B-to-B Auctions From A to Z

FRAMINGHAM (04/18/2000) - The business-to-business market segment is brimming with online auction sites where companies can barter, put work out to bid, purchase or sell anything from plastic bags to multimillion-dollar electronic aerospace components. But before your company signs up to hawk or buy online, analysts and participants suggest that potential users examine what happens both online and off-line at a Web-based auction.

Most online auctions require sellers and buyers to register their name and billing information in order to conduct transactions. But in larger, more complex bids for contract services and specialty items, an auction site might check references and credit and perform other types of due diligence.

Generally, the buyers or sellers, and many times both, pay a small percentage-based transaction fee.

Blending Transaction Models

"One important value of an e-marketplace is that it allows participants to blend together different transaction models," says Bruce Tempkin, an analyst at Forrester Research Inc. in Cambridge, Massachusetts. "This does not mean [the] entire universe will use them, but enabling new online transaction forms is an important option."

As with any marketplace, the ability to attract many qualified suppliers into the bidding process, which often involves lots of off-line marketing activity, is one of the most important requisites for conducting a good auction.

Cierra Industries Inc. in Auburn, New York, sells refurbished plastic processing equipment to manufacturing companies. It joined Greenville, South Carolina-based Datastream Systems Inc.'s BizSurplus.com industrial procurement network in January and has sold about $150,000 in plastic granulating equipment online. Although the sales have been small to date, Warren Vanderpool, business manager at Cierra, says the exposure is important. "We're presenting our equipment to thousands of people," he says. "Whether they buy or not, we're presenting our name, and they see that we're seriously in this business."

"As you get increasing numbers of participants in these auctions, the prices paid will decrease over time," says Tim Minahan, an analyst at Aberdeen Group Inc. in Boston. He estimates that most businesses will cut purchasing costs by 5 percent to 10 percent by using online auctions and procurement services. He said he also expects an increase of up to 15 percent in savings as more buyers and sellers participate.

Glass fiber and composite materials maker Owens Corning in Toledo, Ohio, spends roughly $3.5 billion on procurement each year. The company wants to channel half of that spending through online business-to-business auctions and other procurement systems. Thus far, Owens Corning has auctioned more than $7 million in goods from San Francisco-based ChemConnect Inc.'s World Chemical Exchange and expects to channel more than $400 million in supplier contracts through Pittsburgh-based FreeMarkets Inc.

Strategic Part of Business

"We wanted to target cost savings of 5 percent, but we're running higher than that," says John Gellatly, electronic-procurement leader at Owens Corning.

"[Online auctions and procurement have] taken procurements from being perceived as just playing golf and sitting around eating doughnuts to being a strategic part of the business."

But Gellatly said one of the most important tasks in using business-to-business auctions is creating a strong market for the auction, which requires a lot of advance work.

"We're creating a more business-neutral playing field so that the buyer and the sellers can see what the market really is," Gellatly says. "In paper bidding, the incumbent always has an advantage because requests for proposals are not always spelled out and all the suppliers are not asking all the same questions.

In an electronic bid, you cannot have any outstanding questions."

"Technology is a key component, but even more compelling and challenging is the market-making activities of bringing suppliers and buyers to the table," Minahan says. "There is a good deal of hand-holding that is required, from physically talking to participants on the phone to assisting buyers during an auction event."

Some auction sites will solicit and offer training to participants and ensure that expected participants are available when an auction begins. Others offer access to services such as equipment inspections and escrow account services, in which a third party withholds payment until the buyer takes possession.

The electronic world, though, may give the word auction new meaning.

"We're not terribly fond of the term auction," Vanderpool says. "It implies desperation, liquidation and ultralow prices, and that is not what we're looking to achieve. We're looking for fair market value for our equipment, even though we're starting with a less-than-retail price."

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