1. What is the central issue at Casturn Systems?

a. Why re-sourcing is a focus issue for Casturn

b. What are the pros and cons of process in Figure 1?

Not able to achieve significant cost reduction through reverse auction.

The re-sourcing process in Casturn Systems wanted to implement e-RA to meet their Sourcing needs
and increase their procurement efficiency. However, their inability to successfully implement the
Reverse Auction process in their organization, seems to be the central issue faced with. This resulted
in their inability to achieve the anticipated savings as projected.

Re-sourcing implementation is a focus issue for Casturn as they had challenges in its
implementation. They discovered that most of the savings’ opportunities were unachievable due to
the following factors:

a. Suppliers could not pass the stringent technical evaluation of Casturn Engineering
b. Estimates/Quotes of suppliers were disturbed post understanding the technical expectations
c. Suppliers either backed out or demand changes to requirement specifications, which were
not acceptable for Casturn customers.
d. Re-sourcing process was inherently time consuming and full of hurdles (up to
18 months).

Re-sourcing process include below steps

1) Technical Evaluation.
2) Business Case Approval(Cross functional board)
3) PPAP (Meeting industry standards and production requirements as per North
American Automotive Industry).
4) Customer Approval (Casturn should follow annual window for this process
and further they should pass on fraction of cost reduction).
 Pros and Cons:
Pros
a. Reverse auction & further negotiation allows Casturn to gain a deeper
understanding of the suppler cost structure and get a cost concession.
b. During technical evaluation, Casturn are able to weed out incapable
suppliers who might later create problems for the company and incur
significant cost of lost demand, time and supplier resourcing.
c. The collaborative approach of the teams from engineering, commodity
management, launch management and end user plant in PPAP and business
case approval ensures the suppler is of required quality standards.

Cons
a. Having technical evaluation after the price bid evaluation, the process could
lead to choosing an incapable supplier or someone who misinterpreted the
specification of the product just because of the low quoted price. These
errors would slow down the process of sourcing and would demotivate
potential suppliers from participating.
b. The whole process of e-RA takes on an average 18 months and Casturn,
which has highly engineered products, which are changing rapidly with the
technology, might miss the chance to capitalize on the reduced sourcing
price for their products.
c. Since the whole process is based on selection of supplier with least quote,
the factor of small cycle time has been neglected in it.

2. What explains failure of reverse auctions in first two attempts

a. What challenges faced in the first auction? Why did it fail
b. What challenges were faced in the second auction.

In the first auction, the problem observed was – unsuccessful bidding process, as none of the
suppliers submitted any bids beyond their initial bid. Hence finding a competitive price using e-RA
was not successful.

The bidding was for a set of parts from the casting’s commodity. These parts can be categorized as
Bottleneck Items, where supplier skill scarcity was high in the market, for the level of design quality
expectations which Casturn had for castings. Hence the suppliers who had long standing relations
with Casturn and was well versed on the design and quality expectations of the castings. Other new
entrants could not participate effectively, as the requirements/technical evaluation were stringent
which provided little scope of make changes in requirement post understanding.

Hence the bidding process did not work out, as older suppliers did not move their bids due to the
understanding of product and long-standing relation and the newer suppliers were not confident of
their participation.

a) Due to generous time given for auction, none of the supplier submitted any bids
beyond their initial entry bids. Post event they analysed and discovered that all were
above current supplier landed cost.
 b) Lack of movement in the auction had spoiled all chances of finding a more competitive
price.
c) Even newly entered suppliers also did not move their bids as expected.

In the second auction, product was simple rubber bushings O-rings which can be termed as
Leverage Items and ideal candidates for e-RA. However, in the second auction, the level of training
and understanding of the process for the suppliers were not satisfactory, mainly because much time
investment was not done on training of the incumbent suppliers.

Hence there were errors in execution of the bidding process as the Suppliers defaulted while bidding
and it resulted in disturbing the process plans, which impacted savings anticipated from the bid.

a) Unfortunately, rushed training ultimately resulted in the incumbent entering a wrong bid
that spoiled the entire auction.

