An April 11, 2018, article in the Wall Street Journal reported that Sears Holdings is partnering with an online auction platform to sell 16 of its profitable store locations because the platform would create a highly transparent and competitive process. The action was part of a broader initiative to unwind assets to improve liquidity and get back to profitability.
The idea of buying and selling items online is not novel. However, as procurement professionals, when we think about auctions, it is generally the idea of reverse auctions. In a reverse auction, sellers bid for business by offering lower and lower prices to the buyer in a competitive attempt to win the auction.
However, some organizations are using sourcing platforms to support their broader operations in selling items online to the highest bidders – using forward auctions. This is a stark difference from reverse auctions, where the buyer pays the lowest price offered by competing sellers. Recall that in a forward auction, buyers bid for items by offering increasingly higher prices to the seller. That is exactly what these organizations are looking for: a place to sell items to the highest bidder by providing a transparent and competitive process.
Benefits of forward auctions
Conducting an effective forward auction requires clear specifications for what is being sold, careful event logistics and coordination, and an understanding of the buyers’ market, buyer training, and practice. Mistakes in the setup and execution of the auction could be costly and frustrate bidders. The benefits from a well-orchestrated event are substantial, however. Benchmark data from the 2017–2018 SAP Ariba Benchmark program indicates that top-quartile organizations are able to drive approximately 12%–14% profit margins on their auction-based sales. In other words, an item that is valued at $1 million on the seller’s books can sell for up to $1.12 million at the auction. Not bad, considering that the costs to sell the item are the investment in time to educate the buyers and the platform is already available.
What is commonly auctioned on the sourcing platform?
Data from SAP Ariba Network shows that organizations use the sourcing platform to generate additional revenue by selling various items including scrap metal, corrugated cardboard, office furniture, real estate, and more.
Cost reduction has always been a key focus for procurement professionals. Elevating procurement’s reputation and role to that of a valued business adviser across the enterprise is something that most organizations aspire to. Demonstrating value beyond cost savings by partnering with the business is what procurement analysts and experts have been advising for years. And there are different ways procurement can do this. By providing a platform, change management support, shrewd negotiation rigor, and tactics across the business, procurement teams can add this example as another way to broaden their influence and value across the enterprise.