A Perspective on
E-Bidding
Food growing, food processing, food distribution and food retailing is undergoing tremendous change. Many would say that this is the most dynamic in history. That however is not altogether factual. The reality is that the supply chain that delivers food to North American consumers has been experiencing dynamic and constant change for decades. The advent of technologies and their integration into our industry has been reshaping us from the early part of the century up to the present. Whether it was the internal combustion engine powering trucks and delivering large payloads more efficiently or the electrification of the country bringing refrigeration to small town grocery stores or the hundreds of other influences that have impacted the industry; those who embraced new and better technology have succeeded and those who did not are lost in the pages of history past.
The onslaught of technology that faces us today is simply
more in a long line of what for the most part have been good things. It is
daunting at times, exasperating at times, but it is in general good. Our industry is a vital, essential one that
is critical to the sustenance of life.
We daily in our businesses are looking for efficiencies, economies of
scale, differentiations and opportunities to simply be better at what we do. We
are fiercely competitive and those that are successful among us soak up all the
new efficiencies we can get our hands on. We all know that the spoils of the
market will go to them that are the most efficient. We must be as an industry looking at every
opportunity for continuous improvement.
New Technologies will be essential to helping us get our jobs done. We
have a big job to do now and a bigger one to come as the
What about things like e-bidding? I have heard a great deal of groaning and consternation among manufacturers about this new and recent development. Change is always difficult. Is this an improvement or a calculated assault on the well being and profits of manufacturers? In the adversarial world of buyer and seller one should always greet the initiatives of his adversary with caution. Although we give lip service to concepts like “partnering” between retailers and manufacturers no one should be deceived, manufacturers and retailers are adversaries. The normal, natural conflict between buyer and seller prevails as it always has and always will. E-bidding has been an initiative championed by the retailers and not by the manufacturers. It is therefore logical to assume that e-bidding was conceived as a tool for the gain of the retailer and not for the manufacturer. Even so, I think the right question to be asking about e-bidding is can it make us more effective in our mission to manufacture, distribute and sell food in the most efficient manner possible? Can it ultimately represent something that can be of value to us as manufacturers?
I want to put forth a few possibilities that I think may in fact turn a challenge into an opportunity for us to be a better industry. First, are pricing systems employed in the industry fair and equitable for the new environment of the mega-retailer dominated grocery industry that we live in today or are we still using the remnant of a system developed for a much more fractured and regionalized environment of the past. I believe that it is inarguable that retailers by virtue of the leverage of their size and the costs that are incurred serving them deserve and should expect proportionate pricing. By that I mean that a retailer who has established a market position as a preferred destination where shopper’s needs are fulfilled deserves a better price. By that I mean that a retailer who does partner with vendors to cut out distribution obstacles and limits the manufacturer’s cost of doing business with them deserves a better price. Question, are there inequities in the pricing offered to retailers? Are the costs of doing business averaged over the entirely of the base of our customers leaving some short of the price they deserve and giving others pricing they do not deserve? For most manufacturers the answer is yes. If I were one of the retailers that does not create an endless chain of spurious deductions, I would question why my price was the same as those who do. Some retailers it seems to me have a very legitimate point; the pricing system as it stands today is not entirely fair. In my opinion, retailers should get the pricing they deserve. For some retailers that would be good news for others it would be bad news.
What constitutes a healthy supplier base and what effect might e-bidding have on that? Like it or not. Down and dirty. E-bidding is brutally efficient. If done right it can remove any fog or haze from the equation in a hurry. The most efficient will rise to the top and those that are not will fall by the wayside. Is the marketplace simply saying through e-bidding, get efficient or get out? The caveat of course is that if too many sources of supply are eliminated from any market that it soon will cost the buyer more for his goods. A short term gain in price may be later eroded in the future by a more limited source of supply. I believe the question that retailer and manufacturer alike should be asking is what is the most fair and equitable price that will make our industry the most effective now and in the future. I believe it is legitimate to consider the possibility that some may see the probable diminishment of supply sources that may result from an industry based on e-bidding as a great place for predatory schemes. This environment would be a place where those with the deepest pockets may eliminate or devour other sources of supply and find their payback in higher prices down stream. I realize that many examples of this practice presently exist but certainly a severely margin depressed environment created by e-bidding could exacerbate and expand in graphically. Do we want many vital and healthy sources of supply or a few giant sources of supply? Like a teeter tauter, the one who is up and the one who is down could shift quickly. Will the probable compression of margins that will likely result from wide spread e-bidding lead to more consolidation among manufacturers? Are all these things simply good things as we plumb for the most efficient marketplace possible? Are all of these things merely the inevitable outcome of market dynamics? Or are we trading pennies gained today for dollar lost tomorrow? In my opinion, a plan that keeps good efficient sources of supply plentiful and gives manufacturers a reasonable profit is best for the long-term health of the entire food industry.
