Online Buyers Tout Auction Gains

FRAMINGHAM (02/25/2000) - Erase the image of backroom purchasing agents thumbing through fat paper catalogs or haggling over prices with suppliers by phone.

At General Motors Corp., The Quaker Oats Co. and state government offices, they're online, racking up millions in savings by buying parts, grain, rock salt and other raw materials at Internet-based auctions.

And purchasers are only too happy to tell the world about it, trumpeting the news in press releases the way they used to tout quarterly profits or slam-dunk customer wins.

"Before, you never would hear about procurement savings. Now, traditional companies are using it to tout that they're an Internet player, and that they haven't been left on the sidelines in the business-to-business revolution," said Steve Kafka, an analyst at Forrester Research Inc. in Cambridge, Mass.

"It's funny, but the Internet has made procurement sexy."

For example, GM announced in February that it saved $147 million during an Internet-based reverse auction for rubber sealing packages. Eighteen prequalified suppliers bid on GM's business at the automaker's TradeXchange Web site.

Chicago-based Quaker Oats announced savings of $8.5 million in an online auction for transportation services and glycerine and other raw materials. The auction was set up by FreeMarkets Inc. in Pittsburgh.

State officials in Pennsylvania said they saved more than $8 million buying everything from salt for icy roads to aluminum for license plates at live online auctions, also set up by FreeMarkets. In one 30-minute auction, the state saved $1.5 million buying sugar.

The savings represent the difference between what the state paid at the auctions and what it paid for the same products previously under the traditional request-for-proposal process.

"Frankly, it gets great [cost savings] results, but it also aligns them as movers and shakers," said Jim Zuffoletti, FreeMarket's director of market-making. He said FreeMarkets has arranged auctions for everything from plastic bags to tax preparation services.

Such factors as access to more suppliers, pricing pressure on suppliers who must underbid one another in real time and significant time reductions - from weeks to minutes in many cases - can yield savings ranging from 2% to 25%, Zuffoletti said.

But companies this deeply involved in digital marketplaces are still in the minority.

"Anyone who's buying direct products [at Internet auctions] is ahead of the curve," said Emily Andren, an analyst at Stamford, Conn.-based Gartner Group Inc. Most companies have long-term relationships with suppliers. "The longer term the relationships, the more reluctant companies are to destroy them and go online and do business," she said.

Compared with countless phone calls and weeks of pushing paper back and forth with potential suppliers, live online auctions are "very exciting, with tense moments in each of them," said Gary Ankabrandt, assistant chief counsel at the Department of General Services in Pennsylvania. "During the first 20 minutes, there might be very little activity, then the bidders - all of whom can see competitors' bids - get serious in the last minutes."

Savings accrue for buyers not only in pricing, but also in the reduced time spent negotiating and closing deals.

When Quaker Oats did things the "old-fashioned way," getting three rounds of bids from six bidders could take as long as three weeks, said Carl Curry, a vice president at Quaker Oats. By contrast, he said, "we did the FreeMarkets auction in 30 minutes."

Suppliers enjoy no such benefits, said Paul Post, purchasing manager at J. R.

Wald Co. in Huntingdon, Pa., which sold aluminum for license plates to Pennsylvania in an online auction last year.

"It took a lot more time for us because you've got to get the software from the auction company, load it and train [people to use] it. Then you've got to tie someone up the whole time the bidding is going on," said Post. "For suppliers, it's a lot more time than writing it down on a piece of paper and sending it in."

For information technology groups, the Internet auctions are both a blessing and a curse, said Karl Jessen, an analyst at The Yankee Group in Boston.

"IT has a more limited role in [purchasing via online auctions] because companies don't need to buy and install software. They access the auctions through a browser," he said.

On the other hand, because access is so easy, companies are likely to conduct auctions at several digital marketplaces. That means integrating data from multiple trading exchanges into corporate enterprise systems, Jessen said.