Reverse Auctions: The Games Companies Play The Use of Reverse Auctions and Strategic Sourcing in the Context of Game Theory Sourcing Interests Group Orlando October 17, 2002 "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Panel Members / Topics B2eMarkets (Patrick Murzyn) Game theory and strategic sourcing – Is it conflict or cooperation or both? 3M (Stephanie Wang) Delivering reverse auction results through six sigma & global teams Progressive Insurance (Laurie Manderbach) Game theory applied to all types of negotiations CAPS (Stewart Beall) The role of reverse auctions in strategic sourcing
Questions and Answers Wrap-up "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Game Theory: How we will define and use it
Pat Murzyn
The study of how intelligent, goal-seeking entities interact to determine social outcomes Considers both conflicting and cooperating goals Conflicting Goals Cooperating Goals Note: Zero Sum (or Constant Value) is all Conflicting
Considers: the players, their interests and objectives, the rules of the game, and the balance and flow of information (asymmetry) … and these combined elements on the likely outcomes! "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Some Examples to set the Stage
Dividing the Orange Teammates Teammates Scrimmaging Individual Incentives for Teammates Buyer – Seller Negotiation for Title Transfer Buyer – Seller Negotiation for a Future Relationship
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Relating Games to Sourcing and Negotiations Alignment Longer-term performance Specifications
Conflict Price (cash flow between parties) Risk Specifications (so you thought this was only part of alignment?) Growth vs. Savings
Players (think of all of them) Objectives of each player Power (gaining it and using it) Information (managing and controlling it) Rules (especially negotiations and bidding activities) "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Delivering Reverse Auction Results through Six Sigma & Global Teams
SIG Conference October 17, 2002 Stephanie Wang 3M Sourcing Operations
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
Overview
3M Background Delivering Results Through Reverse Auctions Using Six Sigma for Identifying Reverse Auction Opportunities Leveraging Global Teams for Replicating Success
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Mærke Merk Tavaramerkki Marque de fabrique Marke Marca di fabbrica Marke Marca de fábrica Marca de fábrica Märke Mærke Merk Tavaramerkki Marque de fabrique Marke Marca di fabbrica Marke Marca de fábrica Marca de fábrica Märke Mærke "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando Merk
Brands
October 17, 2002
A Century of Innovation Bright Future
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
3M Reverse Auction Activity is Delivering Results
Stephanie Wang
Conducted first pilot in late 2000 Completed over 100 Reverse Auctions 30% Activity from outside of U.S.
Sourced $600MM in spend through Reverse Auctions
Identified 15% in planned savings
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
Identify Reverse Auction Opportunities
Objective: Increase identification of global reverse auction spend using Six Sigma Tools.
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
Six Sigma Definition ...
Six Sigma is a methodology for pursuing continuous quality improvement and reducing inherent variability. It requires a thorough process and product understanding and is clearly focused on customer driven expectations.
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
Outcome of Using Six Sigma Tools
Identify and quantify impact of critical success factors Create tool to screen all contract opportunities for fit Maximize impact of resources by focusing on higher probability of success events
Tripled reverse auction completion rate !
