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Managerial implications from Indian case studies on e-reverse auctions
Samir K. Srivastava
Operations Management Group, Indian Institute of Management, Lucknow, India
Abstract
Purpose – The purpose of this paper is to investigate e-reverse auctions (eRA) implementation experiences across a diverse group of firms and sectors in the Indian context, to derive useful insights for theory and practice. Design/methodology/approach – The paper takes the form of a qualitative multiple case study following direct observation of object reality. The data analysed include written documentation, archival records, physical artifacts and unstructured interviews with key eRA personnel. Findings – eRA work best in a competitive, high capacity marketplace and are the dominant strategy when the focus is on low search cost per supplier, when the percent reduction over time in the price offered by the current supplier is low and when the product is standardized. The optimum number of bidders is five to ten. Most of the findings are in line with literature but some of them differ too. These will add to academic discourse. Research limitations/implications – The small sample size and case method approach limits the ability to generalize the findings. The firms were selected as a convenience sample and so may not be truly cross-sectional. Only analytical generalisation is claimed rather than any statistical generalisation. Practical implications – eRA improve effectiveness of the sourcing process and facilitate access to new suppliers. They also lead to standardization of sourcing procedures, reduced order cycle, reduced prices and generally higher service levels. This paper will help firms in India and other countries to develop policies, strategies and procedures while implementing eRA. Originality/value – The paper is perhaps the first on eRA practices in India. The author describes the practices in detail and based on this develops a framework for eRA process and provides detailed and concise guidelines for managers. Keywords India, Electronic commerce, Auctions, Marketing strategy, Process management, Electronic reverse auctions, Managerial guidelines, Case studies, Three-stage framework Paper type Research paper

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1. Introduction Electronic reverse auctions (eRA) enable suppliers to compete online in real time and are changing the way firms and their consortia select and behave with their suppliers worldwide. They have gained popularity with the advent of economical and efficient electronic capabilities (Smeltzer and Carr, 2003). The term reverse emphasizes that
The author thanks the middle and top managers of six firms for informal discussions and interviews, as well as for allowing on-site observations and document perusal. The author also thanks the suppliers’ managers who participated in informal discussions and interviews. This work would not have been possible without their co-operation and sharing of experiences, vision and expertise. Finally, the author thanks the anonymous reviewers whose pertinent feedback and useful inputs led to significant improvement in the manuscript.

Business Process Management Journal Vol. 18 No. 3, 2012 pp. 513-531 q Emerald Group Publishing Limited 1463-7154 DOI 10.1108/14637151211232687

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competition among suppliers typically drives prices down, as opposed to the prices being driven upward by competitive bidding in forward auctions. Further, location is not a constraint. Firms are using eRA to drive purchase costs down to the lowest possible price (Attaran and Attaran, 2004). Many firms report millions of dollars of ` -vis traditional sourcing methods (Emiliani and Stec, 2002; savings through eRA vis-a Smeltzer and Carr, 2002). Presently, eRA account for around 10 percent of total corporate purchase spend in India. They are being carried out across items, industries and sectors since the beginning of the current decade. Some of the leading third party eRA vendors in India are 01markets, Ariba, CommerceOne, Trade2gain, Metaljunction, Synise and India Markets. Most of them provide end-to-end services that include spend analysis, opportunity assessment, supplier identification, preparing request for quotation (RFQ), training suppliers, bid events execution and post-bid analysis. For this, they deploy diverse fee structures comprising various combinations of fixed start-up fee, transaction volume-based fee, saving-based commission and consulting fee. Many firms like Apollo Tyres, Arvind Clothing, Berger Paints, Carrier Aircon, Coal India Limited, Electrolux, Godrej & Boyce, HCL Infosystems, HDFC Bank, Hero Cycles, Hindalco Industries, Hindustan Motors, Hindustan Unilever Limited (HUL), Himalaya Drug Company, JK Corporation, Larsen & Toubro, Mahindra & Mahindra, Madura Garments, Maruti Suzuki Limited, Oil and Natural Gas Corporation (ONGC) and Tata McGraw-Hill Publishing Company have reaped the benefits of eRA. These firms saved between 2 and 22 percent on their purchases, with average savings of 10 percent across all item categories. Some segments where eRA have delivered substantial savings for buyers in the Indian context are steel, automotive, commodities (starch and sugar), stationery, transportation freight, maintenance, repair and operations (MRO) items, advertising space, infrastructure items and hi-tech equipment. The growing adoption of eRA in India motivated the present work wherein we investigate corporate experiences with eRA across a diverse group of firms and sectors to study their impact on business policies and practices. For the purpose of this paper, we define eRA as:
[. . .] an online, real-time auction between a buyer firm or a consortium of firms and many invited suppliers, where the suppliers can submit multiple bids during the time-period of the auction, and where some degree of visibility exists among suppliers regarding the actions of their competitors.

We synthesise from review of the eRA literature and six case studies to develop a framework for carrying out eRA process effectively and provide step-wise detailed practical guidelines for managers. This will ensure that the firms adopting and implementing eRA are better prepared and need not reinvent the wheel. 2. Literature review eRA offer dynamic pricing and enable the purchasing firm or consortia to buy goods and services at the lowest price or a combination of lowest price and other conditions. Sufficient literature exists to highlight the benefits of eRA (Attaran and Attaran, 2004; Emiliani and Stec, 2002; Smeltzer and Carr, 2002; Kulp and Randall, 2005). Hawkins et al. (2010) find that expected savings, buyer confidence and prior eRA sourcing satisfaction lead sourcing managers to choose to source via eRA. A case study in the UK public sector

