E-Auctions – A Major Trend in Supply Chain

(Literature Review)

Mikael Thakur
Kyle Seidler
Jun Bi
Anshul Goswami
Mohan Mogulla

SCHULICH SCHOOL OF BUSINESS -YORK UNIVERSITY

4700 Keele Street, Toronto, Ontario, M3J 1P3
Masters of Business Administration (MBA) Program

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Table of Contents

ABSTRACT...................................................................................................................................................................3
1.0 INTRODUCTION...................................................................................................................................................4
2.0 METHODOLOGY & SOURCES..........................................................................................................................5
3.0 LITERATURE REVIEW.......................................................................................................................................6
4.0 TRADITIONAL PROCUREMENT METHODS................................................................................................7
5.0 IMPACT OF E-BUSINESS ON SUPPLY CHAIN...............................................................................................8
6.0 ROLE OF E-AUCTION IN SUPPLY CHAIN...................................................................................................10
6.1 E-COMMERCE.........................................................................................................................................................10
6.2 E-PROCUREMENT.....................................................................................................................................................11
6.3 E-COLLABORATION...................................................................................................................................................11
7.0 E-AUCTION DEFINED.......................................................................................................................................12
7.1 MAJOR TYPES OF E-AUCTION....................................................................................................................................12
8.0 HOW E-AUCTIONS WORK..............................................................................................................................13
8.1APPPLICATION OF E-AUCTION....................................................................................................................................15
8.2 E-AUCTION TECHNOLOGY........................................................................................................................................15
9.0 BENEFITS AND LIMITATIONS OF E-AUCTIONS.......................................................................................15
9.1 BENEFITS OF E-AUCTIONS.........................................................................................................................................15
9.2 LIMITATIONS OF E-AUCTIONS....................................................................................................................................17
10.0 CHALLENGES AND ISSUES WITH E-AUCTION.......................................................................................19
10.1 CONFLICTING OPINIONS – BUYER/ SUPPLIER RELATIONSHIPS........................................................................................19
PROCUREMENT TRENDS, HTTP://WWW.EPIQTECH.COM/E-PROCUREMENT-TRENDS.HTM, EPIQ, ACCESSED ON APRIL 8, 2008.......41
10.2 SUSTAINABILITY – BUYERS PERSPECTIVE..................................................................................................................20
10.3 SUSTAINABILITY – SUPPLIERS PERSPECTIVE...............................................................................................................21
11.0 TRENDS AND FUTURE OF E-AUCTIONS...................................................................................................21
12.0 CONCLUSION....................................................................................................................................................23
APPENDIX 3 –E-AUCTION EXAMPLE (SUN MICROSYSTEMS)...................................................................32

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ABSTRACT
Purpose: The purpose of this paper is to present an analysis of the impact of e-auctions (reverse

auctions) in today’s supply chain management methodology with a focus on the current

limitations and the future potential of the sourcing mechanism.

Design/ Methodology/ Approach: Through the use of an extensive literature review, this paper

will explore the current knowledge on e-auctions, the present trends around its integration within

operations and the future expectations for this sourcing method. Particular interest will be given

to the roll of e-auctions, their benefits, and the limitations within supply chain management.

Findings: This paper highlights major benefits and limitations of e-auction from buyers and

supplier viewpoints. Moreover, it succinctly describes the challenges and issues within e-auction

framework and showcases where the e-auctions are heading in the future.

Research limitations/ implications: Even though there is sufficient literature available on this

topic, several supply chain researchers have expressed conflicting opinions on e-auctions in

terms of cost, quality and buyer-supplier relationships.

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1.0 INTRODUCTION
As the growth of internet based commerce accelerated during the 1990’s operation managers

increasingly looked for new and novel ways to strategically capitalize the electronic networks via

improved supply chain methodologies. One of the newest mechanisms to gain popularity in the

latter part of the decade was e-auctions (also known as online reverse auctions). Carter et al.

(2004) defined an e-auction as a real-time auction between a buyer (including an organization)

and multiple invited suppliers, where suppliers can submit several bids during the specified time

period of the auction. This concept was introduced to improve the efficiency of distributing

requests for proposals to larger markets while easing the bid evaluation and selection process.

For more than a decade, e-auctions have brought significant advantages in terms of

quantitative and qualitative supply chain factors, thereby signifying its growing importance

within the supply chain framework. Theoretically, the buyers should realise savings by reaching

a larger volume of qualified suppliers which will result in reduced purchase prices. At the same

time, suppliers should benefit due to the means of reaching a larger customer market and

increasing sales volume. For both parties, lower transaction costs are the driving benefit.1

However, unqualified bidders, like brokers, who are incapable of supplying the product have

been found participating in the auctions.2 Furthermore, while early data suggests that the

variance in purchase price per unit provides positive results, the total operation costs are often

higher once the costs of implementing the auction are included. To add to the confusion, the cost

information provided by the auction administrators is often skewed to show only end of auction

values.3

Beyond the desired cost savings, e-auctions provide potential strategic opportunities for

buyers and suppliers alike. Most significantly, e-auctions provide an efficient means for

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obtaining market information about world-class suppliers, buyers and competitors. The

increased information flow combined with the reduced time requirement for transaction

processing allows for reduced forecasting horizons and additional effort to be placed on strategic

sourcing.4 The unfortunate negatives surrounding the mechanism include an increased focus on

cost over quality, service and relationships. In addition, mistrust between buyers and sellers have

grown due to opportunistic objectives being assumed.5

In spite of the negative cogitations surrounding e-auctions, many Fortune 2000 organizations

continue to pursue the activity with the expectation of reduced purchase prices.6 The greatest

potential for the sourcing strategy is expected within bulk, commoditised and easily specified

goods with low switching costs. Specialty items with custom modifications or non-standard

sized order may complicate the logistics of information flow in the electronic system. That being

said, senior management often still support the activity due to early reports of success and a

failure to utilize total cost metrics.7

2.0 METHODOLOGY & SOURCES

The research conducted has relied upon a rigorous literature review of peer reviewed and

academic articles combined with support from additional information gathered via online trade

journals. The focus of the investigation has been towards the effects of e-auctions upon the

supply chain management framework. Our intention is to determine the composition of this

sourcing mechanism, its trends and the future potential in sourcing management. Initially we

focussed upon the traditional procurement methods, then emphasized upon the impact of e-

commerce on the supply chain management. Next, specific attention has been placed upon the

various roles in which e-auctions are utilized within supply chain management. Thereafter, we

focused upon the e-auctions’ working mechanism and their benefits and limitations in industry

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today. Finally, the research has been expanded to determine the current trends, challenges and

the future opportunities facing the mechanism.