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
Global Teams Facilitate Replication
Establish common vocabulary & tool set Communicate Strategies & Best Practices Create consistent guidelines Share outcomes allowing for continuous strategy refinement Track expected and actual results
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Indirect Global Commodity Team Harold Laskin Vice President Lead Dave Swenson Director Indirect
Area Coordinator
North America
Europe
Latin America Africa
Asia Pacific
IT Logistics MRO/OEM & Supplies Travel Professional Services Outsource/Hardgoods
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
e-Negotiation Facilitator Organization
Coordinator - US
Coordinator - LA/A
IT
Chemicals
Health Care Markets
Logistics, Legal, Finance
Packaging
Consumer, Ofice Markets
Energy & Capital
Polymers
MRO & Supplies
Papers
Travel
Cloth & Fibers
Prof. Services
Electronics
Coordinator - EU
UK Italy Germany France
Outsource/Hardgoods
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
Examples:
Replicate across geographic areas Share learning from Brazil Æ US
Replicate across commodity area Include same supplier base in multiple events Demonstrate willingness to switch suppliers Communicate rules to suppliers
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stephanie Wang
Summary
Auction tool leveraged to achieve cost reduction Six Sigma methodology employed to simplify the assessment of auction opportunities Global team structure used to facilitate replication of Best Practices
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Progressive Insurance Laurie Manderbach Sourcing Interests Group 2002
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Laurie Manderbach
Progressive Insurance History
Founded in 1937 4th largest auto insurance company $7.2 Billion company Growing at 28% and very profitable Best year ever 22,000 employees
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Laurie Manderbach
Progressive’s Sourcing History
1997 developed home grown e-Procurement system to order all goods and services 2001 conducted first reverse auction 2002 rolled out both Strategic Sourcing and eSourcing (electronic sourcing process, e-RFX and auction functionality)
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Laurie Manderbach
Challenges We Face
Growing and profitable – no cost cutting initiatives Culture – entrepreneurs, no mandates Must sell sourcing, one employee at a time Moving away from cost center budgets Change management tough IT Sourcing separate from non-IT
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Game Theory Applied All Types of Negotiations
Laurie Manderbach
Face to face negotiation e-Sourcing (private offer) Reverse auction (with consortium)
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Laurie Manderbach
Face to Face Negotiation
Recognized supplier would be a partner Face to face negotiation rather than auction Developed game strategy for negotiation Identified what supplier’s other interests were besides price (press release, marketing, etc.)
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Laurie Manderbach
e-Sourcing Private Offer
Few suppliers met our internal standards Game – don’t let short listed suppliers know they hold the bargaining power Auction might reveal few suppliers
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Laurie Manderbach
Reverse Auction
Reverse auction with our consortium 6 companies participated $35M spend Incumbent supplier refused to play the game All companies switched Overall savings, $7.1M (24%)
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
THE ROLE OF REVERSE AUCTIONS IN STRATEGIC SOURCING A Process To Drive Change And Deliver Value
Stewart Beall CAPS Research Center for Advanced Purchasing Studies
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
CAPS Research Project
Center for Advanced Purchasing Studies 9 Partnership with ISM and ASU 9 140 Fortune 500/Global 1000 companies (80% funding) 9 Research available at website at no charge (www.capsresearch.org) e-Research Project 9 Public Marketplaces (2001 completed) 9 Industry-sponsored Consortia & Private Exchanges (2002 completed) 9 Reverse Auctions (2002 in-process) "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Research Project On Reverse Auctions
Sourcing Process Spend Spend Analysis Analysis
Develop Develop Supplier Supplier e-Sourcing e-Sourcing Identification Identification Strategy Strategy
eRFx eRFx
Auction Auction Strategy Strategy
Reverse Reverse Auction Auction
Award Award Business Business
Follow-up Follow-up and and Resourcing Resourcing
OUR CURRENT FOCUS Develop e-Sourcing Strategy
Supplier Identification
eRFx
Auction
Reverse
Award
Strategy
Auction
Business
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Research Project On Reverse Auctions
3600 VIEW Provider Companies Buying Companies
North America
Europe
Supplier Companies Non-using Companies "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Providers’ Service Models
