reverse auctions: another tool in the toolbox
TRANSCRIPT
““NIGP’s 2004 E-Procurement NIGP’s 2004 E-Procurement Symposium: Empowering the e-Symposium: Empowering the e-
Procurement Community”Procurement Community”
Reverse Auctions: Another Tool in Reverse Auctions: Another Tool in the Toolboxthe Toolbox
Thomas E. Youngs, Jr., CPPO, C.P.M., Chief Thomas E. Youngs, Jr., CPPO, C.P.M., Chief Purchasing OfficerPurchasing Officer
County of Allegheny, Department of County of Allegheny, Department of Administrative Services, Division of Administrative Services, Division of Purchasing and SuppliesPurchasing and Supplies
What is a Reverse Auction?What is a Reverse Auction?Buyers use an auction format platform to Buyers use an auction format platform to obtain prices from a number of suppliersobtain prices from a number of suppliers
Prices go incrementally Prices go incrementally downdown as suppliers as suppliers continuously place bids against one another continuously place bids against one another on specific itemson specific items
Bidders are anonymous to one anotherBidders are anonymous to one another
Only the buyer conducting the purchase Only the buyer conducting the purchase can view the bidders’ identitiescan view the bidders’ identities
Some Reasons for Private Sector Some Reasons for Private Sector Reverse AuctionReverse Auction
Customers said to do itCustomers said to do it
More efficient for both buyer and supplierMore efficient for both buyer and supplier
Increased foreign competitionIncreased foreign competition
Consistent process and a standard Consistent process and a standard presentation to supplierspresentation to suppliers
More ethical competitive bidding environmentMore ethical competitive bidding environment
Some Reasons for Public Sector Some Reasons for Public Sector Reverse AuctionReverse Auction
Elected official said to do itElected official said to do it
Efficient for both buyer and supplier (more?)Efficient for both buyer and supplier (more?)
Consistent process and a standard Consistent process and a standard presentation to suppliers (don’t we have this presentation to suppliers (don’t we have this already?)already?)
Ethical competitive bidding environment Ethical competitive bidding environment (more?)(more?)
Supplier second chance at bidSupplier second chance at bid
Value of a Reverse AuctionValue of a Reverse Auction
Accelerated bid evaluation processAccelerated bid evaluation process
Possible savings through intensified competitionPossible savings through intensified competition
Redirection of supplier inquiries to online managementRedirection of supplier inquiries to online management
Automated online delivery of solicitations, RFQ’s and Automated online delivery of solicitations, RFQ’s and amendmentsamendments
Complete bid histories, line-item by line-item, in Complete bid histories, line-item by line-item, in spreadsheet format for efficient tabulationspreadsheet format for efficient tabulation
Can be simple and cost-effective to implementCan be simple and cost-effective to implement
The Reverse Auction ProviderThe Reverse Auction ProviderSelecting a provider involves striking a Selecting a provider involves striking a balance between cost, customization, balance between cost, customization, experience and customer serviceexperience and customer service
Technology is important but not necessarily Technology is important but not necessarily the key differentiatorthe key differentiator
Customer service/compatibility is key in early Customer service/compatibility is key in early “learning” stage for bidders and buyers“learning” stage for bidders and buyers
Consider how much work provider does for Consider how much work provider does for buyerbuyer
Consider program flexibility and evolutionConsider program flexibility and evolution
Provider’s FeesProvider’s FeesSeveral payment options:Several payment options:
– Upfront feesUpfront fees– Straight transaction feesStraight transaction fees– Supplier feesSupplier fees– Percentage of savings calculationsPercentage of savings calculations– Software purchasesSoftware purchases– Subscriptions / DIYSubscriptions / DIY
Upfront fees can range from $0 to $100,000 Upfront fees can range from $0 to $100,000 and can also involve additional event-specific and can also involve additional event-specific feesfeesTransaction fees can range from one to five Transaction fees can range from one to five percent, but are simple and straightforward to percent, but are simple and straightforward to quantify quantify
Provider’s FeesProvider’s Fees
““Supplier pay” is initially less expensive for Supplier pay” is initially less expensive for agencyagencyPercentage of savings is more difficult to Percentage of savings is more difficult to quantify, requiring solid market intelligence quantify, requiring solid market intelligence and accurate price history recordsand accurate price history recordsSubscription fees usually apply to do-it-Subscription fees usually apply to do-it-yourself format optionsyourself format options
Current ProvidersCurrent Providers
Ariba / FreeMarkets / CovisintAriba / FreeMarkets / CovisintOrbis OnlineOrbis OnlineMoai TechnologiesMoai TechnologiesGlobal eProcureGlobal eProcureRFP DepotRFP DepotAlphaSourceAlphaSourceManagement Science AssociatesManagement Science AssociateseSGSeSGSNeoformaNeoformaFrictionlessFrictionless
Key ComponentsKey ComponentsEase of useEase of use
Proxy BiddingProxy Bidding
Dynamic CloseDynamic Close
Variables/FactorsVariables/Factors
F.A.Q.F.A.Q.
