Practices Make Perfect Market A Case Study on Sustaining an Active e-Auction Market

SU-HUA, OU
Graduate Institute of Technology and Innovation Management, National Cheng Chi University, Taipei, Taiwan participate in the e-auction game. In other words, there are unique and essential practices to make the perfect market work. The findings also illustrate that the innovation process of an e-auction does not only offer tangible and intangible benefits for buyers, but also strengthens the production chain of suppliers by reviewing their very working practices and enforcing corporate governance. II. Literature Review Adopting new technologies can lead to product and process innovation and improvements that produce tangible and intangible market advantages. Most technology researchers focus on the discussion of why organizations fail to adopt new technology and point to both organizational and technological features that thwart the adoption of an innovation. Organizations have been depicted as being: blind to the existence or advantages of external innovations [3], trapped by current competence [4] or business models[5], and handicapped by a lack of relevant expertise[6]; hence resulting in failure to adopt external innovations. On the other hand, certain technologies themselves present barriers to adoption; for example, the architectural innovations [7]. Successful implementation of new technology has been defined as the incorporation of new routines on an ongoing basis in an organization [8]. Many studies emphasize the need for organizations to do essential adaptation for a new technology to be effectively utilized. Leonard-Barton [9] described a need for mutual adaption by both organizations and technologies. On his part, Edmondson [10] emphasized the importance of a process to establish new routines. This paper assumes the perspective that when adopting a new technology, organizations have to adapt new practices or routines to fit in with the features of the new technology. Only by figuring out the spirit of the technology and the embedded innovation practices, can organization work effectively to make new technology well implemented and sustained in an organization. In contrast to previous research that emphasizes organizational characteristics, this paper focuses on the innovation process of an organization which is apparent in the daily practices and also illustrates how these practices fit the spirit of the new technology. III. METHODOLOGY This paper employs a qualitative method to investigate the innovation process and working practices which sustain an e-technology. An in-depth case study was adopted which allowed researcher to explore social processes as they were hidden in an organizations operations. According to Hartley [11], a case study allows for a processual, contextual and generally longitudinal

Abstract The objective of this paper is to clarify how the online reverse auction can perform as well as the market maker. This real-time, dynamic, open bidding process typically results in significantly lower unit prices than for buyers who have paid previously, and it has proved increasingly popular among Fortune 2000 companies. As a global, online sourcing market, many companies have embraced the e-auction as the realization of Adam Smiths perfect free market to inspire price competition. However, yet many others consider that it presents many challenges, from squeezing suppliers profits, jeopardizing long-term relationships, to procurement quality deficits. This study, tries to deconstruct the innovative elements of this online bidding technology by scrutinizing the unique and systematic practices executed by one of the most successful companies adopting the e-auction, Singapore Technology Engineering. This company demonstrates that only by exercising well-defined practices, including establishing disciplined codes of conduct to regulate both buyers and sellers, can the e-auction perform as an active, perfect market maker. Keywords E-sourcing, technology adoption, sustain

I. INTRODUCTION The Business-to-Business (B2B) online reverse auction (also known as the e-auction or downward price auction) is regarded as an efficient and effective marketplace by ambitious suppliers for competing aggressively in real-time, online bidding. Contrary to paper-based submissions, online bidding enables suppliers to communicate their best offers sequentially, after observing competitors bids. The term reverse emphasizes that competition among suppliers typically drives prices down, as opposed to prices being driven upward by competitive bidding in forward e-auctions, such as those featured on E-bay. Many companies have reported impressive savings from reverse auctions such as 20 to 30 percent on the cost savings of indirect goods and 0.5 to 2 percent on the costs of direct materials [1]. But since 2000, some companies have found themselves struggling against resistance from their suppliers, as well as from their own procurement or engineering departments. Still many others are willing to participate in reverse auctions but remain wary of the drawbacks [2]. This paper explores how the reverse auction has been adapted and sustained successfully by one of the reverse-auction pioneers in AsiaSingapore Technology Engineering (ST Engineering). The findings illustrate that there are essential practices that need to be aligned with the innovative elements of e-technology. Since the e-auction works as a perfect, globally competitive market, transparency and trust building become very important in building an active market. As long as any opportunism is permitted to occur, suppliers, especially incumbent suppliers will no longer