3. What improvements would you recommend to Casturn to achieve success in re-sourcing

initiative?

Casturn should continue on its current process for sourcing items which are Bottleneck or Strategic
in nature, as building a strong supplier relationship is key to the success of such items as skills are
scarce and enables the supplier. Process of e-RA should be avoided here for these specific products.
Some of the focus areas of improvement here:

1. Design flexibility to adopt the market conditions

2. Better alignment between Launch Management, GCM and SD teams
3. Reserve price can be included for such contracts where the stake is higher

For Leverage Items like O-rings, Casturn should build on e-RA process and get the most competitive
bid. They should ensure:

- Incumbent suppliers have sufficient training provided

- Price Visibility in case of leverage items like rubber is made available for suppliers

Improvements
a. The process could be altered with Technical evaluation being the step prior
to commercial bid evaluation. This way the errors could be minimized and
cycle time could be improved.
b. Rather than taking the quote on per piece basis, total landing cost to be used for
commercial evaluation.

a) In my opinion technical evaluation should happen first to avoid any misunderstanding

of requirement.
b) Over all new supplier on boarding process time to be reduced drastically.
c) Proper training for e-RA to be provided for all capable suppliers.
d) Complex Designs will be reassessed to broaden the pool of potential suppliers.
What are the drivers for successful usage of e-RAs?

e-Reverse Auctions is tool where suppliers bid for business with buyers by lowering their
bid prices on products that the buyers are willing to procure. These auctions are designed
for facilitating re-sourcing options for buyers in order to enable efficient procurement. This
tool helps buyers to identify competitive suppliers and achieve cost savings in their sourcing
activities. The following are a few aspects that might be considered as important for driving
a successful reverse auction:

 ▪  Complexity of the part being sourced: Reverse auctions are usually preferred in
cases where the parts to be sourced are simple.
 ▪  Number of suppliers of the part and their qualifications: The suppliers (both their
number and qualification) participating in the auction plays an important role as this
determines the competitiveness of the bidding activity.
 ▪  Supplier relationship: The relationship with incumbent suppliers may add
complexity to the bidding process. Auctions may sometimes have a negative effect
on supplier relationship. This may result low number of participants in the auction.
 ▪  Cost for switching from existing supplier: The switching costs should be low
enough to justify the cost savings expected from sourcing from a new supplier. The
complexity of approval process for the new supplier may diminish the cost benefits
resulting from low cost of sourcing.
 ▪  The format of auction: The platform of auction and the parameters that the
buyers set can affect the level of competition and participation in the auctions. Few of
the parameters that the buyers set could be Price Visibility, Rank Visibility, Auction
Duration, etc.

2) Can e-RAs be used for sourcing highly engineered parts?

It is recommended that e-RA be used for re-sourcing of relatively simple parts and
commodities. Highly engineered parts have relatively high complexity and may lead to
unsuccessful auction. The following are a few disadvantages of using e-RA for sourcing
highly engineered parts:

 ▪  Low participation: There might be very few suppliers producing highly

engineered parts. This would result in low participation and competitiveness in the
auction.

▪  Partsnotgettingapproved:Complexengineeringpartsmayhavespecificationswhichare not
clearly understood by the suppliers. The criticality and specifications of these parts for
buyers and the inability of suppliers to meet these standards would result in the parts not
being approved eventually. Some suppliers might increase the price once they understand
the criticality of part after the auctions thus nullifying cost advantage.

 ▪  High switching costs: Critical parts would require elaborate testing and approval
process form OEMs. This can result in significant costs for switching from an existing
supplier who is providing parts according to specifications.
 ▪
Damagingsupplierrelationship:Theremightbeathreatofstrainingthelongtermexisting
relationship between buyers and suppliers if the supplier has developed engineering
capability for servicing specific needs of the buyer.