In a move to cut buying costs, some big clothing retailers now
require their suppliers to participate in reverse Internet
auctions. They use these auctions mainly for sourcing large volumes
of supplies and for standard products with easily defined
specifications, where there are a minimum number of suppliers for
the products, who can bid against one another.
For buyers, reverse auctions can spur dramatic cost savings and
long-term efficiency improvements in the purchase of goods and
services. For example, procurement charges account for about 60% of
the cost of woven shirts; saving even 5% in costs is, therefore,
important. As well as lower prices, buyers can also reduce
negotiating times with manufacturers. Since buying represents a
substantial portion of retailers' business activity, automating and
streamlining the process can allow buyers to focus on other aspects
of their job.
Cooperate with primary suppliers
For manufacturers, reverse Internet auctions make prices
transparent, which encourages competing suppliers to lower their
prices to win orders. Up to 75% of the cost of an item of clothing
is made up of fabric and trims, so clothing manufacturers need to
cooperate closely with suppliers of these primary items to succeed
in Internet auctions.
In fact, a close strategic partnership is imperative. If clothing
manufacturers bid on their own, their whole margin can be
eliminated immediately. Competitors with a strategic partnership,
however, have the margins of the clothing and trim manufacturers
and the fabric mill to manoeuvre with. Ideally, all the partners
should participate jointly in the auction to analyse bids and
discuss how they can further cut prices.
One supplier's experience
Newage Group, a Bangladeshi shirt manufacturer, had to adapt to
online bidding when one of its customers, a large French
supermarket chain, said Newage would have to go through a reverse
Internet auction with other trusted suppliers to provide shirts to
the company's stores.
For some products, this retailer still follows normal ordering
procedures, but for orders of 35,000 pieces or more, it selects a
number of sellers and asks them to participate in an online
auction. Newage and other suppliers are informed of the
requirements six to eight weeks before the auction. The retailer
still negotiates an initial free-on-board (FOB) price for some
products, and still requires samples before approving a supplier
for the auction. Once it approves the samples, the retailer
notifies the suppliers that have met its criteria, who then receive
specifics on the auction in advance by e-mail.
Bids are transparent
The auctions are usually conducted in dollars or euros if a "full
package" (i.e., landed cost service) is asked for. If the retailer
is responsible for logistics, transportation and import procedures,
an "indexed" auction is held, with each supplier being allocated a
price index related to such factors as the freight cost and whether
the supplier is entitled to duty exemption. In this way, the
retailer can compare FOB shipment from suppliers in different
regions, such as Dhaka, San Salvador and Shanghai.
Suppliers place opening bids within 30 minutes of logging on. Users
generally see their own bid and the lowest bid on the screen. If
the user's bid is the lowest it is displayed in green, if not it is
red. Sometimes bidders are shown all bids submitted while the
auction is open, which generates competition.
The auction usually lasts two hours, although it can be extended by
20 minutes if a lower bid is made in the final ten minutes. Bidding
can be lengthy - suppliers usually drop their bid by one index
point (corresponding to US$ 0.01) initially and wait until the last
minute to make final bids.
Bidders are notified of the results once the auction is complete,
and the winner receives confirmation of the successful lowest bid
by e-mail.
Lessons for manufacturers
Be prepared. Participating suppliers
should be well prepared with the basis of costing, with a clear
idea of how low they can go and at which point to step out of the
auction. They need, at the minimum, standard personal computers
with Internet access.
Lowest price prevails. A supplier may
have already negotiated a price with the retailer before being
asked to participate in the reverse Internet auction. If the
supplier wins the auction with a bid that is higher than the one
already negotiated, then the lower price prevails. In that case,
the auction will have had no impact on the price - which has
happened to Newage.
Technology is not foolproof. Newage once
won an auction but was asked to go online again because a
competitor had a bad phone connection and lost the Internet hook-up
during the auction. In that case the auction started again with the
lowest bid that had been made when the Internet connection was
lost.
Auctions don't help marketing. Internet
auctions are not marketing tools for small and medium-sized firms
or new suppliers that want to supply to large retailers for the
first time. Reverse Internet auctions are usually conducted between
long-term trading partners, where the auction is a step in
conducting business and securing an order.
In a buyers' market, suppliers that want to continue exporting have
to comply with requirements. A way to avoid being part of a "race
to the bottom", however, could be to develop non-standard products
that won't put manufacturers in direct competition in reverse
auctions.
This case is drawn from ITC's book, Get Connected:
E-applications in the textile and clothing sector
. For a copy,
visit ITC's e-shop at http://www.intracen.org/eshop.
Steve Hirsch is a Washington-based freelance journalist, writer
and editor specializing in international news. He is the former
Editor-in-Chief of UN Wire
.