EDITOR’S NOTE: Thanks to James Meads, whose post on LinkedIn inspired my comments below.
You have probably seen this from me before, but it is worth a revisit here.
In 1998, I developed one of the industry’s first algorithm-driven web-based RA solutions with the generous support of the government’s Scientific Research & Experimental Development Program (SR&ED) for the DND.
The solution – developed initially under the name IPOS – for Interactive Parts Ordering System, was ultimately patented under the name RAM for Reverse Auction Model.
The two biggest raps against RAs were:
1. It reduced the buyer-supplier relationship to a transactional exchange based solely on the lowest cost.
2. Procurement professionals feared they would lose their jobs.
The problem wasn’t the tech itself but the misalignment of its implementation and spend application. One day, I will have to tell you about the early AI algorithms that drove the engine. However, here is the result – https://bit.ly/3oe5Vql
“The DND realized a 23% cost of goods savings annually over several years while simultaneously reducing the number of buyers required to manage the contract to 3 from an original 23. Delivery performance and product quality also improved dramatically.)”
Note: RAM also worked for the NYCTA – https://bit.ly/3ZD4EHC
The algorithms are key
MORE TO CONSIDER
Here are critical elements for a successful RA implementation:
– Use an agent-based versus equation-based model
– Understand the importance of “strand commonality,” e.g., tie-in to other depts such as services and external partners such as UPS*
– Understand commodity characteristics, e.g., Dynamic Flux versus Historic Flatline
– Ensure that your algorithms are self-learning, taking into account both historical performance and current market conditions using a weighted scoring model
– Accept that depending on the size of your procurement department, “FTE resource allocation” will happen.
– Introduce a Products Compression Model as the efficiencies you gain on the acquisition side of the process will enable you to lower inventory levels substantially – in one instance, we are able to reduce warehouse inventory requirement by 80 to 90 percent.
* strand commonality also includes factors such as the time-of-day (TOD) orders are placed impact on commodity types.
Procurement Insights 
Colin Cram
October 2, 2023
Reverse auctions are good in the right circumstances and in a genuinely competitive market. Tendering in the public sector provides transparency and justifies a solution, but it doesn’t necessarily secure low prices and can encourage supplier collusion. Reverse actions can provide a big price drop first time around, but further benefits are likely to be slight. Also, unless it is managed very well, suppliers will try to find ways to recover their margins. So, great tool when used intelligently.
piblogger
October 3, 2023
A “great tool when used intelligently” – I could not have said it any better myself. Of course, I think that applies to any technology, e.g. used in the circumstances. Great feedback as always, Colin.