finds that eRA can improve procurement processes, realize cost savings and reduce delivery times ( Jones et al., 2007). Bandyopadhyay et al. (2008) find lowered prices driven by increased competition as the most notable benefit of eRA. However, the success of eRA may not manifest just in price reductions but also in the reduction of costs of the purchasing firm (Arnold et al., 2005). Sometimes, the buyer may experience an increase in realized costs of doing business with the winning supplier (Elmaghraby, 2007). eRA use has been and will likely persist as an effective cost avoidance mechanism (Schoenherr and Mabert, 2007). One may refer to Wagner and Schwab (2004) for early literature on eRA. They summarize in detail several sourcing management related conditions that influence the success of eRA. They find that eRA are applicable to a host of items (products/services) such as stationery items, software licenses, insulators, personal computers, chemicals and plastics, billboards, etc. in sectors such as telecommunications, logistics services, engineering and transportation. The responses of buyers and suppliers to eRA have been found to be generally different. The buyer firms that aim to compete on prices are very positive about eRA whereas supplier firms that aim to differentiate on basis of their innovation capability report bad experiences with eRA (Caniels and van Raaij, 2009). The buyers often use the information gathered in eRA to renegotiate with their incumbent suppliers (Elmaghraby, 2007). Literature finds that eRA may be coercive (Giamietro and Emiliani, 2007) and also mentions unethical eRA practices, opaque contract awarding processes and changing item specifications after the auction. An exploratory study of eRA outcomes based on an extensive literature review and multiple case study research finds that sometimes, buyers merely use eRA to survey market prices and qualified suppliers are asked to unfairly compete against unqualified lower-cost suppliers (Amelinckx et al., 2008). Some studies report a small set of suppliers who perceive eRA as an opportunity rather than a threat and have favorable opinions about them (Caniels and van Raaij, 2009; Srivastava, 2009). Schoenherr and Mabert (2007) describe a few common myths versus evolving reality in eRA context and describe their implications for managers. Elmaghraby (2007) defines various eRA formats and also addresses issues related to constructing bidding lots, sequencing the lots’ auctions, types of feedback to provide to bidders during the auction and the type of bid format to use. She also discusses merits and demerits of rank versus full disclosure in eRA. Careful preparation of the event including strictly equal treatment of all participants and effective communication are key factors for obtaining benefits from eRA (Losch and Lambert, 2007). From supply chain perspective, Sehwail et al. (2008) carry out a detailed literature review of eRA and call for more supply chain management research within the field. Chopra and Sodhi (2004) suggest that acquiring redundant suppliers may be one of the strategies for risk mitigation as eRA generally lead to higher number of potential suppliers. eRA create supply chain efficiencies by selecting the least costly bidder, while long-term relational contracts ensure the quality of the procured products or services when these have non-verifiable attributes (Tunca and Zenios, 2006). Acquiring redundant suppliers may be one of the strategies for risk mitigation as eRA generally lead to higher number of potential suppliers (Chopra and Sodhi, 2004). Empirical investigations about the role of firm size in the use of e-procurement applications and their ability to facilitate supply chain integration have been carried out. Analysis reveals a significant relationship between firm size and e-procurement application.

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Specifically, larger firms are more likely to use integrative types of e-procurement (Pearcy and Giunipero, 2008). So, literature suggests that eRA lead to accurate fulfillment and improved effectiveness of the procurement processes, achievement of higher service levels, access to new suppliers, improved control of supplier relationships, reduced prices from the key suppliers, reduced inventory carrying costs and reduction in the order cycle. The research in the area is exploratory in nature focusing on defining criteria and rules for managing the actual event, chronicling success stories, examining the barriers to implementation and suggesting ways to surmount them (Emiliani and Stec, 2004). Much of the research endeavour is fragmented and there is little in the literature that offers a holistic management approach that is underpinned by an empirical study. Corporate experiences based step-wise detailed practical guidelines for managers to ensure better preparedness of firms adopting and implementing eRA is missing. Concerns about supplier-buyer relationships persist. Contingency approaches to eRA use also need to be explored empirically. Another area of concern is the relative lack of security in eRA which too is getting attention. There is not much published literature on eRA practices in India. Recently, Srivastava (2009) describes reactions and tactics of suppliers and suggests countermeasures against them based on his study of Indian firms. Detailed studies about the implementation and use of eRA by Indian firms need to be carried out and documented along with their managerial implications. 3. Research methodology A three-step research design was adopted. The first step comprised of an extensive literature review that has been summarized in the previous section. In the second step, a multiple case study analysis involving a set of six firms was carried out. The empirical analysis explored a number of key issues concerning eRA. We used a series of event observations, interviews and perusal of written documentation such as reports and memos, archival records and physical artifacts as the primary source of data. These were substantiated with data from secondary sources which included firms’ and vendors’ web sites and articles in business magazines. The findings from auction event observations were triangulated by analysis of documents and information from secondary sources. Our approach was not limited to description of the phenomena, but also sought to develop theoretical concepts. In the last step, deductive analysis of the case study findings was carried out to derive useful managerial guidelines. Multiple cases are a powerful means to create theory because they permit replication and extension among individual cases (Eisenhardt, 1991). Comparison of two or more case studies provides concepts that are relevant to an emerging theory and support explorative investigations. We used a cross-industry sample of six firms from among the firms carrying out eRA for at least last five years in India at the time of the study to derive a comprehensive set of findings. Care was taken to ensure that it represented a diverse group of industries and auction experiences. It was a convenience sample whose managers were known personally and agreed for allowing on-site event observations and document perusal besides informal discussions and interviews. Yin (2003) argues that, in most situations, six to ten cases should provide evidences to support or reject propositions, while Eisenhardt (1989) recommends four to ten cases. Our selection of six cases falls within these recommended frames.

