A New Book
On Lean Manufacturing
From Manufacturing &
Technology News
"Reverse" online auctions that claim to save manufacturers up to 30 percent on machined parts designed by the buyer could in fact be costing more than they are saving, say two researchers from Rensselaer Polytechnic Institute.
Reverse auction companies such as Ariba, CommerceNet and FreeMarkets claim that manufacturers using their procurement systems can immediately and substantially reduce parts costs. But there are numerous direct and indirect losses "that buyers invariably fail to consider when engaging in online reverse auctions," say M.L Emiliani and D.J. Stec of RPI's Center for Lean Business Management in Hartford, Conn. "For many companies, the promise of lower unit costs is just an illusion because expenses in other budget categories (i.e. indirect losses) may actually increase. The cost of goods sold will thus be maintained or may even increase."
After analyzing about a dozen online reverse auctions, Emiliani and Stec found that users of the technique tend to be traditional batch-and-queue manufacturers whose executives are fixated on reducing unit costs. These companies "typically view reverse auctions as an easy way to improve financial performance and thus quickly increase shareholder value," say the two researchers. "The service is sold as a 'quick hit' solution, strengthened by the allure of rapid price negotiation and B2B e-commerce hype. This combination has proved irresistible to many senior managers, particularly CEOs, presidents and purchasing vice presidents; people not known for their grasp of total costs."
Emiliani and Stec found that the auctions are not healthy for supply chains and for relationships between customers and suppliers. "If online reverse auctions are so good, then how come [their] most ardent users do not want [them] applied to their own products?" they ask. "Companies that hold this view do not want to be 'beat up' by their customers in the same way that they 'beat up' their suppliers! A duplicitous view of online reverse auctions will certainly not improve the buyer's credibility in the eye of suppliers."
Mutual respect and long-term stable relationships that mark the supply chains of the best companies and especially those practicing lean techniques are not part of the process. Instead, parties involved tend to get bogged down in lengthy, acrimonious negotiations, and are surprised when orders change or quality problems arise.
Numerous direct and indirect losses (see chart on page seven) can be avoided by adopting a different approach to dealing with suppliers, one based on the principles of lean manufacturing, whereby customers work with suppliers on reducing costs, especially during the design phase when 90 percent of the cost of a product is determined.
Online reverse auctions have other negative unintended consequences, say Emiliani and Stec. "Buyers do not challenge suppliers to accept additional responsibilities to develop new value-added capabilities," they say. "Over time, the buyer inadvertently de-skills its suppliers...Paradoxically, this will hurt the buyer's own future competitiveness and will result in many more rounds of heavy-handed cost cutting. Thus, as a result of online reverse auctions, both the buyer and seller will fail to develop the capabilities that are needed to compete effectively in the future."
The buying technique also adds a level of cutthroat competition to the supply base, and results in fewer capable suppliers. Companies using auctions do not fundamentally restructure their supply chains and thereby "place their enterprises at risk," say Emiliani and Stec. "The frantic quest for unit cost reduction using online reverse auctions can, in fact, turn out to be far more expensive than first appearances would indicate."
Companies considering the technique would be better served by studying how Toyota and Honda work with suppliers to reduce costs, increase their capabilities and share the rewards. "Is the quick-hit solution really as good as it appears to be?" the two ask. "What hidden costs accompany such shortcuts and how will they impact key stakeholders? These are important questions to answer before joining the herd."
For more information, go to the RPI's Center for Lean Business Management at www.clbm.org.