1.  What are the general key roles, characteristics and objectives of the purchasing and supply management function are mentioned in this article?
2. (3 Marks) How do you link strategies and purchasing functions in a company? Give two specific examples.
3. (4 Marks) How purchasing function in an organization can tackle changes?
4. (3 Marks) How do you place the Purchasing and Supply Management Function within the corporate hierarchy?
5. (3 Marks) Identify special roles of purchasing and supply chain profession?

EDI Associates is a small distributor with two full-time and five part-time consult- ants. Revenues during the past three years were approximately $10 million. EDI Associates packs and exports commodities to the Asian market. EDI has provided logistical services for the KACI Corporation for the past three years. Each year EDI negotiates transport and shipping rates with a variety of carriers. Recently, KACI decided to conduct a reverse auction for all packing and shipping services. The current contract with EDI was valued at $1.6 million per year. EDI Associates out- sources approximately 80 percent of the contract to a major shipping company.

THE AUCTION

KACI contracted with Auction.com, a multinational, market-leading, e-commerce company specializing in e-procurement and auctions. Auction.com has approximately 1,000 employees worldwide and has conducted auctions for 140 large multinational clients. They have conducted about $21 billion in auctions, resulting in savings of about $6 billion. KACI is a global organization based in the United States. KACI was undergoing financial strain due to increased worldwide competition. In order to reduce costs, KACI turned to Auction.com to conduct a reverse auction. The auction event was a global procurement exercise focusing on logistics and transport. The auction event consisted of five stages:

1. Making the market (client).
2. Prequalification (supplier).
3. Preauction planning (supplier).
4. Auction-strategy (supplier).
5. Postauction analysis (client).

Making the Market

Shortly after the notification from KACI, EDI Associates began to prepare for the upcoming reverse auction. EDI received a CD with the documentation of the re- verse auction process. This documentation consisted of over 50 files including ten- der documents, quote spreadsheets, specifications, and other relevant information. There were at least four updates prior to the final auction. The deluge of information was overwhelming.

Prequalification

The nonperforming suppliers are eliminated from the auction at the prequalification stage. At this stage, Auction.com must ensure that there are an adequate number of bidders remaining. EDI Associates had no idea how many other companies had been prequalified. Prequalification also introduces some financial parameters for the event. Auction.com set the switching cost at $1.3 million; that is, the price when KACI would consider awarding the contract away from the EDI supplier. The difference between the switching and existing contract prices was approximately Auction.com quotes savings of 19 percent. EDI Associates again expended considerable resources at this stage: two site visits, four subcontractor meetings, 200 phone calls, 45 e-mails out, 15 e-mails in, 30 hours of the managing director's time, and 20 hours of the consultant's time. EDI's setup costs for the reverse auction were increasing.

 EDI Associates' market entry price: $2 million.

Existing contract price: $1.6million.

Reserve (switching) price: $1.3 million.

For EDI Associates, the setup for the new quoting process was impressive.

Auction Strategy

Waiting for the auction was stressful for EDI. What strategy should be adopted? What would happen if the power failed, or the ISP went down? What would be the lowest position EDI Associates would take in the auction? Would they be swept up in the auction dynamic? Who would press the buttons? Would they hold their nerve? Auction.com conducted a training session from their Asian headquarters and EDI Associates soon mastered the auction interface. EDI established three strategies for the auction: entry, middle, and end strategy. The entry strategy was to come in at the high prequalification bid after about three minutes and then watch the market develop. The middle strategy was to maintain control on the screen and drive the bids down in a controlled manner. It is important to under- stand that, in the auction event, you only see bids and do not know where they come from. The only strategy was to be in the end game and, if EDI Associates did not win, they wanted to be under the switching cost at the end. This would show KACI that EDI Associates was a serious bidder. EDI Associates had seen sample auction events where the end game was frantic.

The Auction Event

The auction was delayed a week and, with a late flurry of updates and clarifications, EDI Associates waited until 10:33 to press the bid accept button. In five seconds, the early and middle strategies were destroyed. There were three other bidders and one bidder came in right on the switching price. This was felt to be a ploy to scare off other bidders; it was felt that this was the existing contractor.

Early Action

Where did that bid come from? (See Figure C5.1.)

FIGURE C5.1 Start of the Auction 2.0 1.7 1.3 10.30 EDI Associates