Knock down prices

Just how tough has become the life of players in manufacturing's supply chains could be no more evident than in the process of competitive tendering on an e-procurement platform. It's a place where bargains can be bagged by the powerful. Or where, in the blind, anonymous gloom of the virtual auction room, he who blinks first might stand to win or lose a valuable contract. Take Sean Davis. The time is 11 o'clock; the place is his office in Bromley, Kent. He has already punched the pass codes into his computer keyboard and the PC's screen is flashing a five digit sum; £27,500. The reverse e-auction has begun. Scattered around the country – maybe even around the world, Sean can't know – are four other bidders all vying to supply one of the automotive industry's biggest and most prestigious OEMs with chrome badges for its cars. Every minute or so, the flashing numbers click up another £300. £28,800; £29,100; £29,400 … Sean isn't worried. He's done his homework; worked out his costs and decided on the margin he wants to earn on the job. In deference to the reverse auction he has gone back to his own suppliers, told them to sharpen their pencils, then sharpened his own. His carefully worked calculations are alongside him. How much 18,000 badges will cost to manufacture, the price he would like to sell them for and, finally, the lower price his new ultra-lean re-costing exercise suggests he can charge and still turn a modest profit. Holding his nerve is easy at this early stage. The numbers on the screen continue to tick upwards but are still well short of the cost of manufacture, let alone Sean's rock bottom selling price. The screen changes yet again but this time, instead of another number, instead of another £300 increment, it reads "Auction over". In less than a quarter of an hour, Sean has lost a job from a customer to whom his company has been a sole supplier for a dozen years. Lost it to an unknown competitor from an unknown factory in an unknown part of the world. And crucially, lost it to a competitor prepared to sell their wares for less than Sean can make them. Meanwhile, on the other side of the divide that separates buyer from seller and engineering from process manufacturing, the chocolate-maker Thorntons needs to buy some butter; hundreds of tons of it at £2200 a ton. Paul Layzell, director of sourcing at the digital boutique Wax , an e-auction outsourcer and software provider to the food manufacturing industry, makes a small wager with the Thorntons buyer. He bets the man who he reckons knows the market so well that he can recite the names of the cows in the field, that he can do better. Layzell wins the bet as 20% of the previous butter price melts away at auction. He describes his victory and the margin of it as "a jaw dropping moment." Sean Davis' jaw dropped too. But not in a good way. Davis is managing director at Creative FX which, among other things automotive (take a peek at www.fxuk.net), manufactures vehicle badges for the likes of Nissan, Renault, Subaru and Toyota. "You will see our work every single day," he says, although he doesn't want me to snitch on the carmaker that staged the auction. "We've had a good working relationship with them for about 12 years; we were their sole supplier in the UK," he recalls. Three years ago, the OEM that shall remain anonymous, moved to a competitive tender process for its badge needs. "We found that we would win between 75% and 80% of the briefs." But very recently the system changed again, to one whereby Creative FX was commissioned and paid separately for designing the badge and creating the CAD drawings. It might have known what would happen next; once delivered, the CAD drawings were provided to four other suppliers who, along with Creative FX, would vie, at auction, to be selected to manufacture a five year supply of the badges to the drawn specification. "We were invited to quote on a five year supply but it wasn't even a contract," Davis says. "A year or two into the period they could discontinue the badge, so we had to make them on a supply and demand basis. This was 18,000 small chrome badges spread over five years. We couldn't go out and make the 18,000 badges so we can't nail our suppliers down by saying we can make 18,000 badges. It was all speculation really." He is understandably cagey about wanting his costs for the job and his margins published; after all, his experience, and particularly his most recent auction experience, tells him that the automotive supply chain is a dog eat dog world. Suffice it to say that the winning bid came in at 10% below Creative FX's manufacturing cost price. "Someone was able to do the job that much below even our costs. Five years ago if I'd quoted for that job and put my unrevised quote into the customer, I would, without a doubt, have got the order." Although he jumped through the hoops of meeting ability-to-deliver, approved-supplier and quality thresholds "years ago" he knows nothing of any criteria that his competitors might or might not have been required to meet. "We were just four digit numbers so we were completely unaware of even what part of the world the [successful] supplier was from. It could have been China or someone five miles away." While regretting the lost order, Davis is philosophical about the contract that wasn't really a contract and worth, over five years, "not a great deal of money". However, he does get more animated about the significance of the loss in terms of his traditional customer/supplier relationship. "We give our clients a hell of a lot more than a unit price," he explains. "They get a lot of service; if they need me to whip over to their head office just to take a look at something, I'll be over there. If they want my advice on something, and it can't be emailed, I'll be there." If margins have to be pared to the bone, the customer will have to pay separately for such service. But Davis reckons: "Of course, they won't and someone else will [do it for free] but we wouldn't be able to add the margin to give them any kind of service whatsoever." Sean Davis is refreshingly honest about