Procurex Milestone

Procurex, Inc. runs first-ever Online Reverse Auction for Energy Efficiency Grants for the State of Missouri resulting in up to 75 Million kWh of energy saved


The Missouri Department of Natural Resources utilized the Procurex, Inc. online reverse auction engine to successfully award $3 million in energy efficiency grants. Procurex, Inc. structured 3 consecutive one hour auctions with 23 pre-qualified bidders. A total of $3,000,000 in grants were awarded with grant values of $100,000 (10 grants), $250,000 (4 grants), and $500,000 (2 grants).

(Vocus) October 4, 2010 -- Procurex, Inc. in association with Shaw Environmental successfully implemented the use of it's proven reverse auction technology to run the first ever reverse auction for energy efficiency grants on July 28, 2010. Procurex, Inc's online reverse auction allowed pre-qualified providers to bid on $3 million in incentives on a $/kWh saved basis for expected energy efficiency projects. Available incentive dollars were allocated based on a lowest-price obtained, thus increasing the cost-effectiveness of the program and allowing the Missouri Department of Energy to spread each grant dollar further.

When all the winners fully implement their programs, Missouri could save up to 75 million kWh (kilowatt-hours) of energy, equivalent to powering 6,537 homes for a year or taking 10,299 cars off the road for a year. As one participant in the process put it, "That is a powerful use of reverse auction technology". Procurex, Inc. used its proven technology and procurement expertise to work with Shaw Environmental and The Missouri Department of Natural Resources to structure the most fair and competitive grant auction process available.

"It wouldn't have been possible to reap these types of results without the help and expertise of Procurex, Inc." said Jonathan Dierking, PE, CEM, LEED AP, Shaw Environmental. Ian Ayres, the William K. Townsend Professor of Law at Yale Law School and writer for the New York Times blog Freakonomics covered the historic event and said, "Overall, across three different auctions the averaged promised price-effectiveness was 3.97 cents per kilowatt hour of saved energy. This compares favorably “to recent point estimates of the average cost of other utility energy efficiency programs, which range from 4.7 to 13.3 cents per kilowatt-hour.” (Auffhammer, Blumstein, and Fowlie 2008).

He followed "For now, the great state of Missouri (the only state with two Federal Reserve banks) has shown that competitive auctions are a feasible way to get the most out of our stimulus money. (Now if only the Treasury would run with the reverse auction idea as a way to value troubled banking assets)."

Bret Grady, CEO of Procurex, Inc. said, "I was quite pleased with the results that we delivered with this auction. A process that has worked so well in other categories such as energy, commodities, and services was applied very successfully for the State of Missouri. I would expect given these results that we will be running similar events for other states and municipalities looking to replicate these savings."

Strategic Sourcing and its Benefits

Procurex has conducted over a thousand reverse auctions that have saved buyers an incredible amount of money. The Procurex approach has proven to be wildly successful over the past decade using strategic sourcing. There’s a whole lot to like about the strategic sourcing approach. They address both of the procurement goals: improving purchasing conditions and increasing procurement efficiency. Let’s lay it out for you:

• Broadening the list of participating vendors: reverse auctions reduce the cost to include a greater number of seller participants than your traditional methods. The pool of vendors can be extended beyond the local area or circle of existing or known vendors to, literally, the world (unless vendor location is a critical issue). A broader list of vendors increases the chances that the purchaser will find a “better or best fit” vendor for each item purchased.

• Increasing competition: with an increased number of participating vendors comes increased competition. This favors the buyer with better pricing and allows vendors the opportunity to compete to the best of their abilities and eliminate the guesswork of “best and final” quotations. This can produce substantial cost savings and/or product improvements to buyers.

• Decreasing cycle time: by concentrating the interaction with vendors into one time frame (the auction), the process of contacting and negotiating with individual vendors is severely truncated, reducing the time required to actually purchase an item. Reducing the cycle time for each item purchase can result in significant savings in procurement resources.

• Increasing efficiency of the procurement function: with an electronic system available to interact with an increased number of vendors and manage activity with them, the procurement personnel can produce better results without increasing the resources used.

• Improving ROI: through more efficient use of existing purchasing resources and lower prices from better competition, the return on capital spent on strategic sourcing and reverse auctions (as well as the entire procurement function) will yield a higher return, improving the buyer’s bottom line overall.

