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Reverse Auction - Will it Change the Way Sourcing is done
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In their
frantic efforts to reduce cost to attract and retain customers,
retailers / buyers have now innovated a new way to source -
through reverse auction. Under this system, buyers / retailers
issue specifications and invite, online, lowest bids for the
garments from across the world. Apparel Online discussed this
new phenomenon with Devangshu Dutta, a textile and apparel industry
professional and international consultant, on the future of
this alternative to sourcing as is being done today. This, he
felt, could only be possible for mass product categories rather
than small, niche products that we specialize in. We also spoke
to Lalit Gulati of Modelama and Richa Exports who has actually
participated in reverse auctions, but failed to click, as suppliers
from Bangladesh and Indonesia could quote much less that what
he could possibly afford.
Dr. H. K. SEHGAL
In the sheer fight for survival, retailers are attempting
to attempting to give more respect to "value for money", which
the consumer is seeking more vigorously than ever before. They
are cutting corners to provide products to the consumer at the
lowest rates to pass on the benefit to their consumer. One of
their latest tools is "Reverse Auction", which places the onus
for competitive bidding on their suppliers with the support
of new electronic methods.
Now imagine a fictional scenario. The room is dimly lit. All
eyes stare transfixed at the projection of a computer screen.
Every number must be legible to those gathered around the conference
table this early morning.
Suddenly the image projected on the wall comes to life. The
reverse auction pilot test has begun. Dollar figures flash as
vendors from around the globe bid for the apparel order at hand.
The atmosphere in the conference room has changed from one of
apprehension to excitement as it becomes evident that the price
that will be paid for today's order will become quite competitive
indeed.
Someone whispers encouragement for a long-time vendor as the
group watches the contractor place his online bid in real-time.
This spurs another buyer at the table to rally behind one of
her favourite supplier, "Come on, you can do it! Just a little
lower." And all the while the dollar amounts on the screen become
smaller and smaller and smaller still. Will the increasing use of business-to-business (B2B) exchanges
and reverse autions to procure apparel and soft goods change the
way the retailers and the vendors conduct business with each other?
First let us understand how the system works.
What are B2B Exchanges?
B2B exchanges are online marketplaces that enable trading
partners to conduct real-time business communications with each
other, whether they are issuing requests for quotes (RFQs),
bidding for orders, sharing product forecasts or collaborating
on product development. Exchanges usually are classified as
public or private. Examples of public exchanges include Global
NetXchange and the WorldWide Retail Exchange (WWRE).
Examples of private exchanges include Wal-Mart's Retail Link
and other portals that individual retailers, brands and trading
companies have established for B2B communications with their
own networks of customers and suppliers. (Article continued
below)... |
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What are Reverse Auctions and How Do They Work?
Reverse auctions involve bidding for orders - such
as for a new type of product that a retailer needs
produced to its specifications. The orders could be
for everything from basic towels to private label
jeans and dresses.
Typically, before an online auction takes place
via an exchange, the retail buyer issues product specifications
and order requirements via the exchange to a select
pool of approved vendors who are invited to participate
in the auction. Request for product samples are usually
issued at this time so that the buyer will have samples
on hand to examine / approve prior to the auction.
At the designated auction start time, the vendors
log into the auction via the Internet, and begin submitting
their prices to win the business. Bids are automatically
processed in real-time, and the exchange automatically
guides the vendors through the auction process. In
some cases, vendors can see the prices being offered
by competing vendors, although the identity of the
other vendors is not revealed to them. The auction
typically closes after a pre-determined period of
time, which may be hours or days, and the retailer
then determines which vendor will win the business
based on the price and other variables at the retailer's
discretion, such as each vendor's quality record,
shipping history, etc.
There can be many variations of the reverse auction
business model, depending on differing retail procedures
and exchange tools, but this is the gist of the process.
Who Is Using Exchanges and to What Extent?
Pertaining to apparel and soft goods procurement,
the major public exchanges are being used by some
of the world's largest retailers but not many mid-tier
or smaller retailers. For instance, among GNX's members
are retail heavyweights like Sears, Roebuck and Co.,
Federated Department Stores, Pinault-Printemps-Redoute
(PPR), Carrefour, Linens'n'Things and Bed, Bath and
Beyond. WWRE members include such major players as
JCPenney, Kmart, Target, Target, Gap, ShopKo.
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BREAKING MYTHS
A study by M. L. Emiliani of Lally School of Management,
Hartford, USA and D. J. Stec of the Centre for Lean
Business Management, Kensington, USA has listed some
pointers relating to the concept of reverse auction.
The key highlights, though not specific to the garment
industry, are:
- Online reverse auctions do not yield a quick
return on investment.
- Online reverse auctions do not deliver fast
savings.
- Unit price realisations are difficult to measure
accurately.
- The time to source parts is not actually reduced
from weeks to hours.
- There are no substantive benefits for suppliers
to participate.
- The savings were not as great as advertised
by online reverse auction services providers.
- Online reverse auctions do not teach buyers
and suppliers how to jointly solve problems.