If e-bidding is a permanent part of the future landscape of our industry what elements need to be developed around it so that the best outcome will result for the health and future of the industry? Let us for a moment pretend our industry exists in a perfect world. In this utopia everyone is genuine, everyone has the best moral intention and everyone is merely looking for the best deal that they legitimately deserve. In this perfect place retailers get the price they deserve with full considerations of their merits whether positive or negative. Likewise, manufacturers do all the right things and earn the profit they deserve. Here all the facets of oranges are perfectly defined and all the characteristics of apples are crystal clear to all. No one deceives, no one seeks unfair advantage and everyone plays by the rules. What would be the standards that guided this place? Who would be its arbiter of truth? Under whose auspices are these standards to be issued? These are huge questions. If the future is one that includes e-bidding as well as fairness and a healthy industry they must be answered.
Let me share a true story. Our company participated in an e-bid in which all of the major world class manufacturers bidding on the business fell within a few pennies of one another. One bidder bid more than 15% below everyone. As the incumbent for this business we were asked to meet the low bid or suffer the loss of the business. I pointed out to the retailer that one of the bidders and the one I supposed to be the low bid competitor (curiously, something the retailer did not deny) had been convicted of multiple felony charges of adulterating products, that their facilities were unable to pass audits of other retailers and that they were known to have had several product recalls in the last few years. I agreed that if I were being asked to meet the price of a legitimate competitor that I would do so. The retailer’s response was alarming. They said there was simply too much money on the table to ignore and that I should respond if I wanted to keep the business. I did not respond to what I felt was an illegitimate bid and after several week of terror was relieved to have been awarded the business. I felt unfairly treated by the retailer who was trying to use a bid he knew was not acceptable to try to get me to give him the profit I deserved. An article in Private Label Buyer in November asked a question that begs answering. Do we need a body of standards for the industry? Are things like ISO certification important? Are excellent and superior ratings from independent audit agencies important? Are credentialed QC staffs important? What about information technology support? What about category management? What about years of exemplary service to the industry and an old fashioned good reputation? We could go on and on. If any manufacturer cuts enough corners he can of course gain an advantage. In my opinion, we desperately need a body of standards that sets clear guidelines for our industry. How orange are the oranges, how red are the apples?
Can the retailer have the lowest costs for goods and the healthiest manufacturing base from which to obtain them? Could e-bidding and reverse auctions provide that? There are some possible advantages to e-bidding if certain accompanying elements went with it. Retailers spend great energies and money in the constant pursuit of the best coast for goods. If the process of e-bidding established the ballast point for a retailer’s best price and they could confidently believe that point would not change significantly for a protracted period, why would they want to go through the exercise of frequent price reviews? Why would they want to suffer the costs of supplier changes? Quarterly or yearly pricing reviews could be stretched to twenty four, thirty six or even perhaps forty-eight month terms. The counter balance that would protect both the manufacturer and retailer would be that escalator and desesculator clauses would have to be in a place to compensate for true and demonstrable increases or decreases in manufacturing costs. The gain for all would be that we could have a healthy, more efficient industry with manufacturers being able to plan capitalizations over a longer term. Otherwise, the world dominated by e-bid is likely to fling huge chunks of business back and forth among the manufacturing base and could push manufacturers to think of capitalization in smaller and smaller terms of time. No manufacturer wants to capitalize for business he may not have in a year, especially business that has been bid down to the lowest margin possible. The probable outcome of short term e-bid cycling business that is here today and could be gone tomorrow is that it will become less valuable to manufacturers. It will likely get less capital support and manufacturers will be less ready to embrace expensive new technology even if that technology could pay off somewhere a long way down the road.
Whether e-bidding and reverse auctions become the standard means of buyer, seller interaction in the future or not will not likely be the decision of manufacturers. The battle between retailer and manufacturer is not a fair fight. As brand power is likely to erode in the face of private label growth it the fabled eight hundred pound gorilla. The bad news is that with the consolidations of the past few years and those that are likely in the future that the gorilla is only going to gain weight. We can only react to and try to help shape the outcome of choices made by the retailers, should they choose the e-bidding route. If it is to be, let us get on board and make it the best it can be. I believe the best course for all involved is to make that future one where fairness prevails, where our total effectiveness as an industry is enhanced and where we can accomplish our mission of providing plentiful, best cost goods and services to our consumers.