Eastman Kodak Co. is adding reverse auctions to its e-commerce strategy, which already includes electronic requisitioning for both direct and indirect materials.

The $13 billion photography giant is in the process of rolling out an application from Procuri Inc. that supports reverse auctions worldwide, said George , Kodak's manager of e-commerce for worldwide manufacturing and purchasing. "This is part of our tactical and strategic approach to e-procurement," Siviy said. "On the tactical side, we already have the basic tools in place" to let the company trade electronically with its suppliers. "Now we want to move into electronic negotiation, and that's where [reverse auctioning] comes in."

Kodak spends more than $6 billion each year for goods and services that range from office supplies to automobile fleets and multimillion-dollar capital construction projects. The addition of Procuri's technology will let Kodak take advantage of reverse auctions, which enables buyers to announce their needs to vendors that then bid down their prices until a bid is accepted. Kodak's goal is to have reverse auctions account for a "noticeable percentage" of its overall procurement spending, Siviy said, covering as much as 20 percent of the company's annual purchasing within the next year or so. Since Kodak began using the offering this summer on a pilot basis, the company has been able to slash up to 20 percent off the prices of goods that it purchases The savings have reached as high as 40 percent on some goods, translating into an return on investment for the company.

With pilot evaluation now complete, Kodak wants to expand the use of the technology to all of its worldwide facilities, making it available to approximately 100 commodity buyers. The number of auctions it's conducting is expected to increase from the dozens Kodak's running this year to more than 400 next year. That deployment will be driven by Procuri's self-service architecture, which lets users conduct auctions without requiring an outside facilitator. "We wanted something that was self-service," Siviy said. "Our people run it, and we don't have to worry" about waiting for the vendor to set up the reverse auction.

Back-End Integration Kodak managers aren't concerned about administering the application, Siviy said. The browser-based offering runs on the Microsoft Windows 2000 platform and relies on a SQL database. It's hosted by Procuri at data centers operated by Exodus Communications Inc.

The application communicates with enterprise resource planning and other back-end procurement applications via XML. The software costs about $15,000 per month for up to 15 users. For now, Kodak hasn't taken the step to automate how the application with its SAP ERP applications, Siviy said.

"Ultimately, we want to tie into our ERP, but that's not a short-term goal," Siviy said. "All we have to do now is issue a purchase order. While it would be nice to push a button to get it done, all we have to do now is cut and paste [between the systems], and that's not bad." Interestingly, Kodak's use of Procuri's technology almost didn't happen. The company was close to choosing another reverse auction vendor when Kodak officials--who hadn't heard of Procuri--were contacted by the vendor. Kodak decided to use Procuri's product because of the offering's self-service model, cost and future enhancements such as analytics and decision support, Siviy said.

Following the rollout, Siviy said he'll evaluate forthcoming Procuri applications that will add decision support and analytics to the reverse auction foundation. That combination will give Kodak a reservoir of market information and other data buyers can tap to ensure that they're getting the best price.

REVERSE AUCTIONS MAY seem a consumer-centered technology, but savvy businesses are discovering that by allowing buyers, contractors, and service providers to bid prices down, they save more than just money. "They save an awful lot of time," says Michael R Kelemen, acting director of the U.S. Army's Communications Electronic (CECOM) Acquisition Center in Fort Monmouth, N.J. "Sometimes time is the most valuable piece of the process."

The reverse auctions -- where interested parties bid a price down from the amount set by buyer – are finding a foothold in industries where companies often send out RFPs (requests for proposals) or RFQs (requests for quotes) to garner bids on business contracts or supplies. As these processes move online, auctions are becoming a powerful weapon in the procurement arsenal.

"What's driving [reverse auctions] right now is the time efficiency you get out of using them," says Willia Brandel, research director for e-business at Aberdeen in Boston, noting that online reverse auctions can reduce the process from months to a few days. "Buyers, sourcers, and procurement agents are able to make their requests for service known to a much wider audience by combining reverse auctioning with matching engines and marketplaces." Whereas buyers get a chance to open up their procurement requests and often snag a lower price, sellers participating in reverse auctions can tailor their bids to the bidding progress; this was not possible in a "sealed bid" submission process, where companies requested bids from suppliers by a certain time and opened them all at once, with the lowest bid winning the contract.

