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Purchasing and Supply Chain Management Articles

Outsourcing Without Losing Control of Internal Manufacturing.

Should Our Purchasing Department Have a Web Site?

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Cost Reduction Is As Easy As ABC

by Lee Krotseng, C.P.M.

It is now 12:00 noon on a rainy Monday morning. Joe Purchasing Agent contemplates his lunch with limited enthusiasm. The PA is concerned about a directive from the president of the company mandating that within twelve months the company must achieve a 10% material cost reduction for a product line that is manufactured in varying volumes at least once per year. The directive closed, "...failure to meet this goal could result in negative consequences..." Joe can read between the lines as well as anyone else - his job is at risk! As he eats his lunch, he reviews the options open to him.

He thinks back to a recent call from a headhunter who wanted him to apply for an opening with a company in another state. At the time Joe had turned him down for several reasons - his retirement with this company would be vested in a less than two years, his wife had a good job in town, and his dog (Beauregard) had settled into a routine of playing with Fifi, the neighbor's French Poodle. Joe could look for another job if he was forced to, but it would be a financially and emotionally draining event. He decides to update his resume just in case, but to realistically explore the possibility of meeting the goal before circulating his resume.

Joe knows that the product line in question has never been aggressively looked at by engineering or purchasing for true cost reductions. He also is aware that to significantly review and/or change all the parts in the product (over 700) would take longer than the time allotted by the directive. If he is to achieve the cost reduction goal on time he must work smart as well as hard.

In a recent discussion with some of his peers, Joe became aware of the fact that ABC techniques (i.e., the most expensive to the least expensive) can be applied to bills of material cost as well as inventory items. He knows that his computer system can give him a costed bill of materials report by assembly or subassembly. However, it does not have the ability to add like part number quantities from different subassembly levels together and then multiply the sum by the item unit cost. Nor can the computer sort the extended line item costs from most expensive ("A" items) to least expensive ("C" items). Joe knows that data presented in this fashion will quickly show him which parts he should concentrate his cost reduction efforts on to achieve maximum results in the shortest time. (For example: a 10% cost savings on a $100.00 part is worth more cost reduction dollars than a 50% cost savings on a $.01 part.) With this game plan in mind, Joe decides to enlist allies to help him reach his goals.

His first stop is the Information Systems (IS) Department. Six months ago he negotiated favorable pricing on some hardware the computer people needed. Both Joe and Susan (the IS manager) believe in co-operation and quid pro quo (you scratch my back, I'll scratch yours).

After reviewing the PA's request, Susan decides that a program can be written that extracts the the data required and prints the report. She calculates that the programming and documentation will take a few days of extra time for her staff. Some of the money saved by Joe will be used for the effort. With a firm promise to have the program in two weeks, Joe's next stop is the Engineering Department.

Again Joe's strategy of co-operation yields a willingness to help. However, Fred has a budget problem and warns he can only allocate a limited amount of engineering resources to reach the goal. Joe assures Fred that with his ABC techniques and the new computer report, they will be able to focus the effort very effectively. Fred wants to hear more about the ABC techniques and wonders aloud if they could be used on other projects as well. After some discussion and a quick call to Susan in the IS department, they agree that any bill of materials in the system (even if it is only preliminary) can be analyzed using the ABC techniques.

It is now exactly four weeks since Joe PA sat down to a gloomy lunch. It's still raining, but Joe's mood is upbeat. An examination of the bill of materials sorted by ABC has highlighted several areas for cost reduction. In fact, Joe thinks he can save more than the 10% material cost reduction required by the directive. Engineering is also pleased since the ABC report on preliminary bills of materials is an efficient tool to assist them in keeping new product costs within budget. Susan can once again point to another IS contribution to the bottom line. In short, a win-win situation has developed from what seemed to be at first glance an impossible or very difficult problem.

Oh yes, Beauregard is happy too.

The author has utilized the above techniques (but not under the same circumstances!) to help reach significant cost reduction goals.

