Posted on 19 May, 2016 by Neil Sharp
E-auctions have been used since the late 1990s. Soon after the world-wide adoption of the Internet, many companies spotted an opportunity to use this new technology to improve their request for quote (RFQ) process by creating virtual "gateways" between them, the buyer, and the supply chain.
Predicted to be the "next big thing", the use of e-auctions increased rapidly over the next few years. Fast forward to 2016 - a place where the Internet of Things (IoT) is now a reality, with people, systems and devices more connected than ever - and the e-auction tool doesn’t appear to have maintained its initial appeal.
Maybe that’s not surprising? Like anything "new", particularly when it's technology-based, after the hype dies down expectations don’t always turn into reality. E-auctions also started to become used and abused - a result of "lazy" buying habits and poor implementation. While some organisations reported "significant" savings and a reduction in quote turnaround, many suppliers were left with a sour taste in their mouths. And that taste was price – specifically, the lowest possible – with zero consideration given to other factors, such as quality, flexibility, or the importance of long-term partnerships.
So should e-auctions remain in the 1990s archive along with 56K modems? Or is there still a place for them in today’s hyper-connected world? And can they help an original equipment manufacturer (OEM), who is looking to outsource their manufacturing to an electronics manufacturing services (EMS) provider, achieve their strategic goals? Let’s find out.
When e-auctions are implemented correctly, they can be a powerful tool for purchasing professionals. They can be an efficient form of communication and negotiation between the OEM and a broad range of suppliers. E-auctions have the ability to generate significant price savings and can also speed up the RFQ process by encouraging competitive behaviour among the suppliers involved.
So why have they lost popularity over the years? Well, much relates to "fit". This is something you will hear us regularly mention within many of our blog posts - but, when it comes to the topic of e-auctions, this point cannot be stressed enough.
Right place, right time?
The number one objective of running an e-auction is to get the very best market price. The process may help speed up the time it takes to get this pricing - but let’s not kid ourselves that these auctions are used for much else. And there is absolutely nothing wrong with this approach. With popular comparison sites popping up on a weekly basis, we all now have the luxury of comparing entire markets for the very best "deal" at the click of a button.
The problem with e-auctions is when they don’t really "fit" with the product or service being procured - i.e. when price alone should not be the deciding factor. Unfortunately, a number of companies misused the process and applied a "one size fits all" approach to their purchasing decisions. Regardless of the value or complexity of the product, or indeed the market size and levels of competition, e-auctions were seen as a quick way to get the best deal.
The other problem relates to timing. Ideally, e-auctions should be used at the end of a thorough purchasing process. This ensures that any suppliers participating meet certain criteria set out by the buyer. A site tour, factory audit, review of quality standards and accreditations, along with a thorough understanding of the key services and solutions, should be carried out as a minimum.
In the past, some OEMs were guilty of ignoring these initial checks and balances and only carrying them out after the contract had been awarded to the lowest bidder, resulting in a mismatch of on-going expectations between both parties.
When could an e-auction be effective?
E-auctions work well when the buyer is looking to negotiate commodity items, which are price driven and readily available within a market with a consistent specification. These include:
- Sheet metal
- Brochures, flyers and other marketing printed items
- Certain electronic component packages
- Computer consumables
These products are incredibly easy to buy, and there are a number of suppliers in the market perfectly capable of providing them. The most competitive price will almost certainly clinch the deal and the overall risk to the business of making a poor supplier choice is relatively low. And if the supplier doesn’t turn out as expected? It’s easy: change them the next time the order or contract comes up for renewal.
Many OEMs looking to outsource their electronics manufacturing now class their printed circuit board assemblies (PCBAs) as a commodity too. There are a large number of EMS providers with the production equipment necessary to populate boards, and the electronic components specified in the Bill of Materials (BOM) are usually well defined and available through a range of franchised distributors. So, providing you have a relatively simple design, a stable run rate, and finding the cheapest pricing remains the number one objective, initiating an e-auction for PCBA requirements could be an efficient and cost-effective solution for you.
When should I avoid them?
If you are planning to take a step further and outsource all of your manufacturing responsibilities, including test and outbound logistics, or your product consists of complex machined parts, castings and bespoke electronic sub-assemblies, e-auctions are unlikely to achieve what you want.
To start with, the number of solution providers capable of supporting you is likely to reduce dramatically. While the majority of EMS providers can place electronic components on printed circuit boards (PCBs), a much smaller number have cabinet and panel wiring capabilities and even fewer can support with electro-mechanical assembly. Once you start to research potential EMS providers that can meet all of your criteria, you may find you are naturally left with a smaller number than you first thought.
Secondly, price is unlikely to be as important to you. It will, of course, play a part in your decision-making process but other considerations, like on-time delivery, quality yields, and change management, often play an equal - or even greater - role, depending on your outsourcing objectives. You are no longer looking for someone to build you a product at the lowest price; you are looking for someone to offer you a complete solution tailored to your specific needs. And unlike buying a set of pens, nuts, bolts and washers, or even a simple PCBA to some extent, the impact on your business in choosing the wrong supplier could be disastrous.
Finding the right EMS provider will take time. The most successful OEMs carry out a substantial amount of due diligence before they begin to talk about the more operational issues of unit pricing or delivery schedules. By this time they are usually down to two, maybe three providers, who they feel comfortable can meet their criteria and support them in the long term with their outsourcing objectives. Asking them now to compete against one another purely on price, throwing out all of the intelligence gathered and applied to the process so far, makes very little sense for all involved.
E-auctions remain an effective tool to obtain competitive pricing for "low risk" commodity items on a quick turnaround. However, when it comes to finding the right EMS provider to take care of your manufacturing outsourcing we recommend you go back to basics.
Conduct site visits and thoroughly audit the manufacturing locations your product could be built in. Hold face-to-face meetings with all the key members of staff that would have input into your account and talk to the operators on the production line. Can you see your product fitting in there and are you confident that those responsible for assembling and testing your product are fully trained?
And, of course, don’t forget to use the most powerful tool you have available to you. It dates back thousands of years and no matter how impressive technology becomes nothing will ever get close. It’s called instinct and is rarely wrong.
Image by Daremoshiranai