Sandy D. Jap
Executive Summary
As more and more industries adopt e-procurement tools for their sourcing activities, firms are increasingly relying on the use of online reverse auctions. However, the online bidding experience can have potentially damaging effects on relationships with suppliers because the experience of bidding competitively in real time under time pressure can be disconcerting and stressful. So how should buyers design these auctions to minimize their potentially harmful impact on these valuable relationships? Buyers must consider various factors, ranging from the number of bidders to participate in the event and the size of the purchase contract in an auction event to whether all bids should be visible to all bidders and whether the winner should be the lowest bidder or determined by the buyer postauction.
The author tests these factors across 25 auction events that involve 125 suppliers and $385 million in procurement contracts in the automotive, chemicals, consumer products, and high-tech industries. Each auction event varied in the number of bidders, economic stakes, winner selection rules, and bid visibility format. Then, the author mathematically models and assesses the impact of these differences on the supplier’s relationship with the buyer.
The results indicate that buyers can safeguard their supply relationships by creating auction events with large contract values and multiple product lots. By doing this, buyers make it possible for suppliers to recoup any margin losses through economies of scale, and this provides multiple opportunities for suppliers to participate and provide compelling purchase configurations for the buyer. In addition, when the auction uses a partial price visibility format—that is, suppliers know only the competitive rank ordering or the lowest bid price (not the spread around this price)—the detrimental impact of these auctions on supply relationships can be avoided. Conversely, auctions in which the lowest bidder is guaranteed to win the contract and the bids of all suppliers are fully visible can damage relationships by raising suspicions of opportunism. For these types of auctions, this damage to the relationship can be avoided by adding more product lots to be bid on or using a partial price visibility format. In summary, these approaches (i.e., creating auctions with significant economic stakes and using a partial price visibility format) provide the financial motivation to participate and some level of pricing confidentiality without necessarily sacrificing valuable relationships.
The results underscore the notion that conducting online reverse auctions that also preserve interorganizational relationships is a delicate balancing act. To avoid raising suspicions of opportunism, buyers must consider the number of suppliers and lots. Too few or too many suppliers or lots can have damaging effects on supply relationships. The results indicate that approximately 12 bidders per auction and six to seven lots for auction in an event are best for maintaining key relationship aspects, such as satisfaction, expectations of continuity, and dampening suspicions of opportunism. Finally, uncontrollable aspects may affect relationships; for example, large price drops (greater savings) have an adverse effect on supply relationships.
Biography
Sandy Jap is Caldwell Research Fellow Associate Professor of Marketing in the Goizueta Business School at Emory University. In general, her research focuses on the development and management of interorganizational relationships and the interface between online procurement technologies and these relationships. Her research has been conducted in several industries, and the results have been published in various journals and books, including Management Science, Journal of Marketing Research, Journal of Marketing, Sloan Management Review, California Management Review, and Harvard Business Review, as well as an array of special issue journals related to channel management, sales force management, competition, and e-commerce. She has won numerous research awards and grants and is an editorial board member of Journal of Marketing Research and Journal of Marketing. Before joining Goizueta, she served on the faculty of the Sloan School of Management at the Massachusetts Institute of Technology. She received her PhD and undergraduate degrees in Marketing from the University of Florida.
Journal of Marketing, Vol. 71, No. 1, January 2007
View Table of Contents