October 21st, 2013
What do you call a fertilizer buyer? A poo-curement expert.
August 27th, 2013
Plexxus Hospital Operations Sourcing Team took a new approach towards driving down costs for Member Hospitals by having proponents in the Nursing Staffing Services RFP– on behalf of University Health Network and Mount Sinai Hospital — participate in a live reverse auction, a first in healthcare in Ontario.
Six proponents who obtained the minimum score in the RFP evaluation process were shortlisted and invited to participate in a reverse auction, where they would submit decreasing bids on their hourly rates.
The Plexxus Hospital Operations Sourcing team was tasked with solutioning a tool to facilitate the live auction, which would take place online. After an involved process including research and product demos, K2 Sourcing Inc., was engaged to be the service provider for the tools required to facilitate the auction.
The auction was scheduled for 30 minutes with 5 minute extensions in the case of a last-minute bid. In total, the auction lasted 50 minutes, with four suppliers submitting 30 counter offers resulting in significant savings over the five-year agreement.
Final price submissions as a result of the auction for the four participants ended with less than a 3% spread, confirming that a market value was established. A market value allows for qualitative factors to have a larger impact on the final decision, thereby helping to ensure that the most competent supplier is selected at the best price.
Because of the successful outcome of this event, this technique may become more widely used by Plexxus as a sourcing strategy.
Additional details can be found at: http://www.plexxus.ca/annual-reporting.html
K2 Sourcing has helped many organizations reduce the cost of contingent labor and over 200 other spend categories using a combination of eRFP, and where fitting, reverse auction technology combined with the best service in eProcurement.
For more information about K2 sourcing or to set up a demonstration please contact K2 Sourcing at 1-877-824-9809
August 5th, 2013
Many CFOs and CEOs believe there is a gap between what the procurement organization is reporting as cost savings and the reality shown in the P&L. The difficulty is primarily due to poorly agreed upon definition of cost savings by many organizations, a lack of sophisticated reporting tools, and appropriate checks and balances. In the 1st installment of this multipart commentary, K2 Sourcing will provide an overview of a few different methods organizations utilize to measure cost savings.
Most organizations start with purchase price variance (PPV). This is the difference between the standard cost and the purchase price. Another way to define standard cost is to say it is the baseline to compare offers to. In an upcoming post, will examine the nuances of establishing standard costs and baselines. PPV is a good starting place because it captures a large percentage of an organization’s expenditures. However, PPV typically ignores expense items, and measured alone PPV can overweight price in decision-making.
As organizations improve their cost savings metrics, they typically add methods to review total cost. The most common categories K2 Sourcing observed included freight, duties, return allowances, co-op marketing, and rebates. These organizations have also established methodologies to measure savings on indirect categories.
The factors mentioned so far impact organization profitability, but they don’t take into cash driven goals like inventory reduction and improved payment terms. Some organizations have turned to a cost of capital calculation which converts interest on cash to show the impact on profitability and return on investment. Right now with low interest rates many organizations are using a hurdle rate for interest. We will discuss more about the math behind cost of capital based total cost models in a future installment.
We have also observed organizations including less tangible factors like engineering support, vendor managed inventory, monthly invoices, online catalogs, general responsiveness scores, risk and other probabilities, etc. One organization had an interesting method of utilizing market indexes to provide credit for cost savings. If the index increased, thereby showing unfavorable PPV, if the buyers could show their costs increased less than the increase in the index, they were given credit for cost savings.
Many organizations measure only PPV because it’s easy. As we move into more complex total cost models with additional rules, it typically takes organizations more labor to calculate savings, and usually requires manual intervention. Unfortunately, measuring only PPV holds procurement back. People work on what they get credit for.
After benchmarking several hundred organizations, K2 Sourcing observed procurement departments with great credibility had one thing in common. Cost savings were clearly defined and the numbers were regularly reviewed and signed off by the CFO or appointed accounting team member.
If there is one thing to take away from this article, it is to have a conversation with the CFO or Finance Director about the definition of cost savings. Determine where your current state and which model makes sense for the future. In future installments, K2 Sourcing will discuss establishing baselines the organization buys into (pun intended), and the variables and the math for various cost of capital based total cost models. If you want to know more now and discuss your organization, please don’t hesitate to give us a call (talking is free).
Let’s expand procurement’s impact together!
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March 22nd, 2013
K2 Sourcing has helped organizations bid over $150,000,000 in indirect consumable expenditures. We have learned a great deal on the way and will share some of that with you here. Before we talk about the seven components, let’s take a minute to define consumables and what we like and what is challenging about these categories.
