Reverse Auctions: Another Tool in the Toolbox

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  • Simple, easy to use, usually browser-based technology – no software or significant training Proxy Bidding: Bidders can set price points and allow the system to bid for them to those levels Dynamic Close: System monitors event within moments of the close and if a bid is placed, the event is automatically extended to allow for a responding bid Variables/Factors: Introduces other variables into the bid value determination to better reflect true value, for example - warranty, incumbency, service rates
  • Requirements - Contracts with uncertain order quantities present a challenge. A possible solution is to offer an “estimate” for the bidding event to give scope to the project but base the transaction fee on a “pay as used” system whereby purchases are confirmed through the life of the contract and the fee is billed periodically. It is up to the service provider to set appropriate fees. Small businesses/suppliers - While all purchasing professionals would like their suppliers to be progressive, many small “mom & pop” companies have yet to become fully connected to the Information Highway. These companies cannot be overlooked, however, as they are oftentimes important and competitive suppliers for the public buyer. It is important to ensure that the service provider offers a solution to allow these suppliers to participate in the process even if they do not have an active Internet capability. One solution is the “proxy bid” submission, established with the supplier prior to the event. How many bidders - The larger the field, usually, the more competitive the event. It is important to select those purchases which can be directed at a wider number of suppliers. Successful bidding events can be held with two or three suppliers, however a field of at least six to eight is preferable. Purchase specifications and market data are important considerations when selecting appropriate candidates.
  • Allowable - Not all legislation has evolved to accommodate reverse auctions. It is important to review the concept with your legal department and other oversight authorities to ensure your current codes and regulations allow you to host such an event before expending resources on the project. Live signatures - As mentioned earlier, customization is important and there is no reason why programs cannot include traditional requirements if necessary. The online reverse auction is a price submission step only. All traditional steps can be included. Of course, it can also be an opportunity to begin evolving your system to take advantage of the new environment (paperless office and electronic RFQ's). Suited - As the process is refined and experience gained, more complex purchases will be possible. At the start, the best purchases involve relatively simple, commodity-style items. Contracts requiring little in the way of service components or sampling, and items that have relatively stable markets and a well developed supplier base are best. Higher dollar volume purchases and long contract terms also attract a more competitive field of suppliers. Interact - The answer is really dependent on the service provider, their structure and remuneration. Initially, enthusiastic and positive supplier support is necessary; online, in person or by telephone. This support can be provided by either the buyer or the provider. Over the coming years however, online reverse auctions will become a standard business tool with which most suppliers will become familiar and the requirement for training and education will diminish.
  • Reverse Auctions: Another Tool in the Toolbox