On-site observations were carried out for a period of about eight months. This included observation of a total of 18 auction events in the six firms. Unstructured interviews were conducted with managers of each of the six firms at several points in time (generally before and after auction events) to understand the processes as well as the evolution of changes. Informal discussions and interviews with a few suppliers’ managers were also carried out wherever possible. Related data and information for six to ten years were analysed through a cross-case analysis comparing evidence from the six firms. The cases were compared with each other in order to identify commonalities and potential patterns. The emerging patterns were then analysed and compared with the existing literature findings to identify potential explanations to differences and also to provide directions for further research. Two levels of analysis are embedded in this study. The first is the eRA instance, i.e. each individual instance where a firm conducted an auction. From this unit of analysis, we derive information about the process of conducting an eRA, including the steps to follow the problems that are likely to occur and how to avoid/fix them. Multiple events helped to develop sound arguments. This also helped us in suggesting best practice processes. The second level of analysis is the firm, i.e. the process a firm used to build eRA capability, use it, and refine it over time. From this level of analysis, we derive results about the process of initiating and adopting eRA as a business practice. Data at this level provided insights into organizational changes to support eRA, finding conditions under which eRA is/is not effective, and in identifying steps required to set up an eRA capability. 4. Case studies We explore how the six sample firms in five different sectors use eRA and how these are integrated into their sourcing processes. All the six firms in our study used online e-procurement and reverse auction tools at their e-business platform either by themselves or through third-party online reverse auction service providers. They had been doing so for at least last five years and had carried out a number of auctions on diverse items like third-party transportation, steel, advertising, computer peripherals, rubber, courier services, wire grills, wiring harnesses, auto components, capacitors, wire shelf, insurance policies, travel packages and packaging materials. Key observations related to actual implementation, the information revelation options available and exercised are drawn from the case studies. Our sample firms comprise of a global travel, financial and network services provider (service sector), an automobile manufacturer (auto sector), a computer equipment manufacturer and distributor (IT sector), an air-conditioner manufacturer (consumer durables sector) and two firms manufacturing and distributing fast moving consumer goods (FMCG sector). Managers and executives directly responsible for eRA implementation in these six firms participated in discussions and unstructured interviews. Corporate documents and archival records were accessed for primary information. A brief profile of the firms under study describing nature of their business, year in which eRA were started, percentage purchase spend in turnover and percentage of eRA spend in overall purchase spend for the year 2009-2010 are presented in Table I. Turnover means the total revenue arising from the principal activities of the firm and excludes those items of revenue and gains that arise incidentally. The purchase spend refers to the total

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Firm Nature of business A Global travel, financial and network services provider Automobile manufacturer Computer manufacturer and distributor Air-conditioner manufacturer FMCG Manufacturer and distributor FMCG manufacturer and distributor

Year eRA started 2002 2003 2003 2004 2000 2001

Auction process choice Third party In-housea In-house In-housea Third party Third party

Percentage of purchase spend in turnover for 2009-2010 36 65 57 60 43 45

Percentage of eRA spend in purchase spend for 2009-2010 28 4 14 12 10 9

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B C D E

Table I. A brief profile of the firms under study

F

Note: aStarted with third party and subsequently shifted to in-house

amount spent by the firm on procurement of goods and services. For the reasons of anonymity, we name the Firms A-F and disclose data in terms of percentages only. From Table I, we see that the FMCG sector firms (Firms E and F) were the first-movers and started eRA during early part of the last decade. In fact, one of them served as an example for its counterparts in Asia-Pacific to go for eRA. The manufacturing-focused firms (Firms B-D) were slightly late to start eRA and although their purchase spends form high percentages of their turnovers, the sourcing through eRA is relatively lower. The service sector (Firm A) is reaping higher benefits as it has significantly higher percentage of eRA spend in purchase spend. Comparison of records between early, late and lagging adopter firms did not indicate any significant differences in benefits accrued which were measured in terms of percentage cost savings, delivery improvements and larger supplier pool. None of the firms in our study lost trust in the external service provider and all these firms are continuing with eRA and continue to source more items through them. In two cases, the firms subsequently joined a consortium of supply chain partners to conduct eRA for certain items in order to capitalize on economies of scale. As one of the managers at Firm B stated:
We found that our item quantities for certain items were not large enough to leverage the benefits of eRA; we could also not attract many suppliers [. . .] we then realised that we can achieve “c ¸ ritical mass” if we somehow combine our orders with our tier-2 and tier-3 suppliers [. . .] today this strategy is benefitting us as well as our tier-2 and tier-3 suppliers.

Initially, all the firms used eRA service providers but later two of them (Firms B and D) started carrying out the auctions in-house. It is worth sharing here is that for these two firms, the absolute percentage spend on eRA was quite low and stagnant as evident from Table I. So, shifting auction in-house worked out as a more effective option. Firm D, being a small firm was mainly facing supplier pool insufficiency. Once a sufficient pool

of suppliers and mutual trust had developed, it started conducting eRA in-house. As one of the managers at Firm D stated:
Initially, we were apprehensive in going for eRA for certain components where we had a limited number of suppliers. The eRA service provider helped us to increase the supplier pool [. . .] they helped us achieve low search cost per additional supplier [. . .] this also resulted in better delivery adherence besides cost savings.

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Another manager at Firm D stated:
There was lot of initial resistance from incumbent suppliers; our relationships took a downswing [. . .] with time, our suppliers have got acquainted with the process and faith in eRA has firmed up [. . .] today we have a larger pool of suppliers and slowly but steadily mutual trust too has developed. Now, we seldom have to look beyond our existing supplier pool for conducting eRA.

Firm B had reasonable potential to conduct eRA in-house. This comes out clearly from statement of a manager at Firm B:
We have a full-fledged IT department employing competent professionals [. . .] the eRA concept having been internalised, we found paying the service provider an unnecessary and avoidable expense; from 2006 onwards, we are carrying out auctions using in-house developed eRA platform [. . .] after a few successful auctions we have been able to arrive at a right auction designs which are robust and flexible establishing trust in the tool.