Lee Krotseng, C.P.M. is the Manager of Seminars and Training for International Purchasing Service, a supplier of temporary purchasing/materials professionals and purchasing/ materials consulting and training services based in Detroit, Michigan. He has over twenty years purchasing and materials management experience from small startups to divisions of Fortune 500 companies. He has a Master's Degree in Industrial Management. He is the author of the textbook "Global Sourcing," and has written many articles on purchasing and materials management. Lee has also taught college level courses in purchasing and computer applications for business. He presents seminars on purchasing and materials management topics and is a frequent speaker on purchasing and materials management topics to NAPM affiliates nation-wide. Lee has been active in several NAPM affiliates as a member of the Board of Directors, Professional Development Chair and C.P.M. Study Review instructor. His e-mail address is: pseminars@compuserve.com or you can reach him at http://www.pseminars.com.

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Out-sourcing Without Losing Control of Internal Manufacturing by Lee Krotseng, C.P.M.

In the 1990's out-sourcing became a fact of life in many manufacturing organizations. NAFTA and other world wide market and economic changes are demanding we review our manufacturing operations for efficiency and effectiveness. Lower labor costs in Pacific Rim countries have enticed many electronic firms to out-source some board level assembly with final assembly taking place in the U.S. This has meant that Purchasing and Materials Management have taken on new responsibilities. This article will address one aspect of the out-sourcing issue - the challenge of coordination between out-sourced or subcontracted sub-assembly and in-house sub-assembly and final assembly.

The transition from in-house to fully subcontracted sub-assembly can be difficult, particularly if your organization is using an MRP system. It can get more complicated if you are only sending part of the sub-assembly work to a subcontractor and/or are providing some or all of the parts to the vendor. Most MRP systems (I or II) offer a Make or Buy alternative, but not Make AND/OR Buy.

Like many purchasing/materials professionals, I wondered why the computer couldn't automatically track make and buy. In some respects the challenge is similar to the alternative or substitute part number matter - i.e., have the computer check for a substitute part if the original part number didn't have enough inventory on hand to meet the requirement. In order to check all possible alternatives the computer system gets driven to its knees and your answer comes back in days instead of minutes. I called one of my engineering friends to find out why.

Summarizing the advanced math course to which I was subjected, it works like this. Assume we are manufacturing 10 widgets each made up of 1000 different parts. Further assume that each part has one exactly equal alternative part number. The computer would have to perform 1000 * 1000 * 10 or 10,000,000 comparisons and store the intermediate results. It gets more complicated when the parts aren't exactly equal. The same problem exists for Make/Buy. In the near future, when parallel processor computers become more affordable (and fuzzy logic software is written to solve it) we may see this problem minimized. However, today's computers and software are not up to the task of providing the information in a timely manner. This brings up the obvious question, "What can we as purchasing/ materials professionals do today to keep control of our operations while we are out-sourcing?"

If your organization is already using the turnkey approach where all labor and materials are provided by the subcontractor, then you should treat the part as a "Buy" item in your MRP system and you can stop reading this article. If your company is thinking about out-sourcing, is out-sourcing some of the production or is providing vendors with some parts, then read on.

The transition to out-sourcing, a mixture of Make/Buy (where some production is kept in house) or a situation where we provide some or all of the parts or sub-assemblies to the vendor can be the most challenging aspect of out-sourcing. If we aren't careful we can lose control of our internal materials flow, creating shortages and excess inventory with negative bottom line results that will quickly get the wrong kind of attention from top management. A short review is in order on how MRP systems work. This will help the buyer who is unfamiliar with how individual part number requirements are generated and will serve as an outline to show how the MRP system can be used or abused by out-sourcing. Most MRP systems offer a "make or buy" classification for each part number on the Bill of Materials (BOM). If a sub-assembly is considered a "make" part then parts that create the sub-assembly are "exploded" generating "buy" parts which create the demand we see on our screens and reports. If the individual parts are "buy" parts then we see requisitions to buy the parts. If the individual parts are "make" parts (as in a multiple level BOM) then a shop order is usually generated instructing the manufacturing floor to make the parts. "Buy" parts do not get exploded down any further even if there are several parts that make up the "buy" item. This last fact is very important. Looking at the sample indented BOM will help clarify this information:

SAMPLE: (note: this example assumes we have no inventory on hand)

2 each part number A Buy - purchased part

1 each part number B Make - sub-assembly (work order)

3 each part number C Buy - purchased part

If we want 10 Widget 123s then the MRP would generate a shop floor work order for 10 Widgets, a requisition for 20 each part A and 30 each for part C. A shop floor work order for 10 each part B would also be generated.