• Gathering information: buyers can develop important data on the pricing and sales terms for various items and vendor behavior by analyzing the activity during an auction. This could prove to be a vital resource for future sourcing. Essentially, a reverse auction creates an environment that more closely approaches the economic ideal of perfect competition: a large number of participants, readily available information, and a narrow decision making process that reduces other influences. By using this objective method, a buyer can substantially improve performance by creating a better market in miniature, reducing cost and improving conditions.

A Word of Advice: Don't be THAT Guy

The world, sometimes, is a scary place. And for as great as money is, it can make the world even scarier. Businesses around the globe are feeling the heat as a result of this worldwide recession. However, all is not lost. An article by Angeline Yeo iterates how buyers from all around the world failed to recognize the procurement opportunities. Here’s the article by Ms. Yeo.

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"Global - Buyers failed to take advantage of a potential 4% savings on material costs resulting from the global recession because of a lack of skilled personnel, inadequate number of procurement professionals in the sector, and the failure of top management to deal with the problem, revealed a new study released yesterday.

The study was conducted by consulting firm Valueneer and polled over 790 companies from 62 countries across all industry sectors.

The survey found the companies were achieving only a quarter of the potential 4% savings, hampered by the lack of qualifications and inadequate number of procurement personnel.

Potential savings went identified because there was not enough attention given to strategic procurement tasks, the study said. The bigger a company, the more likely it is to have a better procurement performance.

The study also said that CEO or CFO-lined procurement organisations have a significantly higher performance record than companies organised on a chief operations officer-organised procurement basis. Clearly defined and documented procurement strategy and implementation, purchase control, optimal tendering and skilled procurement personnel were also considered major factors of success.

Breakdown by region

The survey found that Indian companies showed the best procurement performance, followed by German, Australian and Swiss companies. The retail, consumer goods and automotive industries demonstrated the best procurement performance.

For North America, India is now the fastest growing sourcing market, with China stagnating at a high level. But China is expected to retain its importance as a key sourcing market in Asia. The country is also expected to develop the most rapidly in the procurement sourcing sector among the four emerging countries of China, Brazil, Russia and India.

Global sourcing is expected to continue increasing, with one-third of respondents indicating that they intend to bump up sourcing from markets like China, India and Eastern Europe, the study said.

Source: Yeo, Angeline: “Buyers Missed Out on Savings During Crisis” (http://www.procurement-online.com/news/19211)

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It’s an extremely interesting read. As a member of the procurement community, I cringe when I see articles like this. But that’s the way it is. This is living, breathing proof that companies aren’t utilizing the resources they could very easily have.

A buyer who utilizes the Procurex method will come to us with a wallet with a big wad of cash they’re willing to spend, and a cell phone (since EVERYBODY has one of those). They’ll leave us with another wad of savings tucked snugly between the wallet and the cell. On behalf of Procurex and the strategic sourcing community, PLEASE don’t be THAT guy who ignores the strategic procurement way.

Penn State Sees the Light

Q: How does a university purchasing department turn a routine purchase into an event worthy of a champagne celebration?

A: When you save over $200,000.

Penn State University recently conducted a reverse auction using Procurex and saved over $200,000 on audio-visual equipment. The equipment included Epson projectors, Extron switching equipment, WolfeVision document cameras, Sharp projectors, Crestron communications equipment, and other cabling and connection equipment.

This is real money that could go to save jobs, fund scholarships, manage tight budgets, buy lab equipment, new sports equipment, or a thousand other priorities.

Most people wouldn't get too fired up about buying audio-visual equipment, but reverse auctions can change the game in big ways!

Check out the stats:

Category: Audio-Visual Equipment
# of items: 12
# of Suppliers invited: 10
# of Suppliers who bid: 9

Event duration: 40 minutes.
Extended Start Price: $1.003 Million
Extended Low Bid: $784 K
Savings: $219K

Not a bad day's work! Go Nittany Lions!

If I used the term "Strategic Sourcing", would you think I'm smart?

The advances in IT (information technology in Layman’s terms) and the internet have made methods in procurement a whole lot easier. By leveraging the procurement assets—personnel and existing infrastructure—and directing them in a systematic way, companies are in a better position to do more with less. That is one of Procurex’s “claims to fame”; we like the challenge of finding additional cost savings, using fewer resources, producing less headaches. IT technologies allow you to save time and effort on mundane tasks, while the Internet opens users to a nearly infinite supply of information. Thus, employees kill two birds with one stone: they become more efficient and have access to better information. These are the keys to successful purchasing. Procurex is in business largely because the internet today is so “scalable”.

