concern. As you can see, the farther the prospect of change moves along each axis, the smaller the probability of a customer implementing a change, and when the two are combined the results are multiplicative.
THE WILD CARD
Regardless of the answers to all of the above questions, there are circumstances in which the procurement team will go with the lowest qualified bidder. We have seen circumstances in which an award was given to a company offering savings of less than one percent, even though the material would need to be qualified in over 30 locations.
Before the Auction begins, it is critical that you ask the buyer this direct question: “If I am the low bidder, will I definitely be awarded the business?” The phrasing here is critical, as this question implies that you intend to win, and want assurance that if you are the lowest bidder that you will get the business. The answers we receive to this exact question are almost always accurate.
A very similar question, “Do I have to be the low bidder to win?”, will typically receive a very different response. Because this question appears to be probing into whether or not you really need to be the lowest, the buyer often implies more strongly that you must win, even if that is not necessarily the case.
If the answer to question #1 above was “Yes” and you are the Challenger, congratulations! You have a very real chance of winning this business. If you are the Incumbent, however, you should consider your business to be at serious risk and set some well-defined pricing “walk-away” points prior to the Auction.
In conclusion, conducting proper advance assessments is a critical step in preparing for (or deciding to participate in) a Reverse Auction. Spending a little extra time up front can prevent a significant loss of time, opportunities, and margin dollars, while also greatly increasing your chance of winning or defending the business. Spend the time now, and reap the rewards later!
If you have any additional questions that pertain to your business, please don’t hesitate to reach out using our CONTACT page.