- Online reverse auctions are inconsistent with
ethical business practices.
- Online reverse auctions trigger opportunistic
behaviour among suppliers.
- "Total cost" RFQs do not in fact account for
total cost
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WINNING STRATEGY - Deepak Mohindra
The assured success or the winning strategy for
bidding in reverse auctions can only happen when all
the members of the supply chain get together and jointly
bid or the bidder should be a vertically integrated
unit.
Since the fabric constitutes some 65% of the total
garment cost, the mills should be willing to reduce
the cost of fabric by one cent for every two cents reduced
from the manufacturing cost of the exporter / bidder.
The costing of a product should be transparent
and open to all members of the supply chain with a total
professional approach and an attitude to win. This alone
will see the bidder get any foothold. To save on extra
fabric width-wise or length-wise, the mills should not
hesitate for any re-adjustment of the looms or re-working
the pattern by the supplier. The bidders should also
be encouraged to increase productivity through better
incentives. All factors, including flexibility, which
is India's strength, should be built into the process
to get any foothold in the bidding process.
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What Worries Vendors?
The advantage of reverse auctions is that all parameters
are accessible in one place prior to bidding for an
order, and the auction provides valuable insight into
whether a price is "realistic". One the flip side,
it "hurts partnerships because price is not everything".
Although vendors must pass through the same retail
approval processes and are competing for business
based on the same set of specifications, they may
not be getting credit for producing a better product.
This, however, does not reveal the full story.
Apparel Online asked Devangshu Dutta if "reverse
auction has a future as an alternative to the sourcing
option". He says, "Reverse auctions have been most
successful in standard and commodity supply areas,
where a like-for-like comparison can be made.
"Fashion goods mostly do not fit the description
of 'commodity'. Other than design, or look and feel,
small qualitative changes or even labelling and packaging
changes can create cost differentials, which can upset
the standard reverse auction method."
He adds, "A retailer with almost US$ 3 billion of
fashion buying per year, is reported to have sourced
only around US$ 20 million over a two-year period
through reverse auctions in an e-market in which it
has a direct financial / equity investment.
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Say, if 75%
of that US$ 20 million was this year, that is still only 0.5%
of the total sourcing. Note that, as an equity-holder, this
retailer has a vested interest in making this e-marketplace
survive." There may also be other motivations.
Devangshu says that, despite the fact that it is traditionally
believed that there are increasingly more suppliers in the
world than buyers, the reverse auction platform had most buyers
registered than suppliers. So despite the technology, he asks,
is the buyer really getting the best choice - are the best
suppliers even participating in the reverse auction?
Second, despite all the contractual flim-flam,
there were deals that did not go through, even if the buyer
got his target price met by one or more of the suppliers.
Thirdly, the activity, and all that buzz, seems
to be bunched around the very end - maybe even the last couple
of minutes of the reverse auction. The result could be that
the reverse auction gets extended - but how many times will
it get extended and until when? Is that time really bringing
the savings needed, he questions, or could those savings/ better
margin have come from other areas? Reducing costs from specialised,
non-commodity or engineered products needs discussion and collaboration
between the buyer and the supplier, not an impersonal reverse
auction, Devangshu feels. |
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The Indian Concern
There is, however, one grace. India's strength is
not so much in "mass production" as in niche products
in smaller quantities. Apparently, reverse auctions
will not be possible in such cases.
To that extent, the suppliers would be relatively
safe from the onslaught of international competitive
bidding. It is only the big players making basic garments,
who might have to face the music, but then they, because
of their inherent strengths, can possibly compete.
Again, this concept will take its own time to catch
up.
On balance, it is felt that the technology-enabled
reverse auctions are here to stay, but their importance
is often blown out of proportion - perhaps there is
a lot more hope or a lot more fear than there should
be, Devangshu concludes. One could not agree more.
Source:
ApparelOnline, January 16-31, 2003
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EXPERIENCE - Lalit Gulati
Lalit Gulati of Modelama is one of the very few Indian
exporters, who have actually participated in this process.
Talking of his experience, Lalit said that the choice
of vendors is entirely a prerogative of the buyers,
who know which particular product can be made by which
suppliers (manufacturer-exporters).
"The buyers give us the style and specifications,
and we make the sample. They also quote their price
for the product, say $5 a piece. Now, once the competitive
bids start, every two minutes there will be price reduction
by different bidders. Suddenly there is a price quotation
of $3.60. Now, we cannot bring our price down to that
level. Though we have tried to offer our bids, we have
never been able to get any business. Generally it is
only for basic products, where such a reverse auction
system is possible, which again is bagged by other countries
like Bangladesh or Indonesia. Reverse auction is not
possible for value-added and fashion products, which
are our niche.
"In yet another case, both Modelama and Richa jointly
participated in the reverse auction process but failed
to get business even when we were reducing the rates
- when quoted at $7.20, we offered t reduce to $5.60,
but someone made an offer at $4. At this price level,
there were no margins left at all and though we wanted
the business to come to India, we could not go down
to that level."
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