One of the questions addressed to a panel of Washington apple marketers on Aug. 21 at the U.S. Apple Outlook Conference had to deal  with the use of a “centralized auction approach” for buying apples by retailer and what that might mean for the future of the apple industry.

I’ll have some coverage from that session for The Packer, but I thought I’d pull out the comments from the session on this question. Comments are from four major apple shippers in Washington State: attribution in The Packer story later, but here is the gist of the exchange (not verbatim):

Moderator:  With some retailers apparently moving to the centralized approach for buying apples, trying to achieve their objectives, what are the implications for the apple industry?

Shipper 1:  When the prices are bid down to the lowest bidder, quality follows and the consumer loses.

Shipper2:  Anytime taking you are taking service and driving innovation of the equation, nobody wins. One positive thing about the (online) auction, you know it’s the truth. At least you see the other bids live on the computer, rather than have a buyer tell you what another shipper is doing. That’s grasping at straws for positives, because you don’t want to be in a price war

Shipper3: Our industry needs to go through marketing consolidation. In the future we will be better prepared for this. The challenges are the logistical challenges; we have to make it the easiest to do business with us; at the same time, what will this do for innovation? Innovation usually costs something. It is definitely a balance of how we approach the market.

Shipper4: It is out there. We don’t know to stop it or if we should. When those bids situations come to us, we will sit down and work out something needs to be a win win situation. Am I willing to give up a little bit on pricing, if it brings value, like commitment and volume?

TK: Interesting thoughts from these apple suppliers. I would like to become more knowledgeable about the kind of centralized auctions, reverse auctions and other online market places where this type of trading currently occurs in the world of fresh produce. Comments and emails welcome…

My questions:

1.    Does such an auction environment necessitate that the low price bidder always gets the business? Or can the buyer choose who will be his supplier after the bidding process concludes?  For example, I found this quote about the use of reverse auctions for canned sweet corn:

The most common category chosen for reverse auction by retailers is house brand products - both food and non-food. The example shown above is for tinned sweet corn. Notice the 'true market price cluster' of 3 suppliers that have all finished within 1.5% of each other. This allows the buying organization to make their final decision almost exclusively on the qualitative ratings of those three suppliers as pricing is no longer a differentiating factor. This 'clustering' is a common characteristic of reverse auctions.

2.    How does the reverse auction process cultivate a relationship where suppliers are focused on making improvements in their products to meet the buyer's  needs?
3.    How will an auction/reverse auction format touch on issues of sustainability, traceability, etc.
4.    How can a much varied product like apples, even with the help all the federal grade standards,  be rolled into an auction process?
5.    What will this mean for niche and club varieties and the question for innovation and new products for consumers?
6.    Is this a sustainable strategy in the event of a crop shortage when buyers need strong relationships with suppliers to procure their needs?

TK: So, based on question one, a reverse auction allows the buying organization gets to beat down all the supplier prices thanks to the “cluster factor” and then make their choice based on whatever other criteria – compliance with traceability, food safety audits, sustainability – you name it. As it stands now, some shippers believe that lowest price is the only thing buyers want, notwithstanding pronouncements from corporate to the contrary.  It would seem retailers want suppliers who have jumped through all their hoops (sustainability, traceability, etc)  to offer the same price as those suppliers who have not.

In any case, here is another paper about the reverse auction as it relates to the supplier’s view point.

Here is an educational piece that refers to Birds Eye and their use of Advance Purchasing Technology:

Finally, here is a column by Rob Handfield of Supply Chain Management magazine. From that piece:

 Used properly and ethically it is extremely valuable in arriving at true market pricing for commodities and services as they are specified. However, only select items lend themselves to auctioning. The confidentiality of data shared between the auction provider and the buyer is of the utmost concern to the sell side. The awarding of the contract to other than the low bidder is a major concern to the sell side. The lack of dedication to an account, the lack of additional service, and lack of focused quality improvement after award is of serious concern to the buy side.

Uptake of this tool in this industry has only been a recent supply strategy, and not enough time has elapsed to determine whether a second round of reverse auctions can be valuable. However, there was consensus that the second time around was not as productive for the buyers, unless there had been a major shift in market dynamics. In most cases there hadn't and the return to the buying organization was a mere fraction of what had been achieved the first time around. And the sellers suspect that the return didn't cover the cost of the entire process for the buyers.