Consumable expenses are those categories of purchased goods that are usually expensed (not inventoried), and that are used to support the general operations of the organization. Common categories include; office supplies, IT products, MRO, safety supplies, janitorial supplies, production supplies, distribution supplies, etc. There are many sub-categories.
What we like about these categories is they offer a medium to high savings opportunity with typically very low risk. What we find challenging is the high labor to execute, the typically poor specifications, and brand preferences. Despite the challenges, we find companies we work with typically save 15% to 35%. Here are seven components needed to create a successful project.
- Manufacturing part numbers. Many organizations buy private label or distributed products with item numbers that are difficult to link to a good product description.
- Historical purchase volumes. As expense items for many organizations it is difficult to gather purchase history and sub-categorize items.
- Tail-end spend. Indirect consumables usually are high mix low volume with many one-off purchases. Breakout contract vs. discount or cost plus items.
- Standardize. Combine the low volume purchases into higher volume purchases. Use a weighted average to later calculate savings.
- Unit of measure. A case is not a case and a bottle is not a bottle. Drive to lowest common use denominators.
- Substitute items. Allowing generics, private label, and other brands increases competition. The additional savings is worth the extra work needed to complete due diligence.
- Audit. Contract compliance within organizations can be difficult. Take advantage of web based technology suppliers offer wherever and whenever possible.
The seven components above are suggested to help get you the most out of specifically indirect consumables bids. As in any request for quote or reverse auction, a great deal of additional information needs to be defined. Please contact K2 Sourcing or ask us questions about your indirect commodities by commenting.
January 29th, 2013
For anyone procuring IT Hardware, internal customer satisfaction ranks as one of the main concerns. The article, “45,000 PCWorld readers name the brands they love (and love to hate)” (February 2013, Christopher Null) in PC World provides consumer feedback across a desktops, laptops, smartphones, tablets, and printers.
I liked the article, but didn’t get a clear feel for the number of respondents. If 45,000 people responded, the information should be statistically valid, and a good source of information. I asked the author for clarification and, provided a response is given, I will post an update.
Getting back to procurement, while customer satisfaction ranks high in importance, purchase price and ongoing costs should also be primary drivers. K2 Sourcing has helped fortune 500, large government institutions, and small business entities procure IT hardware. The projects that were most successful did NOT specify a particular brand or model number, they specified performance characteristic such as screen size, processor, memory, etc.
Of course, there is a whole lot more to IT Hardware procurement than satisfaction and cost, but it’s a good place to start when thinking about an IT Hardware Procurement RFP.
January 23rd, 2013
One corrugated box says to another box, “I just got sold at a 20% discount! What do you think of that?” The second box thinks, “Wow!!!! A talking box!”
December 14th, 2012
As a child, I remember standing on the side of the dusty road seeing the bright sun glinting off the chrome. The ground vibrating as the king of the road, the 18 wheeler, charged down the highway. Using children’s sign language my half bent arm moving up and down like a piston, my heart raced as I compelled the driver to answer my pleas. Then like a thousand trumpets playing a single perfect note the air horn heralded the king passing by.
Is this vision from the past, shared by so many children, doomed to extinction?
Google’s self driving car, enabled by GPS technology and on board computers, has now driven over 300,000 miles without incident. Nevada and California have already passed “Autonomous Vehicle Bills” into law, and Google’s Brin expects self-driving cars to be on the road in five years and drivers licenses to be obsolete by 2040.1
It is not difficult to see the impact on the trucking industry. In the US, driver shortages are common, stricter hours of driving regulations have been implemented, and fuel costs are ever increasing. Imagine a line of 50 trucks drafting down the highway a few feet from each other bumpers accident free – shaving 20% off fuel costs. Without the need for 3 manpower shifts, the asset can run round the clock shortening delivery cycles and further reducing costs. As automation impacted the factory, so will autonomous vehicles impact trucking.
As a procurement professional, I always want to select the best suppliers. In upcoming contract reviews and reverse auctions, it’s time to start asking shippers about their plans for autonomous vehicles. Those with plans to invest in the technology will provide lower costs, faster delivery times, and it almost hurts to say it, lower accident rates.
Let’s just hope the industry programs motion recognition for the kid standing on the side of the road.
1. CNN Tech, Self-Driving Cars now Legal in California, October 30, 2012 Heather Kelly
November 6th, 2012
CAPS Research provides a summary about the CPO role in the report “Snapshot of the CPO Role Shows Significant Change.”