Let's look at our friend above, and let's call him Chip. Boom, step 1. Chip's never heard of strategic sourcing before, like most other computer animated faces. Needless to say, he's a little spooked. But no need to cower in fear, Chip; it’s not that bad.

Strategic sourcing is basically the application of the principles of strategic planning, management, and cost reduction to purchased goods and services. We see these principles at work in many other functional areas of the company such as manufacturing and operations. The key is to look at the procurement function in strategic terms across the entire panoply (how about that for an intimidating term) of items purchased. Analyze what is being bought, from whom, and under what conditions (including price). Once this data is gathered, the company must categorize the total “spend” and decide which items are more significant in terms of amount purchased, cost reduction potential, supply market dynamics, and criticality to the company’s core value. This process is referred to as the Spend Analysis. It also includes a determination of the important parameters of each spend category such as price goal, quality standard, delivery conditions, etc.

The next step is to examine the methods involved in purchasing. The goal is to maximize value, not just price, and implement fair, effective, and objective means of purchasing the items to achieve the best value. In economic terms, this means approaching the conditions of a competitive market or perfect competition as nearly as possible. Under these conditions, the purchaser will realize the best price and delivery conditions. Therefore, objective means are those that tend to create conditions that approximate perfect competition. This includes disseminating as much information as possible for buyer and vendors to use; qualifying all potential vendors against clear and comprehensive standards, maximizing the number of qualified vendors offering each item, and limiting the points of negotiation or interaction between buyer and vendor to those pertinent to each item. These means should reduce or eliminate the influence of uneven personal interactions or the relative power of the negotiators that often are determining factors in the final purchasing agreement with more traditional methods.

Strategic sourcing usually includes the use of a Reverse Auction. A reverse auction is an auction where vendors bid to supply a product or service to a purchaser, pretty much the opposite of what you would envision a normal auction entailing. Most people are familiar with the sealed bid process used by many public entities to award contracts. Reverse auctions used in strategic sourcing work in essentially the same way. However, there are several important differences: reverse auctions are typically done electronically, over the Internet or a similar network. It’d be pretty tough to have 4 to 5 companies, who are bidding for your business, in person. It’d probably be a little bit crowded. Information on the individual bids is disseminated to the entire bidding group on a regular basis, in many cases in real time; vendors are typically qualified prior to the auction, rather than through their responses to the bid documents and subsequent to the award; auctions are dynamic events, allowing the participants to update their bid information in response to other bids. Reverse auctions resemble the auctions held on eBay that have become a mainstay of the popular culture and experience. In fact, the eBay system was originally developed with very similar goals to improve the trading of securities. In addition, these auctions require little infrastructure or management relative to other methods, because they are run electronically.

There's your general overview of strategic sourcing. Hopefully I've enlightened you a little bit, and hopefully Chip can sleep a little better at night now.

Modernized Business: The Quest for Quality, for Less

Let’s be honest. “Do more with less,” is probably the most common and constant refrain in today’s business world. It has become the mantra if you will for all companies and industries. Executive management has directed the lower levels of management to live by it and find ways to implement it. In turn, managers have made it a focus of all of their tactical planning. As a consequence, all areas of the business have been affected; they must reduce their costs and support an increased level of activity with the same or fewer resources. Procurement and purchasing have been at the center of this drive as the chief stewards of company spending.

Managers in procurement or purchasing fight this battle on two fronts: reducing the cost of the materials, supplies, and services purchased by their companies and increasing the efficiency of their own departments. In essence, they must be able to continually reduce the amount paid to vendors with the same or shrinking resources in terms of personnel and infrastructure. Doesn’t sound easy, does it?

The silver lining lies within the fact that typical or traditional purchasing or procurement methods have certain limitations. Manager frustration, stress, and on occasion, indigestion simultaneously rear their ugly heads to these boundaries. These methods were not designed necessarily to address the twin problems of continuous cost reduction and limited infrastructure to support the search, evaluation, and negotiation functions required to find quality products and services for less. New methods are BADLY needed to address both simultaneously. Enter: Procurex. The Strategic Sourcing method Procurex implements combines new technologies in IT and the internet with a systematized approach that allows even the smallest companies to, you got it, “Do more with less.” That's all for today folks.