The primary sources for our research come from public online journals, ‘ABI/Inform’,

‘ProQuest’ and the Schulich School of Business Library.

3.0 LITERATURE REVIEW

In the supply chain management literature, high attention has been focused on electronic

medium and its potential benefit to an organization's supply chain capabilities (Sehwail and

Ingalls 2003).

Since the emergence of e-auctions in the mid 1990’s as a cost savings mechanism within

procurement methodologies (Kumar and Chang, 2007), it has gained significant press throughout

supply chain management literature (Sehwail, 2006) in regards to its potential benefits and

limitations. Within the first ten years of its usage, from 1995 until 2004, e-auctions were

involved in transactions totalling over $70 billion worth of goods and services. (Zaccone, 2004)

Within this context, one major supply chain trend is the use of e-auctions to obtain efficiency

within supply chain framework (Supply Chain Digest 2007). Virtually every major industry has

begun to use and adopt e-auctions on a regular basis (Smith 2002). The phenomenon of e-

auctions in supply chain has been receiving increasing attention among researchers from

purchasing and supply management (Jap 2002; Smeltzer and Carr 2002; Sehwail and Ingalls

2004). E-auctions have been depicted as a procurement tool capable of benefiting both suppliers

and buyers. (Supplier Selection & Management Report, 2003)

There are many contradictory opinions on the value of e-auctions in the marketplace and

whom, if anyone, benefit most. (Zaccone, 2004) The mechanism promotes cost savings (Kumar

and Chang, 2007) while increasing access to potential suppliers and enhancing buyer supplier

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relationships. (Losch and Lambert, 2007) Opponents to the system suggest the costs savings

are smaller than most expect or often nonexistent when the total procurement costs are

considered (Emiliani, 2006). Furthermore, using e-auctions, product quality can be negatively

affected and buyer-supplier relationships are damaged or destroyed. (Nair, 2005) Suppliers view

buyers as being opportunistic by placing unrealistic demand upon the agreement. (Tonbridge,

2003; Nair 2005) In addition, buyers are seen as making decisions based primarily on price,

disregarding the value of quality (Emiliani and Stec, 2005) and established relationships.(Chain

Store Age, 2003) Several academic journals highlighted the negative effect on the buyer-

supplier relationship as the biggest concern related to using e-auctions (Jap 2000; Sehwail and

Ingalls 2003; Smeltzer and Carr 2003). Executives are suspected of encouraging the usage of e-

auctions due to misrepresentation of costs/benefits process by the marketmakers (Emiliani,

2006). The most noted message for e-auction is that while it has its place within procurement,

individuals and organizations alike must be cautious while determining if e-auctions is an

appropriate mechanism for their required activity. (Crane, 2008)

4.0 TRADITIONAL PROCUREMENT METHODS

Procurement is the process of establishing agreements for buyers to acquire good or services

from available suppliers. In general, this process includes, amongst other things, establishing a

price, delivery, timing, and conditions upon which, the item is to be transferred. There are many

steps that may be included within the process from initial specifications to negotiations and order

fulfillment. One of the main challenges with establishing a procurement contract is managing

the information flow among all the stakeholders.

One traditional method of handling this is the bidding or tendering process. With this method

a buyer will issue a written Request for Proposal (RFP) detailing the specifications for the

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acquisition to potential suppliers and sealed tenders are invited over a specified period. The

suppliers will then return official bids detailing the offering. After the tender submission period,

the tenders are opened and examined for another period, usually for approximately 4 weeks, and

then awarded to a supplier based upon pre-decided evaluation criteria.

On commodity items, the deciding factor may be limited to price and/or timing of the

delivery. More complex purchases may require a series of negotiations to ensure quality,

reliability and trust between the parties involved.

5.0 IMPACT OF e-BUSINESS ON SUPPLY CHAIN

For the last few decades, all businesses across the industry have been influenced by the e-

business technologies. Since that time, we have witnessed how information technology has

revolutionized supply chain management. In 2003, researchers estimated the online business-to-

business (B2B) is around 78% of the overall e-business market, which signifies the importance

of usage of internet technologies within businesses.8

Researchers have focused on the significant effects of the e-business and Internet revolution

on supply chain management practices and concluded that the Internet will enable organizations

to achieve high cost efficiencies and allow organizations to react quickly to major market

changes9. The use of Information Technology is critical in supply chains because it enables

dynamic reconfiguration of organizational structures and adds flexibility to supply chain

processes10. Supply chain management has been literally reinvented by the new networked

technologies and the business processes and practices that these technologies facilitate, such as e-

procurement, e-marketplaces, e-logistics, collaborative commerce, e-auction, just-in-time (JIT)

production, customer interface, and web-based package tracking11.

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By taking their supply chains online, organizations realized significant savings across the

supply chain, thus they are quite supportive of the evolution of the e-business12. Online

marketplaces help buyers reduce their unconventional spending (including their expensive

emergency buying), since every item is pre-negotiated and catalogued13. In addition, these

benefits also include reducing bullwhip effect by better information management through

accessing more suppliers, exchanging information real-time with a single point of access to

ensure consistent workflow, decreasing processing errors, and reducing information technology

complexity by reducing the electronic connections established with suppliers14.

Nowadays, several manufacturers are doing business with vendors they never knew existed a

decade ago simply because they were located in a different part of the world. By allowing

businesses to expand their horizons, ecommerce has given them the tools to truly find the best

and most affordable suppliers. While before, the buyer had to create a complex RFP, distribute it

to potential vendors, wait for their responses, then sift through each of their proposals

individually in order to make a decision, nowadays, enabled by the internet, the entire process

can be completed in 3-7 days instead of weeks or months.

