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    Reverse Auctions Sharpen Competition


    © International Trade Centre, International Trade Forum - Issue 3/2005

    Photo: Photodisc

    Reverse Internet auctions put clothing manufacturers in competition with one another to offer buyers low prices. By teaming up with textile mills and trim suppliers, manufacturers can bid prices that won't wipe out their profit margins.

    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.