"A reverse auction keeps the industry posted of the prices while the [bidding] process is in progress, so there are no surprises, and industry can choose at any time to opt in or opt out," Kelemen explains. "They're not just giving us what they think is their best shot; many times their best shot could be better, but they don't have the chance to change it." Phil Moore, vice president of sales at Egghead.com in Menlo Park, Calif., has seen the reverse auction work well, from a reseller perspective, when Egghead has participated in reverse auctions at FreeMarkets.com. "It's really important for you as a supplier to do your homework and know the lowest you could possibly go on a particular deal and still make money," he says. "I think reverse auctions are the future. In terms of bidding and RFQs and so forth, they're clearly the way to go. It's easier, from a supplier standpoint, to do this rather than sitting down and typing up a 40-page response." Linking small and large Reverse auctions offer another benefit in that they somewhat level the playing field when it comes to bidding on business. Small companies can use reverse auctions to learn about the negotiation process and how to be competitive on the buying end. "[Reverse auctions] allow the buyer to see a much larger array of suppliers they might want to work with instead of the one they've been using just because it was local," Aberdeen's Brandel adds.

The U.S. Army first looked into auction technology in March 2000, creating an auction tool with Frictionless Technology that interfaces with the Army's Web-based application for awarding contracts and soliciting and receiving proposals. The tool also contains a "spidering technique" for finding items on the Web, as well as both reverse and forward auction capabilities, says Kelemen, who praises its capability of allowing smaller parties to bid for government contracts "We've procured everything from fax machines and computers to lumber and goats," he adds. "Farmers are very familiar with auctions because they're certainly involved with auctions all the time. They struggled a bit with dealing with a Web-based [auction] application, but they certainly understood the auction ideas."

Reverse auctions are also used by the U.S. Marine Corps, Air Force, and Navy, and have been used overseas in London and Germany; other government departments are also beginning to use them. Since the technology was implemented, the Army has conducted about 30 reverse auctions and saved an average of 53 percent of the starting prices, says. "I think the result has been the creation of the first Army unified e-market."

Bidding up the future

Egghead.com's Moore says reverse auction technology can greatly benefit educational institutions, government agencies, and large private-sector suppliers because "the bigger the quantity, the more sense it makes." Egghead.com uses NexTag's pricing engine in their online Volume Pricing Center to provide instant responses for larger-quantity product requests, an application of reverse auction technology that Brandel is seeing more often.

"It's sort of like a reverse auction becomes a reverse pricing tool. I see people just starting to become much more market-savvy, using these tools in terms of determining their own pricing as well as their competitors, which I think is a good thing," he explains, noting that companies can use auctions to see what price similar goods are getting on the market before setting prices on their own.

Kelemen expects to further enhance the Army's auction technology to make it more robust, as well as adding best value considerations for reverse auctions so that they will include a variable other than just the lowest bidding price. "Industry likes the [reverse auction] product because they feel it's fair, open, and honest," he says. "I absolutely think it's going to revolutionize the way government procurement is conducted in the future, particularly as it applies to commercial items." As the time-and money-saving aspects of reverse auctions catch the eyes of more industry players, Brandel expects companies to want the auctions to be able to tie into their overall financial and procurement systems or be included in procurement packages.

"At the end of the day, it's always good for the market to find what is a fair price," he says. "So if you believe in that, then these are all great tools for the greater good, for finding the fine balance of capitalistic forces."

... dynamic pricing commerce, most of which is online reverse auctions, will top $45 billion or 15 percent of all e-commerce in 2002, rising to $500 billion in 2006 ...
\... typical companies can expect savings of 10 to 20 percent on goods purchased through online reverse auctions ...
... purchasers also save time, compressing into hours price negotiations that normally take weeks. Buyers also reach new suppliers who, because of location or reasons, never bid for their business before ...
... online reverse auctions make sense for purchases, almost everyone agrees. And it is only a matter of time before small companies use them ...