- Increasingly CPO titles include VP or Executive VP.
- This suggests growth in the profession.
- 60% are hired from within the company.
- CPO’s average 27 years of experience with 14 years in supply chain.
- Highly educated – 43% undergraduate and 53% masters.
- The average salary according to the 2012 Survey guide is $291,000. (1) 2012 Survey guide is $291,000. (1)
The full report, “Snapshot of the CPO Role Shows Significant Change,” can be found at www.capsresearch.org.
1. Source ISM 2012 Salary Survey. http://www.ism.ws/files/Tools/2012ISMSalarySurveyBrief.pdf. You may want to compare that figure against other impartial surveys as I have heard people tend to over-inflate salaries in self surveys. I haven’t done the research. That is based an opinion of a friend in the industry.
October 6th, 2012
You have probably heard plenty about the “Euro Crisis.” However, there does not appear to be articles relating to the tremendous impact such a change would mean to global sourcing and procurement professionals. This article quickly examines how such professionals and organizations should prepare for such a split.
Roger Bootle, Winner of the Wolfson Economics Prize, argues why and how the Euro should split. The split is called bifurcation, and Bootle argues it is a necessary. The basic argument is that Portugal, Italy, Ireland, Greece, and Spain, are unable to compete globally under the Euro.
What would happen if the Euro splits? Let’s be clear. The Euro would not cease to be a currency. Rather, less competitive countries would split from the Euro. The result is massive immediate changes in exchange rates that for most would generate significant declines in purchase price variance (PPV).
As per the New York Times, Say Greece exits the Euro. The Euro valuation would immediately increase creating an unfavorable exchange for organizations buying goods from Germany, Netherland, Austria, France, etc.
Further, say all five of the underwater countries split. The Euro currency will significantly strengthen as it sheds debt. At the time of this writing, I could not find research predicting the amount of such a change. Based on a very simple look at historical figures, before the debt talk, I would suspect it could be a 10% swing or better. Mind you at that time when the Euro was stronger the debt was present the world was just not speaking much about it.
On the other hand, the new currencies would be valued significantly lower than the current valuation under the Euro. This would result in large favorable variances. However, most organization have already moved purchases away from these countries. On a macro scale, the favorable variance will not offset the unfavorable. However, Bootle suggests the needed devaluation change would be 25-55%. For long term sourcing plans, these countries may become attractive.
The unfavorable PPV is of course a generalization, and will not hold true in all circumstances. As some wise person said, “prepare for the worst and expect the best.” You might want to quantify your purchases on a regional basis to determine the risk of a Euro split on your organization, and plan your savings funnel and objectives accordingly.
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For Additional Research:
This article in Fortune, “The Euro Break Up,” offers a good summary. Bootle provides detail at
www.telegraph.co.uk/finance/comment/rogerbootle/. Will Greece be first? Read more at
the New York times, “US Companies Prepare in Case Greece Exits Euro.“
August 30th, 2012
Popular Science predicts carbon fiber as one of the major changes that will reshape the cars (Future of Cars, September 2012). 5 times stronger than steel while weighing in at two thirds the weight carbon fiber reinforced plastic (CRFP) has been used for years in race cars. Increasingly efficient manufacturing is bringing the cost down. Costs have decreased far enough that BMW expects to manufacture over 1 million parts by the end of next year. BMW predicts the cost will be on target with Aluminum extrusion. BMW further predicts CRFP will be used in normal passenger cars as well and will help drive the electric car movement.
Along with construction, the auto industry is one of the largest consumer of steel. How could a lighter weight stronger material impact building? Thinking of transport requiring ever stricter requirements and facing rising fuel prices, CRFP seems like it could be a good alternative. The more I think about the more applications I see CRFP as being a game changer.
What does this mean to procurement professionals? First it means sourcing will need to understand how it might impact there organization so we can prepare accordingly. Secondly sourcing will need to understand the market and potential suppliers so as to guide engineering and other areas of the organization to form good partnerships. Thirdly, sourcing should understand the impact to current markets-especially steel.
In the short term, it is unlikely to have an impact on steel price. However, CRFP appears to be one of those disruptive technologies that could reshape markets over the long-term. As a substitute product for steel, it is essentially creating additional supply which is one factor that will pressure price lower. If you are a strategic sourcing professional and your company purchases steel, CRFP is one of the longer term trends you will want to keep on your radar – it is certainly on ours. Come back to our blog to see updates from time to time.