eRA helped our sample firms to reduce the cost by 15-20 percent in first year of implementation. The additional savings in the subsequent years varied from 3 to 8 percent. The number of participating suppliers also generally increased. The multi-year change in data for a particular item in one of the FMCG firms (Firm E) is summarized in Table II. The base order value is taken as 100. Savings in the first year were 15.2 percent and then hovered around 3-4 percent in subsequent years. Table III summarizes the 18 auction events that we observed in the six firms. All of them were planned eRA and none had to be cancelled. The items were found to be routine and leveraged types as per Kraljic’s (1983) framework. Most bid events were single-lot, single-price auctions. A few were for multiple lots too (bundled). Bundling was done for procedural convenience or when the volume for individual items was low. The supply market was either competitive or oligopolistic. In most occasions, the overall supply capacity was much more than the auction bid requirements. The number of participants in each eRA varied and was found to be dependent on the type of item, volume of order and a host of other factors. Generally, service levels increased marginally in eRA. Further, there was significant reduction in order cycle times in certain instances, specially when eRA was being conducted for a particular item for the first time (S. No. 16 and 17 in Table III).
Year of eRA Base year First year Second year Third year Fourth year No of suppliers 10 (sealed bid) 8 (eRA) 10 (eRA) 12 (eRA) 12 (eRA) Order value 100 109 120 135 140 Percentage savings Not applicable 15.2 3.4 4.2 3.1 Table II. Subsequent savings in eRA for a third-party transportation in a Firm E

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Type of S.No. Firm item(s) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 A A C B A E F D F E A F C D E C E B Leveraged Routine Bundled Bundled Routine Leveraged Bundled Leveraged Bundled Leveraged Leveraged Bundled Leveraged Routine Bundled Leveraged Bundled Leveraged

Supply market characteristics Competitive High capacity Competitive Oligopolistic Competitive Oligopolistic High capacity Competitive Competitive High capacity Competitive Oligopolistic Competitive High capacity High capacity Oligopolistic Competitive Oligopolistic

Reduction in price Supplier Percent change (%) participation in service level 6 7 5 3 4 3 8 3 8 5 6 4 5 4 3 10 16 4 10 15 9 5 18 7 10 5 15 14 9 6 7 14 11 7 13 8 Up 1.5 No change Down 1 Up 2 Up 1.8 No change Up 1 No change Down 2 Up 2 No change Down 1.5 No change Up 2 No change Up 1 Up 3 No change

Percent change in order cycle 2 20 2 10 2 10 28 No change No change 2 10 No change 25 No change No change 2 15 No change No change No change 2 50 2 30 2 20

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Table III. Summary for observed auction events

In all these instances, specific identities and passwords were provided to bidders for online bidding after providing sufficient training. The practice of charging an earnest money deposit (EMD) was followed. The EMD ranged between INR 50,000 to INR 1 million. This eliminated non-serious suppliers and left little scope to various stakeholders for tinkering with the system. The software solution in all instances had built in security checks and balances to ensure that no unauthorized bidder could participate in the bidding process. Further, data encryption was used to ensure that data traveled safely. Table IV summarizes the savings in a particular eRA instance (S. No. 8 in Table III) for wire harness at the air-conditioner manufacturer. The potential savings ranged from 2 0.2 to 3.6 percent over the previous year. These are on the lower side as the auction was being conducted for the sixth time and the item material prices too had risen marginally over the previous year. One noteworthy feature was that the final award went to the firm which had quoted second lowest as it was an incumbent reliable supplier while the lowest quoting supplier was a non-incumbent supplier. The criterion for certain additional weightage to incumbent reliable suppliers had already been specified
Supplier Final price Table IV. Summary of savings in an eRA at Firm D Savings Rank Firm X 124,000,000 INR 500,000 INR (0.4%) 4 Firm Y 120,000,000 INR 4,500,000 INR (3.6%) 1 Firm Z 124,750,000 INR 2 250,000 INR (2 0.2%) 5 Firm V Firm W

123,457,750 INR 121,000,000 INR 1,292,250 INR 3,500,000 INR (1.0%) (2.8%) 3 2a

Notes: aFinal bid winner; INR – Indian national rupee (1US $ < 47 INR in January 2010)

clearly in the RFQ. Similarly, in few cases of eRA involving different lots, more than a single party was awarded the contracts as per the pre-stated criteria in RFQ in four of the firms studied (Firms B, C, E and F). Going back to adoption of eRA, the first auction event in our sample firms was carried out by one of the FMCG manufacturer and distributor (Firm E) in the year 2000. The managers of the firm shared that this was more incidental than being innovation driven. This firm used third parties for transporation from its five contract manufacturing sites and had reasonably good service delivery experience with the incumbent vendors. The rise in gasoline (diesel) prices led to a demand for 10 percent hike and negotiations with the incumbent vendors were not yielding results. Around the same time two eRA service providers, Freemarkets.com (now acquired by Ariba) and 01markets.com (an eRA arm established by Wipro in April 2000) approached the supply chain head with the concept of eRA. Both these eRA service providers were keen to establish themselves in the Indian market and saw great opportunity in proving service to this reputed FMCG firm. The managers of this FMCG firm were thus exposed sufficiently to the eRA concept, technique and technology. They decided to give eRA a try for transportation as the potential benefits seemed promising and one of the eRA service providers (01markets) offered very enticing terms of contract. It was charging negligible fixed cost and very small percentage of savings accrued, if any as additional charge. It was also willing to take responsibility for training the vendors and taking care of most of other technical requirements for hosting eRA. So, the push to adopt eRA was circumstantial. This firm worked in close co-operation with 01markets to conduct eRA for the first time. There were large resistance from incumbent vendors to participate in eRA but finally the firm was able to convince most of them to participate. Total 22 Vendors agreed to participate. This included a few additional vendors identified by 01markets in supplier search. In pre-bid qualification, 17 of these qualified for the bidding. A lot of effort went into electronic document preparation and training. 01markets trained the vendors for online bidding and conducted a few mock runs. Some technological glitches were detected and corrected during mock runs (like even larger bid prices being accepted or typological errors like additional or skipped number entries in bid values). Finally, online eRA was conducted. Archival records show that three vendors won the bid for overall seven lots. These comprised two new and one incumbent vendor. This eRA resulted in savings of about 9 percent from the base year for the firm rather than it paying additional 10 percent as per incumbent vendors’ demand. Since then, this firm has been conducting eRA for these services and has also been adding other items in the eRA fold. Experiences of the other five firms in our study have been similar. However, rather than co-incidence, benchmarking and top management dictates have been the prime drivers for eRA adoption for them, The initial response of most incumbent suppliers in first instance of eRA proposal in all case studies was not very positive. Archival records, incidence recalls and our own observations reveal incumbent vendor’s statements like, “You’re focusing only on costs and trying to squeeze us [. . .]. It will lead to compromise on quality!” [. . .] “We always served you well; we feel betrayed!” They expressed unequivocally that there was no upside for them. On the other hand, reactions from new potential vendors were generally positive like, “We would love to supply to you!”. In all our observed eRA events, we did not observe any instance of coalition and collusion nor was this reported by any of the stakeholders we interviewed. We also did not observe or hear about unethical

