Outcome Sourcing Part 2: Expressive Bidding Technology for Specifying Outcomes
By Bill McBeath
on Mar 23, 2010
One promising e-sourcing technology to support outcome sourcing is expressive bidding. Reverse auctions evolved to allow evaluation of a broader set of requirements beyond material price, such as total landed cost, quality, lead times, supplier capabilities, and capacity. Expressive bidding takes it further, analyzing thousands of combinations of bids across many dimensions.1
The early use of expressive bidding occured in transportation optimization. Traditional reverse auctions ask a carrier to bid on a handful of lanes. With expressive bidding, all the carriers are invited to bid on all the lanes and are allowed to give as many different proposals, on as many different combinations and permutations, as they want. The bid analysis software then crunches through all of these different possible combinations to find the optimum set. Optimum of course depends on the outcome that you are trying to achieve (for example, low cost, on-time delivery, supplier diversity, special handling, and so on). Therefore, these tools give you a number of optimization parameters to play with and let you compare multiple scenarios (combinations of bids) and evaluate the tradeoffs.
Another way to view expressive bidding is as an auction where suppliers do the lotting and can bid as many times as they want. This enables buyers to solve very complicated problems by giving the suppliers many more degrees of freedom in responding. It uncovers hidden opportunities such as lanes with empty backhaul, which would never be discovered in normal lane-by-lane bidding.
Use in Dynamic and Complex Spend Categories
Companies have discovered that they can apply the expressive bidding approach in many other areas. For example, a large consumer goods company uses expressive bidding for chemicals, packaging, contract manufacturing, and display production. These are dynamic and complicated situations.
Companies have gotten good results, not just on price but also on rapid delivery/response. They likened it to “Getting e-auction results without the suppliers being mad.” Suppliers can be as creative as they want and the buyer discovers the suppliers’ cost structure and opportunities.
Expressive bidding enables buyers to solve very complex problems by giving suppliers many more degrees of freedom in responding to bid requests. This uncovers hidden opportunities which never would be discovered in the traditional, highly prescriptive bidding process.
Several vendors offer expressive bidding solutions, including CombineNet, Iasta, Emptoris, JDA/i2, and Ariba/Procuri. Note that the term expressive bidding is trademarked by CombineNet who was one of the first to offer this type of technology. For that reason, the other vendors tend not to use it, but we think it is a descriptive term for solutions that allow suppliers to submit multiple (potentiallly conditional) different bids, with multiple non-price factors and enable the buyer to optimize selection of those bids.
Some solutions are geared at letting the end-user organizations take control and run their own auctions. Others are more sophisticated and complex, and may require the vendor’s professional services team to come and help. Under Non-Disclosure Agreements, they will discuss needs, which could range from a single commodity to a whole area of spend, and create a model unique for that project or product. Fairly large spends are needed for that custom approach to payout.
In many cases, such as Emptoris, i2, and Ariba, the sourcing optimization capability is part of a much larger suite of offerings. Buyers must consider the tradeoffs of these various solution offerings to pick the one best suited to their situation.
Expressive bid reverse auctions require a fairly radical change in thinking about preparation of RFx requests and how engineers and buyers specify their requirements. In setting up these requests, the buyer specifies the business rules, policies, and objectives that they are trying to achieve—specifying the outcomes they need. The auction can go through multiple iterations with suppliers to refine the rules and the bids. This means that you have to think hard about what you are really trying to achieve.
For example, the buyer may decide they don’t want any one supplier having more than 20 percent of their business. Or, the buyer wants diversity suppliers to get at least 10 percent of their business. After these rules are defined and you’ve gone through some iterations, the optimization software can show the buyer how much those constraints or requirements are costing the buying firm. For example, “if you relaxed your current requirement for no single supplier to get more than 20 percent of the business, and instead allow up to 40 percent for a single supplier, then here’s how much money you would save.” Now you know how much that specific requirement is costing you. This enables the sourcing team to go back to the person who is imposing that requirement and say, “Is this requirement actually worth the $X that we are paying for it?”
Because of the effort required, expressive bidding is not for every category or situation. Ultimately, expressive bidding drives the sourcing process toward outcome sourcing—an RFx process that is less narrowly prescriptive about the exact things being purchased and is more about the desired business outcomes. It is only a technology, but can be used to transform the sourcing process.