Lotting Strategy – Key to Successful Reverse Auction

What is Lotting Strategy?

Negotiation is one of the key steps during any Strategic Sourcing process, Procurement Organizations adopt different methods to negotiate prices with vendors. However with the advancement in technology and availability of various online tools, Reverse Auction is one of the most frequently adopted methods these days.

Lotting Strategy is designed when negotiation is conducted using Reverse Auction tools. Lotting Strategy is a process of clubbing or grouping certain SKU’s or Line Items or Lanes so as to create lots representing unique sets of vendors. This is either based on capabilities required or certain common set of criteria. The objective is to maximize participation for each lot.

Recently we conducted a Reverse Auction for Corrugated Boxes for one of our clients. As a part of this process, the lots were created on the basis of delivery location. Each lot included all the SKU’s which were to be delivered to that specific location. After receiving the responses (pre-bids) it was realized that most of the vendors did not quote for all the SKU’s within one specific lot. After analyzing the specifications for these SKU’s it was identified that the reason was more about capabilities of these vendors. Since they had chosen to quote for select group of SKU’s based on their strengths. To enable maximum participation, as a next step we decided to break this lot into multiple smaller lots, this was done to accommodate vendors who were not able to quote for all SKU’s.

Factors affecting the success of a Lotting Strategy

When the stakes are high for both buyers and suppliers the Lotting Strategy plays a very critical role in ensuring success and eventually higher savings, some the factors that can affect are as follows:

1)            Spend size of the lot can affect interest level of suppliers and depending on their capabilities they may quote aggressively or decide not to quote at all.

2)            On the similar lines even buyers have their own set of constraints because more lots may mean more number of suppliers to manage and that may take away plenty of their bandwidth during normal operations. Hence it is important to have optimum number of lots while designing a Lotting strategy.

3)            The Lot total should represent Total Cost of Ownership for the buyer and should include all factors so as to ensure apple to apple comparison, also this would allow vendors to have a real picture of where they stand among all competitors. In addition this will also make the award process faster and simpler.

What is the best method of designing Lots?

There is no rule book to decide the best method for designing Lots, it is all about trying to maximize participation taking into consideration the set of constraints like the number of suppliers to be awarded, the optimum spend that may interest suppliers and finally - Is the lot total true representative of the Total Cost of Ownership? So essentially there are multiple factors that go into preparation of a perfect lotting strategy.

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EmpoweringCPO is a Procurement and Sourcing Advisory Firm; our services are delivered using proven Knowledge Process Outsourcing (KPO) model with delivery centers located in India.

Our main offering is to support procurement organizations with market intelligence and analytical rigor so as to help achieve higher strategic sourcing project savings and support category management on an ongoing basis. Our services include - Procurement Intelligence, Procurement Analytics, Spend Analysis, Strategic Sourcing, Compliance Management, Low Cost Country, Supply Chain Risk Management, Sustainable Procurement and Supplier Diversity Management.

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