Now let's assume we are contracting out 10 each of Widget 123. Here is what the MRP will see.

1 each Widget 123 Buy - sub-assembly

Obviously we have no demand for parts A, B or C. Only a requisition for 10 Widget 123s will be generated. Nor will any shop floor work orders will be created. The other parts are still on the BOM, but because "buy" parts are not exploded down any further the MRP doesn't see the demand. In a 100% turnkey subcontracting operation this is fine since all sub-assemblies and parts that go into Widget 123 are the responsibility of the vendor. However, if we have produced the Widget in the past or are currently doing so, then any part numbers and sub-assemblies in stock are now excess. Inventory turns can quickly drop and excess and obsolete inventory valuation sky-rocket within two MRP runs. Open orders with vendors will be flagged for cancellation. If your company is on an automatic EDI system, vendors who thought they had long term contracts will be confused and irritated at the purchase order cancellations. Buyers will think that the MRP is wrong (AGAIN!). In short, all $%@# can break loose!

It may seem obvious that changing the Widget from a "Make" to a "Buy" would create problems. Unfortunately, many manufacturing organizations from small operations to Fortune 500 companies keep making this error. Whether due to time constraints, computer hardware or software limitations or other reasons, the risk of losing control of the manufacturing process isn't worth it. Particularly since (with a little pre-planning) there are ways around the challenge.

Now that we've seen how to get into trouble, the next step is to find out how to avoid the trouble. There are three different methods or approaches that can be used to keep the manufacturing process under control while still making some of the sub-assemblies in house or providing parts to the subcontractor for assembly.

The first approach is the simplest. Unfortunately, many MRP systems can't do it. Some MRP systems will allow you to change the "make" Widget 123 to a special "buy" that will permit the MRP system to still explode the parts making up the BOM. Note that our sample BOM requires two changes - changing both "make" parts. Also note that the indented "make" part is flagged for reference only (most MRP programs permit this). The BOM will look something like this:

2 each part number A Buy - purchased part

1 each part number B Reference - sub-assembly

3 each part number C Buy - purchased part

A forecast for a build of 10 units of Widget 123 will generate three requisitions - 10 each Widget 123 (for the vendor), 20 each part number A and 30 each part number C. The drawback to this approach is that a work order to pull parts A and B is not automatically generated. A special work order will have to be manually entered into the computer to create the pull sheet for the A & B parts. The increase in manual work orders can be considered a good trade-off when compared to loosing control of the manufacturing process. This particular approach is good when you expect to temporarily continue to assemble units in house and/or provide the vendor with the parts. It is not recommended for long term split production.

The special work order can be used to pull a "last time build" if you go to 100% turnkey out-sourcing. It can also help identify any excess parts that can be sent to the vendor to meet the requirements. (Savvy purchasing/materials managers will sell excess parts to the vendor at their company's standard cost or the vendor's current cost - whichever is lower to decrease their inventory costs.)

Since most MRP systems do not support the "special buy," another approach must be used. One approach is to create an additional BOM for the out-sourced parts. This example will make the same assumptions as the previous one (i.e., - in-house production and out-sourcing with parts provided to the vendor). The BOMs will look like this:

For in-house requirements nothing will change:

2 each part number A Buy - purchased part

1 each part number B Make - sub-assembly (work order)

3 each part number C Buy - purchased part

For sub-contracted requirements:

2 each part number A Buy - purchased part

1 each part number B Make - sub-assembly (work order)

3 each part number C Buy - purchased part

Special shop routing instructions will send the pull kit to shipping and on to the chosen vendor. Again, manual work orders will have to be created. Widget 123 (OUT) part should be received like any other part number. Both parts can be stocked under the original part number (with the Widget 123 (OUT) part transferred by stock transfer ticket) if traceability is not a consideration. If traceability is important, then the documentation for the assemblies that use the Widget 123 needs to show Widget 123 (OUT) as an alternative part number.