978-1-4244-2330-9/08/$25.00 2008 IEEE

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analysis of the various actions and meanings which take place and are constructed within an organization. Case selection. The firm studied, ST Engineering, is one of the most successful examples of e-sourcing adoption. ST Engineering is an integrated defense and engineering group, with 17,000 personnel in 25 cities. It provides advanced solutions and services in four strategic business areas (SBAs): aerospace, electronics, marine, and land systems (see Table 1), and operating with a combined revenue of $4.49 billion in 2006. ST Engineerings Cost of Goods Sold (COGS) constitutes between 65% and 85% of sales, which makes procurement a strategic concern. Finding an alternative purchasing method has been an ongoing endeavor for improving operational efficiency. In February 2000, ST Engineering decided to adopt e-sourcing to improve its competitive edge in supply chain operations and to reduce procurement costs. Using electronic bidding, the firm was able to reach a cost savings of 15-23% in each purchasing transaction and reduce lead time to three days (down from 4-12 weeks).Such considerable benefits were impossible with traditional face-to-face procurement, which merely generated a limited 5-10% price reduction. These savings primarily were attributed to the severe competition among suppliers involved in e-auction transactions. How did ST Engineering make e-auction the main cost savings tool and sustain its e-technology for over seven years? What innovative processes and which practices fitted in with the e-auction mechanism? This study sets out to illustrate the essential practices for a successful e-auction. INSERT Table 1 ABOUT HERE Data Collection. This study was conducted in two stages. The first stage is the fieldwork observation and e-auction participation executed by the authors assistant between July and December in 2007. The second stage is conducted by the author in 2008 till now, who consistently interviewing the key personnel and participating in the fieldwork. The survey candidate including purchasing managers, the CPO (the chief procurement officer) and senior executives involved in etechnology adoption. In addition, the author interviewed the executives of technology provider, Abecha, so that they could explain how they managed to set up a reverse auction. The author maintained frequent contact with the market makers and gained the support of the executives on the reverse auction bidding platform in order to understand the characteristics of the e-sourcing system. The data collection and analysis ran parallel with the fieldwork, which consisted of four stages. First, the author started with a comprehensive understanding of the capacity of the e-sourcing technology, including the esourcing operational system, suppliers bidding strategies, and commonly faced challenges. Second, the author conducted fieldworks to observe the detailed activities at ST Engineering. By being involved in frequent sourcing operations, the researcher had the opportunity to participate in their routine vendor surveys, site-visits and

vender conventions, and thus to perceive how the company managed buyer-supplier relationships. Third, the author interviewed different external experts to understand the management and coordination of technology adoption. Lastly, knowledgeable professors were interviewed to obtain more objective viewpoints on sategies to sustain e-sourcing technology. Table 2 provides a summary of the fieldwork. INSERT Table 2 ABOUT HERE IV. RESEARCH FINDINGS As a leading e-sourcing company, ST Engineering has developed a unique and systematic e-sourcing framework over seven years of e-sourcing experience. With its unique framework and daily practices, ST Engineering has mastered the art of e-sourcing with double-digit savings while most other companies have failed to sustain such e-technology within two to three years. As illustrated in Table 3, ST Engineering has developed three innovative processes, which include seven essential practices to sustain its e-sourcing operations. A summary of these systematic and standardized practices are described as followings. INSERT Table 3 ABOUT HERE Process 1: Preparation stage. Practice 1: Assessing Auctionability In contrast to traditional procurement which is decided by each department in an organization, ST Engineering organizes a committee to centralize the procurement process, and establishes the rule of eauction first for every procurement event. As the senior procurement manager explains:
The successful use of e-sourcing can be attributed to the sourcing policy. As long as the business environment is assessed appropriately, every product can be procured by e-sourcing.