Heavy Touch
Full Service
Mid-Touch
Consulting available, but self-service encouraged
Mild Touch
Do-It-Yourself, with little or no training
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Buyers’ Observations Simple Definition
Stewart Beall
Always Consider an Auction if:
Scope is clear to bidders
Competitive markets exist
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Buyers’ Observations
Auction maturity 1999 auctions become visible 2000-2002 early adopters put auctions in sourcing tool box Very few power users over
5% of spend
Mature users are gaining a competitive cost advantage
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Buyers’ Observations Four Different Models
Strategic
Up to 50% of $
Project orientation Aggregation
Supply rationalization
Cost reduction
10-15% of $
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Buyers’ Observations Auction Rules
Stewart Beall
Majority price visible Movement toward rank visibility e-RFI and e-RFP have increasing importance Simplicity leads to better results Auction times are becoming shorter Competitive supplier networks increase auction frequency
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Buyers’ Observations Awards
Some companies award 80% to incumbents ➢Average is 50% to incumbents Others 85% to lowest total cost Improves market intelligence, increasing new supplier qualification efforts Award time from end of auction to award varies 1 day to 2 months
average 1 month
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Buyers’ Observations Critical Success Factors
Stewart Beall
Planning and preparation e-Tools for internal and external communication Excellent award analysis communication Award credibility Qualified suppliers
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Suppliers’ Observations General statements are: Incumbents dislike Believe auctions are focused on margin compression New suppliers like opportunity for new business Improved communications will foster acceptance Fair. Helps develop market price. RA’s assist in internal productivity and cost improvement. Decrease sales cycle by six months, improving cash flow
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Why Some Companies Are Not Using Reverse Auctions
Stewart Beall
Getting prepared to use in the future No clear ROI - (indirect purchasers) Tried but quit using no great price reductions lack of supplier participation (cartel) lack of critical mass (value) in the auction buyer resistance technical specifications not possible to identify in detail
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Stewart Beall
Reverse Auction Results Savings
Highly variable
-15% in up markets; considered a cost avoidance
70% for companies beginning to aggregate
Average savings
Very few commodities have been re-bid due to auction maturity
10% to 25%
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Reverse Auction Results Soft Savings
Stewart Beall
Cycle time reductions 9 Variable 9 0% 9 70% Average 9 15 to 30 % 9 difficult to separate auction time savings from e-RFx process savings Increased strategic orientation for sourcing personnel "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Wrap Up
Comments on Game Theory and Sourcing Cooperative objectives Long-term relationship Net Risk reduction / management
Conflicting objectives Price paid/received for well-defined good or service Risk shifting Growth vs. Savings
Complex / Shared (can be conflicting and/or cooperative) Cost Reduction (depends on type of cost removed) Process defect removal (depends on who gets benefit) Increased Value of good/service (depends on who realizes)
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Supplemental Slides
The following slides are included in the handout package for the attendees.
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
What Makes Procurement Auctions Different?
Generally speaking: Determining a relationship versus transferring title Best bid wins? Not! (but should they?) Product / service often not yet created Agent of organization (yet to perform) Bid price rarely represents total real value/cost to buyer
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
If it is about the bidding event, then …
Use auction and bidding theory A subset (or specialized segment) of game theory Considerations Number of qualified and interested bidders Public valuation Private valuation Information symmetry or asymmetry Experience of the bidders Degree of transparency in bidding (if any) Rate of information exchange during bidding
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
References: Auctions and Bidding
Pat Murzyn
Articles Milgrom, P. Auctions and Bidding - A Primer Journal of Economic Perspectives, Vol. 3, No 3, Summer 1989, pp. 3-22 Engelbrecht-Wiggans, R. Auctions and Bidding Models: A survey Management Science, Vol. 26, No 2, February 1980, pp. 119-142 McAfee, R. P. and McMillan, J. Auctions and bidding Journal of Economic Literature, vol. 25, 1987, pp. 699-738.