how what he calls this new "hard nosed" kind of relationship works. "When they first asked me to do this, I told them the process wasn't going to change my quotation, even though it did in the end. They clearly wanted what from our point of view was a ridiculously tight price'. I pointed out that it would be difficult to retain suppliers if they all turned in losses but that didn't appear to be their priority. Asked what would happen if all his customers took the reverse auction route, Davis regrets: "It wouldn't finish us as a company, because we do lots of other things as well, but that part of the business would be damaged irreparably." However, like most manufacturers of his ilk, he is a pragmatist and unlikely to idly stand by watching his business go down the drain. "From a selling perspective I hate it but it would be a fantastic way of buying anything. If I was looking at buying a black Ford Mondeo with aircon, electric windows – the full absolute spec – and all the Ford garages went onto this system I could upload everything I wanted [on the car] and the first one to press the button would be the man who got the deal." And while he rues the fact that Creative FX may not be big enough to order large amounts of all the things it needs to run the business, Davis is already musing on the possible upsides of the reverse auction process. E-auctions could come into play "on things like cars, laptops, computers, software; perhaps even the vinyl materials we buy, absolutely. "It may sound crazy, but I can also see a sort of giant sector specific ebay where companies such as mine upload specs of material and component requirements. There's a bit of me that says I've had it done to me and I need to do it to someone else." That's where companies like Wax Digital and its director of sourcing Paul Layzell might come in. The man who was instrumental in Thorntons spreading its butter costs thinner, helps a whole host of companies cut the cost of their supplies but he admits to being a little embarrassed that many of them, particularly those in the retail sector, "don't like to do their laundry in public". He began his career as a buyer for Gordon's Gin and recognises the changes that e-procurement have wreaked on supply chain relationships. "It's happened to me as a buyer; there are suppliers you've built a rapport, relationships with over the years, [then] all of a sudden, because the auction shows visibly to an almost mind boggling extent how much margin there is to be squeezed out, it drives more competitive behavior." Understandably, Layzell is a keen advocate of e-procurement in general and reverse auctions in particular, but he recognises Sean Davis' dilemma. "In the current economic climate, existing suppliers who have the luxury of an account are having to give away more margin to retain business because those who are trying to break in are willing to do so at lower margins just to get a foot in the door." However, he believes there should be more to the process than appears evident from Creative FX's experience."It isn't just about wading in with an auction straight away. It's about a full evaluation and score carding methodology, the request for proposals, requests for information, pre qualification to determine whether or not you are a suitable supplier, meet quality thresholds, whether suitable insurance is in place and so on." That said, not all auctions are about the appliance of science and the best man winning. "Maybe I shouldn't admit this," Layzell says, "but sometimes we've been engaged with multi million pound contracts that [the buyer] perhaps wouldn't want to go away from a preferred supplier and where an auction has been used to spook them. It works; I kid you not." And there exists what are known as Japanese auctions "where you can have only one supplier in the event who doesn't necessarily know that they are; moreover, you're telling them what the price is you're prepared to pay – all they have to do on the system is say whether they're prepared to stay in at that price". Some procurement – where a high level of technical back office support is required or where military certification is in place – may be inappropriate for the reverse auction process but all in all, Layzell believes that the reverse auction is gaining momentum, whether it be for items requiring capital expenditure or regular supplies. "Transport, civil engineering, discrete manufacturing and telecos are all using it as much as the food industry is; everything from picocells for Cable & Wireless through to carrier bags for the retail industry, heating and ventilation and air conditioning refits and facility management." In engineering, savings range from five to 40% and using a reverse auction to procure a warehouse management system for an international organisation across 19 countries drove out a seven figure saving, he says. Reverse power If you're a mid-size manufacturer, buying energy and power via an e-auction may be advantageous; it's reckoned that around 25% may already be doing so. Big users usually prefer to play the market by adopting a strategy of making price-advantageous multiple purchases throughout the year but a middle market that doesn't count energy and power among its top three costs might, depending on their overall risk strategy, want to opt for more certainty. EnergyQuote JHA, which claims to have been among the first to bring auction technology to market in 1997, says that in a fast moving market where prices change by the minute, the swift process of the e-auction allows the deal on offer to be fixed against the market to everyone's advantage. The trick, says EnergyQuote MD Gary Worby, is for the customer – probably with some expert help – to have looked at the energy market, come to the conclusion that the price at that moment is acceptable to the allocated budget and to have decided: "I would like now to take a fixed amount of energy for a predetermined period, maybe 12 or 24 or even 36 months forward. "They're making one buying decision at one moment in time and thus securing their cost of energy for a predetermined period," he says.