July 4th, 2012
One of the big up and coming jobs is data mining. It is interesting how quickly one can find opportunities simply by taking the time to review organization data. Recently I had one such experience, when reviewing an organization’s spend and procurement process.
Like most organizations some spend was managed with minimal procurement support. Plant managers created the purchase forecast, received three quote from suppliers, then submitted a requisition to purchasing to cut the actual order.
Upon review of the req’s I noticed that though certain reqs were for slightly different products (categorized as different commodity codes), the three quote requests from one plant manager involved the same 3 suppliers each time. Combining the expenditure would provide leverage and should lead to lower costs. Lesson 1: commodity codes can be misleading and get to granular. Always look for leverage within and across plants.
The next thing I noticed was that all of the categories received a maximum of three quotes. Some of these classes of goods represented a pretty significant spend for the organization. In doing a quick search of our supplier database there were over 10 other local suppliers that appeared to have the capability to provide the product. Lesson 2: if a policy is set (in this case a minimum of 3 quotes) then expect to get three quotes.
Lesson 3 is a bit about structure. Use your best negotiators whose performance is tied to excellence in procurement to procure goods and services. It sounds simple but most organizations allow a significant amount of spend to flow through department experts (Marketing, HR, IT) that may be following a policy and may not have any formal training or real procurement experience. Additionally the procurement process may be viewed as another task that is really outside of the goals of their job.
Whether one looks at organization structure or process, data provides the supporting facts. That is why best in class organization use KPI’s like Spend Under Procurement Management and staff appropriately internally or through the use of a shared procurement service company like K2 Sourcing. The more spend managed by the experts in the procurement process the more likely the organization will have be competitive in the global marketplace.
June 4th, 2012
Sourcing Manager sensitivity classes suggest that, when a supplier’s sales manager requests a price increase, a nice way to decline is to follow these 3 steps:
1. Share a copy the article “How to Break Bad News to Your Boss.”
2. Give them a hug and let them know everything will be OK.
3. Take them to lunch and reminisce about the great service they used to provide.
In place of these three humorous steps, you might consider using the 8 Steps to Avoid Price Increases that really work.
June 4th, 2012
At the end of the year when looking at overall cost-savings, little gets in the way of the goal more than cost increases. Think of it this way. If the cost reduction goal is 3% and inflation is expected to be 3%, if the expected increases cannot be avoided the market adjusted cost reduction goal is actually 6%.
Here are 8 methods to at least delay, and likely stave off, price increases.
Ask all suppliers to sign an agreement that price increases must be provided in writing at least 90 days in advance.
All contracts should include an escape clauses for increases.
Create an internal company policy that price increases must be signed off by higher level managers in accordance with the level of increase.
Require meetings with the supplier providing detailed market data and cost breakdowns to justify the increase.
Negotiate – do your home work looking for data that does not support an increase.
Request a detailed report showing internal actions and suggesting methods to offset the increases with product and or service level changes.
Let supplier know the increase will trigger the need for you to perform a full market review justifying the increase, and the increase cannot be accepted without this data.
Consider running a reverse auction. K2 Sourcing can share many stories of requested increases that turned into substantial decreases using reverse auctions on everything from office supplies to direct materials.
The process above will many times derail price increases not fully supported by a demand driven or base cost driven issue. Even in these instances where the increase might be justified the tactics will delay price increase by a minimum of 3 months and normally much longer.
Some of these tactics may be viewed as fairly aggressive means to combat increases. When using such methods, one should take into account the power between the buyer and seller and the risk of supply disruption to your organization.
However, especially in markets pressured by inflation, managing increases effectively makes hitting the reduction goal much more likely.
May 21st, 2012
I recently visited a supplier’s plant. It needed water.
May 17th, 2012
K2 Sourcing hosted a Reverse Auction for a Fortune 100 technology related company that netted its client a savings of over 48% on Promotional Items.
Over a period of 44 minutes, 65 bid iterations were exchanged among 9 different suppliers. The suppliers involved had previously been pre-qualified to participate by the client. Duplicating this level of activity using traditional negotiation methods would take several weeks or more.
Of particular interest, was the use of negotiating improved rebate percentages during the reverse auction. Marketing organizations might be unsure of the future mix and amount of purchase dollars. The combined strategy of negotiating rebates with a sample of common items provided the flexibility needed to optimize results and manage the unknown.
