Mars Incorporated: Online Procurement

As the internet continues to play a major role in globalisation, companies are striving to use the resource to its full potential. Just as millions of individuals use eBay in the hope of snatching a bargain, global corporations are now getting in on the act.

Following the lead of companies such as John Deere, Ford and PetroVantage, Mars Inc are the latest company looking to online auctions as a way to lower costs and increase profitability. These “reverse auctions” involve suppliers bidding for contracts, with the lowest bid winning. There are numerous advantages of such a process which prompted Mars to investigate the option.

Looking at other major firms which had implemented such systems, it was apparent that there were cost savings to be made. For example, BAE systems claim cost savings of 15-20% as a direct result of their online procurement system, Exostar (Flynn, 2003). Other research suggests savings to be around five percent. While this may not sound a great deal, to a company annually purchasing materials to the tune of $4 billion, this represents a significant saving.

Online auctions would also eliminate many of the inefficiencies of procurement processes based on one-to-one negotiations have. Firstly, the auction would be readily accessible worldwide to any company wanting to bid. As a result, competition is increased and the probability of Mars obtaining materials at the cheapest price is increased. Infact, the case study highlights that a problem of the current purchasing system leads to situations where one supplier found out that a competitor had been awarded a contract under terms it would have been prepared to better.

Also, conventional methods of purchasing involve a disproportionate amount of time negotiating prices and quantities. Such a problem is immediately solved using online auctions. Online auctions would also allow Mars to meet its objective of obtaining “the needed materials from the list of approved fairly and at minimum (monetary) cost.”

However at what theoretical cost?

In my opinion two other objectives of Mars could be compromised were online auctions to be used. Mars believe they offer “outstanding quality” and “mutual benefit.” However, selecting suppliers based purely on price may well lead to a decrease in quality, as suppliers strive to cut costs in order to be the lowest bidder. If suppliers refrain from lowering quality and simply cannot cut costs any further, then the profit that suppliers make will simply be reduced. While this may make financial sense to Mars, it contradicts their principles that success should “mutually beneficial to all parties involved” and that suppliers should not be squeezed “to the point of no return.”

Mars continually state that the relationship with their suppliers is extremely important to them and this has been a significant influence on the success that the company has had. However such relations would not be maintained were internet auctions to be used in the future. Two of the most outspoken critics of reverse auctions are David Stec and Bob Emiliani from the Centre for Lean Business Management at Rensselaer Polytechnic Institute (bostonapartments.com). They believe that online auctions do not teach buyers and sellers how to solve problems jointly and conclude that reverse auctions are toxic for buyer-supplier relationships.

As mentioned above, the reason for companies looking into online auctions is simple; to cut costs. However, Stec and Emiliani believe the cost savings which are reported are often inflated and not a true representation of the facts.

Their research paper, published in 2006, revealed that that 50 percent of the savings from using reverse auctions disappear because of factors such as errors in supplier data, post auction negotiation, and changes in specifications or quantities. Such problems would not be incurred as frequently were online auctions not used. In addition it can be the case that a company does not account for extra expenses resulting from problems such as poor quality, late deliveries and supplier non-performance. If this is indeed the case, when these losses are added up, the five percent savings that companies have reported are in fact closer to 2.5 percent and thus less appealing to Mars.

Hohner et al (2003) believe that online auctions are inappropriate when the firm wants to control business volumes or the number of suppliers, as is the case with Mars, who outline stipulations they would want added to a contemporary online auction. The company want to enforce a minimum number of winning bidders in any auction, do not want too many suppliers, want to limit the monetary amount won by any one supplier (presumably to reduce risk) and also to put in place a minimum total amount of business one supplier receieves from auctions. For Mars to successfully implement an auction system which would gain wide acceptance, it would have to customise such a system.

At the time the case was written it appeared that a formula for meeting the needs of Mars had been devised, but determining the winning bids within a short time frame had not. It appears than a human could not do this in a matter of minutes. However, although I admit to not knowing a great deal on the subject of computer programming, I would have thought that a program could now be written which would be able to meet the company’s needs.

In conclusion, I feel it is obvious that Mars would gain a financial benefit from implementing an online auction process- i.e. cost would be reduced. However, the image Mars currently enjoys may suffer as a result as it appears that it is the suppliers who will lose out. While costs would be cut, so could profitability. Therefore I recommend a cost/benefit analysis should be carried out before such a decision is made. If Mars were to go ahead with the plan, I would think it necessary to amend the key principles they advocate, as such a move would conflict with many of these as I have outlined above.


Sources used

Flynn, T “Doing Your Bidding”, Director, 2003

Hohner, G. J. Rich, E. Ng and G. Reid, “Combinatorial and quantity-discount procurement auctions benefit Mars, Incorporated and its suppliers” Interfaces. Linthicum: Jan/Feb 2003. Vol. 33, Iss. 1; pg. 23, 13 pgs

http://www.bostonapartments.com/business/online_reverse_auction.html