n Online auctions have raised the hackles of suppliers, many of whom believe they could be the killer punch from retailers whose sole intent is to drive down prices. Elaine Watson reports Picture the scene. As the current supplier to one of the multiples, you are invited to take part in an online reverse auction putting this contract up for tender. You're in a pretty incestuous business, and a specialised field, so you know there are probably only two or three suppliers out there capable of meeting the buyer's specifications. You also have a fairly good idea what their cost bases are. So imagine your horror when you sit at your PC to see nine or 10 anonymous and apparently bona fide suppliers submitting bids that wouldn't even cover your costs. Driven down as far as you can go, you call it quits and log off. You've lost the business. Half an hour later, the buyer is on the phone to congratulate you on keeping the contract (at a vastly reduced price). After all, he says, it's not always the lowest bid that wins... Armed with this knowledge, you approach your next auction, again as the incumbent, confident you can keep the business and your margins too. If the price starts to get silly, you'll just stop bidding. This time however, the phone call doesn't come and you hear the contract has been awarded to a company you've never heard of. A week later you get a call from the buyer asking if you could continue supplying the product for another nine months because the auction winner has no experience of manufacturing the product in question and hasn't even got the capacity to make the required volumes. But could you supply it at the new price? The supplier involved in this real-life scenario now refuses to take part in most auctions after being "repeatedly crucified" as the incumbent. "If someone is brave enough to set up an anti e-auction committee, there will be no shortage of people signing up. There's got to be a backlash," he predicts. Ironically, the fact that the lowest price doesn't automatically secure the contract is what has thrown the whole process into disrepute in the eyes of suppliers contacted by The Grocer this week. If buyers were completely satisfied that everyone invited to the auction was equally capable of supplying the contract to their precise specifications, the lowest price should always win the business, argue suppliers. The fact that it doesn't merely fuels suspicions that retailers have invited in suppliers they have absolutely no intention of doing business with ­ purely to drive down the price. "Auctions are not about getting the lowest price per se, but getting the lowest price per supplier," says one manufacturing source. Perhaps the biggest gripe is that suppliers do not feel in control of the process. Because the legwork is done beforehand and the only variable left to negotiate at an auction is price, those bewildered by the events unfolding on their computer screens have no recourse to traditional negotiating tools. "When you enter the situation," says one account manager, "you don't own it at all. There's no way of verifying what you see on screen. It's totally impersonal." And as one senior executive of a leading own label supplier remarks: "Let's just say that there have been occasions when we have lost business to manufacturers who are offering prices we don't understand ­ and you can't even pick up the phone to find out what the hell's going on." Technically, of course, an auction renders the buyer redundant ­ he merely facilitates a process in which the cut and thrust of negotiation is replaced by a two-hour show that he can sit back and watch on his PC at head office. But retailers are not doing themselves any favours by commoditising the supply base in this way, argues one sales director at a major fmcg company. "On the one hand they ask you to invest in ECR and category management and so on and then they say they are putting the contract up for auction. And the sales cycles keep on getting shorter. Where's the incentive to invest?" Auctions are all very well on tyres and photocopy paper, he says. "But my business is all about working collaboratively with retailers to develop business for both sides." Boycotting auctions altogether doesn't do you any favours, while trying to pitch your bids against who you believe to be your only "genuine" competitors in the auction is like "playing Russian roulette". The fact that retailers are prepared to ruin relationships they have spent years building with their supply base for the sake of savings that won't keep on coming, shows how shortsighted they are, he says. "What happens when the contract comes up next time? It's pennywise, pound foolish." As for the consumer benefiting from the savings, he says he's yet to see this on the shelf for the tenders he's been involved in. "There should be an urgent review of how and where auctions are used." Yet to the dismay of those who have seen their margins dwindle at the click of a mouse, buyers are so impressed by this hi-tech tool to drive down procurement costs, they are reaching for it more and more often. And who can blame them? Collectively, grocery retailers and larger manufacturers have put millions of pounds worth of supply contracts up for auction over the past 18 months, from own label commodities like kitchen roll and value ice cream to office supplies, utility contracts and promotional space. And, savings, they say, have run into millions. Moreover, the transparency of an online bidding process can work in the supplier's favour, they insist. In a traditional, sealed bid process, the supplier will always put in his best offer. In an online auction, he can see what the competition is offering and may find he can win the contract without having to go so low. Great in theory, a joke in practice, say suppliers: "Prices always go down." So what do retailers make of this wave of hostility and distrust? Tesco's director of supply chain development Barry Knichel says there is a "degree of nervousness and anxiety on both sides," but emphasises auctions are not used in areas where Tesco has strategic relationships with suppliers: "It's highly unlikely we'd do auctions on Tesco Finest products for example. We're not interested in destroying long term relationships for short terms gains and our ceo is keen we do not perpetuate old style business practices." If bad practice is starting to creep in, says Knichel, "then we're running a fool's errand." However, suppliers shouting the loudest are often incumbents who have been "sitting on healthy margins for some time," he suggests. Sainsbury general manager of b2b John Padgett admits auctions have been a learning curve for both sides, although buyers at Sainsbury are now "using the tool with more finesse". While no category is off limits, says Padgett, "there's no point in making long term plans with a supplier if we're going to move the business in an auction the following month". As for the suggestion that retailers invite rogue manufacturers into the auction, or even spike them with internal bids, he is adamant: "It's unethical and it simply would not happen on the GNX platform." Asda is equally anxious that auctions are not seen as blunt instruments wielded by poor negotiators purely to bludgeon suppliers, says business development manager Will Andrews. "Auctions are just another tool at our disposal, and they are not used carte blanche. Each category is taken on its own merits," he emphasises. "We're not trying to railroad our supply base." So where does this leave those at the receiving end? The good news is we're some way off a situation where contracts will change hands every month because buyers are getting click happy. "At the end of the day," says one retail source, "it's a pain in the arse to change a supplier. We're not going to hold an auction unless there is a chance of a significant price reduction. And if we set a ridiculous price to open, we just shoot ourselves in the foot. After all, no one has to bid." The bad news is that reverse auctions are not going to go away, and all the signs are that retailers are slowly but surely ramping up their activities in this field, says Accenture analyst Jon Bumstead. "What's surprised everyone is how much money they've actually saved and how much more scope there still is for saving. Of course, when you've reached critical mass, the same savings won't keep coming, but we're nowhere near that yet." n l What's your view of auctions? Write or e-mail us. {{FEATURES }}