Develop an effective e-auction lotting strategy
Buyers can capture a significant source of power by setting the bidding rules
We discuss how buyers can use lotting strategy to plan for successful e-auction outcomes.
1. Develop an effective e-auction lotting strategy
Introduction to lots and lotting
A lot is an item or a combination of items that the suppliers can bid for in its entirety.
Lotting is the process of dividing the items into lots.
1.1 Lot Examples
A lot can be further defined as the smallest single item (or group of items) that a supplier can bid for in an e-auction and is the term given to the item or items that engage suppliers to submit bids. Examples include:
The separation of requirements into lots usually follows a distinction based on the Buyers categorisation work previously completed.
1.2 Lot Characteristics
Different lotting approaches have their characteristics that buyers should be aware of:
The characteristics of the lot types helps buyers chose their lotting strategy approach in the e-auction.
2. Lotting is important because:
2.1 Buyer structured lot
The buying company can develop lot-bidding rules by analyzing the supply market and structuring lots to increase competition and drive cost reduction opportunities:
- Well-structured lots facilitate competition within the supply base and support lower pricing by reducing bidding complexity for suppliers and focuses competition.
- Grouping items into lots reduces complexity by consolidating suppliers, by preventing suppliers from “cherry-picking” attractive goods or services from the less attractive business, and simplifies the post-auction award process.
- Enables a buyer to leverage total spend across their companies (e.g., obtaining a common price for items purchased by several sites/divisions)
- Quantity discounts also can be part of the RFQ, giving suppliers the ability to reduce cost if awarded larger volumes of business.
- Lots can also be structured for global or regional aggregation and placed in the same e-auction.
2.2 Seller structured lot
Buyers can consider allowing suppliers to structure lots, to enable them to maximize their efficiencies. Buyers can review the TCO of the lots suppliers have constructed and see where supplier efficiencies can improve TCO.
3. Developing Your Lotting Strategy
The lotting strategy must support both competitive bidding and contract award
A lot strategy requires the strategic grouping of items or services to increase competition to optimize supplier competitiveness and contract award
3.1 Within the Sourcing Process
Buyers develop a rational and appropriate market approach to it strategic sourcing process, taking into account what item or service is being sourced and the makeup of the supply market:
The strategy for lotting should always be focused on creating greater opportunities for competition between the suppliers bidding for the business.
3.3 Lotting Strategy Success Factors
Lotting Strategy plays a critical role in ensuring successful e-auction outcomes. Some these factors are:
a) The size of lot spends:
will impact supplier interest levels and depending on their goals may price aggressively or decide not to quote at all at the other extreme.
b) Number of Items:
A lot containing too many items runs the risk of restricting the number of suppliers who can bid because they may not be able to supply all the requirements. A lot containing too few items may reduce the value of the lot and so may dissuade suppliers from bidding for it.
c) Buyer Constraints:
Buyers have their set of constraints because more lots may mean more suppliers to manage, increasing resource requirements post award. It is important therefore to have an optimum number of lots while designing a Lotting strategy.
The Buyer must ensure Lot totals represent the Total Cost of Ownership by taking care to include all cost components so as to ensure ‘apples to apples’ comparison and will also make the award process faster and simpler. For the suppliers, it provides greater visibility of where they rank.
3.4 Lotting errors
It is easy to fall into the trap of preparing a lotting strategy that follows how an organization uses a commodity.
Instead, the buyer should study the supply market to establish how it is organized and the suppliers who are likely to bid and structure the lots according to the supply market.
The separation of requirements into lots follows spend categorization into logical supply market facing lots.
4. Develop an effective e-auction lotting strategy
While there is no rule book to decide the best method for designing lots Buyers can use these guidelines to set the bidding rules. This is a great source of power that can help Buyers achieve successful outcomes:
a) Sourcing Strategy
Follow a rigorous strategic sourcing process to consider the Buying companies objectives and the structure and capabilities of the supply base to meet them;
b) Maximize Participation
Consider the trade-off between increasing the value of the lots (the “leverage”) and the number of suppliers who can bid on those lots (the competition);
c) Minimize constraints
Minimize constraints like the number of suppliers to be awarded;
Ensure the lot structure produces a true Total Cost of Ownership?
e) Award Criteria
Make sure the lotting strategy supports the contract award criteria?
The growing recognition of the value procurement professionals can deliver, and increased customer demands have a huge impact on the growing complexity that supply management professionals face. Combine this with increased supply chain complexity and the challenge to find the right sourcing strategy fit represents a significant challenge that requires a more refined approach to sourcing.
Optimizing e-auction lotting strategy is a powerful component of the sourcing and negotiation process that will drive lower total cost, optimize your supply base and add significant value.
Nuff said …
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