Procurement 101The Top 5 Reasons Why Procurement Needs a Closed Bidding Process
Coca-Cola Middle East recently produced a video for their product range that doesn’t seem to be related to the closed bidding process in procurement. However, the connecting link is the notion of “darkness” as a curtain that separates individuals from certain information. Why would this be desirable, you ask?
First, an overview of Coca-Cola’s commercial. Six strangers are sitting around a table in a room dark enough to prevent vision. None of the participants had met prior to this set-up. Each person spoke about their interests and then asked the others to make guesses about their physical appearance. When the lights were turned on at the end everyone was shocked: what they saw didn’t match preconceptions. They were actually at an advantage in the dark – free to receive information without the external red herrings that result in an erroneous thought process.
You can view the video here: www.youtube.com/watch?v=84OT0NLlqfM
Now back to procurement. While the standard buyer might go straight to a single supplier and make a purchase, a strategic buyer is more interested in directing orders to multiple suppliers for comparative purposes. This is called a reverse auction. The buyer then writes up all the specifications and in return suppliers send their offers in an attempt to close the deal. In a reverse auction, closed bidding occurs when only the buyer sees offers made by suppliers. Any supplier making a bid is “blind” to offers made by other suppliers. Alternatively, open bidding (which is less favorable) allows suppliers to see all competing offers. Here are 5 reasons why a closed bidding system can be more advantageous than open bidding:
- No Sacrifices on Quality.
A closed bid system allows buyers and suppliers to determine an optimal offer on terms that go beyond lowest price. Product quality can be a huge deciding factor for bid selection, in addition to packaging, safety regulations, shipping details, and other value-added capabilities. In comparison, open bids can create a fixation on the lowest possible price that may cause suppliers to sacrifice quality.
- Targeted Communication.
Buyers and suppliers are able to work collaboratively and negotiate the specifications of a transaction. If they so choose, buyers in a closed bidding system can focus on a potentially attractive offer and initiate a one-on-one discussion with the supplier. Individual components of the transaction can be modified, often to the benefit of both parties. An open bid process does not facilitate such communication as suppliers are preoccupied with outbidding each other and lack incentive to engage in dialogue.
- A Level Playing Field.
As illustrated by Coca-Cola, sometimes we’re better off assessing things in the dark. When suppliers are unable to see offers made by their competitors, all companies have a fair chance to win a bid based on the buyer’s predetermined criteria. A process of open bidding can discourage some suppliers from participating if they believe the bids are beyond their financial capabilities. This decreases the overall volume of business.
- Establishment of Long-term Relationships.
When targeted communication occurs repeatedly, over an extended time period, a long-term relationship between buyers and suppliers can be established. Buyers may be able to secure loyalty discounts, and suppliers are able to expedite transactions if the customer’s details and preferences are known. Trust is maximized. An exchange of open bids does not encourage thoughtful, precise interactions between buyers and suppliers. Less opportunity for relationship development limits potential savings.
- Suppliers Meet Contract Requirements.
Closed bidding helps suppliers meet their financial targets: they are unable to make an offer as a knee-jerk reaction to a competitor’s bid that they cannot fulfill. An open bid system turns otherwise respectable suppliers into frenzied hyenas ripping into the same carcass, hungry to overtake opponents and dominate the bones. This isn’t National Geographic: keep your bidding closed.
These five reasons create advantages for procurement companies that utilize closed bidding in their reverse auction system. More is not always better, especially when this involves information that only moves us further away from a thorough, honest assessment of a situation. In the style of Coca-Cola, cast some darkness on a situation if you want a lightbulb moment – implement a bidding system that functions blind.
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