The third approach assumes that for some reason your MRP system will not permit you to use either of the previous methods. In this case you must track your out-sourcing parts requirements "off line" using a spreadsheet software package. Each column becomes a time bucket matching the time buckets of the MRP system (usually weekly). Working with the sub-contractor, we determine how much total lead-time is needed to provide parts to his stock room. Keep in mind that each part will have its normal lead-time, plus in-house handling time, plus shipping time from our warehouse to the vendors.

In this case, the BOM will look like this:

1 each Widget 123 (OUT) Buy - sub-assembly

Note that the MRP lead-time for this part will have to be reset to what your sub-contractor vendor and you agree upon. In addition, each time the MRP is run, someone will have to update the spreadsheet. Below is an example of the spreadsheet. Assume that we are using the same Widget 123 subassembly. Further assume that we need 10 units each week and that each part number we supply the vendor has a cumulative lead-time of one week. The vendor will also need one week to assemble the part and return it to our dock. The spreadsheet will tell us when to order parts just like our MRP system. In fact, the spreadsheet should look similar to our MRP material requirements report. Using the above assumptions, our spreadsheet should look something like this:

Purchase orders need to be generated for Widget 123 (OUT) for delivery in weeks 4, 5, 6 and 7; and for Part Numbers A and C for delivery in weeks 2, 3, 4 and 5.

The drawback to this approach is the additional time required to update the spreadsheet. Again this is a trade-off for keeping control of the manufacturing process. All three of these solutions should be considered temporary. Anything less than 100% turnkey for long term projects can create significant challenges (such as excuses for late delivery), particularly if your company is dealing with overseas sub-contractors. I am aware of two instances when the overseas sub-contractor "lost" the parts shipped to him. The amount of time and resources used to clear up those matters was significantly greater that the additional cost some sub-contractors want for doing a 100% turnkey job.

In conclusion, most organizations that out-source production evolve into a 100% turnkey approach for the part assembly over time. If you are planning to out-source for an extended period of time, you should plan on moving to 100% turnkey using one of the above strategies to help in the transition. However, if you are covering a spike in sales or other temporary need, consider using one of the above strategies to keep your internal manufacturing operations under control until things "get back to normal."

Should Our Purchasing Department Have a Web Site?
If Yes, What Kinds of Information/Content Should Be Included?

by Lee Krotseng, C.P.M.

Purchasing professionals are beginning to be inundated with information about using the Internet to conduct purchasing business. Sale brochures, CDROMs, etc. tout a variety of opportunities for purchasing to save time and money - from posting contact names to the Internet's version of EDI. In the next few years, we will all be using the Internet more to source, communicate by e-mail, etc. This article will suggest some criteria to help purchasing managers decide whether it is worthwhile for their purchasing operations to create and maintain (two different functions) World Wide Web (WWW) sites (sometimes called a web page or home page) and suggest what might be put on these sites.

Here are some definitions that will help cut through some of the "Websters' " jargon.

- Web Site - a location on an Internet provider's computer (in-house or external) to place information that can be accessed by anyone on the Internet.

- Home Page - The first page in a web site usually used as a table of contents that provides information (text or graphics) and access (hot links) to other web pages (internal or external).

- Web Page - one "page" (usually 50 lines more or less) of information with/without Hot Links.

- External Hot Link - a short line of text or graphic (usually highlighted in blue) that can be mouse clicked to gain access to another related Web site on the Internet.

- Internal Hot Link - a short line of text or graphic (usually highlighted in blue) that can be mouse clicked to gain access to another related Web page within the Web site.

More organizations (public, private and non-profit) are creating and posting Web pages, but most do not list purchasing information. Higher Educational institutions (public and private) have been wired to the Internet for many years since the "net" traces some of its origins to a need for a communication channel between higher education researchers. However, colleges and universities tend to use their Web sites for admissions, alumni affairs and fund raising and/or course/degree information. Private businesses that do have Web sites usually devote the site to marketing and selling their products and services and/or provide investment information - one notable acceptation is Toshiba (Japan) that solicits bids from overseas suppliers from its' home page. Non-profit organizations tend to market or sell as well. With the increased use of the 'net by buyers and the advent of cyber-auctions (see article below) this is slowly changing.