Following table highlights the comparison of Traditional model vis-à-vis eBusiness model

Traditional Procurement Model eBusiness Model

Based on personal contacts
High investment in assets
Standardized products in large volumes
High transaction costs
High inventories
Restricted flow of information
Focus on profits
Highly dependent on electronically based
communication and relationships
Lower investment in assets
Made to order based on customer demand
Low transaction costs
Rapid Information flows replace inventory
Free flow of inter-organizational information
Focus on supply chain efficiency, growth and
profits

(Source: Antonnette, G., Giunipero, L.C., Sawchuk, C. (2002), E-Purchasing Plus: Transforming Supply
Management through Technology, JGC Enterprises)

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6.0 ROLE OF E-AUCTION IN SUPPLY CHAIN

Following the e-Business framework designed by Lee and Whang (2002c), we will explore

the role of e-auctions in Supply Chain Management. This framework assigns all e-Business

applications into three main categories, namely e-Commerce, e-Procurement, and e-

Collaboration.

6.1 E-commerce

E-Commerce assists a network of supply chain partners to identify and respond quickly to

changing customer demands captured over the Internet.15 Within e-Commerce segment, e-

auctions has brought huge efficiency for organizations in supply chain areas such as order

fulfillment process, cost structure, profit contributions, logistical requirements, service quality,

degree of market segmentation, access to demand/supply information and return policies. E-

auctions have also led to the effective formation and utilization of e-fulfillment in e-Tailer

businesses through its ability to customize the diverse requirements across industries, buying

situations, and types of products.

(Source: Johnson M. et al (2002), E-

business and supply chain management: An
overview and framework, Production and
Operations Management Journal)

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6.2 E-procurement
E-Procurement allows organizations to leverage the Internet for procuring direct or indirect

materials, as well as handling value-added services such as transportation, warehousing, customs

clearing, payment, quality validation, and documentation.16 The key aspect of e-procurement is

to include the end-user (requester) in the procurement process via an electronic multi-vendor

catalog and to close the process gaps (e.g. re-entry of data) in the supply chain for indirect goods

(Neef, 2001). E-auctions offers a common platform to facilitate efficient procurement as

numerous buyers and sellers find each other and transact according to some pre-specified

protocols, governed by the marketplace or traders’ internal rules. Modern manufacturing

requires flexibility in order to cope with strong competition, fast changing customer preferences,

shortening product life cycle and product variety proliferation. An efficient material procurement

via e-auctions is needed to support flexible manufacturing.

6.3 E-collaboration
E-Collaboration facilitates online coordination of various decisions and activities beyond

transactions among the supply chain partners17. These activities include information sharing and

integration, decision sharing, process sharing, and resource sharing. Procurement through

collaborations deals with the strategy development, supplier selection, negotiation, supplier

evaluation, and supplier development. Several researchers indicated that similar to e-

collaboration, e-auctions is concerned with continuous supplier management in terms of supplier

evaluation and development to improve the overall cost performance of the supply chain.

Moreover, e-auctions empowered by the information flow of e-collaboration will help greatly to

reduce the impact of bullwhip effect and can be utilized in developing a commodity sourcing

strategy. Furthermore, e-auctions can greatly improve purchasing process through automating

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requisitions and purchase orders for goods and services, decentralizing buying, connecting to

suppliers directly and improving employee compliance with preferred supplier policies.

7.0 E-AUCTION DEFINED

CAPS Research (2003) defined an e-auction as an online, real-time dynamic auction between

a buyer (including an organization) and a group of pre-qualified suppliers who compete against

each other so as to win the business of supplying products or services that have pre-defined

specifications for design, quality, quantity, delivery, and related terms and conditions. Within this

e-auction, these suppliers compete against each other by bidding online using specialized

software by submitting successively lower-priced bids during a scheduled time period.

Additionally, Sehwail and Ingalls (2004) defined e-auction as the real-time electronic bidding

event, which a company uses to outsource products/ services with reducing bid prices, and

bidders would be allowed to enter bids once or continuously as per the auction format.

Interestingly, in this e-auction, there exists some degree of visibility among suppliers regarding

the actions of their competitors towards getting the contract for supplying products and services

to the buyer.18 Furthermore, e-auction design is not one-size-fits-all as its design is based upon

the several aspects present in the marketplace such as technology, business processes, preference

of different players, power disparity between buyers and suppliers etc. Thus, based on these

aspects, we will view how buyers apply different types of e-auctions to distinctive categories

within the supply chain.

7.1 Major Types of e-auction

Following are the five different types of e-auctions19:

1. Reverse English
2. Reverse Japanese
3. Reverse Dutch

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4. Weighted/ Multi-Attribute
5. Sealed Bids
The first three auction types: ‘English’, ‘Dutch’ and ‘Japanese’ are typically used in a price-

only environment. However, ‘Weighted/ Multi-Attribute’ auctions put emphasis on non-price

attributes, and can deliver effective results in the appropriate categories20. ‘Sealed Bids’ are most

useful where the bidders could not compete effectively because source of products/ services

cannot be specified clearly21. (For details on each auction, see Appendix 2)

8.0 HOW E-AUCTIONS WORK

An e-auction allows suppliers to use internet-based software to bid against each other online

and in real time against a published specification from a single buyer. Within this auction,

suppliers can bid for the posted contract at the buyers’ internal marketplace or at one hosted on a

neutral site, such as eBreviate.com or FreeMarkets.com. The buyer will post the RFP with

specific requirements and a starting value and suppliers will bid against it until the auction

closes. The lowest price is not always the criteria to win a successful bid, but one who offers

value and speed of delivery along with quality and reliability. After bidding has ended, parties

will contact each other and arrange payment and delivery terms as well. Several organizations

have utilized e-auctions successfully. An example of e-auctions has been described in

Appendix 3.