First of all, ST Engineering asks the question: Can esourcing be applied for this product? It identifies auctionability by assessing the business impact of esourcing on ST Engineering and any possible supply vulnerability to suppliers. ST Engineering divides its products into four categories (see Table 4):1) shop items, of which supply is abundant and items are exchangeable from one supplier to another; 2)Leverage items, which have a considerable impact on the companys profits because they are bought in big volumes, while the supply risk is low; 3) Management risk items, which are items with high supply risk and low profit impact, and of which the number of suppliers is limited; and 4) Partner items, with high supply risk and high profit impact, which should be treated with strategic consideration. INSERT Table 4 ABOUT HERE Among the four categories of commodities, only leverage items are deemed appropriate for sourcing on the e-platform. In order to clearly define all the auctionable products and services, the company has to sort out all the procurement events and items in the different departments,

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as well as to define specified categories and lists for all divisions to adhere to. Practice2: Definition of Requirements After assessing the auctionable items, ST Engineering has to regulate different requirements among the four SBAs. At this stage, the question is: Do we understand what we want to buy? The reverse auction committee has to clarify the sourcing requirements and oversee the processes. The committee includes the CPO (Chief Procurement Officer), the procurement head of each SBA, project engineers and technical experts. Since the knowledge and skills required for global sourcing differ dramatically from those for domestic sourcing, the committee can combine all information procured by both procurement managers and technical experts to draft the RFQ (Request for Quotation). A clear definition can achieve accurate price quotations from the suppliers. Additionally, the company is able to generate a significant purchase volume with a specified definition. As Goh BakNguan, the Chief Procurement Officer explains:
Every supplier must understand the requirement conditions, or we must make them understood. The better you tailor the specifications, the better the price. It is only under such circumstances, that a reverse auction can be a very effective tool.

While the RFQ is being defined thoroughly, ST Engineering embarks on the qualification process for suppliers. In fact, suppliers who have provided good products and services previously will be kept in the database for three years and have the privilege to participate in future sourcing transactions. For every supplier selection process, ST Engineering will send out the RFI (Request for Information) and FRP (Request for Proposal) to the incumbent suppliers. If the conditions provided by the incumbent suppliers fail to meet ST Engineerings requirements or if the number of incumbent suppliers is insufficient, the company will then move on to another round of supplier selection. In other words, ST Engineering qualifies suppliers with criteria based on relationships and transactions at this stage. Thus, the company can reduce supply risk, save time and costs while engaging in supplier selection. Practice 3: Spend Analysis After setting out a clear and standardized requirement definition to enhance the e-auction process, ST Engineering attempts to conduct potential cost-squeezing from its entire supply chain. This differs considerably from other companies that focus on cost-saving opportunities only by engaging in the procurement process. At this stage, the question being asked is: Where can we obtain value from e-sourcing? ST Engineering cleans up the spending data to offer spend visibility. It focuses on category visibility and item visibility and defines what product categories they are purchasing each year, such as cleaning services, which are purchased annually. Concerning item visibility, the company is able to analyze

the detailed specifications of product and service requirements and examine the suppliers from whom they purchase. By enhancing spending visibility, ST Engineering succeeds in making the procurement process and supply chain more reasonable, thus saving potential costs. Process 2: The Implemetation stage. Practice 4: Lot strategy. At this stage, during the implementation of esourcing, ST Engineerings concern is: How can we ensure effective e-sourcing? The company adopts a lot strategy. In fact, a lot strategy is defined as a subgrouping of parts. For example, the company may need to purchase 20 parts and may group these parts into four or five lots depending on the reverse auction committees decision. The evaluation of the lot strategy is based on the suppliers capacity, the similarities of a product, the process requirements, and regional distribution, etc. Concerning the lot strategy, the company has to weigh high value buys against simple buys as well as incumbent suppliers against new entry suppliers. High value buys are mostly project-based transactions acquired at reverse auctions, such as an MRT system, and a countrywide traffic light system. Sourcing for simple buys is carried out for standardized items, such as PC computers, batteries, name cards and stationery. By distinguishing between high value and simple buys, the company can achieve better cost savings effectively. With regard to incumbent and. new entry suppliers, since the company has the potential for bulk purchasing, incumbent suppliers are willing to participate in its reverse auction events. Some of the purchasing quantities actually surpass the suppliers annual sales targets. Moreover, ST Engineering awards incumbent suppliers with a portion in each auction to reduce supply risk. In order to achieve the maximized cost savings and minimize risk taking, the company sets into operation the incumbent against new entry supplier lot strategy. According to CPO, Goh Bak-Nguan:
You should not give the overall purchasing lot to the supplier who offers the lowest price. We give 1/3 of the overall purchase to our incumbent supplier and the rest, i.e., 2/3, to new suppliers. The 50% to 50% strategy will be better for new products or critical parts that incur more risk.

