How can you save 10-15% of your annual buying costs?

Founded in 1995, and now with over 600 employees, Freemarkets creates online e-marketplaces for a wide variety of manufacturing industries, including automotive, aerospace, pharmaceuticals, electronics, metals, plastics and capital equipment. Freemarkets is headquartered in Pittsburgh, but has a growing network of offices in Brussels, London, Singapore and India. The company also boasts a very attractive list of clients in Europe, including SmithKline Beecham, BP, Pilkington, Visteon, Norsk Hydro, and Delphi. To date, in Europe alone, Freemarkets has conducted more than $1 billion of commerce, and the company claims to be able to save buyers, on average, 15% of their annual procurement costs. Sounds impressive, but how exactly do they achieve this? The process is not simply about staging an online auction in order to make savings for the customer. There is a lengthy (4 to 6 months typically) supplier ‘screening’ process which has to occur before any online bidding can begin. There are four main phases to Freemarket’s buyer solution: the first process centres on the identification of savings opportunities, working directly with the buyer. Next, comes the preparation of the Request for Quotation (RFQ). Since the bidding process is compressed into a few hours, RFQ preparation involves much more than simply providing drawings and volume forecasts. Questionnaires are prepared, site visits often occur, and all elements of total cost are carefully scrutinised. Stage three is the supplier screening process, where Freemarket’s “market-making” team acts as a funnel, narrowing down the field of potential suppliers to those whose capabilities best match the buyers’ needs. The fourth stage is when the actual online bidding occurs. Those suppliers who have been selected by the buyer (typically between 5 and 10), prepare their quotes with the support from Freemarkets. All the suppliers have to participate in training sessions on Freemarket’s BidWare software so that they can submit real-time bids. The buyer and suppliers then dial into a secure global network ready to begin the actual bidding. BidWare is also available in 30 different languages, with many different formats depending on the market. The bidding process itself, which usually takes place at one of Freemarket’s Operation Centres, is not simply a case of each supplier submitting online bids over a certain time period. There also needs to be rules in place to ensure market integrity. As David Sobie, Freemarket’s UK director of market-making, explains. “We have strict rules in place. Suppliers agree to bid as aggressively as they can, and buyers agree to award the business at online bid prices, to only qualified invited suppliers.” Sobie continues. “Buyers are still driving everything. What we specialise in, is helping them make better strategic purchasing decisions.” Freemarkets has a global supplier database of more than 300,000 company details, and currently has over 7,000 participating suppliers – but this figure is growing rapidly. With 84 Global 1000 customers, Freemarkets has already held 6800 online auctions, saving more than $2 billion for buyers. So when does the Freemarkets process work best? There seems to be three key criteria for success: Can you specify what you are buying? Are there enough suppliers to create competition? And is the size of the buy large enough to generate competition among those suppliers? If the buyer can answer “yes” to these questions, then Freemarkets can make savings for them. Freemarkets also emphasize that its BidWare technology is not enough on its own. The upfront manual “screening” process is just as important, and the whole process forces the buyer to analyse the existing in-house buying process and its supplier base. In addition to its well-publicised success on the buy-side (the BBC ran a slot for them on the ‘Money Programme’ in April this year), Freemarkets is opening up completely new markets for its buyers. When a buyer, who was looking to source solenoids for use with automotive windscreen washer motors, approached Freemarkets, the market was deemed ‘uncompetitive’ and an auction could not be staged. However, Freemarkets used its global supplier database to identify several suppliers of solenoids in the alternator industry, who all expressed immediate interest in bidding for volume business. Price should not concern manufacturers either. Freemarkets charge between 1 and 3% of any savings they make for the customer. That means if they save 15% (£1,500,000) of a buyer’s annual spend of £10 million, that’s only a payment of between £15,000 and £45,000 to Freemarkets. Perhaps the only concern for manufacturers considering using an online auction, is consolidation of the fast-growing e-marketplace. Therefore, looking for a company, which has a good track record of success for its customers, becomes an important issue. Freemarkets certainly has an impressive track record so far.