Do you ever get the feeling that despite all the gee-whiz technology on the Internet, your job in corporate procurement essentially hasn't changed all that much? Your job is just faster and more far-flung as you acquire the capability to more easily find suppliers worldwide.
That's what Wes Guillemaud, a 36-year-old water-polo-playing entrepreneur from Plano, Texas, thought. Swimming around the pool between polo matches, he wondered: Are EDI and now Internet procurement solutions simply automating a necessary evil of the past, a procurement process that was put in place decades ago?
Now on the Internet buyers can search for lots more suppliers, but the process of buying really hasn't changed much. Even all these vertical Web sites that offer online auctions don't alter the basics of the buying model, contends Guillemaud. "The entire order-to-payment process has been defined by the seller," says Guillemaud. "And the buyer still has to go through the time and trouble of finding the product."
What if a buyer could put his or her request-for-quote online and have relevant suppliers who meet or beat a specified price bid for the work? Instead of searching online to find the product required and bidding in an upward race against other buyers, what if the buyer could have suppliers bid against each other to bring the price down? What if spending hours and sometimes weeks searching for suppliers to fill a need became passé as suppliers instead spend their time searching for the buyer's RFQs?
"The idea was so deceptively simple, I told Wes that I thought someone must be doing it already," says Jim Tyson, director of corporate purchasing for Pier 1 Imports in Fort Worth. "I even got online to see if anyone else was offering a service like this to buyers, but no one was."
So on May 7, with validation from folks in the purchasing community like Tyson and procurement experts like Graham Collins at PricewaterhouseCoopers, Guillemaud founded a new buyer-centric auction Web site, www.sorcity.com. Four months after incorporating his business, Guillemaud had enticed 600,000 suppliers to participate on the site and has gotten so many people psyched about the idea that he has no time left for water polo.
Welcome to my RFQ
Here's how Sorcity.com works. The first step that a buyer takes is to sign up online as a member. Sorcity asks for detailed information like the company's duns number and validates addresses and phones. "We have to make sure the member is a valid buyer," says Guillemaud. "We don't want any 13-year-olds participating in bids." As a business-to-business auction site, Sorcity probably does not want to attract any RFQs for human kidneys, as occurred by some jokesters on the consumer eBay auction Web site.
No special software and no special training are needed for buyers to participate in Sorcity. Most important, no money is required from the buyer either. Sellers pay the freight to participate in Sorcity and win business. A 2% fee payable to Sorcity is tacked onto each bid price that a seller proffers. The only party in the transaction that has to share a credit card number is the seller.
According to Guillemaud, the 2% fee that Sorcity earns does not mean buyers are necessarily paying a higher price for the products they buy. "We are basically finding leads for sellers and reducing their marketing costs dramatically," says Guillemaud. Theoretically at least, as marketing costs fall, prices can fall too, even as suppliers' margins improve. "Salesmen may worry if this is going to jeopardize their commissions, but sales management loves the idea of Sorcity," says Tyson, who has encouraged several of his suppliers to join the new marketplace.
After registering, the buyer then develops and submits the RFQ. This is the tricky part and is a critical step in the process. The item as well as payment and delivery terms must be specified precisely. A form online with detailed questions for the buyer to answer about the RFQ helps ensure the right RFQ gets written.
"The biggest risk that purchasers face in b-to-b online auction buying is not being certain that the product a seller has placed out for bid meets their needs," says Guillemaud. "It may sound and even look right, but until the buyer compares the delivered product with their specifications, they can't be sure and by then it may be too late."
According to Guillemaud, the fact that buyers define exactly what they need and Sorcity then communicates that need consistently to all relevant supplier members helps to mitigate this risk of buying via an online auction. Furthermore, Sorcity.com provides a way for buyers and sellers to ask and answer questions about an RFQ too, so that all parties can make sure the delivered product meets the buyer's need.
For the buyer, now the RFQ is out and the hard part is done. Sorcity sends automatic e-mail notifications to qualified seller members who sell products in a given product, commodity, or service category. Sellers can ask questions to clarify the RFQ via e-mails with Sorcity. Buyers can watch the bidding progress. After the time limit for bidding (as specified by the buyer) has passed, the three lowest bidders that meet or beat the buyer-specified threshold price are introduced to the buyer.
Only after the buyer selects the winning bid and confirms the selection with Sorcity is the 2% commission then collected from the seller. The buyers and seller then exchange product and settlement independent of Sorcity.
Pier 1 insights
The Sorcity.com Web site is only a few weeks old, but already examples of completed bids are posted on the site. In August, for example, one buyer submitted an RFQ for 100 office set-ups (supplies and copiers) to be delivered to Dallas; Seattle; San Diego; and Norfolk, Virginia. The first bid for $31,250 was submitted at 8:59 am on August 10. Six days and eight hours after the bidding began, the final bid for $28,000 had entered the field.
Tyson of Pier 1 Imports plans to use the Sorcity auction site in November for a big order. "We spend $1.5 million a year on light bulbs for Pier 1's 750 stores, and I currently buy from a source in Fort Worth," says Tyson. "To satisfy the internal auditors we have to put the contract out to bid once a year; this year I will use Sorcity.com."
Tyson says in the past he has spent a lot of time finding six to 10 suppliers and then pouring over their prices. "This year, we will let Sorcity alert suppliers that we are looking for bids and I expect this to save me time and money," says Tyson.
Not all reverse auctions will yield success, of course. An attempt by Tyson to buy rubber cups that go under furniture legs back on August 25 was unsuccessful and yielded no good bids. "We spend tens of thousands on carpet protectors, so I wanted to try Sorcity," says Tyson. "The bids weren't better than the source we already had, so we stayed with our existing source."
"I also have to watch out that I'm not qualifying a vendor who is just trying to get their foot in the door with a low price and then will be raising prices in the future," says Tyson. "The trend these days is to build relationships with suppliers, so in that sense the reverse-auction model goes against the grain. But as long as I understand my business and understand when the auction model will work and when it won't, then I believe I can use Sorcity.com effectively." Indeed, Tyson has already forewarned his light bulb supplier that he will be bidding out his contract via Sorcity come November.
Other than the need to hone the RFQ, the only risk Tyson foresees with using Sorcity is a matter of trust. "We are trusting Sorcity to get our RFQs to the right supply base and trusting them to analyze the bids correctly and to present the three closest bids," says Tyson. But given the huge amount of time that this process is likely to save him and his personal knowledge of Guillemaud, Tyson says he's not much worried about that risk.
Besides, says Tyson, "I'm in the retail business and the [non-merchandise] procurement function doesn't get a lot of support or attention from information systems. With Sorcity.com I'm getting a free electronic tool." In other words, the price is exactly right.