Mars Inc. (Mars) is one of the largest privately owned businesses that purchases more than $4 billion of materials annually. It is the producer of many well-known brands including Mars, Twix and M&Ms. The company was aware that many major firms were achieving savings of around five percent through the use of online procurement auctions. These are also known as reverse auctions where typically the buyer (in this case Mars) puts a Request for Quote (RFQ) for a supply contract up on the procurement website and potential bidders (suppliers) submitted bids in a reverse style to normal auctions where the bid price was driven down until, usually, the lowest price won the contract. There are many advantages and disadvantages to this method of selecting a supplier which may affect Mars in different ways.
One of the most notable advantages of reverse auctions is the savings that can be made. Recently it was documented that Thorntons the confectioner, a similar business to Mars, had made significant savings by using the online procurement service Wax Digital. Here they only signed up suppliers of hazelnuts, diesel and air conditioning with a six-figure saving (Goldsmith, 2007). This should be noted by Mars especially as they are in a similar business category. Mars is even bigger than Thorntons therefore, even more savings could stand to be made.
The reverse auction system was also seen as an advantage in addressing some of the weaknesses that Mars faced with the previous contracting procedure. One of these points is that the endpoint of negotiations with suppliers could become arbitrary and often led to a situation where another valued supplier may have been willing to offer better terms. The auction environment is ideal for this as it is seen as a much quicker process roughly taking between three and seven days compared to negotiating with suppliers which may have taken weeks of months (www.epiqtech.com). Further, it has been seen that producers have been able to streamline the vendor selection process and have made it easier on themselves to select the right supplier for each process (www.epiqtech.com). Thus, eliminating the problem of other valued suppliers being able to offer a better deal.
Another point related to reducing cost is that through auctioning over the internet, producers can be in business with suppliers from all over the globe. Before this process, producers may not even have known that these suppliers had existed due to lack of communication and information (www.epiqtech.com). This could open new doors for Mars, as an international company, to utilise the best suppliers at the best costs to them.
However, there are several disadvantages to the whole auction procedure as opposed to a conventional one. One of which is that the brute force reliance on price. It has been seen from previous examples that producers may choose the lowest bid only to find low quality products (www.epiqtech.com). Further, recently a large Asian FMCG conducted a series of auctions for its raw materials where the RFQ went well however, the suppliers refused to submit proposals as the initial bid price was set too low. Therefore, they had to cancel the auction and fresh RFQs were issued resulting in them having to pay a much higher rate for the materials (www.esourcingwiki.com). For this reason Mars may want to steer some focus to their relations with suppliers. However, it appears that they have already taken such steps with a team of consultants working with suppliers to help them with their bids.
Further, again if too much emphasis is focused on cost the producer may loose goodwill from a vendor that they have worked together for years (www.epiqtech.com). This may be particularly damaging for Mars as the bulk of their $4 billion annual direct material purchases came from a small number of highly valued suppliers. It may be that if the auction process continues that Mars will need to make specific efforts to maintain these good relations with the suppliers especially with the five core business principles that it aims to run its business by. The two principles that may cause problems related to the auctions are responsibility and mutuality. However, Mars have already stated that they do not expect to squeeze suppliers to the point of no return with the benefits of the auction being shared between Mars and its suppliers.
A further point that could amount as a disadvantage to Mars is that in auctions, opponents start with a high bid and only reduce it if they are forced to with their competitors and therefore do not always drop to the lowest price they would be willing to offer (www.aia.org). Due to this Mars may not achieve the reduced cost that they were aiming for.
In terms of the problems that Mars have found with the online auctioning system, there are possible solutions. One such problem was that Mars did not want to become dependant on just a few suppliers or end up with too large an amount of prospective suppliers. I feel the Mars has already partly found a solution to this problem through the use of passwords to gain access to the auction website. This means that all the suppliers that Mars are interested in can gain access and bid. To further combat the problem of not enough bidders, they could send the RFQ via letter or e-mail to make the announcement more visible to prospective suppliers and even advertise their website with the view of prospective suppliers applying for a password to access the site at the discretion of Mars.
In conclusion, I feel that the advantages and the measures that Mars have taken to reduce the disadvantages of the auction procedure make it a worthwhile venture to pursue. It speeds up the process of selecting a supplier and negotiating considerably and also, on the whole, has been seen to reduce costs. I also feel that if Mars continue to follow its five core business principles, through to the auction process that they will not loose the valued relationship that they have built up with valued suppliers especially if they highlight that the potential savings could be shared mutually.
REFERENCES
Bell, P, C, Mars Incorporated: Online Procurement, Ivey Management Services, 2003
Goldsmith, J, Thorntons Whips up Suppliers with Reverse Auctions, Silicon.Com, October 2007, Accessed from: http://www.silicon.com/retailandleisure/0,3800011842,39168748,00.htm
http://www.aia.org/static/state_local_resources/projectdelivery/CICC_of_MN_Reverse_Auctions.pdf
http://www.epiqtech.com/e-procurement-Trends.htm
http://www.esourcingwiki.com/indexphp/Maximising_Potential_Benefits_In_Reverse_Auction
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