This event is an example of K2 Sourcing’s reverse auction managed service. As part of the managed event service, from the start of the project, K2 Sourcing worked very closely with its clients to understand the requirements and desired results. Utilizing the requirements, K2 Sourcing designs an auction that will yield the best results. K2 Sourcing additionally provides the hosted auction software, set-up of the system, training of the suppliers, dedicated support during the event, and generates detailed post-auction analysis.
For additional case studies and tips, join K2 Sourcing on Facebook and Twitter.
May 7th, 2012
Using averages when planning is like the statistician who drowned crossing a river. The average depth of the river is 3 feet. Though 3 feet in the shallows near the shore, it’s twelve feet deep in the middle. The original story is adapted from The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty. Dr. Sam Savage 2012. Get more tips and procurement humor by joining K2 Sourcing on Facebook and Twitter.
May 1st, 2012
In 2010 Eduardo Castro-Wright, vice chairman at Wal-Mart, announced plans to centralize global sourcing. Much of the drive was to generate cost savings and improve internal efficiency. Why do organizations centralize strategic sourcing?
- Greater contract volumes equate to lower acquisition costs
- Specialization leads to improved efficiency
- Knowledge sharing yields improved decisions
- Standardization and use of best practices generates internal efficiency
- Centralization reduces redundant sourcing activities
When entering into a centralized sourcing arrangement keep in mind 5 issues that can derail your efforts:
- Talent: Developing a centralized sourcing team might require members to learn new markets and new spend categories -fast. How well the team performs and avoids mistakes due to lack of experience will directly impact future opportunities. Consider filling in knowledge gaps by direct hiring or using a shared services company.
- Silo Mentality: Sometimes departments like to protect their spend. They simply do not want to give up control of decision making. Many times this is a result of supplier or brand preference. When sourcing efforts show a 15% cost differential without loss of service or quality, it can put department leaders in a defensive position. Find department leaders that are new or that want to lead the change and ensure them that they play a central role in the effort.
- Leadership: Centralizing sourcing requires a change to the organization structure that will impact the culture. Successful organization changes, as a general rule, are led top down. Improperly supported, fear and trust issues may quickly stall centralization efforts. Our advice is to communicate this concern to leaders. If you feel there is a lack of support, centralization will be much more challenging.
- Job Security: Even at a single location when the selection of suppliers is separated from daily interaction, the person that originally managed both roles is likely to feel a loss of control and authority. Combined with recent years of workforce reductions, understand the effected parties will be concerned about their job. Expect some challenges getting the information you need until trust develops. Involve them in the process early, especially when defining the business requirements.
- Winners and Losers: What is best for the corporation is not always best for a particular location or department. What if one site will have longer lead times and as a result will require greater inventory levels? What if one site will pay a slightly higher cost even through the corporate contract saves 12%? Before getting started, develop a defined process to quickly escalate issues.
Sometime ago a Purchasing.com article called, “Centralize,” noted that through centralization, savings of up to 15% can be realized. Imagine an organization with a spend of $60 million dollars generating annualized savings of $9 Million dollars.
With CEO’s stating rising commodity prices are one of their biggest challenges, you can imagine they will be looking for ways to offset rising costs. Effectively implemented, centralizing or specialized strategic sourcing is a proven method to reduce costs. By being aware and avoiding the 5 pitfalls of strategic sourcing centralization, your organization will be much more likely to demonstrate success.
April 13th, 2012
I remember an exceptional plant tour I took about 15 years ago. As one part of the visual management system, there was a large chart on the wall depicting the workforce and their rated skill levels at various jobs and tasks within the plant.
From day one of K2 Sourcing our mission is to provide the Best Service in eSourcing. While that includes many moving parts, one key is developing internal operations with the capabilities to execute in a manner that exceeds customer expectations. A key component of operational excellence is talent development.
Which brings us back to the skills set matrix – K2 Sourcing style. At K2 Sourcing we have 6 delineations of strategic sourcing project management job classifications. Positions are entered in columns from entry level to senior across the top. The very first column in the rows we list nearly 100 different skills in order of increasing complexity.
For example, an entry level skill may be the ability to classify client data in spend categories (spend analysis). A higher level skill includes the ability to conduct needs analysis interviews with client stakeholders in order to build effective eRFP or reverse auction supplier qualification requirements. These are two of nearly 100 skills that it takes to achieve a senior position.
