A tangled web: As Internet technology and its applications expand, railroads and suppliers inch closer to butting heads over certain aspects of e-commerce

Railway Age, March, 2002 by Christopher Ytuarte

The introduction of new technology into any industry is always a bumpy ride. Use of the Internet for procurement of railroad supplies is a concept still in its burgeoning state, but already a sticky situation looms over one area of c-commerce. Railway Age spoke with members of the rail industry on how to address problems in such a new field, and what is being done to continue the advancement of the technology.

Class I railroads throughout North America have been busy developing their websites, making them user friendly for an industry not always receptive to new technology. In addition to honing the capabilities of each individual website, the six major roads teamed up just over a year ago to create RailMarketplac.com, a conglomerate of Class I's working in unison to simplify the procurement process. As a relatively new c-commerce entity, the Chicago-based site has a COO and president in place for just 30 days, and a chief sourcing officer considered the seasoned veteran of the site, having been at his position a full three months.

Howard Levy, senior vice president of purchasing and materials at CSX Transportation, believes RailMarketplace is off to a promising start. "We've started a process of strategic sourcing in a number of areas that has realized real-world, significant dollar savings," he says. "But we're still in the early phases, and anything that's just a year old, particularly in the railroad industry, is still an infant. I do sense that some of the suppliers are concerned though, particularly with reverse auctions."

It is never too early for a problem to arise, and recent grumblings in portions of the railroad supply industry point to a possible confrontation over the reverse auction function of RailMarketplace.com. Concerned parties worry that the railroads may attempt to improve their bottom line by using reverse auctions to force suppliers to cut their prices.

Levy believes reverse auctions, while important, will be of limited use. "They are not something you do broadly across the board. They're sort of like any other major purchasing strategy area, like global sourcing, for example. Selectively, on some limited commodities, it makes sense to look at global sources. And on such non-strategic commodities as fuel, forklift trucks, or promotional items, reverse auctions may make sense."

Both Levy and Jeff Campbell, vice president and chief sourcing officer at Burlington Northern and Santa Fe Railway, view the reverse auction function as simply "one tool in the purchasing toolbox" that, when utilized properly, can benefit all involved.

"Reverse auctions are nothing more than technology that allows us to fast-cycle the sourcing effort required to make a buy decision," says Campbell. "For example, take locomotive filters. If you have four suppliers, and all four are certified in terms of their quality, etc., then we do an auction."

The type of products procured through reverse auctions would seem to be the focus of any potential controversy. The railroads contend that such a function does not, and most likely will never, apply to certain products. "We're not going to buy locomotives using reverse auctions," Campbell says. "We will buy office supplies and pens and pencils using reverse auctions. Simple buys, commonly found products, and off-the-shelf items typically are the things that most avail themselves to reverse auctions."

"I think some of what's being picked up out there in the industry is from suppliers concerned about how broadly reverse auctions may be used," says Levy. "My perspective is that it is a limited, selective tool when used in its appropriate place."

Suppliers participating in a reverse auction may have different experiences depending on the railroad involved. CSXT, for example, runs its auctions under the notion that disclosure of bids generates more interest in the suppliers involved. "By using the reverse auction and working jointly with marketing, we were once able to find a supplier with national reach," says Levy. "This supplier got substantial additional business because of the visibility of a reverse auction, since ours is not a sealed-bid process or a hidden quote."

BSNF, on the other hand, operates its reverse auctions in nearly the opposite fashion. "At BNSF, we have technology that allows us to do things a little bit differently," says Campbell. "First, our auctions are sealed-bid auctions, meaning there is no public transparency of price. We've had less push-back from our suppliers because we utilize that methodology. Second, almost all of our auctions are what we call multiple-attribute auctions, meaning when a supplier responds, it's not just with a price. They can respond to any attributes that we have established in the auction. In that environment, it's more about automating the RFP process and fast-cycling it, as opposed to a pure reverse auction based upon price."

According to both Levy and Campbell, the conglomerate of RailMarketplace.com is dedicated to integrating suppliers into the web community it has created, and addressing concerns over issues like reverse auctions is a priority.