Researchers presented four general guidelines for successful implementation of an e-auction

event: the buyer must clearly state the commodity specifications, the purchase lots must be large

enough to encourage suppliers to bid, the appropriate supply market conditions must exist, and

the correct organizational infrastructure must exist for the buying organization.22

Following flowchart describes the step-by-step procedure of e-auctions:

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Source: Office of Government Commerce, http://www.ogc.gov.uk/assets/images/eAuction_next_steps.gif

(For details on e-auction process, see Appendix 1)

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8.1Appplication of E-Auction
E-auctions are relevant to the products or services of considerable market competition, a

minimum of four suppliers is considered as a healthy level23. Moreover, the contract offer should

also be large enough to attract the suppliers i.e. the predictive savings must exceed the cost of e-

auctions. On the other hand, there are following areas, where e-auctions is not relevant and not

advisable. First, if the suppliers have demonstrated the sign of not being able to cut the prices

further than e-auction is not a correct option. Second, if most of the suppliers do not have

internet availability to participate in the process. Third, if the buyer has to initiate the process

only for short period and is not looking to initiate a strategic partnership with supplier(s)

Undoubtedly, e-auction, which has the immense capability in terms of its usage, is an

emerging supply chain trend and was considered to be top 10 trends in 2007.24

8.2 E-Auction Technology

The e-auction does not require any specialized computer equipment nor do they need any

extra software to be downloaded onto their computer hardware. The only basic requirement is a

reliable Internet connection with a recent Microsoft’s Internet Explorer Version.

9.0 BENEFITS AND LIMITATIONS OF E-AUCTIONS

E-auction delivers innumerable benefits to both buyers and suppliers across the supply chain

in terms of overall costs, strategic sourcing, supply chain efficiency and compatibility with other

quality practices such as JIT and others.

9.1 Benefits of E-auctions

In this section, we will analyze the e-auctions’ benefits from buyer and supplier viewpoint.

From a buyer’s perspective the advantages of e-auction depend on the buying situation, the

strategic importance of the product, and the existence of international standards for the product25.
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Yet the researchers, due to increased competition, have generalized these benefits for buyers in

terms of lower transaction costs, shorter order cycle-times, and competitive purchase prices26.

Additionally, e-auction attracts buyers with the appeal of low prices, a broader supplier base, and

highly efficient procurement process27. Several large companies reported decreases in purchase

prices by 10 % or more of those prices by using e-auctions28. Organizations, such as ‘Quaker

Oats’ and ‘Smith Kline Beecham’, reported millions of dollars in cost savings with e-auctions

compared to traditional purchasing methods29. However, strategic advantages of e-auctions are

more significant than mere cost savings across the supply chain. Using e-auctions, supply

analysts can identify several world-class suppliers, gather and analyze market data, and focus on

strategic sourcing rather than on processing transactions only. Interestingly, the classic economic

order quantity (EOQ) model suggests that as ordering costs are reduced, it becomes economical

to order in smaller quantities, resulting in lowering total inventory holding costs30. Thus, with the

use of e-auctions resulting in lowering ordering costs, organizations should have lower inventory

costs31. It is known that Just-in-time (JIT) purchasing and having small quantities of materials

delivered frequently can lower the buyer’s inventory costs and purchase prices32. Researchers

suggest that e-auctions are compatible with a just-in-time strategy because sourcing can be done

quickly33. The Gartner report (2001) stated that the buyer’s ability to identify new suppliers

quickly through electronic medium is quite useful, especially in a fragmented industry. As per

IDC study (2001), additional benefits for buyers might include process cost reduction and

accelerated product development.

On the other hand, suppliers can benefit by obtaining market information about buyers and

other competitors, having an outlet to better manage excess capacity, and competing for business

from new customers34. E-auctions provide an opportunity for suppliers to gain a better

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understanding of the buyer’s financial goals by viewing buyer’s opening price ceiling for the

specified product/ service. Suppliers also gain valuable information about their competitors’ cost

structures that can help them to become more effective, thereby providing value to the buyers in

the long run35. Several researchers emphasized upon the key benefits of e-auctions and listed

four key reasons, as perceived by buyers, for suppliers to use e-auctions: new business, market

penetration, inventory management and cycle time reduction36.

Following table shows the benefits to the buyers and suppliers within the supply chain.

Benefits For Clients Benefits for Suppliers

1. Reduces the cost of products/ services 1. Improves discipline in the tendering

2. Reduces negotiation process time
3. Is an easy process to repeat with other
products
4. Encourages development of closer
supplier relationships. (Alternate
opinions will be discussed in the report)
5. Availability of quality market
information.
6. Wider pool of sellers to choose from.
7. Improved inventory management.
8. Short and improved purchase orders.
9. Strategically fits with JIT management.
process
2. Encourages transparency of pricing and
ability to react to competitors' prices
3. Reduces negotiation process time,
thereby promoting convenience
4. Short and improved bids due to
elimination of travel, paperwork etc.
5. Allows suppliers to track their status
relative to competitors.
6. Access to new geographic markets.
7. Strategically fits with JIT management.

9.2 Limitations of E-auctions

Regardless of the aforesaid benefits within the supply chain framework, e-auctions still fall

short in few areas. Most academic journals and business press articles agree that the negative

effect on the buyer-supplier relationship is the biggest concern related to using e-auctions37 38 39 40
41
. As e-auctions by nature are the buyer driven tools, which explains that the transparency and

power are not balanced in the buyer and supplier relationship42. A buyer need not be as

committed or invest as much as in the traditional formats. Such an unbalanced business

environment can lead to reduction in trust, commitment, expected continuity, satisfaction and

investment into the relationship43. Many buyers are anxious that using e-auctions might destroy

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their relationships with the suppliers. This fear is especially pronounced when the buyer and the

supplier have had a long working history and they have spent decades building strategic alliance

partnerships based on trust and loyalty. With the announcement that an e-auction would be used,

the buyer was possibly indicating that the supplier was no longer meeting the expectations of the

buying organization44.

On few occasions, researchers noticed that the cutthroat price war between the bidders leads

to compromise on quality issues. Because e-auctions seem to emphasize cost over other

qualifications, many buyers may choose the lowest bid only to find out that it includes shoddy

workmanship, low quality products, and slow delivery times, which in turn cost them more in the

long run. Judgmental errors may occur in the process of quoting the bid lower than that appear

on the screen. Furthermore, there is scope for the introduction of ‘Ghost bidders’ by

unscrupulous buyers so as to increase the bidding price among the genuine suppliers.