Those that currently post purchasing information are usually governments (federal, state, and sometimes local) and public educational institutions. Since many government purchasing Request For Quotes (RFQ, RFB, etc.) are required by law to be open to all potential bidders, the use of a Web page to post bids makes a lot of sense. What about the rest of us - particularly in the for-profit sector? Professional purchasing managers need to ask themselves, "Does my purchasing department need a Web site/page?"

To answer this question, several other questions must first be addressed. Specifically: 1. Are my current and near future communication needs between my organization's suppliers and the purchasing function unsatisfactory when using the telephone, fax or e-mail? 2. Do I want to conduct electronic commerce? (Note: EDI will become part of e-commerce in the next three to five years, so if your organization is currently doing EDI, you should answer yes to this question.) 3) Do I want to reduce my RFQ paperwork costs? If so what are these costs currently? 4) Do I want current and possible new sources of supply world-wide to know what kinds of goods and services I'm purchasing without having to conduct sourcing exercises every time a requirement comes in? 5) Is my organization doing business with a government customer or a major supplier to a government customer that necessitates posting bids for all possible suppliers? 6) Does my organization currently have a Web site where I can piggyback a Purchasing Page? (Note: this can save a lot of time, money and effort) 7) Do I work for a organization trying to promote a "high tech" image as part of its' marketing?

If the answer to most of the questions is "no", then purchasing probably doesn't need to spend the time and expense associated with creating and maintaining a Web site and the reader can stop reading this article. For those who answered "yes" most of the time or who for whatever reason want or need to promote a "high tech" image, read on.

In order to keep this article short, it will be assumed that the buyer's organization has access to the Internet through one of the thousands of Internet providers. The next step is to find out if your organization already has a Web site. If yes, then purchasing can simply add additional web pages to the site and add an internal hot link on the Home Page. If not, purchasing may want to check with other departments (particularly sales/marketing) to see if they are interested in a Web site. This can help spread out the costs and improve the chances of top management's approval and support. It can also increase cooperation among the various departments and purchasing.

Generally speaking, a basic professionally designed site can be created for about $5000. If in-house talent is used, the cost can be much lower. The author created his own Web page using free software from one of his Internet providers ($10/month) in about 20 hours and externally hot linked it to his company's homepage that was professionally designed. See below for pros and cons for using in-house vs. contract help. Additional costs such as monthly Internet provider fees (from $10/month for one user to several $1000/month for multiple users) must be budgeted as well. Maintenance and updating of the site (including hardware, software and personnel time answering "site hits" and e-mail requests) can run from next to nothing to $1000s of dollars (depending upon frequency and complexity) and must also be budgeted.

The above numbers are just for rough planning purposes and can vary widely. Top management usually wants a ballpark figure before authorizing a project. To get tighter figures, a Web site project should be treated like any other in-house or outside service contract. This would include a statement of work to be done, the completion date, milestone charts, etc.

This raises the next question - What kinds of information/content should be included on a Web site? Some purchasing web sites include their organizations' Purchasing Policy and Procedure manuals, Purchasing Code or "How to become a supplier to our organization" brochures. This is particularly true for public concerns such as the Web site for the city of Orlando, FL. However if your organization's manuals are lengthy, you may want to put an edited version on the Web site or at least reference the document on the Home Page and place the complete document on an internal page.

If you want to use the site to look for suppliers of goods and services, be prepared to list what you are looking for in some kind of indexed order (alpha-numeric, by product type, etc.) and provide quantity, delivery and quality requirements as well as the buyer to contact. Some buyers may want to include a contact person(s) for technical assistance as well. It may help to think of this kind of web page as an on-line RFQ, so include any information and documentation you would for a formal written quote - including company name, address, phone/fax numbers and contact person(s), etc.

