Letter from Ed - Going, Going, Gone!
Online Auctions - PE publisher explores the impact of online auctions for pallets.
By Dr. Ed Brindley
Date Posted: 5/1/2000
Going once! Going twice! Gone! Sold to the highest bidder! No, it’s bought from the lowest bidder. Or is it?
Certainly one of the hottest issues in the pallet industry over the past six months has been the Internet auctions for pallets held by FreeMarkets.
For starters, FreeMarkets’ auctions are not auctions in the usual sense. The sellers bid, not the buyer. At a typical auction, buyers can observe each other. In some cases they may even know each other. Even unfamiliar competitors put out recognizable signals that may help a bidder to make decisions.
Not with FreeMarkets. You know the prices being bid and can relate bids to a specific bidder, but you still do not know the bidder’s identify with certainty. If you don’t know the competition, you are at a disadvantage; not knowing the other bidders creates a very unfair situation.
After the bidding closes, you breath a sigh of relief because you offered a price that was so low that your company would have lost money. Well, you may not be in the clear. The FreeMarkets buyer can take your lowest bid if the winning bidder does not deliver or the buyer is not satisfied with them.
Since the pallet specification was spelled out, everybody is participating on a level playing field, right? Maybe not.
I know of cases where the pallet that was supplied was different from the one that was specified. If your bid is too low, you may be tempted to "cheat on the spec."
The people at a buyer’s local plant may not be too happy with the bidding process, either. Suppose they suddenly are told that they will have to work with a new pallet supplier instead of the one that they have had a good relationship with and has helped them many times out of tight situations. If the pallet does not meet the standards they are used to, you have an unhappy customer whose good supplier was removed from the Internet bidding process.
Price is important, but only if you assume that you are getting a good product that will perform without causing too many headaches. Without a good supplier-customer relationship, the pallet user suffers. Where does the customer turn when the lowest bidder just doesn’t cut the mustard? Where is that dependable supplier that was always there with a good product and a fair price?
My advice is to read the fine print before you participate in an online auction. Talk with others who have tried them. Know your costs and your limitations before bidding. Sometimes it is better to let business go instead of getting it at extremely low prices.
How can the pallet industry, which is running at 3% to 5% before tax profit levels (maybe somewhat better for recycled pallets), cut prices by 10% or more — sometimes much more — and still perform? How can it survive? The cost of manufacturing and recycling pallets is so slanted to heavy variable cost that there is not much meat left on the carcass. When an impersonal auction is over, there may not be much left but the bones.
Currently, I cannot see a good side for the pallet industry to Internet auctions. Unfortunately, we will probably have to learn how to live with them.
Out staff is starting a detailed investigation of online auctions. Please send us information on your experiences.
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