Other limitations include suppliers’ not participating in the auction. In theory, only two

competitor firms are required for an auction. But economic game theory indicates that when only

two competitors exist, they are not inclined to participate in either a ‘reverse’ or ‘forward’

auction. Even though only two parties may well be involved in the final stages of bidding, at

least four or five viable, competitive bidders are generally required to begin an auction45.

Another risk is that the sellers may get caught up in what may be termed “the race.” Bidders may

get so caught up in the emotion of the race or competition that they offer unreasonably low

prices46. On the other hand, buyers are also facing the risks of e-auctions. With the aforesaid

benefits of e-auctions, buyers, on few occasions, could not anticipate the hidden costs such as

costs associated with changing and approving suppliers, monitoring new suppliers, using

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additional manpower to move products from one supplier to the other, employing technical

assistance, and the services of the market maker.

In summary, the practical, legal and ethical limitations on part of e-auctions can be

highlighted as follows:

1. Possibility of fraud and anonymity

2. Limited participation
3. Reoccurring order fulfillment costs
4. Possibility of harming strategic relationship with supplier
5. Low cost vs. best value issues
6. Risk of plotting ‘Ghost bidder’
7. Lack of negotiable terms and conditions
8. Hidden costs associated with the process

10.0 CHALLENGES AND ISSUES WITH E-AUCTION

10.1 Conflicting opinions – Buyer/ Supplier Relationships
In recent studies (Carbone 2003), some researchers have identified apparent negative effects

of e-auctions on buyer-supplier relationships. In addition, many authors have assumed that e-

auctions are detrimental to effective construction and management of buyer-supplier

relationships (Craig R. Carter, and Lutz Kaufmann 2007). On the other hand, some researchers

have also argued that both market efficiency as well as long term relationship can be

dramatically improved if e-auctions are used properly (Adam J. Fein, 2002). Therefore, finding

out the answers for the questions of how and when E-auctions have seemingly different effects

on buyer supplier relationship become very important.

Significantly, some researchers have found out that there are general negative effects of e-

auctions on the collaboration between buyers and suppliers in the short term relationship (Craig

R. Carter, and Lutz Kaufmann 2006). More specifically, research has shown that suppliers who

participate in a e-auction feel exploited by the process and lose trust in the buyer (Adam J. Fein,

2002). This is especially when e-auctions are used to support short-term relationships. Suppliers

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feel a great deal of competitive pressure due to a larger pool of participants, resulting in a forced

offer with a lower price to the buyers. Although the market efficiency was increased, the buyer

supplier relationship was decreased dramatically in this case.

On the other hand, it was shown that when e-auctions are used to support long-term

relationships, both market efficiency and long-term relationships are improved drastically. This

is primarily due to the fact that both price factors as well as non priced factors such as product

quality, delivery time, and service level, have to be taken into consideration when making

repeated souring decisions47. However, if the needs of buyers can only be fulfilled by a small

number of suppliers, then e-auctions should not be applied here. Essentially, the transaction price

will not be reduced enough to generate significant savings for the buyer if only limited

competition exists48.

10.2 Sustainability – Buyers Perspective

Some research has appeared to confirm that buyers may be shifting away from a total cost

approach toward a price-only-based approach thus not adequately considering non priced factors

in their selection decision (Carbone 2003). Significantly, buyers in e-auctions need to think

beyond simply the quoted price in order to make their strategic souring decisions more

effectively. Price may be an important factor in the decision, but other elements, such as added

services, must also be taken into consideration when making souring decisions.

Accordingly, a buyer’s utility is determined by both price and supplier quality49. Ignoring

these non priced factors in e-auctions will eventually lead to higher overall costs to buyers. For

instance, some suppliers who win the e-auction will cut out normal services, use less quality

materials, or extend deadline just to make it possible for them to place a more competitive initial

bid even though the final bill may end up being much higher50.

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In addition, Carbone (2003) stated that the success of an E-auction primarily depends on

whether it is conducted under the right conditions. More specifically, goods and services that can

only be provided by a limited number of suppliers will not be effective with e-auctions since the

suppliers, not the buyers, will have all of the power in the situation and can actually drive the

price up instead of down51. Buyers need to be aware of this and also need to realize that treating

suppliers with respect now can secure them a trustworthy supplier in the future52.

10.3 Sustainability – Suppliers Perspective

Besides being very competitive in auction price, suppliers in e-auctions will also have to be

very proactive in offering value added services to buyers in order to sustain their future

businesses. Accordingly, Carter believes that "E-auctions are widely perceived ... as a divertive

purchasing tool designed principally to drive down supply prices without adequate consideration

given to other important measures ...." Typically, on time delivery, extra warranty, better quality

of product, and flexibility could all be part of these important measures.

11.0 TRENDS AND FUTURE OF E-AUCTIONS

In spite of its limitations and challenges as a sourcing tool, e-auctions have not only been

utilized for the past decade, it has also shown significant growth in its market penetration.

According to market research, by 2003, 42% of large buyers and 14% of small buyers were

already utilizing e-auctions.53 As shown in the figure below, this penetration has been achieved

through consistent growth since 2000. At the same time, only 5%, on average, of buyers total

spending was through the use of this mechanism.54 By 2004 over $70 billion worth of goods and

services have been involved in e-auction transactions.55 The momentum of this sourcing totals

growth in market utilization has continued over the following years.

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 E-Auctions – A Major Trend in Supply Chain

Sources: Fein A., Online Auctions are here to stay, Modern Distribution Management,
http://www.mdm.com/stories/fein3401.html

With the growing application of e-auctions across various industries, there has become

increasing scrutiny concerning its various limitations and effects upon the procurement process.

The key issues that are being addressed today, and must continue to be improved upon in the

future, are: (1) buyer-supplier relationships, (2) e-auctions dominant focus upon lowest price and

(3) business sustainability. How these issues are addressed will determine the ultimate market

utilization level of the tool and its ability to handle specialty and customized items in additional

to the more common usage on commodity items.