By comparing high value buys against simple buys, and incumbent against new entry suppliers, ST Engineering thus recognizes the importance of different e-auction events and makes procurement more efficient. Practice 5:Trust building The main concern at this stage is: how does the company ensure fair and transparent e-sourcing? Based on the companys experience, suppliers are only willing to offer their best price when they know the market making is neutral and the buyer is treating the reverse auction event seriously. To build mutual trust, the company evolves clear market rules before starting the reverse auction and requires both buyers and suppliers to adhere to the established codes of conduct. These codes can

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help to ease the fear of price competition and persuade the suppliers to delve deeper into their supply chain and conduct themselves as follows: Bidding online. Buyers only agree to award suppliers who bid online. On the other hand, suppliers should not submit bids offline. Only qualified suppliers are invited. Buyers invite only qualified suppliers, and these suppliers must agree to bid as aggressively as possible. Awarding whole lots as described in a RFQ. Buyers should award business in whole lots as described in an RFQ, while suppliers should bid on entire lots too. Bid price adherence. Buyers should award business at the online bid price. At the same time, suppliers have to submit all bids as legal quotations. The lower bidder does not always win. Buyers have to give low price bidders a fair chance to win the business. But suppliers need to understand that a lower bidder does not automatically win the transaction. There are other factors to be taken into consideration; such as quality, history of the relationship, and service-level. It is all about the total costs of ownership, not just the price. Only by adhering to these codes of conduct, will suppliers be able to build up confidence in the e-auction mechanism. At the same time, the transparency of the eauction transaction is better ensured by the codes of conduct. Process 3:Evaluation stage Practice 6: Active market During the evaluation stage, the main question is: How can we keep suppliers energetic? ST Engineering guarantees that every reverse auction event would be awarded at least two times faster than the industry average. Besides, the company attracts suppliers by releasing high dollar value purchases. For example, in 2006, the company ordered 1300 desktops and 400 notebooks. With such high value purchases, a supplier would only need to make one bid to meet the whole years sales target. It is by being offered such profitable purchases that suppliers would be motivated to act as energetically as they can. Practice 7:Reputation mechanism How do we keep the best suppliers? In Practice 7, ST Engineering manages to build up a reputation mechanism to keep the best suppliers. A post-bid assessment procedure is set up to measure and record the individual performances of suppliers. Once the supplier evaluation is completed, the company will renew its supplier base accordingly to keep the best suppliers. The company evolves the Vendor Performance Measurement System (VPMS) to evaluate the performance of suppliers. The VPMS is computed by the weighted average of three measurement criteria: delivery performance, rejection level, and service level. Delivery performance. ST Engineering measures and

monitors the delivery performance of suppliers by comparing the actual delivery date with the agreed expected date. Rejection level. The rejection level is measured by recording and monitoring the quality of goods being delivered by the suppliers and rejected by ST Engineering. Suppliers quality performances are also computed by the Vendor Quality Assurance Engineering (VQAE) on a monthly basis, based on the rejection rate. Service level. The ratings of the service level are computed, and are based on the feedback survey conducted on internal buyers. By evaluating the performance of suppliers who win the procurement, the company can assess the total quality of the suppliers and record this into a database containing a list of the incumbent suppliers for the next e-auction event. V. RESEARCH IMPLICATIONS A monopoly granted either to an individual or to a trading
company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. Wealth of Nations, Adam Smith, Scottish economist (1723-90)

