How 30 minutes could save you $700,000 or more on sourcing IT hardware
When was the last time you ran a sourcing event?
If the answer could be expressed in years, you should know about our Sourcing Quick Start program. Customers with Coupa Procurement can get a 30-day free trial of our sourcing module along with expert assistance to help you launch your first sourcing event.
I recently did this with a large media company, helping them conduct an RFQ followed by a thirty-minute reverse auction that saved them about $700,000 on IT hardware. I worked with the indirect procurement team there, who had been doing business with the same vendor in this category for over eight years. It was time for them to test the market, and test-drive Coupa Sourcing at the same time.
Prior to this, they did all of their sourcing manually using Excel to package and share information. With the complexity of the IT category that hadn’t been sourced in nearly a decade, it seemed like a perfect place to try bringing some new technology to bear.
How complex was the category? There were over 9,000 SKUs spread across numerous IT sub-
categories. You can’t put 9,000 items in a sourcing event; it just doesn't make sense. We needed to start by breaking it down strategically.
Applying the 80/20 rule
The 80/20 rule applies here—usually 80% of your spend comes from 20% of the items you buy. To figure out where we could save the most, we analyzed the data and identified 160 items, a much more manageable number for a sourcing event.
Next we had to think about what we wanted our event to look like. We knew we wanted to do a reverse auction, as part of the overall process, because it’s more transparent and competitive than doing an RFQ only. With a technology-enabled reverse auction, the auction host can enable different levels of feedback and visibility. For example, bidders might be able to see where they rank, but not how many overall bidders there are. If you have many bidders, maybe you do want to show that, so they can see that they’re ranked fifth out of seven. Or, you might just show everyone what the price to beat is but nothing else. It’s up to the auction host to decide.
We invited seven vendors, but you can’t have them bidding 160 line items at a time because the event moves too quickly. So we needed to do it in two stages.
Pre-qualifying the bidders
In the first stage, we asked suppliers for their list price and bid price for the top 160 line items so we could see what kind of discounts might be available. From there, we chose 28 line items to put in a reverse auction.
We chose a mix of items --some laptop items, some router items, etc.—so we could have vendors compete across different categories within IT. The strategy was to gain visibility into each vendor’s relationship with the manufacturer and what their discount capability was, so we could roughly apply that to other items from the same manufacturers that weren’t included in this event. For example, if a new router comes out, we know from the sourcing event that in general this vendor gives us 15% on their items, so we want that same discount for new items. For a three or five year agreement, it’s important to lock in discounts.
As part of the RFQ, we also asked a number of qualitative questions, such as, “How fast can we get items with expedited delivery? Or will you send people onsite to help us configure the systems that we buy from you?”
There were 84 questions in total, in addition to pricing the 160 items, so we allowed three weeks for this qualifying phase. Suppliers were instructed to use the online message board in Coupa Sourcing during this time to ask questions. This saved the buyer quite a lot of time, because in the past they had to answer all the questions via email, many of them multiple times. With the tool they could answer each question once and share it with all suppliers so everyone has the benefit of seeing the answers and the opportunity to contribute to that exchange.
This first pre-qualifying stage helped us qualify the bidders and also make sure they were bidding apples to apples. For example, we thought we clearly stated, “Service for 36 months” on one of the line items. But a few suppliers bid on a 12-month service contract because that’s what they typically do. That made their prices look lower, but we caught it and were able to get everyone to bring their prices in line. Had we gone to auction with that, we’d have seen some big, puzzling price discrepancies.
At the end of the pre-bid phase, we had five qualified vendors for our event. When the reverse auction opened, the five vendors logged in and started to vie for first place. As in most auctions, the real competition took place in the last 5 minutes of the event. One setting we turned on for this event was the automatic extension period at the end to prevent sniping. As a buyer, you don’t want the event to end when suppliers are still willing to compete.
You want the event to extend as long as people keep lowering their prices. So, we set the ground rules up front that the auction will remain open for five minutes after the last bid. So, it goes back and forth until five minutes go by with no bids. Many reverse auctions get extended this way. Ours was no exception and after several time extensions we achieved nearly $700,000 of savings.
Current and future time savings
In addition to great hard dollar savings, we also saved the company time, both now and in the future. In the past, it would have taken weeks to go back and forth with vendors one by one over the phone and email to negotiate final pricing. With the reverse auction it took thirty minutes.
There’s also future time saved by retaining all the information from the event in the tool--all the Q & A, pricing and bidding are in the tool, right where you’d think to look, instead of spread across people’s emails or sitting in a hard drive somewhere. That’s incredibly helpful because five years from now when they want to source this again, they know exactly where to go to find it, no matter if the same people are doing the sourcing or even working at the company.
Lastly, because they already have Coupa Procurement, they can push the new pricing right back into the catalog and even create a contract with a push of a button, saving even more time, and ensuring the future purchases are made with the newly negotiated pricing.