Quality Extremes in Electronic Auctions, Tendering
Sep 27 2019
Love them or loathe them, online bidding platforms are so entrenched in modern-day shopping habits that the verb “eBay” has an entry in the Oxford English Dictionary.
The runaway success of that virtual shopping site spawned a mass of copycat e-tailers and, over the years, continued use has allowed buyers and sellers to become comfortably familiar with the e-auction format for trading goods and, more recently, services.
Personal has translated into professional and now the project cargo and breakbulk world is seeing a proliferation of e-auctions sites and platforms, aimed at simplifying and improving transparency for project bidding. But is it effective?
Ove Meyer, managing partner of Zeaborn Holding, pulled no punches when he lamented the lack of proper risk assessments on e-auction sites when he spoke at Breakbulk Europe earlier this year. If set up the right way, he said, e-auctions are a positive development, but not when any company can bid, regardless of their asset base or appreciation of the market.
On the one hand e-auctions allow for more digital analysis in costing, standardization of prices and rates, and improved tracking and tracing – using technology and analytics – all of which should allow forwarders and suppliers to price more accurately. But on the other hand, there is not always a standard for vetting who’s bidding on the other side. If an algorithm says “here’s your winner” there’s no way of knowing if it’s a one-man-band operating from the back of a shoe store, with no owned fleet and a nonchalant approach to safety.
Counting on Experience
Siemens has been using its proprietary e-auction platform for a decade and has learned much about the process in that time. And while the shipper has been approached to include its tenders on third-party e-auction sites, it remains reluctant to risk sharing confidential information with outside vendors. Ruediger Fromm, senior director and head of global project logistics at Siemens Gas and Power, recalls that there was pushback against the use of e-auctions from the project cargo team at the start: “There were big discussions around whether you could do project logistics by e-auctions – it took us a while to get onboard.”
Now, though, the team has fully embraced their use and, from a shipper’s perspective, see limited downsides to running e-auctions. “We see it as simply a different way of awarding tenders,” Fromm said. “The biggest positive argument is that this is the most compliant way of awarding tenders. There is full transparency for all stakeholders, and there is less of the human factor in the awarding process. From our point of view, it is the fairest approach to competing in the market.” He estimates that 20 percent to 25 percent of Siemens project cargo awards go through e-auction today.
Istanbul, Turkey-based KITA Logistics comes at e-tendering from the other side of the table. As an air, sea and road logistics provider, KITA Logistics has more than 20 years of experience in large-scale logistics projects. Managing Director Emre Eldener estimates that about 10 percent to 15 percent of all KITA Logistics’ tenders are now done electronically, and he anticipates that percentage will rise, although this trend is not necessarily viewed as a positive.
“Transport or any type of logistics service should be based on trust, and we consider that the parties must meet face-to-face and understand each other’s needs. Ultimately, it is the people who do the business,” he said. “Most of the services are tailormade in logistics and e-tenders structurally cannot see and evaluate the outcome in the best way possible.”
Beyond trust issues, Eldener criticizes e-tenders for creating fiercest competition on price, and only price. “This is the negative side of it,” he said. Eldener relays an e-auction incident where the time was extended by an additional three minutes every time someone reduced the price. “It went on forever,” he said. “There was no deadline for bidding, and it was an absolute negative experience. We lost that one, but I do not think the winner was happy either.”
Learning from Past Mistakes
Perhaps the sector can blame the past for any current reticence towards or criticism of e-auction sites and e-tendering. Big Oil got in on the e-auction party towards the end of the 1990s, and the experience was far from positive. Bidders very often went far below their own breakeven limits, and customers ending up with poor solutions which in fact created a higher logistics cost. This led to a decline in the use of these sites and left a bitter taste.
“Our experience at that time was that it was a pure ‘bazaar,’ with the only focus on reducing unit prices per ton/cubic meters as low as possible, not focusing on lead time, performance, quality, safety, security, compliance, etc.,” said Leif Arne Strømmen, vice president innovation at G2 Ocean. “It was a race to the bottom, and many providers went far below their actual cost or buying rates during these sessions. Many customers also had very negative experience with this approach, since they ended up with vendors not performing, and the overall logistics cost went up.”
While the online tendering and project e-bidding offerings available today are more varied and less con-
strictive, only a few of G2 Ocean’s existing customers use typical e-auction platforms for pricing today. Within the company’s project business, only one customer uses an e-auction platform on a regular basis. G2 Ocean does count several customers using digital tender platforms for handling the overall tendering process, sharing request for qualification documents, and uploading/submitting full tender responses. However, these are not used for the purpose of pure e-auctioning.
