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Competitive Bidding – does it deliver benefits?

May 14, 2013

It will surprise few that over 90% of suppliers say that a customer’s competitive bidding practices impact trust, loyalty and behaviour. Indeed, customers would be rather disappointed if the use of competitive bidding did not impact behaviour. But the key question is whether the effect is positive or negative – and there the answer seems to vary.

Recent research by IACCM suggests that many customers need to give careful consideration to their use of competitive bidding. A majority (68%) see it primarily as a tool to drive lower prices. Around 25% view it as a way to ‘incent improved supplier performance’ – by which they appear to mean an incentive for continuous improvement and innovation or of ensuring the quality of resources and supply. This attitude is consistent with other aspects of contracting and performance management, where negative incentives are the most commonly used approach (e.g. through allocation of performance risk to the supplier, the use of liquidated damages etc.).

But what is the actual effect of competitive bidding on supplier performance? The answer seems to be rather mixed. Regular use, or threats of, competitive bidding certainly keeps a supplier more alert. In commodity environments, it appears to generate some benefit regarding price. For example, 32% of suppliers in this category acknowledge that they are more likely to undertake regular price reviews and pass on any potential reductions. But the other 68% say that they are unlikely to take proactive action; they will store any price benefits until the threat materializes.

It is in higher value relationships that the potential cost of aggressive use of competitive bidding becomes even more apparent. In environments where suppliers are making significant commitment of assets or resources, regular competitive bidding generates understandable caution. For more than 70%, this translates to decisions over customer preference, the quality and timing of resource allocations and the extent to which they share opportunities for improvement or innovation. One executive explained it this way: “Customer A is big, but they use this size aggressively. They make regular use of competitive bids and this sends the message that everything is about price. They forget that they are not the only show in town. Some of their competitors behave very differently – and that is where we are investing our best resources, our development budget and our loyalty.”

There are two problems for any buyer. First, can they trust a supplier to pass on benefits proactively? Second, how do they know that a particular supplier remains competitive over time? The IACCM view of best practice is that buyers should be making far greater use of on-going benchmarks. Our work points to the use of incremental terms within the contract, requiring new and different forms of reporting by the supplier. These can not only ensure the customer is getting a competitive deal relative to other customers, but can also operate as an effective indicator of overall market competitiveness.

Such terms also generate a closer relationship because they prevent the cost and disruption of regular bidding and they also ensure shared data for performance reviews. This sense of working together to achieve shared value has a positive impact on trust, loyalty and behaviour. It generates obvious benefits beyond price – better resourcing, higher investment and the potential for greater innovation.

So it is time for buyers to think about less use of competitive bidding and more use of market benchmarking.

  1. Zahedul permalink

    For some items competitive bidding may bring positive results, e.g. in case of procurement of simple IT equipment (like laptops, desktops) where the market is frequently changing, competitive bidding allows to secure the best price and also provides an opportunity of market survey. However for complex and more strategic items/services, frequent competitive bidding may bring negative results as mentioned in the write up. Supply positioning model may help to identify the complexity of the items and decide accordingly.

  2. Owen Davies permalink

    Tim, the big problem here is that most buyers tend to use both! If a supplier chooses to be competitive to win the business on price then the supplier cannot expect to be benchmarked against a background where quality of delivery is the benchmark; it is just not sustainable.

    • Owen
      I think both are inevitable, at least in the context of a way to benchmark continued competitiveness on price. But the supplier has some control here. Rather than waiting to see what benchmarks are imposed on them, why not be creative and proactive in suggesting approaches that can address a customer’s concerns?

  3. Unfortunately you can’t collaborate with everyone. It takes time and effort to do well and to do badly (by for example doing a skim across a large number of partners) can end with you in a worse position. For some ‘commodities’ you are left with few options but a Darwinian fight for the winner (or loser depending on you perspective). I’m interested in the survey you mention, can you advise on the source?

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