Q What about “requirements” type What about “requirements” type contracts?contracts?
Q What about small businesses/suppliers?What about small businesses/suppliers?
Q How many bidders are required?How many bidders are required?
F.A.Q.F.A.Q.Q Are electronic bids/reverse auctions Are electronic bids/reverse auctions
allowed in your agency?allowed in your agency?
Q What about traditional bid requirements, What about traditional bid requirements, for example - paper documents and for example - paper documents and “live” signatures?“live” signatures?
Q How does the service provider interact How does the service provider interact with the suppliers?with the suppliers?
Q What purchases are suited to reverse What purchases are suited to reverse auctioneering?auctioneering?
Hurdles to OvercomeHurdles to Overcome
Supplier resistance/non-participationSupplier resistance/non-participation
Supplier technology sophisticationSupplier technology sophistication
Agency buy-in and technology sophisticationAgency buy-in and technology sophistication
Accurate historical pricing/usage records are Accurate historical pricing/usage records are importantimportant
Market price movements from previous contract Market price movements from previous contract years make evaluating success difficultyears make evaluating success difficult
Suppliers can undercut to their eventual Suppliers can undercut to their eventual detrimentdetriment
Reverse Auction ExamplesReverse Auction Examples
♦LinensLinens (Sheets & Pillowcases)
♦Swimming Pool Swimming Pool ChemicalsChemicals
♦Printed EnvelopesPrinted Envelopes
♦ Personal Personal Grooming KitsGrooming Kits
♦Janitorial SuppliesJanitorial Supplies
♦Rock SaltRock Salt
Example Auction AExample Auction A
$30,000.00
$32,000.00
$34,000.00
$36,000.00
$38,000.00
$40,000.00
$42,000.00
$44,000.00
$46,000.00
$48,000.00
$50,000.00
$52,000.00
$54,000.00
11:00:00 11:32:21 11:44:12 11:47:20 11:49:22 12:01:04 12:07:34 12:10:05 12:17:12 12:22:12
Time Placed
Tota
l Con
trac
t Pri
ce
Bid Price
Start Bid: $49,026.00Start Bid: $49,026.00
Final Bid: $35,889.50Final Bid: $35,889.50
Dynamic Close - ExtensionDynamic Close - Extension
Duration: 1 hours, 22 mins.Duration: 1 hours, 22 mins.
Bidders: 6Bidders: 6
Savings results: $13,136.50 - 27%Savings results: $13,136.50 - 27%
Linens: Sheets and PillowcasesLinens: Sheets and Pillowcases
Example Auction BExample Auction B
$70,000.00
$72,000.00
$74,000.00
$76,000.00
$78,000.00
$80,000.00
$82,000.00
$84,000.00
10:04 10:14 10:21 10:26 10:34 10:41 10:48 10:57 11:03 11:06 11:14 11:23 11:31 11:40
Time Placed
To
tal C
on
trac
t P
rice Start Bid: $83,500.10Start Bid: $83,500.10
Final Bid: $72,605.80Final Bid: $72,605.80
Dynamic Close - ExtensionDynamic Close - Extension
Duration: 1 hours, 43 mins.Duration: 1 hours, 43 mins.
Bidders: 7Bidders: 7
Savings results: $10,894.30 - 13%Savings results: $10,894.30 - 13%
Swimming Pool ChemicalsSwimming Pool Chemicals
Other Reverse Auction ExamplesOther Reverse Auction Examples
Printed Envelopes – 11% savings over Printed Envelopes – 11% savings over previous yearprevious year
Personal Grooming Kits – increase over Personal Grooming Kits – increase over previous yearprevious year
Janitorial Supplies – difficult to manage Janitorial Supplies – difficult to manage
Rock Salt – increase over previous yearRock Salt – increase over previous year
Swimming Pool Chemicals – limited Swimming Pool Chemicals – limited bidders, increase over previous yearbidders, increase over previous year
Closing RemarksClosing RemarksProvider / Buyer relationship is all-importantProvider / Buyer relationship is all-important
Understand that reverse auctions are a Understand that reverse auctions are a strategic tool, strategic tool, notnot an e-commerce silver bullet an e-commerce silver bullet
Technology and platforms are still evolvingTechnology and platforms are still evolving
Realistic expectations: eight to ten percent Realistic expectations: eight to ten percent savings averagesavings average
Look for solid auction tools and support Look for solid auction tools and support
As always, common sense is keyAs always, common sense is key
Reverse auctions Reverse auctions willwill yield significant savings yield significant savings when applied appropriatelywhen applied appropriately
Closing RemarksClosing RemarksCan we get as good savings through Can we get as good savings through effective sourcing?effective sourcing?
Can we get as good savings through better Can we get as good savings through better specifications and, when appropriate, specifications and, when appropriate, negotiations?negotiations?
Can we build strong supplier relationships Can we build strong supplier relationships with reverse auctions?with reverse auctions?