Online auctions—threat or opportunity? Packaging material suppliers fear them but buyers love the art of the deal. Are packagers ready for Web-based auctions?

Food & Drug Packaging, April, 2002 by Christopher Barry

If you were to listen in on conversations between high profile packaging material suppliers about online auctions, you might hear that e-sourcing is turning the packaging industry into a commodity business. That auctions focus mostly on bottom line cash savings while ignoring service and, ultimately, sacrificing the all-important "human touch."

There's no doubt that packaging machinery suppliers or suppliers in the paperboard, resin, corrugated and bottle industries are nervous about putting their company's bottom line out on a limb online.

It's frightening to play games with prices on the Web. After all, the term in today's Internet environment isn't dot-com anymore--its dot-bomb. Where the web marketplace rose meteorically in the late 1990s, its current crash has wiped out whole business structures akin to Godzilla devastating Tokyo. Failure on the Web seems to be the prevailing thought overshadowing the Internet's potential for success.

So it's no wonder people and companies are nervous. For instance, during an online auction when bottle supplier A has to compete with suppliers B and C for an end user's business, supplier D may come in with a bid price considerably lower than the rest. And D winds up the winner because of that low bottom line. The process understandably upsets suppliers, who provide more than just materials and who take pride in their exemplary service, where they may be undermined by low price alone.

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The rumor is that the only successful auction site online is a consumer site called Ebay. But, according to Forrester Research, a business and technology research firm, by 2004 half of all trade in business-to-business marketplaces will take place through dynamic online pricing venues, forcing suppliers to set prices in real time.

And, according to FreeMarkets, a provider of e-sourcing software and auction service solutions, the e-sourcing market is expected to grow upwards of 75% through 2005.

BENEFITS VS. RISKS

Like it or not, online auctions are gaining in the packaging industry and it looks like they're here to stay. However, as bidding wars become more prevalent as buyers search for the perfect supplier (and vice versa), it's important for everybody involved to understand the pros and cons of using online auctions.

For suppliers, a major strike against online auctions is there may be decreases in prices and margins.

Companies such as Heinz, Welch's and GlaxoSmithKline believe the benefits of using online auctions to procure packaging materials outweigh the risks. Most suppliers understand that buyers frequently go out for material bids and that bidding through a reverse auction online isn't that much different. It provides an alternative venue for procuring materials.

But there can be a tendency to make more supplier changes than before and by doing so can result in disruptions to your packaging operations.

And you may risk damaging important supplier relationships.

Besides possible relationship struggles, the benefits of auctions become more uncertain for both buyers and suppliers when the product in question is also dependent on performance characteristics or if a product carries or needs a service that may be difficult to specify. Those hard to quantify "intangibles" may include:

* Delivery options;

* Warranties;

* Troubleshooting;

* Training options.

Differences among competing suppliers on price related terms may reflect the fact that they are offering different services with their products--services that should, when possible, be disclosed before the auction even begins. The buyer needs to consider those "intangibles" to determine which offer presents the best deal, which may not always be the "cheapest."

But where can a buyer and seller go to make sure the auction process is fair, where both parties walk away feeling they got the best deal?

THE RIGHT PROVIDER

Finding an auction provider can make or break the success of an online auction and according to DiamondCluster, provider of business strategies and technology solutions, auction providers offer two basic services:

* Software applications. A buyer can opt for a tailor-made solution, buy packaged software or license the use of an application solution. Charges can be percentage fees on the traded volumes with fees on added services or an initial fee plus a yearly contract. Among the solution providers: Commerce One, FreeMarkets and eBreviate.

* Third party service providers. Providers charge customers either a fixed fee or a percentage of the purchase volumes traded, plus services such as support, training and market making. Services can be purchased a la carte or as part of a comprehensive package. Service providers include companies like FreeMarkets, eBreviate, Transora, and a range of business-to-business marketplaces.

Providers should also offer auction platforms and support including monitoring and enforcement, supplier training, auction coordination and multilingual customer services for auctions that include foreign buyers and suppliers. Providers should also include supplier profiles including identification, selection, auction strategies and project management (for an online auction overview, see Table 1).