Procurement Auctions in E-Commerce

Southern Business Review, Fall 2003 by Barrett, Robert T, Pugh, Robert E

Procurement Auctions

As the Internet has developed, companies have realized that it provides a powerful tool for the procurement of goods and services to support production activities. More specifically, it has been recognized that commodity-type goods and services are highly suitable for Internet-based procurement, and auctions have increasingly come to be used to assist buyers and sellers in negotiating transaction prices in such procurements. Firms have found that competitive procurements by Internet have allowed them to leverage their purchasing power, attract the interest of a larger group of suppliers, and, in general, streamline their procurement processes. Industries that adopted Internet-based technology at an early stage include chemical, pharmaceutical, manufacturing, transportation, and insurance; and they benefitted significantly. Future growth seems assured, and Forrester Research projects that procurement via Internet-based auctions will increase at a compound rate of nearly 100 percent per year during the early years of the 21st century (Mitchell, 2000).

Most companies that use Internet-based procurement methods also use traditional negotiation methods for some of their purchasing needs. The manufacture of lithium batteries at Eveready illustrates the distinction between commodity-type purchases and critical component purchases. The lithium battery product line is used primarily in cameras and flash units. The company purchases a number of commodities such as chemicals and metals to support the production of these batteries. For Eveready's lithium batteries, the circuit breaker is a critical component for the safety and quality of the product because lithium batteries can produce a huge amount of power that can cause fires if a short circuit occurs. The circuit breaker is a small disk at the top of the battery cylinder that stops an excess current flow that could start a fire. The circuit breaker disk is inexpensive, costing only about a nickel, but it is a critical component. Eveready proceeds carefully in selecting a supplier for circuit breakers, studying a supplier's proposal, conducting extensive laboratory tests on samples of the circuit breaker, and evaluating the supplier's reputation. If the supplier passes these tests and can beat the price offered by existing suppliers, Eveready will consider an agreement with the new supplier. This partnering approach is common in the procurement of critical components, and competitive bidding processes are of no help in this process. However, in the support of the production of lithium batteries, Eveready buys a number of standard industrial commodities, such as the lithium itself. These commodity-type products are purchased from a number of qualified buyers, and, because these products are standard and their market prices fluctuate, auctions using Internet technology are very useful in arranging such purchases at cost effective prices (Hall, 2001).

A basic question companies face is, should they engage in on-line procurement auctions for some of their sourcing? Jap has identified three conditions regarded as critical to successfully engaging in on-line procurement auctions. These conditions were developed from her experience with online auctions in a variety of product categories in conjunction with her field interviews and other research. The conditions relate to product characteristics, sourcing strategies, and supply base characteristics.