That said, Strømmen does expect that digital development will open doors to new tools and digital marketplaces that will influence the project cargo sector in the future. He counts close to 10 different digital marketplaces under development for bulk, dry bulk and breakbulk, a development he believes will change the way chartering and fixing of breakbulk cargo will be done in the future, “not next year, but for sure over the next 10 years.”
These tools include automatic matching of cargo and ships, and automatic pricing based on cargo details, laycan, lead time, carbon footprint, vessel performance and demand/supply, as well as other live and historical data such as fuel and weather data.
While the need for manual assessment for loading, sea-fastening, stowage, weight distribution and so on will remain, Strømmen believes the process of chartering vessels will change, and that will have a knock-on effect on commercial models between project owners, engineering, procurement and construction companies, freight forwarders and carriers. “You will have much more transparency for all parties when it comes to availability of vessels at all times and the same will apply to other means of transport,” he said.
Virtual portal e2log prides itself on its offering of a number of online services for the door-to-door shipping of oversized cargoes, which include e-auction functionality.
Founder and CEO Adolph Colaco described the product as “a digital ecosystem” that connects shippers with due diligence-approved logistics providers. It’s underpinned by a procurement engine, bid evaluation tools, a transparent logistics provider selection processes, cargo tracking and event management capabilities, cloud-based document repository, communication boards and smart phone-enabled functionalities.
“We strongly believe that oversize logistics is not a commodity and price cannot be the only driver,” Colaco said. e2log favors the reverse auction method and requires logistics providers to bid on cost and transit time. “The shipment is ultimately awarded to the logistics provider of the shipper’s choice, after the shipper has evaluated and compared all technical, commercial and risks associated with each bid – and not just to the lowest bidder.”
Colaco is a supporter of online auction platforms, but only if they are fit for purpose. “Stand-alone e-auction platforms which are primarily price focused are not well suited for oversize logistics. Risk assessment can be effectively done only when bidder’s competencies, expertise and performance track records can be mapped to the needs of the shipment.”
E-auctions need to look at the entire chain, from requests for qualification creation to delivery of cargo at destination. “This allows the collection of data and measurement of performance each step of the way, which provides critical data points for risk assessment and decision making,” Colaco said. Platforms like Expedia and Booking.com have successfully implemented similar models, and the oversize/project cargo industry could learn much from that, he added.
However, every auction model is not suited for every product, service or transaction type. The auction model used is ultimately chosen by the party which controls the transaction, so that it delivers the desired outcome … for them.
When the seller controls the transaction, the auction model chosen typically drives the price up; when the buyer controls the transaction, the auction model chosen typically drives the price down. Colaco gives the examples of an auction of artwork versus an auction for oversize cargo. At the artwork sale, the seller controls the transaction and looks to drive the price up and sells to the highest bidder. Whereas in the case of oversize cargo, the owner of the cargo is the buyer of the service and controls the transaction. Hence, they look to drive the price down through an auction.
E-auctions are most effective when the owner of the cargo does not unilaterally set the base price, but allows the logistics providers to first submit their prices which then triggers a reverse auction. “This ensures that the logistics providers have built profit margins into their bids and ultimately gain from the transaction,” Colaco said.
Increased Future Demand
Fromm noted criticisms of e-auctions generally come from the supplier side. “They push the button too early and have to live with their actions.” But given that increased use of e-auctions in the oversize/project cargo community in the future is “inevitable,” according to Colaco, suppliers will need to get onboard and find a way to work with, rather than against, these e-tendering tools.
“I think it will become more and more the normal way for awarding contracts,” Fromm said. “We are facing an increasing requirement to tender on e-auctions.”
Eldener added that the sector needs to accept the fact that e-auctions are a part of logistics pricing and awarding of services today and that training needs to reflect that. “We all need to educate some of our staff to be familiar with all types of e-auctioning, thus making the company prepared for the future,” he said.
Returning to Meyer’s opening complaint of inadequate risk assessments, project cargo movers need to have confidence that vetting is robust on their platform of choice. Siemens takes care to check suppliers in advance and evaluate and analyze risk in any project tender through its platform. Fromm stressed that while the shipper is interested in the lowest rate possible, it is not looking for the cheapest. “We are looking for the best,” he said. “So we do make a high effort in our awarding process to find the supplier with the lowest risk.”
Fromm conceded that not every shipper puts such a high focus on risk assessments, and that some are only interested in securing transportation from A to B at the cheapest possible cost through an e-auction. It is here where problems arise in e-tendering and where Meyer’s criticism can be correctly directed. Shippers, forwarders and suppliers need to compare apples with apples when it comes to online auctions and tendering platforms, else risk being caught out in a race to the bottom on price.