The Battle against the Global Financial Crisis: The Case for e-Reverse Auction
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Author: Eyal Eckhaus, posted on 6/17/2010 , in category "eCommerce"
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Abstract: With the advent of the current financial crisis, global economy has been flooded with uncertainty. Recent technological developments, however, have provided solutions for the growing need of the logistical functions. One of the most popular tools emerging is e-reverse auction (e-RA), providing multiple benefits that may help cope with the financial crisis. While some criaticize the tool for challenging supplier-buyer cooperation, this study substantiates the existence of cooperation, supporting this tool’s potential for counteracting the global financial crisis. Executive summary of Eckhaus and Bates (2009).

Executive summary of Eckhaus and Bates (2009).
With the advent of the current financial crisis, global economy has been flooded with uncertainty. Recent technological developments, however, have provided solutions for the growing need of the logistical functions. One of the most popular tools emerging is e-reverse auction (e-RA), providing multiple benefits that may help cope with the financial crisis. While some criaticize the tool for challenging supplier-buyer cooperation, this study substantiates the existence of cooperation, supporting this tool’s potential for counteracting the global financial crisis.

The financial crisis, effects of globalization, and the need for collaboration

 The financial crisis began in late 2007 after billions of dollars of bad mortgage loans caused a series of bank collapses, creating a catastrophic domino effect for businesses in all sectors, and resulting in recession and unemployment. With the growing expectations that crisis will intensify a range of monetary and trade policy packages were announced, designed to reverse the economic downturn.

 A global crisis requires a global solution; hence, understanding some of the implications of globalization may point to an effective solution. One major and implication is that globalization intensifies local and requires broad-based human cooperation in times of crisis. 

 A slowing economy in the directly impacts all other economies because consumers and businesses reduce purchases from foreign suppliers, and also because of the financial linkages to other markets. The recession knows no borders, and the key to containing it is proactive collaboration. Politically this means nations must work together to maintain socioeconomic stability. Business-wise it means firms must cooperate to weather the storm. Buyers have to work closely with suppliers, sharing the economic burden.

 Globalization intensifies competition, and buyers are trying to diversify their sourcing bases without compromising on quality, quantity and a fair price. On the other hand, due to the financial crisis, order sizes have reduced, and financial resources are allocated with caution. Cutting back on spending using all available tools is the order of the day.

e-RA

 A promising solution that fits right into business needs at a time of global crisis is e-RA, one of the most effective business tools of the digital age. e-RA enables a group of suppliers to compete for a procurement contract in a secured web site, where each bid is lower than the previous one. With increasing popularity, e-RA is fast becoming a strategic tool for the procurement function. Timely use of this tool offers substantial business benefits, and the current crisis provides the perfect opportunity to deploy it.

 The most important strength of e-RA, reported by almost every user, is its potential for reduced purchase prices. Moreover, it is a time saver, shrinking the negotiation process from months to hours, reducing the probability for changes in business conditions that could affect prices – a valuable parameter in a volatile economy.

 The main weakness attributed to e-RA is its effect on supplier-buyer relationships: There is general concern that supplier dissatisfaction with price reduction might hinder future collaboration, particularly in emergencies. Though in some situations e-RA may conceivably affect the relationship this way studies show that it is usually not the case. Our study findings support this conclusion from an entirely new angle.

Volume discount agreements

 The need for cost savings and volume considerations affected by the current financial crisis are commonly recognized in volume discount agreements. It is possible to evaluate volume discount considerations in the e-RA bidding process itself, where bids are a function of quantity. However, our study examined the case where the bids are made only for predefined quantities. Thus, it enables to appreciate how the volume discount concept is reflected in the digital process without explicit reference to it. Our findings therefore serve as another proof that collaboration and agreements between the buyer and seller are not compromised by using the tool.

 e-RA generates intense competition among participants, and may therefore generate bidding prices that are equal to their marginal cost. The greater the predetermined quantity, supplier limits may be lowered. Since the buyer may also expect a lower final bid in this case, there is less potential for the price to go down even further than expected.

 After statistically analyzing a sample of procurement contracts concluded by a global company, results show negative correlation between purchase volume (in dollars) and cost savings measured as a ratio between the expected and final price. This provides added support to one of the most common agreements between buyer and supplier, again demonstrating how virtual economy is completely in touch with reality.

Summary

  The financial crisis has forced companies to seek solutions that will help them remain competitive in the global market. One of the most effective tools that may help them do so is e-RA. e-RA enjoys growing popularity, but its application is not without some challenges, such as the concern it may hinder buyer-supplier collaboration.

 This study provided empirical proof that the e-RA does not eliminate interaction and cooperation that would have otherwise existed between the buyer and supplier, but simply complements it. In addition, it offers several advantages, including huge potential cost savings. Above all, e-RA is the ultimate tool for coping with the financial crisis and supporting the firm’s survival in these volatile times.   

Adopted from:

Eckhaus, E. and F. Bates (2009). "The Battle against the Global Financial Crisis: The Case for e-Reverse Auction", Journal of Business and Economic Research 23(1): 113-132.

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