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Most Important Components of Reverse Auction
Pat Murzyn
Market Conditions Preparation
Knowledge of market Knowledge of alternatives Knowledge of total cost / value elements Knowledge and acceptance of risks Specification Communication (with bidders and stakeholders)
Number of qualified and interested bidders* Perception of fairness – willingness to award *Example of a single source RFQ
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Relationships v Technology Work by Jap, et al California Management Review (Haas School of Business, UC Berkeley) (Jap and Mohr) Summer 2002, Vol. 44, No. 4 Leveraging Internet Technologies in B2B Relationships Exchange Context: Relational Transactional
Web Efficiency: Information Sharing Increased Reach Dynamic Pricing
In Relational x Dynamic Pricing
Lower Customer Service Lower Relationship Quality Lower Cooperation Increased Channel Resistance
However, the opposite impact in transactional exchanges "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Basic Guidelines for the Buyers
Develop an enterprise reverse auction strategy eNegotiation or eBidding center of excellence (COE)
Know your total costs, trade-offs, and risk factors Consider incentives for value added aspects Know the market (predict a result) Learn about auctions Establish and follow rules for events Audit the results and explain all savings Track performance PREPARE and PERFORM "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Basic Guidelines for the Sellers Develop an enterprise reverse auction response strategy eBidding response team – a center of excellence (COE)
Know your total costs, value, and risk factors Know the market (predict a result) Propose incentives for value added aspects Learn about auctions Understand and follow rules (ask if unclear) Explain all savings to the buyer Help track performance (look for incentives)
PREPARE and PERFORM
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
References: Excellent Discussion of Applied Game Theory
Pat Murzyn
Applying Game Theory Think of the 5 “PARTS” of any Game
Players Added Value Rules Tactics / Strategy Scope
How to use this understanding to Change the Game
Image from www.amazon.com
Image from Amazon.com
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
References: Introduction to the Basics of Game Theory
Pat Murzyn
Brief History Matrix representations Explains the basics
Zero-sum, 2-person Non-zero-sum, 2-person N-person Utility Theory
Image from www.amazon.com
Image from Amazon.com
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
References: Games, Strategies & Managers
Game theory for typical business decisions
The basics of game theory Negotiating (2 party) Contracting (incentives) Bidding (N-party) General strategic use
Image from www.amazon.com
Image from Amazon.com
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
References: Story of the life of a famous Game Theory Expert
Pat Murzyn
All about John Nash Not at all like the movie Interactions with the greatest minds on the subject
Image from www.amazon.com
Image from Amazon.com
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
References: Links David K. Levine’s (UCLA, Dept. of Economics) http://levine.sscnet.ucla.edu/general/whatis.htm
Game Theory Definition
http://pespmc1.vub.ac.be/ASC/GAME_THEOR.html
To find the Über web sites Use www.Google.com
B2eMarkets References
(Check the website)
Web Seminar Archive: Reverse Auctions: Is there a Dark Side (episodes I & II) Six Sigma Sourcing
The Strategic Source (Newsletter) articles Reverse Auctions and Game Theory (2 articles)
White Papers: To Auction or Not to Auction Six Sigma Sourcing eNegotiation Strategy (new) "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Pat Murzyn
Game Theory? Morton Davis, author of Game Theory: a Nontechnical Introduction “in a game there are others present who are making decisions in accordance with their own wishes, and they must be taken into account” “There really isn’t a “theory” of games; there are in fact many theories.” “The theory of games is the theory of decision making”
Ray Noorda, founder of Novell “You have to compete and cooperate at the same time.”
Brandenburger and Nalebuff, authors of Co-opetition (Harvard/Yale) “a framework to think through the dollars-and-cents consequences of cooperation and of competition.”
John McMillan, author of Games, Strategies and Managers, (UC San Diego) “In a sentence, game theory is the study of rational behavior in situations involving interdependence.”
Abraham Lincoln, really really smart person “When I am getting ready to reason with a man I spend one-third of my time thinking about myself and what I am going to say, and two-thirds thinking about him and what he is going to say.” "The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Cost Sav ings Corre lation = .44 6
5
eRA
4
3
2
1
0 0
1
2
3
4
5
6
eRFX
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
October 17, 2002
Cycle Time Savings Correlation = .81 8
7
6
eRA
5
4
3
2
1
0 0
1
2
3
4 eRFX
5
"The Games Companies Play" presented at the 2002 Sourcing Leadership Conference in Orlando
6
7
8 October 17, 2002