    1. 1. “ NIGP’s 2004 E-Procurement Symposium: Empowering the e-Procurement Community” Reverse Auctions: Another Tool in the Toolbox Thomas E. Youngs, Jr., CPPO, C.P.M., Chief Purchasing Officer County of Allegheny, Department of Administrative Services, Division of Purchasing and Supplies
    2. 2. What is a Reverse Auction? <ul><li>Buyers use an auction format platform to obtain prices from a number of suppliers </li></ul><ul><li>Prices go incrementally down as suppliers continuously place bids against one another on specific items </li></ul><ul><li>Bidders are anonymous to one another </li></ul><ul><li>Only the buyer conducting the purchase can view the bidders’ identities </li></ul>
    3. 3. Some Reasons for Private Sector Reverse Auction <ul><li>Customers said to do it </li></ul><ul><li>More efficient for both buyer and supplier </li></ul><ul><li>Increased foreign competition </li></ul><ul><li>Consistent process and a standard presentation to suppliers </li></ul><ul><li>More ethical competitive bidding environment </li></ul>
    4. 4. Some Reasons for Public Sector Reverse Auction <ul><li>Elected official said to do it </li></ul><ul><li>Efficient for both buyer and supplier (more?) </li></ul><ul><li>Consistent process and a standard presentation to suppliers (don’t we have this already?) </li></ul><ul><li>Ethical competitive bidding environment (more?) </li></ul><ul><li>Supplier second chance at bid </li></ul>
    5. 5. Value of a Reverse Auction <ul><li>Accelerated bid evaluation process </li></ul><ul><li>Possible savings through intensified competition </li></ul><ul><li>Redirection of supplier inquiries to online management </li></ul><ul><li>Automated online delivery of solicitations, RFQ’s and amendments </li></ul><ul><li>Complete bid histories, line-item by line-item, in spreadsheet format for efficient tabulation </li></ul><ul><li>Can be simple and cost-effective to implement </li></ul>
    6. 6. The Reverse Auction Provider <ul><li>Selecting a provider involves striking a balance between cost, customization, experience and customer service </li></ul><ul><li>Technology is important but not necessarily the key differentiator </li></ul><ul><li>Customer service/compatibility is key in early “learning” stage for bidders and buyers </li></ul><ul><li>Consider how much work provider does for buyer </li></ul><ul><li>Consider program flexibility and evolution </li></ul>
    7. 7. Provider’s Fees <ul><li>Several payment options: </li></ul><ul><ul><li>Upfront fees </li></ul></ul><ul><ul><li>Straight transaction fees </li></ul></ul><ul><ul><li>Supplier fees </li></ul></ul><ul><ul><li>Percentage of savings calculations </li></ul></ul><ul><ul><li>Software purchases </li></ul></ul><ul><ul><li>Subscriptions / DIY </li></ul></ul><ul><li>Upfront fees can range from $0 to $100,000 and can also involve additional event-specific fees </li></ul><ul><li>Transaction fees can range from one to five percent, but are simple and straightforward to quantify </li></ul>
    8. 8. Provider’s Fees <ul><li>“ Supplier pay” is initially less expensive for agency </li></ul><ul><li>Percentage of savings is more difficult to quantify, requiring solid market intelligence and accurate price history records </li></ul><ul><li>Subscription fees usually apply to do-it-yourself format options </li></ul>
    9. 9. Current Providers <ul><li>Ariba / FreeMarkets / Covisint </li></ul><ul><li>Orbis Online </li></ul><ul><li>Moai Technologies </li></ul><ul><li>Global eProcure </li></ul><ul><li>RFP Depot </li></ul><ul><li>AlphaSource </li></ul><ul><li>Management Science Associates </li></ul><ul><li>eSGS </li></ul><ul><li>Neoforma </li></ul><ul><li>Frictionless </li></ul>
    10. 10. Key Components <ul><li>Ease of use </li></ul><ul><li>Proxy Bidding </li></ul><ul><li>Dynamic Close </li></ul><ul><li>Variables/Factors </li></ul>
    11. 11. F.A.Q. <ul><li>What about “requirements” type contracts? </li></ul><ul><li>What about small businesses/suppliers? </li></ul><ul><li>How many bidders are required? </li></ul>
    12. 12. F.A.Q. <ul><li>Are electronic bids/reverse auctions allowed in your agency? </li></ul><ul><li>What about traditional bid requirements, for example - paper documents and “live” signatures? </li></ul><ul><li>How does the service provider interact with the suppliers? </li></ul><ul><li>What purchases are suited to reverse auctioneering? </li></ul>
    13. 13. Hurdles to Overcome <ul><li>Supplier resistance/non-participation </li></ul><ul><li>Supplier technology sophistication </li></ul><ul><li>Agency buy-in and technology sophistication </li></ul><ul><li>Accurate historical pricing/usage records are important </li></ul><ul><li>Market price movements from previous contract years make evaluating success difficult </li></ul><ul><li>Suppliers can undercut to their eventual detriment </li></ul>
    14. 14. Reverse Auction Examples <ul><li>Linens (Sheets & Pillowcases) </li></ul><ul><li>Swimming Pool Chemicals </li></ul><ul><li>Printed Envelopes </li></ul><ul><li>Personal Grooming Kits </li></ul><ul><li>Janitorial Supplies </li></ul><ul><li>Rock Salt </li></ul>
    15. 15. Example Auction A Start Bid: $49,026.00 Final Bid: $35,889.50 Dynamic Close - Extension Duration: 1 hours, 22 mins. Bidders: 6 Savings results: $13,136.50 - 27% Linens: Sheets and Pillowcases
    16. 16. Example Auction B Start Bid: $83,500.10 Final Bid: $72,605.80 Dynamic Close - Extension Duration: 1 hours, 43 mins. Bidders: 7 Savings results: $10,894.30 - 13% Swimming Pool Chemicals
    17. 17. Other Reverse Auction Examples <ul><li>Printed Envelopes – 11% savings over previous year </li></ul><ul><li>Personal Grooming Kits – increase over previous year </li></ul><ul><li>Janitorial Supplies – difficult to manage </li></ul><ul><li>Rock Salt – increase over previous year </li></ul><ul><li>Swimming Pool Chemicals – limited bidders, increase over previous year </li></ul>
    18. 18. Closing Remarks <ul><li>Provider / Buyer relationship is all-important </li></ul><ul><li>Understand that reverse auctions are a strategic tool, not an e-commerce silver bullet </li></ul><ul><li>Technology and platforms are still evolving </li></ul><ul><li>Realistic expectations: eight to ten percent savings average </li></ul><ul><li>Look for solid auction tools and support </li></ul><ul><li>As always, common sense is key </li></ul><ul><li>Reverse auctions will yield significant savings when applied appropriately </li></ul>
    19. 19. Closing Remarks <ul><li>Can we get as good savings through effective sourcing? </li></ul><ul><li>Can we get as good savings through better specifications and, when appropriate, negotiations? </li></ul><ul><li>Can we build strong supplier relationships with reverse auctions? </li></ul>

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