Vendor surveys can also be posted on a Web site, downloaded, filled in and faxed/e-mailed back. Perhaps you may want to list which buyers are responsible for what goods and services or commodities. Generally speaking, any paper you currently release in large quantities can be converted into a Web page including unclassified/non-sensitive drawings and specifications. These can be scanned into a graphic format for download by potential supplies.

Here are some guidelines that might be helpful: Make it simple and easy for a Web surfer to check out your site. Use the Home Page as a table of contents. Most people will not wait for a graphics heavy home page to load, so avoid the flashy artwork and audio clips. Nor will they want to go through several different screens to get information, so design your site for quick and easy access. Work with other departments to include their input on the Home page and to also share the cost. This is particularly true if your organization doesn't have a Web page already in place. Marketing is one department that might be willing to become involved, but consider other departments as well such as Personnel. Top management of public held companies may want to list company financial or other information potential investors might want to know. Some organizations actually create a Web Site committee to design and approve what goes on the pages. Decide if your organization has the in-house talent to create a Web Site or is willing to hire full or part-time personnel to do the job. Outside consultants can be helpful on the front end, but its cheaper in the long run to do it yourself so the how-to knowledge is available when it comes time to maintain and update the site. Keep the site current. If bids are placed on the site, remove them after the award has been made. Potential suppliers don't like to waste time bidding for something that has already been bought. Check the site periodically for unauthorized changes in your web pages. Software exists that permits hackers to modify almost any web site. Answer inquiries promptly, even if its just to acknowledge you received their inquiry. Promote your site by letting suppliers know its there by putting your site address on your business cards and registering the site with several search engines (Lycos, Alta-Vista, Yahoo, etc.). Finally, as with any project, make sure you have top management support to get it up and keep it running.

It will take some time, money and effort to create and maintain a web site, but the global marketplace demands that purchasing proactively use technology to help us do the job more efficiently and effectively. If we do not embrace these kinds of changes, we risk being left behind by our competitors, customers (internal and external) and suppliers.

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Cyberauctions - a Two Edged Sword

by Lee Krotseng, C.P.M.

With Internet usage skyrocketing, a "new" tool is available to purchasing - the cyber auction or cyberauction. The number of web sites offering cyberauctions multiplies daily with names such as ebay.com, amazon.com, marketplace.com, etc. Cyberauctions offer the purchasing pro an opportunity to buy goods or services and/or sell surplus materials. While each has a slightly different approach they all share a common procedure - a multiple bid (in open or closed format) where the highest or lowest bidder is successful. Some people call the lowest bid approach a "reverse auction" since in most ordinary auctions the highest bidder is successful. This article will explore the reverse cyberauction (where the buyer is looking to purchase goods or services) in further detail.

A reverse cyberauction is the multiple step bid technique that purchasing has used for many years with a few additional twists. First, it is not done by mail or in person, but over the Internet. Second, it is done in "real time" like a "normal auction" so that the bid is awarded in a matter of minutes or hours instead of days or weeks. Third, specifications for what you are cyberauctioning must be absolutely clear to everyone. Finally, the bid process is usually public where all parties can see who the other bidders are and what each bid.

In theory anything purchasing buys can be placed in a cyberauction. In fact, several organizations have achieved significant price reductions from using the technique. Go through any major airport and read the advertisements XYZ "company saved $thousands on *.com, you can too." Cyberauctions do permit true global sourcing where anyone connected to the 'net can post RFQs/RFPs and using an existing cyberauction site, or creating his/her own site, "run" an auction for the lowest price bidder. This means that marketplace conditions that were oligarchical or perhaps monopolistic may now be closer to a purely competitive marketplace.

For a reverse cyberauction to be successful, several conditions should be met. Whatever the buyer is purchasing should be non-differentiated - i.e. one seller's product must not be more desirable than another's. Specifications must be well defined and clear to all potential suppliers. The design should be stable and not be subject to change over the life of the contract - otherwise renegotiation must take place again with the successful bidder and perhaps all bidders which increases the buyer's time and effort. Further, the good or service should qualify as a high volume or high dollar "A" purchase in the buyer's industry to justify the additional time and expense associated with a cyberauction. Finally, quality, delivery and service factors must be equal for all potential suppliers since the only thing being negotiated by the cyberauction is usually price. On very rare occasions delivery is auctioned to the supplier who can provide the product the fastest. It is usually a truly desperate buyer who will use this approach and he/she will usually pay a significant price or quality penalty.