This research closely analyses the seven indispensable practices for implementing and sustaining e-auction operations. From the preparation stage, to the implementing and evaluating stages, the company undertakes these practices, step by step, from year to year, to ensure that the e-auction mechanism is well established. The three processes and seven practices are structured in a recycling system and have become the e-auction rules for all divisions to adhere to. The findings suggest that only by employing these practices seriously, can a company find the alignment between a technologys innovative elements and organizational practices. They also provide important theoretical and practical insights. Theoretical Implications This paper contributes to literature on technology adaptation and sustainability. It highlights the importance of the alignment of e-technology practices and the innovative elements. As Adam Smith argued, quite considerable structure is required in society before the invisible hand mechanism is able to work efficiently. He was referring for example to strong property rights, and widespread adherence to moral norms. As an efficient and effective global sourcing market mechanism, the eauction is viewed as the perfect competitive market that is able to achieve the best price by encouraging suppliers to bid energetically. By tracking the successful adoption of eprocurement by ST Engineering, this paper can posit that the company has effectively supported Adam Smiths theory on structure being necessary for a mechanism to be efficient. The perfectly competitive market mechanism

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can only be automatically set into motion by well regulated practices. Both buyers and suppliers are well informed about the procurement specifications. Besides, they have to follow up the established codes of conduct seriously to make an e-auction functional and active. In other words, in a nearly, perfectly competitive market, there are many visible hands which try to influence or take advantage of the market and thus distort the optimal price. Viewed from the spend analysis perspective and the trust building process, ST Engineering successfully identifies these visible hands and tries its best to regulate these manipulations. In addition, it has also embarked on standardizing the procurement process through assessing auctionability, defining RFQ, clarifying lot strategy, rewarding suppliers and evaluating suppliers performance. All these measures are essential but however, have been very difficult for other companies to enforce. Without perceiving the technology innovation mechanism and the embedded innovative practices, it becomes very challenging for other companies to adapt proper working practices to fit the technology. Practical Implications In practice, the e-auction mechanism presents tangible and intangible benefits to ST Engineering, and the suppliers, in turn, are able to take advantage of them, too. For the extended research, the author would like to take the business process reengineering (BPR) viewpoints to examine the interaction benefits driven by e-auction. However, in this research, the author discovers the tangible commercial benefits encouraged include: Procurement cost savings. For each e-auction event, ST Engineering can save 15-23% costs on average, which is greater than traditional sourcing which results in only 510% cost savings generally. Lead time. By exercising the e-auction practice, ST Engineering can reduce lead time, from 4-12 weeks, to just 3 days. In terms of the intangible benefits, the e-auction not only promotes an expert image for the procurement department, but strengthens corporate governance by following a disciplined procurement process. Professional image. As procurement events become more and more indispensable to the companys spending and cost-saving strategy, the title of CPO is redefined as Chief Profitability Officer which enhances the professional identity and advances the status of the procurement department. This is a sentiment which the director of procurement and logistics, Lim Kwok Leong expresses: The procurement experts are advancing from the back
rooms to the board rooms.

The disciplinary codes of conduct not only regulate ST Engineerings procurement process, but also ensure that all suppliers strictly adhere to the bidding procedures which make the supply chain more transparent. Since the Sarbanes-Oxley Act was enacted in 2002, it has become more and more important for companies to comply with the rules to document all financial statements and procurement procedures. From this point of view, suppliers who closely confirm with ST Engineerings codes of conduct, and have been granted all the formal procurement contracts, can also benefit from the companys corporate governance mechanism. Besides, owing to intense price competition, suppliers are beginning to examine their production efficiency, and some of them have moved their production lines to countries with lower production costs. A. Figures and Tables TABLE I Four Strategic Business Areas (SBAs) of ST Engineering Business Units Revenue Capabilities
ST Aerospace (Singapore, US, UK, Australia) Established 1975, S$ 1.092 m Maintenance, refurbishment, modification and upgrading of defense and commercial aircraft

ST Electronics (Singapore, USA, Hong Kong) ST Kinetics (Singapore, USA, China)

Established 1971, S$ 614 m Established 1969, S$ 717 m

Integrates, produces and maintains electronics and communications systems for defense and commercial applications Provides design and engineering services for military vehicles, weapons systems and munitions.

