Electrifying Results: How RA's are Redefining Strategic Sourcing within Energy Procurement

As previously stated in the many blog entries that we write here on this site, reverse auctions are a useful way to quickly and efficiently identify the lowest possible price of an item. Further, these reverse auctions are used by companies to procure items that we use everyday; such as mattresses, floor mats, desks, writing utensils. In a nutshell, any tangible good or service that we obtain, can be lowered in costs by reverse auctions (or RA) given that a healthy amount of vendors are present bidding for the buyer's business.

Perhaps the most valuable reverse auctions include items that we often take for granted, such as electricity in our homes. For example, one of our most successful auctions was held with the State of Maryland. As seen in the Press Release (which can be found here http://procurexinc.com/files/news/MDDGSEnergyAuction-PR.pdf), the state of Maryland Department of General Services Energy obtained three-year energy contracts for 478,050,000 kWh annually. These contracts will ultimately save the State around 11% of their overall expenses on electricity, which equates to $11 million. Six qualified firms participated in the event, which ultimately help reduce the average contract price from 6.90 cents/kWh to 6.43 cents/kWh. Although the difference does not seem like a whole lot, keep in mind that the winning firms had to serve several cities, towns, agencies across the state, among which include Camden Yards (Baltimore Orioles home field) and many University of Maryland member institutions. Given the amount of electricity these places utilize on an annual basis, it is clear that the savings are immense.

Given the current state of the economy, businesses need to re-evaluate their purchasing methods. Unfortunately, many companies feel reluctant to deviate from their current business practices, for it alters the way business is conducted on a day-by-day basis. However, it cannot be dismissed that the world is changing. This change is accompanied by the arrival of technologies and innovations that greatly benefit us not only on an individual level, but on a corporate level as well. The State of Maryland's partnership with Procurex is a great example of how the business world is being redefined by technology.

Procurex Locks Up Deal with Cornell

Janet Reno, Robert C. Baker (inventor of the chicken nugget), and Andy Bernard (Dunder Mifflin's spontaneous salesman in The Office) would be proud. The prestigious Ivy League institution they attended college at, Cornell, just signed a two year procurement contract with Procurex, Inc. Check out the full press release here:

http://www.procurexinc.com/about-procurex/resources/procurex-news

Buyer Categories: Contracting

How a company realizes the benefits of strategic sourcing depends on its individual situation. This determines the type and degree of external assistance that is required—what products and services must be purchased or developed within the company for strategic sourcing. In general, buyers fall into three categories or situations: Contracting, Partnering, Self-Serving. This is the first of a three part series, if you will. We’ll attack the contracting category first.

Contracting

Companies or other entities in this situation are new to strategic sourcing or have only intermittent need for it. They do not currently engage in strategic sourcing or reverse auctions or use them only on a periodic basis. Typically, they have no system or infrastructure in place to conduct the necessary activities. In many cases, the buyer sees no need or is hesitant about expending the capital to build these resources. Therefore, in order to reap the benefits of strategic sourcing, these buyers contract the entire process and management to an external provider.

In this situation the vendor for strategic sourcing services is fully engaged with the customer to provide the necessary consulting and project management for the items to be sourced. The vendor consults with the buyer’s personnel to provide assessments, develop product or service specifications, qualify vendors, host the auction, and provide post award tasks as needed. The internal personnel respond to the consultant’s process. This format allows the procurement personnel to continue providing their normal level of service instead of acquiring the skills and building the resources necessary for strategic sourcing. Thus, their organization is able to reap the benefits without the capital investment. Generally, this service is provided by the contracting entity on a fee-for-service basis.

There are several critical issues in implementing a strategic sourcing program under these conditions:

• Strategic Consulting: the service vendor must have comprehensive knowledge of procurement, sourcing, purchasing, and the technology involved. The vendor must be able to provide the strategic consulting services necessary to implementing a successful program, including best practices, types of procurement tools suited to the particular situation, methods of improvement, and technology.

• Technical Prowess: the vendor must also have access to software that will meet the needs of the buyer and prospective suppliers for ease of use, clarity, security, information sharing, and robust hardware and software.

• Project Management: since the success or failure of the project depends to a great extent on how well it is managed, the vendor must have good management systems, and its employees must possess the necessary skills for project management, including the ability to interact with the buyer and potential suppliers, facility with the software and systems, and knowledge of the procurement process.

• Turnkey Systems: as the buyer has no infrastructure or internal resources devoted to strategic sourcing, the vendor is required to provide a turnkey solution that solves the problem for the buyer with regard to the specific items sourced. This includes all aspects of the strategic sourcing process.

• ROI: the cost of the turnkey system must be low enough relative to the expected savings to produce a strong return for the buyer. Since strategic sourcing will likely be done for discrete projects rather than on an ongoing basis, it is important that each use produce a positive return on investment.

When NOT to Use a Reverse Auction

Took a week off, so you're getting a double-dose of the Procurex blog this week.

Despite the fact that Procurex has run over a thousand reverse auctions, they have also conducted several purchasing projects without using the reverse auction. Why? It simply is not the right strategy in some cases. There are definitely instances where reverse auctions are inappropriate. These factors should be weighed carefully when implementing strategic sourcing:

• Where item specifications or auction conditions are dynamic and cannot be specified with a high degree of certainty.

• Where vendor qualifications are critical, lengthy, or uncommon (e.g. a defense, security, or medical application).

• Where price is not the primary concern or the other conditions of sale cannot easily be translated into an auction specification.