Assuming the above conditions are met the buyer should develop a plan for the reverse cyberauction. First, a buyer should ask him/herself what does he/she expects to gain from a cyberauction that wouldn't normally be done by a one step bid and/or negotiations since these methods usually require less time and expense and in many cases offer a lower risk approach. Next, what are the potential losses (perhaps damage to vendor relationships, delivery or quality problems, decrease in service, etc.) if price becomes the only factor in the buyer/supplier relationship?

If the potential gains exceed the potential losses, the buyer should prepare an RFQ for reverse auction. For a first-time reverse cyberauction, the buyer should choose one item that meets the above criteria and prepare a written document stating what is needed (include all specifications and referenced documents as well as quality requirements), the quantity, the delivery date, and any additional terms and conditions. In other words, a standard RFQ.

Cyberauction sites generally have a form for the buyer to fill in on-line. Most of the time, the cyberauction sites will charge a fee to the buyer or seller to "post" the item to buy. Costs usually vary from 1/2% to 5% of the total selling price. There may be "setup costs" as well that vary from an insignificant $2.00 to significant $1000s. Make sure you understand who pays what expenses before you begin the auction.

Most cyberauction sites will behave as third party brokers acting only as a meeting place. Financial, quality, shipping, rejection of damaged goods, and other terms and conditions are the buyer's and seller's responsibility to negotiate. UCC codes and other standard terms and conditions that the professional buyer is in the habit of using may or may not apply. In fact, fraud is currently a greater problem for cyberauctions than with standard RFQ bids. As with most e-commerce transactions, the courts are playing catch-up so any legal problems associated with the contract could create additional challenges for the buyer. Therefore, it is not recommended at this time that cyberauctions be used when suppliers are across international boundaries.

It should be noted that the majority of cyberauction sites are designed for individual to individual transactions and not commercial buying and selling. Some exceptions include "freemarkets.com," "steel.com," and "farms.com," that use well-known suppliers and allow for pre-approval of bidders. Most cyberauctions are available to all bidders ("open" vs. "closed" or "invitation only") regardless of qualifications and ability to deliver.

Another challenge for buyers can happen when sellers succumb to "auction fever," finding that when the reverse bidding is over, the seller has agreed on too low a price to make a profit and then tries to break the cyber-contract or refuse to deliver. This forces the buyer to either negotiate with the current seller, offer the next lowest bidder the item(s) or reopen the bidding, all which take more time, effort and money on the buyers part.

Generally speaking, cyberauction should be used for MRO and "off the shelf" items. It is also a high tech way to buy surplus products, but there is no guaranty that what the buyer needs will be available when needed at a price the buyer is willing to pay. Cyberauctions can be equated to purchasing clothing at discount stores - the buyer has to visit often to see what is currently available and must be willing to purchase immediately to take advantage of the opportunity. Quality must be checked out before the purchase, because returns may require sometimes difficult negotiations.

For more complex or unique items, the buyer is probably better served to run a cyberauction on his/her own website using the e-mail, conferencing or "instant messenger" features of his/her web browser. A discussion of the methodologies and technicalities associated with this are beyond the scope of this short article and would require the assistance of the buyer's webmaster and/or Information Technologies department.

In conclusion, the reverse cyberauction is a high tech version of the multiple step bid that may generate true long term cost savings. A reverse cyberauction that is "open" to more or all interested parties may generate additional vendors with the accompanying opportunities and challenges associated with new suppliers. A purchasing professional should ask him/herself if the perceived positives of a multiple step bid strategy outweigh the potential negatives. It is very tempting to look at cost reductions in the short term, particularly if top management is pushing purchasing for lower costs. The professional buyer who is truly serving his/her organization must be certain that the four legged purchasing stool called price, delivery, quality, and service doesn't become a short term one legged unsustainable stool called price.

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