Since e-auction is merely a tool for the procurement process, the drawbacks in the

methodology are being quickly compensated for, through rapid advancements in the technology

supporting the application. The advent of increased access to and capacity of broadband internet

services are extending the reach and speed of the e-auction services while providing greater

capacity for data transfers. As a result, software applications are becoming more sophisticated

by allowing buyers and suppliers to apply additional detail to the bidding process. Affectively,

participants will be able to optimize the process by implementing scenarios to tailor bids towards

a variety of market conditions.56 Ultimately the future enhancements to tool will enable

increased negotiation capabilities within e-auctions and move the process beyond price focus and

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 E-Auctions – A Major Trend in Supply Chain

towards quality, relationships, and other value added features. As product margins continue to

shrink due to cost based competition, the e-auction improvements in future will allow suppliers

to leverage their existing relationships and core competencies in order to differentiate their offer

in the auction.

Furthermore, increasing scrutiny is also being placed upon participants within the e-auction

process to ensure the qualification of bidders and the ethical behavior of the buyer.57 The

intention is to improve the reliability and reputation of the process in the future. For example,

some large organizations have taken to rating suppliers based upon past performance and utilize

the ratings to determine which suppliers to invite to particular auctions.58 Additionally, traditional

e-auctions have been based off of the ‘English reverse auction’. Current trends suggest that other

auction forms will gain popularity in the future as a means to differentiate the procurement

process while also creating more affective means for sourcing the required combination of

product specifications and price.59 (For details on different types of e-auction, see Appendix 2)

By continuously developing the methodology in the future, participants will be able to

successfully counter the impact the limitations of e-auctions by developing the processes to

operate beyond them. However, if developments towards enhancing relationships and ethical

behavior fail, the e-auctions’ growth appears to be limited to undifferentiated suppliers with bulk

commoditized items and ever tightening profit margins.60

12.0 CONCLUSION
Through an extensive literature review, an in-depth analysis has highlighted the potential

impact of e-auctions upon supply chain systems and its limitations, trends and future

expectations have been presented.

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 E-Auctions – A Major Trend in Supply Chain

Enabled by advancements in internet technology and the influence of e-business on the

supply chain, e-auctions have formulated a significant role within e-commerce, e-procurement

and e-collaboration. Reduced costs, negotiation processing time and an enlarge pool of potential

suppliers are just some of the benefits being realized by buyers utilizing this methodology. On

the other hand, suppliers gain from access to new markets, competitor pricing transparency and

improved discipline in the tendering process. Unfortunately there are significant limitations still

plaguing the sourcing tool, most significantly the potential for fraudulent behavior, reduction in

product quality, failure to properly meet the product specifications and the dematerializing of

buyer/ supplier relationships. Additionally, many academic and peer reviewed sources disagree

on the true impact upon the buyer/supplier relationships and the sustainability of the mechanism.

Since its inception in supply chain management over a decade ago, e-auctions have been

showing continuous and significant growth in utilization. While Reverse English auctions are

still the norm, other forms of auctions are providing and are expected to continue to provide

significant growth for the methodology. In additional, e-auctions are evolving through

considerable development in the technology and its ability to formulate and value relationships.

Furthermore, e-auctions are moving away from the purchasing decisions being based purely on

cost based factors. Participants are being enabled with the option of customizing bids for

specific market conditions and place value on more qualitative factors like reputation. Overall,

e-auction has proven itself to be a dynamic procurement tool with a valid role and future within

specific parts of supply chain management.

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APPENDIX 1 – E-AUCTION PROCESS

The preparations for an e-auction are quite similar to traditional way of awarding agreements.

The organization examines the marketplace and, if required, a Request for Information (RFI) is

sent to selected suppliers. After the e-auctions are examined, a final specification for tender

process is created. Traditionally, Requests for Tenders (RFT’s) are sent to potential suppliers and

sealed tenders are invited over a specified period. After the tender submission period, the tenders

are opened and examined for another period, usually for approximately 4 weeks, and then

awarded. The e-auction process differs from the traditional process, where instead of calling for

tenders, suppliers are invited to the e-auction event in an online sphere. Prior to the e-auction

event, bidders are pre-qualified not only in their capacity to supply but, if applicable, their ability

to conform to the company’s operations and controls management systems. With the current

CSR corporate agenda, suppliers are also chosen based on how socially responsible their

organizations are within the green supply chain management framework. For e-auctions, the

company operates within strict operations and management systems because suppliers of

operations and sensitive goods and services are audited prior to and during any agreement

period. Bidders in the current e-auctions have been pre-existing suppliers that were already pre-

qualified. To prepare bidders for the e-auction, the company sends an instruction document on

how to use the e-auction application and details of the specific auction to the bidder. A dummy

auction is held if required, with the company staff member hosting the event walking the bidder

through the process. The bidders are given a user ID if not already a registered user and a

password to log-in to the auction web site. In cases where the specifications are complex, the

company may conduct a hybrid process where an RFP takes place and followed up by the e-

auction. This enables the organization to check that the bidders are fully aware of the

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specifications of the agreement that is up for bidding. In these cases, the bidders are told of the

process to take place from the outset. The basic rules of the auction have been the same for all

the auctions held so far: bids are accepted through the online event only (not via phone, fax etc)

and bids are final and cannot be withdrawn. The auctions have been for entire lot of goods, not

goods broken down into parts/components. The feedback to the bidder works on a ranking

system where the bids are shown only where they are in relation to other bids and what their own

bids have been. The bids are only accepted if they fall with a range as determined in the rules of

the auction - the range is set to specific percent or dollar values as part of the configuration of the

e-auction prior to the event. Also in the configuration of the e-auction are the vendor penalty

factors. These are adjustments to the bid price to give an actual price to the company and allow

for such things as exchange rate, switching costs and transportation costs. These penalty factors

are disclosed to the bidders prior to the event and affect the bid ranking position. Also the lowest

bid is not always awarded with the agreement. One of the terms of the e-auction is that the

company reserves the right not to award to the lowest bidder. If the winning bid is invalid, the

company will re-hold the e-auction.

Following figure gives you the overview of pre-auction, auction and post auction phases

of e-auction from buyers’ perspective.