To determine expertise levels, each skill is scored on a scale of 1-5. A score of one is defined as needs and a score of 5 is defined as an expert with the ability to train others. Project managers self score and keep the document up to date. Leaders have discussions so that there is agreement on the level for that skill, and where training should be focused. As a side note, beyond formal training sessions held several times a month, people are assigned “buddies” to immediately provide support.
The complete skills set matrixes provide very useful information. First, employees can see a clear career development path and decide if it is right for them. Second, leaders can see how to best to help employees achieve their professional goals. Third, summarized team scores demonstrate organizational capabilities.
In summary, the skills matrix helps create a culture of continuous improvement and build an engaged high quality team – both of which are requirements to true operational excellence.
April 6th, 2012
Several weeks ago I attended a three day Kiazen event focused on improving the supply chain planning process including sales forecasting, operations, and materials. Like many manufacturers demand continues to show greater volatility which includes a push by customers for shorter lead times.
The issue usually results in increasing inventories to service customers. As inventory levels are a function of demand volatility, lead times, and desired customer service levels, standard material planning calculations mathematically prove the need to establish higher levels of inventory. Does your organization have an inventory reduction goal?
Inventory might be a needed short term solution, but rarely is it the best long term business strategy. There are two primary areas to attack the problem (1) work with the plant and existing suppliers or by finding new suppliers to generate greater flexibility and speed and (2) find ways to help the organization better manage demand.
Improving supply chain flexibility and speed can be challenging when complicated by cost reduction and low cost country sourcing goals. One has to be very good at strategic sourcing and selecting the right partners. Quoting a few parts with a few suppliers to check the market is not sufficient .
So how do we control demand?
Procurement and sourcing experts are deservedly proud about the vendor managed inventory (VMI) programs they have established with suppliers. VMI makes the replenishment process much easier for planners and typically significantly reduces inventory.
Let’s take a look at it from the supplier’s view. As demand flows lower through tiers of the supply chain, volatility increases. For suppliers, the greater volatility results in higher cost structures. Instead of responding through overtime and inventory, suppliers offer VMI.
Rather than forecasting what the customer will purchase, VMI provides earlier warnings and greater visibility to changing demand. There may still be surprises but VMI allows the supply organization improved operations planning. VMI is a win for the buyer and it reduces a supplier’s operating costs.
As a procurement professional, it is our job to ensure suppliers are in alignment through improved management and strategic sourcing initiatives. A second way we can make our jobs easier and bring greater value to the organization is to share our expertise of VMI to help the organization improve customer demand management.
March 8th, 2012
Recently K2 Sourcing completed a reverse auction where rebates played an interesting roll. The impact to supplier’s behavior was quite interesting. Some suppliers offered large price savings and small rebates while others opted for smaller discounts with a larger rebate. As is typical with a reverse auction, the total of rebate plus the immediate price reduction yielded similar total savings when comparing the leading suppliers. How would you award business?
Let’s start by understanding the mechanics of a rebate. In the world of procurement, a rebate is provided as an incentive by the selling organization to create buyer loyalty over time. Over some time period be it monthly, quarterly, annually, or other, the supplier applies some percentage to the total net sales and issues a check to the buying organization.
My first instinct with rebates is to recognize them as delayed savings. When establishing a contracted buy, even based on estimated purchase volumes, take the savings now. Ask rebates to be converted to purchase price savings. Besides receiving the savings immediately, taking the greater discount is an easier process to manage and the results are easier to track. However…..
Rebates can be useful. What was somewhat unique in this reverse auction was that while total spend could be estimated, the mix of goods at the item level being purchased was fairly unknown. What are the implications for award of business?
Let’s revisit the reverse auction results, and look at just the two top hypothetical bidders. Would you award business to the supplier that offers a 22% reduction and a 3% rebate or to the supplier that offered a 15% cost reduction and 10% rebate?
If across a hypothetical 50 items one item was 37% savings and one was 5% savings (averaging 22%) what if 90% of the purchased dollars ended up in the 5% savings item? If one chose the larger immediate discount and the 3% rebate (total 8% across 90% of spend) versus the 10% rebate with say an equal 5% discount (total 15% minus time value save across 90% of spend) the 10% rebate would have yielded the better results.
However unlikely the above scenario, I have to recognize the risk of less savings due to purchase mix of taking the immediate discount versus the percentage applied across aggregate sales. To improve decision making I would apply a weighted percentage decision tree to understand the purchase mix and resulting total savings better.
This seems like a rare case to use rebates. In almost any other instance I can think of at this moment, I would argue against using a rebate as it simply defers savings. What are some other examples of when to use or not use rebates?