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eRA practices, opaque contract awarding processes and change of item specifications after the auction by the buyer. The complete process generally took as long as four months for certain items, where vendor development along with design inputs was required to be undertaken. On the other extreme, the process took only two to four weeks for certain items. The actual auction (online bidding) was usually open for 2-6 h depending on factors such as lots, participating community, bid transaction value and competition amongst bidders. All planned bid events did not always take place, particularly in the initial few years and some of them had to be cancelled/postponed due to reasons like inadequate number of bidders, lack of online bidding exposure, etc. We found only two incidences of cancellation in records. The firms and the service providers shared losses as per their pre-agreed terms. In first instance, few incumbent suppliers of Firm F backed out at the last minute. The losses were made up by the EMD deposits lost by the four incumbent suppliers. In the second instance, Firm C had to pay the service provider the upfront charge of INR 150,000. The service provider too had to bear the burden as the effort gone waste was much greater. We did not observe any renegotiations with the suppliers and none of the firms reported any concern in relation to the supplier performance level once the contract had been signed. This was quite different from the concerns in extant literature. The supplier participation increased in subsequent years in most of the firms studied. All the six firms carried out post-bid reviews to make sure bidders completely understood the scope and schedule a well as all the associated costs. Sourcing managers in all six case studies analysed the advantages, disadvantages, opportunities and risks of eRA sourcing for each specific procurement action. Most of middle and top managers of the sample firms saw both potential benefits as well as risks in eRA. We reproduce below statement of a manager of Firm A:
eRA improve control of supplier relationships, lead to accurate fulfillments and improved effectiveness of the procurement process. Access to new suppliers helped us to mitigate supply chain risk by having more potential suppliers [. . .] eRA also lead to reduction in the duration of the order cycle, reduce prices from the key suppliers, reduce inventory carrying costs and generally lead to higher service levels.

Commenting on the pre-requisites and benefits of eRA, a manager of Firm E stated:
It is vitally important as a buyer to have clear item specification and contract terms. Auction volumes must me reasonably high to attract potential suppliers; so rather than having many variants of the item, it is better to have a standardized one [. . .]. A big advantage of eRA is that participant location is not a constraint [. . .] eRA may provide opportunity for harmonization and standardization of suppliers’ terms and conditions and thereby align the firm’s business processes. Our payment terms were standardized to 30 days from earlier range of 15-90 days that we had for different vendors.

Our study reveals that eRA are the dominating strategy when the focus is on low search cost per supplier, when the percent reduction over time in the price offered by the current supplier is low, when the item falls under routine and leveraged categories and when there are not many variants of the item. The buyers select items for eRA on the basis of various parameters like the market characteristics, supply-demand analysis, commodity price trends, current contracts, number of suppliers available, procurement and technical team requirements, etc. The buyers reveal selective information to the potential suppliers at the time of online bidding. The suppliers are

told the historic prices and the reservation price, if any. They invariably get alias names to prevent cartelization. The computer screens visible to the buyer and the bidders are also different. The buyer gets to see the overall comprehensive information, while the bidders can see only selective information. Bidders see their own rank in the least transparent mode. In more transparent mode, they also see the competitors’ bids. These may again be available for the whole time elapsed or for the last few bids. Our findings reveal that the buyers go for eRA if they minimize their total cost of sourcing. They consider switching and procedural costs besides the bid price to determine the impacts of eRA, although no firm in the study had a comprehensive approach to eRA costing recording and reporting. Expenses other than supplier switching cost are generally not considered in RFQ documentation. Most firms had a list of preferred suppliers and preferences to incumbent suppliers in RFQ served as a surrogate for switching costs. A key observation across all eRA was that the incumbent supplier generally knows the distribution of buyer’s switching cost. It participates and chooses either one of the two bidding strategies: submits the lowest bid or offers the bid price that is greater than the lowest bid price but less than the lowest bid price plus expected buyer’s switching cost. Mostly, high switching costs inhibit the readiness of firms to invite a large enough number of suppliers to participate in eRA. Most successful eRA in our study suggest that the optimum number of bidders is five to ten. As in literature (Bartezzaghi and Ronchi, 2005), our interactions indicate that most incumbent suppliers do not like reverse auctions and offered resistance as eRA restrain their contractual power and reduce their margins. They also used various tactics like threat, deal, circumventing, collusion and bird watching as reported by Srivastava (2009) which are reproduced in Table V. Besides the barriers to eRA from external stakeholders, the firms under study also experienced barriers from within – from purchasing and other departments. The barriers were generally related to entrenched practices (resistance to change), uncertainty about risk versus returns, technology/software related apprehensions, market and business environment/practices and internal resources/competencies. The same can be broadly classified into “adoption” and “implementation” barriers and are similar to the ones suggested by Srivastava (2007) in Indian retail scenario. These barriers may be present elsewhere too but have not been reported explicitly in extant literature. The most
Tactic Threat – try to sway the buyer by claiming they will not participate Deal – offer lower pricing in return for not going through eRA Circumventing – submitting bid outside (e.g. an oral or paper bid before, during or after the online bidding process) Collusion – attempt to collude with other suppliers during the online bidding Bird watching – participating in eRA but not bidding; goal of gaining market intelligence Source: Srivastava (2009) Countermeasure Make it clear that the buyer is totally committed to the eRA process and there is no alternative Buyer should not be tempted since such an offer indicates that there is “money on the table” Make it clear that no bids will be considered outside of the online sourcing process Issue prior warning that supplier collusion is illegal and will be dealt with accordingly Make pre-bid qualifications stringent so as to generally address this issue