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(Source: Kumar S. et. al, "Reverse Auctions: How much total supply chain cost savings are there? - A conceptual
overview", Journal of Revenue and Pricing Management, May 2007)

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APPENDIX 2 - TYPES OF E-AUCTIONS 61

(Source: Alanbuxton, Does Procurement eAuction Design Matter? (part 1),

http://alanbuxton.wordpress.com/2008/03/26/does-procurement-eauction-design-matter-part-1/, Accessed on April
5, 2008)
Reverse English: A reverse English auction is the most common type of procurement auction. In

this type of auction the suppliers all open the bidding at a particular price and bid against each

other to drive the price down.

English auctions are most effective when:

1. They include several suppliers who share a similar cost base.

2. The suppliers are competing to win.

Many researchers stated that an English auction should contain at least four suppliers and those

suppliers should share a similar cost base because to win a reverse English auction, a bidder does

not need to place his best possible bid. It is sufficient to marginally beat the second best bid.

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Japanese e-Auctions: In a reverse Japanese auction, the buyer states a price and bidders have to

accept that price level or withdraw from the auction. Acceptance indicates that the bidder is

prepared to supply at the stated price. When one bidder accepts a certain price level, the buyer

lowers the price level by a defined amount and again asks bidders to accept or withdraw at that

level. This kind of auction continues until there are no more bids placed. Japanese auctions work

well in the following environments:

1. When there are significant differences in cost base among bidders.

2. When the contract is of different value to the different bidders.

Japanese auctions also have advantages for suppliers because:

1. Incumbent suppliers cannot shadow the leading bid because they need to accept each

price level as it is offered.

2. Bidders do not have to reveal their market prices to competitors.

Japanese auctions have the following disadvantages:

1. As this format is relatively new so bidders may be uncomfortable with the process.

2. They do not give suppliers any useful competitor information, therefore an over-

confident supplier may choose to hold back during the auction and miss out on being

awarded the contract.

Japanese auctions are recommended where there are large differences in cost base among

suppliers, or where there are three or fewer suppliers.

Dutch e-Auctions: In a reverse Dutch auction, the buyer offers a very low price, lower than

suppliers would accept. The price gradually increases until a supplier chooses to supply at that

price. The buyer has to award the contract to the lowest priced supplier because this is the only

price revealed during the auction process. Therefore Dutch auctions are limited to those

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categories where price is genuinely the only differentiating factor among bidders. The key to

success in a Dutch auction is a lightning fast connection speed so that the clock can tick

relatively quickly and the bidder can stop the clock at exactly the right moment. Even with the

increasing speed of internet connections worldwide, the internet is still far too slow to be able to

run a true Dutch auction. Therefore most implementations of online reverse Dutch auctions allow

suppliers to submit their best price before the event starts. The clock then ticks up and places a

“bid” on behalf of the lowest priced supplier.

Weighted/ Multi-Attribute eAuctions: Within this auction, non-price factors are rolled up into

a merit score (represented relative value) that is then subtracted from the supplier’s price bid to

arrive at a comparator score. This comparator score represents the relative value of each

supplier’s bid, taking into account price and non-price attributes. Thereafter, suppliers are ranked

based on their comparator score.

These kinds of auctions can have the following benefits:

1. Post-auction decision making is made simpler, because the differences in non-price

elements of the different suppliers have already been factored in.

2. Potential to allow higher-quality and higher-price suppliers to compete on a level playing

field against competitors in the auction.

Sealed Bids (or Vickery - second price sealed)62: A sealed-bid auction allows bidders to submit

written bids without knowing the bid of the other people in the auction. The highest bidder wins,

but the price paid is the second-highest bid. The auction was created by William Vickrey. This

type of auction is strategically similar to an English auction, and gives bidders an incentive to bid

their true value.

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(Source: Alanbuxton, Does Procurement eAuction Design Matter? (part 1), http://alanbuxton.wordpress.com/2008/03/26/does-procurement-eauction-design-
matter-part-1/, Accessed on April 5, 2008)

The aforesaid process chart depicts under what circumstances which type of e-auctions would be highly beneficial to an organization.

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APPENDIX 3 –E-AUCTION EXAMPLE (Sun

Microsystems)
Sun Microsystems uses e-auction as part of its value added procurement strategy to source for

low-end memory circuits and low-capacity disk drives to high-end chips, power supplies and

virtually every capacity disk drive the company buys. Nowadays, it is also using e-auctions with

its electronics manufacturing services (EMS) providers. The company not only awards printed

circuit board assemblies, but also entire systems, including servers and mass storage units, to

contract manufacturers through reverse auctions.

The company invites past business suppliers to participate in the e-auction as they have

already been score-carded (i.e. pre-screened), and their performance

in the past is part of the Procuri (e-auction software) auction tool

that Sun uses. In 2007, the amount of business Sun Microsystems

awarded through e-auction is approximately $2.7 billion. Moreover,

Sun Microsystems' total annual spend with suppliers is around $4

billion.

By using e-auctions as a way to source for components, Sun Microsystems harnesses several

benefits. First, the major benefit is to reduce cost of materials by creating a competitive

environment. When the company initially began to use the e-auction procurement method they

immediately realized a 30% reduction in the components’ price. Then, over time, the cost

reductions become incremental. The savings represented a huge competitive advantage for Sun

Microsystems because it, while spending $4 billion a year, is competing with some companies

who spend upwards in the range of $40 billion.

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Sun Microsystems also participates in a ‘high integrity’ auction, which implies that Sun

Microsystems do not put anyone in an e-auction that it will not award business to. Most of Sun

Microsystems's e-auctions are not winner take all. It is essentially auctioning off pieces of the

component pie and not the entire pie.

Typically, Sun Microsystems asks three suppliers to bid for its requirements. This process

allows healthy competitive environment because each supplier knows that it will get a portion of

Sun Microsystems’ business. A supplier can increase or lose share of business with Sun

Microsystems through e-auctions. A supplier may have 50% share of business for a certain

commodity. If they do well, then they can bring it up to 55% to 60%. If they aren't aggressive

then their share may fall to 40% in a quarter. The other suppliers may get a 35% share and the

third a 25% share. It is about receiving a portion of the overall pie almost all the time.

E-auctions have resulted in Sun Microsystems getting similar prices to what larger OEMs

(Original Equipment Manufacturers) receive. Large OEMs traditionally had gotten better prices

than Sun Microsystems because their volumes were much larger, but as soon as Sun

Microsystems began with e-auctions, the gap shrunk to almost zero.