• In cases where the use of auctions may erode long-term vendor relationships that are vital to supply or buyer outcomes. In these situations traditional methods may be more appropriate. On the other hand, the systematic approach of strategic sourcing should still be considered, even though a reverse auction is not the appropriate tool. Strategic sourcing may be used with other tools (or even traditional methods) to produce improved results. A consultant may be able to suggest alternatives, so that more can be done with less, even in these circumstances.

More on General Procurement

The platform provided by Procurex enables companies to obtain the best possible value for the best possible price. Those in search of large amounts of a specific good or service will be adequately equipped with tools that will maximize strategic sourcing efforts. This platform has proved to be extremely successful in the market for energy, as seen in the blog post written by Matt. However, many businesses partner up with Procurex for the services provided in general procurement. In other words, I’m talking about the tangible commodities that are central to the functionality of a business. Desks, seats, tables, computer accessories, and paper, for instance, all fall under this category. These are the assets that must be given careful consideration prior to purchasing, especially when buying in bulk. As a business, don’t you think that overpaying for, say, computer monitors reflects poorly financially on the business? Rather, shouldn’t time and effort be allocated to the business’s overarching goal or mission, as opposed to miniscule commodities that are essential to the goal? Even though this doesn’t seem like a big deal, those little expenses can accumulate. This in turn may restrict a company’s budget, and that is unacceptable in these current economic times. Among other things, Procurex provides closure to the uncertainty attached with many business transactions; large or small. Here are a couple examples of how the services provided by Procurex can work in general procurement.

Several institutions have recognized the advantages of Procurex’s general procurement platform. For instance, one Big Ten school procured wireless microphones and other computer related accessories for their computer lab using Procurex’s reverse auction technology. In this auction, there were a total of 190 bids between the suppliers, and the price was lowered by approximately 30%. Another large university saved almost 40% on their purchases of ink and toner for their printers. Again, a reverse auction was used, and it took 153 bids to decide the winner.

There are numerous examples that show similar savings to the ones discussed above. In my opinion, the most valuable thing that Procurex provides for our clients is one thing; closure. Today’s economic situation forces businesses to think and rethink every business move. Are we paying too much? Are there alternative options? Did we get the best possible value for the amount of money we paid? These are all questions that must be asked in any business. Procurex puts those questions to bed. Our business model is intended to put them to bed; it’s our job. If you’re a business that wants to be sure you’re receiving the maximum return on investment, then you should look further into what we do and how we do it here at Procurex.

Breaking New Ground

Midwest Energy Efficiency Leaders Recognized for Groundbreaking Achievements with Procurex as reverse auction and technology provider

We have blogged about how Procurex, Inc. ran the first-ever Online Reverse Auction for Energy Efficiency Grants for the State of Missouri that resulted in up to 75 Million kWh of energy saved in the past. This was uncharted territory for both parties involved. This historic auction that was conducted in the summer of 2010 was recognized at the Inspiring Efficiency Awards held by the Midwest Energy Efficiency Alliance (MEEA).

The Missouri Department of Natural Resources won the Innovation Award for its Best Price Energy Efficiency Program. This program would not have thrived if it weren’t for Procurex’s software. Procurex was integral in helping the state of Missouri award $3 million in American Reinvestment and Recovery Act funded energy efficiency grants to businesses. You can see the official link below:

http://www.prnewswire.com/news-releases/midwest-energy-efficiency-leaders-recognized-for-groundbreaking-achievements-113580569.html

This was the first online reverse auction of its kind, and the state of Missouri, with Procurex, has proven that even energy is a product that can yield savings through a specific vision of strategic sourcing.

More On Reverse Auctions

Procurex prides itself in its versatility when it comes to purchasing. The platform they provide can successfully be applied to any market. Nonetheless, one component of their platform often seems intimidating to those who are not acquainted with it - the reverse auction technology. Check out this link - it's a great way to get to know what a reverse auction really is, how it functions, and how they can benefit you.

http://www.epiqtech.com/reverse_auctions.htm

Reverse Auctions: An Overview

So, you've heard about reverse auctions, or maybe you want to do one, but pump the brakes. You have a lot of questions and concerns regarding the process, and you want to make sure you have all your bases covered. With reverse auctions, there are a lot of things to keep in mind. Here is a list of concerns that Procurex has heard over the years, and keep in mind, we’ve heard it all:


- What I'm buying in this case really isn't a price only decision.

- I don't think my incumbent vendor will be too happy about having to compete for "their" business.

- I've heard from some of my suppliers that they hate reverse auctions.

- I want to make sure it's fair for the suppliers.

- Some of my suppliers can barely get their email, how can I expect them to bid online?

- This item/category is highly specialized and very few companies can make/provide it.

- I've heard that companies have to pay a fee to the reverse auction provider.

- What if I run the reverse auction and then, for some reason, I can't follow through with a Purchase Order?

- I can't commit a specific quantity or delivery schedule.

- I have to place this order quickly. Do I have time to set up a reverse auction?

- Can suppliers get help while the reverse auction is going on? What if it's only 15 minutes long?

- Is there a way for suppliers to practice on the system before the live reverse auction?

Procurex has an answer for all these questions and concerns, and probably some things you may not have ever thought of. Procurex has grown to master reverse auction and strategic sourcing methods, accompanying customer needs for everything from pizza to coal. In the upcoming posts, we at Procurex will tackle these issues in depth, and even validate the effectiveness of strategic sourcing with specific examples.