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Table V. Countermeasures for tactics of suppliers

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common means of overcoming these barriers followed by these firms was through education and training of purchasing and other department personnel, obtaining the input of employees in the development of the eRA process, and by providing internal performance incentives including making eRA use and performance a part of the employees’ formal performance appraisal. At one firm, over 50 personnel were trained in the use of eRA, and each of these individuals received over 15 h of training. In these training sessions, the key attributes of an auction, programming an auction, and running and rerunning the auction were addressed. Another technique used by some firms is the sharing of success stories to provide motivation and evidence of the effectiveness of eRA. On the basis of the above case studies, we develop a framework for carrying out eRA process effectively the first time itself. We break the entire eRA process into three major stages or sub-processes: pre-bid, online bidding and post-bid processes. The same is shown in Figure 1. Actually, the pre-bid and post-bid processes are as important as the online bidding process. In the pre-bid process all the necessary spadework needs to be carried out meticulously. This includes collecting methodical and detailed item specifications, collecting detailed information about potential suppliers and collecting performance information about third-party online reverse auction service providers. Next, a decision needs to be made whether a third party is to be hired or the eRA activity is to be conducted in-house. Accordingly, a third party has to be selected or the process of hosting the auction site has to be started. Detailed RFQ and pre-bid qualifications needs to be prepared before suppliers are invited. The selection of potential suppliers after screening through pre-bid criteria and their training for online bidding form the last stages of the pre-bid process. Now, the potential suppliers have to be informed of the date, time and duration of the bidding and the same needs to be carried out. It is advisable to provide alias names to the potential suppliers in order to maintain anonymity during the online bidding process. Pre-agreed selective information may be continuously provided to them during the online bidding process. In the post-bid process, the bid-awards, as per pre-defined criteria need to be transparently communicated to all the bidders. The detailed documentation with the suppliers who win the order has to be carried out as in normal
Pre-Bid Process Collect Supply Requirements TrainPotential Suppliers Collect Third-Party Exptirse Data and Supplier's Data Select Potential Suppliers Select the Third Party or Develop own Web-site Define Pre-Bid Qualifications Prepare RFQ Invite Suppliers

On-Line Bidding Process Inform Date & Time of Bidding Give alias Names to Prevent Cartelisation Carry out On-line Bidding Reveal Pre-agreed Selective Information

Figure 1. Three-stage framework for electronic reverse auction process

Post-Bid Process Communicate Bid Award(s) Carry out Detailed Documentation (as in Normal Bidding Process) Continuously Monitor Supplier(s)Performance

bidding process. A very important aspect of post-bid process may be continuous monitoring and feedback of supplier(s) performance. 5. Discussions and managerial recommendations Although, the focus of eRA is on attaining process and cost efficiencies, they help firms not just in cutting costs or lowering investment but also provide more opportunities to stay focused on core competencies. They reduce the possibility of production disruption due to problems of a single supplier. Often, the advantages of an online auction format could be secondary to the more critical issue of getting more suppliers. eRA work best in a competitive, high capacity marketplace. They reduce paperwork as well as review and award times. Everything is captured electronically, eliminating confusion and potential disputes. The process is transparent and everyone gets the same pre-bid package and walk-through. Besides, all questions may be addressed and answered electronically and shared with all bidders at the same time. Buyers’ decision to use eRA depends on item specifications, supplier relationships, the current supply and demand environment, indirect costs and several other factors which vary for each item and for each buyer. Similarly, suppliers may consider the opportunity to benchmark their cost structures with competitors to improve their supply chain efficiencies. Managers must understand how eRA fit in the broader context of effective supply chain management. It is only a pricing tool a means to an end – not the end itself. Though eRA offer several benefits for both buyers and suppliers, managers must carefully weigh their pros and cons. When a firm is looking at eRA as a sourcing option, it should first and foremost consider some key factors like thorough understanding of their advantages other than one-off transactional cost savings, resource investments, time involved in the process and the likely cultural and organizational barriers. In addition to evaluating the need for transparency in the award decision, there is also a need to understand which auction format is best for a particular market. Issues related to sequencing the auction bundles and rank versus full disclosure need to be resolved beforehand. Further, higher the supply market fragmentation and competition among potential suppliers higher likely is the item auctionability. Similarly, greater the centralization of decision-making in buying centers, higher likely is the possibility of using eRA. In case of bidders from overseas, in addition to the entire legal structure, care has to be taken of the differences in the cost stack up, the duty structure, the freight costs and the currency differences during market making process which includes the RFQ preparation and compliance from the suppliers so that the suppliers are clear what stack up they have to put. On the basis of our study, we provide step-wise detailed flowchart to help managers in conducting eRA, first time or subsequently. The same is shown in Figure 2. The first and foremost step is the identification of a sourcing opportunity. Some of the prime drivers that lead to a potential eRA sourcing opportunity are: cost reduction initiatives within the firm/industry; requirements of new parts/components/material; routine, non-critical and/or leverage items; contract, pricing agreement or blanket order expiring in less than few months; poor incumbent supplier performance and likely price increase. The next step is related to the fact whether the firm has conducted any eRA earlier or not. It is related to the soft aspect of cultural readiness and the hard aspect of eRA software related capability. If a firm is contemplating to conduct eRA for the first time, it needs to make its internal stakeholders change-ready. For this, it needs to start with eRA

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Identify an eRA Sourcing Opportunity

526

Going for eRA first time?

Yes

Conduct an eRA Kickoff Meeting with Key Internal Stakeholders

No

Perform Data Collection and Data Formatting

Are internal stakeholders convinced?

No

No Is the opportunity suitable?