The key highlights of Sun Microsystems’ e-auction:

• E-auctions need to have integrity. In other words, do not include suppliers that have no

chance of getting business.

• E-auctions should not be winner take all. It should be a varying portion of overall pie

should be awarded to all suppliers through e-auctions.

• Only suppliers, who have been previously qualified, and are currently doing business

with a company, should be included in e-auctions.

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How Sun classifies its e-auction spend

Sun Microsystems classifies its production materials into different levels and uses e-auctions for

the following products.

Level Commodity
1 Mechanical assemblies (plastic molding, metals works)
2 Electro-mechanical (fans, cables)
3 Electronic enclosures, PCBA backplanes, power supplies
4 Systems integration (active boards, software)
5 Full system manufacturing/design
Source: Sun Microsystems

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End Notes

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1
Teich, J., Wallenius, H., Wallenius, J. and Koppius, O. (2004). “Emerging multiple issue e-auctions”. European journal of
Operational Research. Vol 159. Iss. 1. Page 1.
2
Emiliani, M. L. and Stec, D. J. (2005). “Wood Pallet Suppliers’ reaction to online reverse auctions”
3
Emiliani, M.L. (2006), “Executive Decision Making Traps and B2B online reverse auctions”, Supply Chain Management.
4
Hartley J. et al (May 2004), An Exploration of the Adoption of E-Auctions in Supply Management, Eee Transactions on
Engineering Management, Vol. 51, No. 2, Page 153
5
Emiliani, M. L. and Stec, D. J. (2005). “Wood Pallet Suppliers’ reaction to online reverse auctions”
6
Emiliani, M.L. (2006), “Executive Decision Making Traps and B2B online reverse auctions”, Supply Chain Management.
7
Ibid.
8
Lancioni et al, Information systems development within supply chain management, International Journal of Information
Management, October 2004, Pages 375-385
9
Ibid.
10
Chandrashekar A. et al, The Virtual Supply Chain, Managing virtual web organizations in the 21st century: issues and
challenges, 2002, Pages 90 - 106
11
Lancioni et al, Information systems development within supply chain management, International Journal of Information
Management, October 2004, Pages 375-385
12
Murtaza M. et al (2004), "E-marketplaces and the future of supply chain management: opportunities and challenges",
Business Process Management Journal, Vol.10, No. 3
13
Barratt, M. et al (2002). “Exploring business-to-business marketsites”, European Journal of Purchasing & Supply
Management, 8(2), 111-122.
14
Sehwail, L. et. al, 2005. “Critical Success Factors for E-procurement Online Marketplace”, International Journal of
Operations and Service Management, Vol. 1, No. 4, pp. 344-357
15
Johnson M. et al (2002), E-business and supply chain management: An overview and framework, Production and
Operations Management Journal
16
Ibid.
17
Ibid.
18
Ibid.
19
Buxton A., Does Procurement eAuction Design Matter?, Trading Partners,
http://www.tradingpartners.com/usa/download.php?Id=85&Field=File&Force=Y&Stream=N , Accessed on April 4, 2008
20
Ibid.
21
Ibid.
22
Ibid.
23
How to be successful in e-auctions, Procurement Program,
http://www.lcpe.gov.uk/Library/pdf/How%20to%20e%20auctions%20web%20version.pdf, Accessed on April 8, 2008
24
Gilmore D., The Top 10 Supply Chain Technologies and Strategies for 2007, First Thoughts – Supply Chain Digest, Jan
2007
25
Branko S. et al (Jun 2004), Advances in e-procurement: A focus on the product/buying situation, Management Services
Journal
26
Hartley J. et al (May 2004), An Exploration of the Adoption of E-Auctions in Supply Management, Eee Transactions on
Engineering Management, Vol. 51, No. 2, Page 153
27
Moser, E. (2002), "E-procurement – reverse auctions and the supplier's perspective", Pharmaceutical Technology, Vol. 26
No.5, pp.82-5.
28
Hannon, D. (2004), "Online buying gathers steam one buyer at a time", Purchasing, Accessed on April 4, 2008
29
Brunelli, 2000. "Online auctions save millions for Quaker Oats and SmithKline Beecham." Purchasing, vol. 128, no. 4, p.
S22, 2000.
30
Prof. Lakats L., Economic Order Quantity, Supply Chain Management and E-Commerce Lecture, Winter 2008
31
Hartley J. et al (May 2004), An Exploration of the Adoption of E-Auctions in Supply Management, Eee Transactions on
Engineering Management, Vol. 51, No. 2, Page 153
32
Dong, Yan, Carter, Craig, and Dresner, Martin, “JIT Purchasing and Performance: An Exploratory Analysis of Buyer and
Supplier Perspectives”, Journal of Operations Management, Vol. 19, 2001, pp. 471-483.
33
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34
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Smeltzer, L., Carr, A. (2003), "Electronic reverse auctions: promises, risks, and conditions for success", Industrial
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37
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38
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Jap, S. (2000), "Going, going, gone!", Harvard Business Review, Vol. November/December pp.30.
40
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43
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44
Smeltzer, L., Carr, A. (2003), "Electronic reverse auctions: promises, risks, and conditions for success", Industrial
Marketing Management, Vol. 32 No.6, pp.481-8.
45
Cassady, R. (1967), Auctions and Auctioneering, University of California Press, Berkeley, CA.
46
Smeltzer, L., Carr, A. (2003), "Electronic reverse auctions: promises, risks, and conditions for success", Industrial
Marketing Management, Vol. 32 No.6, pp.481-8.
47
Gattiker et al., 2005, Why do sellers dislike Internet reverse auctions?: some experimental results, Proceedings of 16th
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48
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49
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50
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52
Hong, Y., Hartley, J.L. (2001), "An exploration of online reverse auctions as a procurement tool", Proceedings of The
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53
Ibid.
54
Ibid.
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http://www.europeanleaders.net/magazines/european-leaders-elp02/articles/11707/
60
Fein, Adam J. (2008), Online Auctions Are Here to Stay, Modern Distribution Management. Retrieved on April 3, 2008
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