ST Marine (Singapore and USA)

Established 1968, S$387 m

Designs and builds defense and commercial vessels

TABLE II
ST Engineering interviewing list

Since 2004, some companies have begun to outsource products and service procurement to ST Engineering, thus enlarging its economic scale of procurements and increasing the companys profits. Corporate Governance.

Position Interviewed CPO, Chief Procurement Officer VP, corporate support Director, procurement and logistics Group procurement managers Procurement manager Project managers Assistant procurement managers Assistant manager, supply chain service Assistant manager Procurement executives Procurement engineers Technical support staff Suppliers Others(including professors) Total

Number of persons 1 1 2 3 1 5 2 2 1 4 5 4 6 3 40

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TABLE III Operation processes supporting e-sourcing Key Question How to do it? Practice 1: Accessing auctionability Can e-auction be applied for this product? Assess business impact and supply vulnerability Assess business, product and supplier context Preparing total-costs RFQ Coordinate with buyers and qualified suppliers to develop detailed specifications Identifying savings opportunities High value buys against simple buys Incumbent and new suppliers Codes of conduct

would like to show my appreciation and gratitude to Professor Hsiao Ruey-Lin for offering his generous guidance and encouragement over the long period of this research. REFERENCES
[1]Emiliani M.L. and D.F.Stec, Aerospace parts suppliers reaction to online reverse auctions ,Supply Chain Management: An International Journal, vol. 9,number2, pp.139-153,2004. [2]Tobias Schoenherr, and Vincent A. Mabert, Online reverse auctions: Common myths versus evolving reality, Business Horizons,vol.50,pp.373-384,2007. [3] March, J.G., and H.A. Simon, Organizations,1958 New York:Wiley. [4] Levitt,B., and J.G.March, Organizational learning ,Annual Review of Sociology,vol.14,pp.319-340,1988 [5] Christensen, C.M., The Innovators Dilemma: When New Technologies Cause Great Firms to Fall. Boston: Harvard Business School Press, 1997. [6] Cohen, W.M. and D.A. Levinthal , Absorptive capacity: A new perspective on learning and innovation, Administrative Science Quarterly, vol.35,pp.28-152,1990. [7] Henderson, R.M., and K.B.Clark, Architectual innovation: The reconfiguration of existing product technologies and the failure of established firms, Administrative Science Quarterly,vol.35, pp.9-30,1990. [8] Yin, R.E.Production efficiency versus bureaucratic selfinterest: Two innovative processes? Policy Sciences, vol.8,pp.381-399,1977. [9] Leonard-Barton, D. ,and I.Deschamps, Managerial influence in the implementation of new technology, Management Science,vol.34,pp.1252-1266. [10] Amy C.Edmondson, Richard M. Bohmer and Gary P.Pisano, Disrupted Routines: Team Learning and New Technology Implementation in Hospital, Administrative Science Quarterly,vol46, pp.685-716,2001. [11]Hartley, J.F. Case Studies in Organizational Research Qualitative Methods in Organizational Research .A Practical Guide, 1994.

Practice 2: Definition of Requirement

Do we understand what we want to buy?

Practice3: Spend Analysis Practice4: Lot Strategy

Where can we obtain value from eauction? How can we ensure effective e-auction?

Practice5: Trust Building Practice6: Active Market Practice7: Reputation Mechanism

How can we ensure a fair/transparent eauction? How can we keep suppliers energetic? How to keep the best suppliers?

48-hour award policy Post-bid assessment Renewal of supplier base

TABLE IV The Sourcing Matrix

ACKNOWLEDGMENTS I would like to thank Singapore Technologies Engineering and all others who have provided their assistance to enable us to complete this paper. I do especially wish to thank Mr. Goh Bak-Nguan, Chief Procurement Officer of ST Engineering, for providing the opportunities to participate in the companys procurement operations. Appreciation is also expressed to Abecha, the e-sourcing technology provider, who so generously provided its technical support. I also wish to thank MBA student, Liaw Chy-Yi, for help with the fieldwork. Last but not least, I

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