Yes Build / Source eRA Software Carry out necessary changes

Yes Draft Comprehensive RFQ Document and Assemble Other Related Documents OK Test Software

Not OK

Increase Supply Base and Develop Supplier Invite List

Pre-Bid qualification Test Finalise Supplier List

Conduct Online Reverse Auction

Manage Suppliers to Bid Day

Figure 2. Flowchart for conducting electronic reverse auctions

Notify Suppliers of Outcome Conduct Post-Bid Award Meeting

Implementation with Awarded Supplier(s)

kickoff meeting with key internal stakeholders such as personnel from purchasing and actual user departments. Many times other stakeholders such as personnel from quality assurance and marketing could also be involved. Detailed discussions and concerted efforts are required to convince most of them about the likely benefits of the initiative. Further, at least some of them should be enthusiastic about it; otherwise, they may not be able to convince the external stakeholders, particularly the incumbent suppliers to participate first time. To actually conduct eRA, software capabilities are required. A firm has the option of doing it in-house or sourcing from outside. The more successful strategy observed has been to engage third party eRA hosts. With experience and growing volumes/value, the firm always has the option of developing the capability in-house. The software needs to be tested and necessary changes need to be carried out to make it appropriate to the particular requirements. An inherent requirement in the software is that it should be robust and reasonably flexible. Once the software capability is established, it has to be followed by data collection and data formatting. The data collection should focus on the unique characteristics, detailed specifications, last price (if any), extended cost, current requirements, etc. The sources could be archival records, drawings and prints, computer databases and inputs from internal stakeholders. Data formatting entails storing the collected meaningful information in a standard format in a computer spreadsheet/database. This facilitates analysis and updating. As eRA may not be suitable for all types of purchases, managers need to decide whether the opportunity is suitable or not for eRA. The formatted information along with factors like availability and readiness of sufficient number of suppliers, reestimation of benefits and software capability provide the instance-related inputs to take a decision. If the decision is yes, the next step is drafting a comprehensive RFQ document and developing a supplier invite list. The detailed RFQ document should contain starting and reservation bid prices, lot listing/bundling, detailed cost breakdown and service level expectations, a non-disclosure agreement, the bidder agreement, quality documents and the terms and conditions document. It is advisable to have a list of preferred suppliers as well. The focus should always be on increasing the supply base (number of potential suppliers). Finally, a supplier invite list should be arrived at. The pre-bid qualification test for potential suppliers is a defining step. Here, historical data and market sourcing may be carried out. Site visits of personnel from buying firm to suppliers’ works may be carried out selectively to ascertain suppliers’ credentials. Those who qualify make it to the final supplier list. RFQ should be posted during this step. Now, rules for the auction are frozen and potential suppliers (only those who qualify pre-bid qualifications and are willing to participate) are to be formally invited. These auction participants need to be managed to the bid day. Ample time should be allowed for them to prepare for the actual online auction. They need to be trained for online bidding through a series of mock runs. Conducting the actual online reverse auction as per agreed upon visibility comes next. Necessary actions should be taken to prevent any eRA abuse. Suppliers may be given an alias name for bidding to avoid “cartelization”. Sufficient preparedness should be there for real-time interventions and clarifications, if any to ensure success of the event. This is followed by the post-bid process wherein a post-bid award meeting is conducted to notify the outcome to the suppliers after analysis of the results. Even non-awarded suppliers should be communicated the result properly. A good practice

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is to flash the results within minutes of the conclusion of the online auction. This ensures transparency and mutual trust. The parties should enter into a written contract as in any purchasing process. The last step is related to implementation with awarded supplier(s). Suitable pre-agreed metrics should be used. Further, noting down critical incidences may also be useful. Continuous auditing and monitoring of performance data is helpful in both good implementation and future use. 6. Conclusion This paper examines and describes the actual experiences in conducting eRA across a diverse group of firms and sectors in the Indian context. The process is applicable to sourcing of many types of goods and services across most sectors and industries. However, eRA seem more appropriate and suitable in industries and sectors like advertising, auto components, bulk chemicals, consumer durables, computers and peripherals, contract manufacturing, courier, FMCG, healthcare, hospitality, insurance, leasing, logistics, maritime shipping, MRO, retail, software licensing, textiles, tourism, transport and warehousing. Through review of the literature and our multiple case study research, we show that buying firms can achieve multiple, combined eRA outcomes and that eRA success may be more than mere price savings. eRA allow procurement cost reduction by increasing market efficiency in terms of suppliers’ search and selection, contract negotiation and purchase price. They provide the opportunity to increase the efficiency of the supply process by automating and facilitating the procurement process; they may also increase the effectiveness of the supply process in terms of quality, degree of innovation, time-to-market, expanding the supplier base, creating competition among suppliers and increasing service level to the end consumer. Proper security checks and transparency in RFQ can successfully stop unethical practices. Issues related to lot-sizing, information revelation and the type of items are also covered briefly. Our case studies suggest that experienced eRA firms have moved beyond the hype and have embraced them as part of their normal sourcing processes. eRA have led to decreased cycle times for suppliers and a significant decreased buyer cycle times for repeat auctions. Location not being a constraint was found very convenient by all the stakeholders. The success of the eRA in general depends on the application of the right conditions for eRA and a right auction design. These need a strong process awareness and knowledge. Missing knowledge may lead to wrong decisions along the sourcing process. Methodologically, our work provides empirical evidence obtained through a qualitative grounded theory approach. In some areas, practice leads theory and therefore the findings will add to academic discourse. They will help firms in India and other countries to develop policies, strategies and procedures while implementing eRA. Our major contribution lies in defining a framework for eRA process on the basis of our case studies. The adoption of the framework will have impact on practitioners. To successfully implement eRA firms should: . provide clear and comprehensive item (product or service) specifications, including lot size, weightages to other criteria besides price, etc. in RFQ; . ensure that the purchase quantity/value is large enough to provide an incentive for the supplier to participate; . build technical eRA competencies or find suitable third parties;

528

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work for gaining potential suppliers’ confidence through transparent trustworthy ethical practices; and continuously experiment with improved eRA designs.

