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Market Insights: A better way to transact

May 7, 2010
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Buyers and sellers of commodity products believe that their expertise yields superior results. Buyers and procurement specialists think their understanding of suppliers provides a leg up in negotiations. Sales professionals think they extract the best possible price from each customer. Both can’t be right and neither can be right consistently.

The cumbersome process of negotiating custom sales terms, conditions and prices through bilateral negotiation is inefficient for buyers and sellers of commodity products. These bilateral negotiations unnecessarily raise transaction costs for both. However, the intangible transaction inefficiencies may be even more costly. High transaction costs prevent companies from serving all potential customers or segments. The inability of the bilateral process to provide credible market price information can stunt market development, restrict the pool of potential customers and lead to inefficient capital decisions

Some markets have revisited a traditional way of selling commodities, the auction. If designed and conducted appropriately, auctions have the potential to significantly reduce information and transaction costs, expand a customer base, and yield the market price signals critical for both new product development and efficient capital decisions. What distinguishes the auctions of today is the level of sophistication and customization that technology allows and that auction experts bring. The trading rules can be tailored to the specific industry and designed to satisfy a range of potential objectives.

Selling by an auction does require a shift in approach to the sales process. In bilateral negotiations, buyers and sellers each focus on establishing the price and terms of the sale. In an auction, the terms of sale for each product or contract in the auction are standardized, leveling the field for all customers. When designed properly, the auction reveals the market clearing price, and the customers purchasing product are those who value the product the most. Buyers and sellers can trust the process as credible and fair.

In 2008, farmer-owned cooperative Ocean Spray Cranberries Inc. approached CRA International (CRA) looking to improve price transparency in cranberry markets. More than a consumer brands company, Ocean Spray operates in downstream consumer markets as well as upstream, selling cranberry concentrate to industrial food and beverage companies. Ocean Spray sought to find a better way to manage its cranberry concentrate sales.

Ocean Spray’s sales process was inefficient. Contract negotiations were cumbersome and costly for all parties. Once negotiated, the management of a diverse portfolio of contracts created an unnecessary administrative burden. Individual contracts had unique terms, conditions and options that complicated contract management and revenue visibility.

Ocean Spray and CRA pioneered CranberryAuction, an online trading platform aimed at improving the efficiency and transparency of Ocean Spray’s cranberry concentrate sales. Two auctions have been conducted to date and the results have been promising. Customer participation has been strong, and more than 400,000 gallons of concentrate has been sold through the platform. Participants have found the process simple, quick, efficient and fair.

Recent economic conditions have created tremendous uncertainty in all commodity markets. However, the auction has proved a valuable tool for customers by assuring that they pay no more for Ocean Spray product than any of their competitors. As a whole, the auction provides a mechanism for all market participants — Ocean Spray, concentrate buyers, growers and others — to transact business with more transparency and efficiency. This is especially valuable during periods of turmoil and provides a win-win situation for all participants.  BI

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