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Presently, eRA account for around 10 percent of total corporate purchases in India which is slightly lower than found in existing literature. The reasons could be lesser economies of scale and higher buyer’s switching inertia. We find that high switching costs inhibit the readiness of firms to invite a large enough number of suppliers to participate in eRA. This is in agreement with Wagner and Schwab (2004). However, the declining level of supplier participation reported in literature was not observed in our study. The reasons could be attributed to the present market and business conditions in an emerging economy. Our findings that the supply market competition, supplier and buyer e-readiness and e-sourcing tools and expertise act as moderators are in agreement with Amelinckx et al. (2008). Hur et al. (2007) find that full-service (third party) eRA are as effective as in-house eRA. However, our study finds that this may not always be true and effectiveness is actually context-dependent. To succeed today and to pave the way for a better future, firms in India need to create strong linkages with their supply chain partners. Based on our study, some emerging trends can be discerned. Technology, which was earlier taken to be a driver for doing business in a particular fashion, has now become a necessary enabler for aligning business in both government and corporate sectors. Web-based tools now exist allowing businesses to host their own eRA on a “pay as you go” basis to procure goods and services. Indian government has large monoliths in sectors such as armed forces, railways and oil and gas. By adopting eRA (as recently done in ONGC pilots), the government can save money in a big way. The government of India should take a cue from the US and Singapore governments which have adopted e-sourcing in a major way. However, labor costs being lower in India, the potential for cutting down costs in labor is less than a market like the USA and Singapore. Our study reveals a few areas of concern as well. With the emergence of web-based tools, online transaction security has become an important area of concern. Codes of conduct and guidelines for eRA need to be formulated by concerned stakeholders and put into practice. The small sample size and case method approach limits the ability to generalize the findings. The firms were selected as a convenience sample and so may not be truly cross-sectional. We have also not looked into eRA as a technologically assisted form of power-based bargaining in supply chains subject to abuse by buyers and market makers. This is an inductive piece of research and it is important to recognise that only analytical generalisation is claimed rather than any statistical generalisation. This research opens the way for in-depth studies of some of the above areas of concern. Research may be carried out using specific cases to study eRA practices at firm level in detail. It may be worthwhile to investigate on pattern of Pearcy and Giunipero (2008) about how eRA practices differ across firm size in the Indian context. Using a third party or conducting eRA in-house may also be studied in detail. Further, comparative work may be undertaken in different international contexts. Another area to explore is the supplier perspective as they are often negatively inclined toward eRA, it will be interesting to investigate how their opinion changes over time, i.e. whether suppliers of an early adopter, having been exposed to this type of sourcing for

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a longer time, possess different attitudes toward online bidding events than suppliers of a late-adopting buyer. A promising research avenue is exploring how early adopter firms will evolve as consecutive cost savings become more difficult to achieve. There is also scope for research in auction analytics, a systematic formal analysis of auctions that entails: . the development of standardized metrics to communicate information before, during and after the bidding event; and . the use of data mining techniques to learn from previous auction events the suitability of various auction formats under different market settings.
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Kraljic, P. (1983), “Purchasing must become supply management”, Harvard Business Review, Vol. 61 No. 5, pp. 109-17. Kulp, S.L. and Randall, T. (2005), Procurement at Betapharm Corp., Harvard Business School Case, Product No. 9-105-032, Harvard Business School Publishing, Boston MA. Losch, A. and Lambert, J.S. (2007), “Information behaviour in e-reverse auctions”, Journal of Enterprise Information Management, Vol. 20 No. 4, pp. 447-64. Pearcy, D.H. and Giunipero, L.C. (2008), “Using e-procurement applications to achieve integration: what role does firm size play?”, Supply Chain Management: An International Journal, Vol. 13 No. 1, pp. 26-34. Schoenherr, T. and Mabert, V.A. (2007), “Online reverse auctions: common myths versus evolving reality”, Business Horizons, Vol. 50 No. 5, pp. 373-84. Sehwail, L.M., Ingalls, R.G. and Pratt, D.B. (2008), “Business-to-business online reverse auctions: a literature review and a call for research”, International Journal of Services and Operations Management, Vol. 4 No. 4, pp. 498-520. Smeltzer, L.R. and Carr, A. (2002), “Reverse auctions in industrial marketing and buying”, Business Horizons, Vol. 45 No. 2, pp. 47-52. Smeltzer, L.R. and Carr, A. (2003), “Electronic reverse auctions – promises, risks and conditions for success”, Industrial Marketing Management, Vol. 32 No. 6, pp. 481-8. Srivastava, S.K. (2007), “Radio frequency identification technology in retail outlets: Indian scenario”, International Journal of Manufacturing Technology and Management, Vol. 10 No. 1, pp. 71-91. Srivastava, S.K. (2009), “eRA: reactions and tactics of suppliers and their countermeasures”, Working Paper IIML WPS 2009-10/6, Indian Institute of Management, Lucknow, 30 July. Tunca, T.I. and Zenios, S.A. (2006), “Supply auctions and relational contracts for procurement”, Manufacturing & Service Operations Management, Vol. 8 No. 1, pp. 43-67. Wagner, S.M. and Schwab, A.P. (2004), “Setting the stage for successful electronic reverse auctions”, Journal of Purchasing & Supply Management, Vol. 10 No. 1, pp. 11-26. Yin, R.K. (2003), Case Study Research, Design and Methods, 3rd ed., Sage, Thousand Oaks, CA. About the author Samir K. Srivastava is an Associate Professor in the area of Operations Management at the Indian Institute of Management, Lucknow (India). He is a Graduate in Electrical Engineering from the Institute of Technology, BHU, has an MBA in Finance and is a Fellow of the Indian Institute of Management, Lucknow. He has about two decades of experience in teaching, research and industry and has published extensively in reputed refereed journals such as Omega, IJPDLM, IJMTM, TQM&BE, IJMR, etc. His papers have received “Best Student Paper Award” and “McGraw Hill Publishing Best Paper Award”. He is also on the scientific advisory board of Journal of Remanufacturing. His major areas of interest are operations strategy, manufacturing excellence, HR-operations interface, retail operations, management of technopreneur-owned firms, reverse logistics and sustainable supply chains. Further details are available at: http:// ganga.iiml.ac.in/, samir/. Samir K. Srivastava can be contacted at: samir@iiml.ac.in

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