To e-Auction, or not to e-Auction, that’s the question. One of the main questions that every purchasing department seems to deal with on a regular basis, is whether a specific negotiation situation would be suitable for running an e-Auction or not.
Here I will try to add my view on this and I hope that you may find it useful.
An e-Auction is an online (reverse) auction that takes place in real time. It gives suppliers the opportunity to bid against each other to improve their offers.
Here are some common reasons why purchasers do not want to run an e-Auction:
- Running and e-Auction will damage my relationship with my supply base in the long run.
This may be true in some cases, but it is also true that your supply base should know that your budget is not unlimited and that you need to cut certain costs sometimes. Therefore your suppliers must be open for some financial negotiations. Also, keep in mind that your supplier’s reaction will depend on how the e-Auction is positioned. If done correctly, most suppliers will agree to participate in an e-auction assuming that the business is tempting enough.
- This category is too complex.
Every category is complex in its own ways. If you can define (all) your cost components and there are multiple suppliers, then any category can in principle be auctioned.
On the other side, if the cost components cannot be clearly defined and/or there not enough suppliers who can deliver at the same level, then an e-auction will simply not work.
Here are some common reasons why purchasers should want to run an e-Auction:
- Saves time during negotiations
An English reverse e-auction tries to automate the situation of having multiple suppliers in different rooms and you go from one room to the next telling them what the other suppliers bid and asking them to improve their offer. Using an e-Auction, the suppliers can sit in their own office and all e-auction details appear on their screen real-time.
- Suppliers should compete against each other on price/costs
In order to achieve this the e-auction must be clearly structured, so that the supplier knows what to expect and they can prepare for the e-auction.Try to picture it in the following way:
For your e-Auction, the sales person at the supplier will invite the appropriate management level and from their Finance department. The higher the business impact of the e-auction, the higher-ranking individuals. In order to keep the interest of these people, the e-auction must proceed at the right speed. If it goes to slow they will lose interest, if it goes to fast then they will find the e-auction to aggressive. Nobody wants to wait for 1 hour and see the price drop from 10 million EUR to 9.999.900 EUR. Likewise, it may be too much to handle if a price improvement rule says that you must improve your bid by 100.000 EUR.The key to success is to make the e-auction go just at the right speed so that the suppliers remain interested all the way until the end of the e-auction (which should equal their bottom line).
9 advice when you decide to run an e-Auction:
- A successful e-auction covers only price and/or cost. The rest should be agreed upon upfront. This means that there should be no other actions required from the suppliers during the e-auction.
- All invited suppliers should be (more or less) comparable with each other in their offers. If a supplier is much more expensive in their price/cost than the rest, you should question if there is any benefit for them to join the e-auction (especially since this may give them certain market knowledge based on the bids from the participating suppliers).
- Concerning the amount of the invited suppliers one could say «The more, the better.
In an RFP you can take a fast one by inviting just 1 supplier and see what happens, but given the competitive nature of an e-Auction this will never work. Also with 2 suppliers, you are running a risk in case of a ‘no show’. Which means that you must aim for having at least 3 and preferably these suppliers should be willing to fight each other financially.
- What the suppliers can and cannot see on their screen during the e-auction is key for their behavior. Questions for you to ask yourself are: Should a supplier see the company names of the other suppliers? Should a supplier always see their current rank or only when they are in the lead? Should a supplier see the exact value of the leading bid?
- The amount of line items should be realistic also from a supplier’s point of view.
Think of it this way: would you be able to (relatively quickly) decide on price/cost if you are looking at screen with 250 line items for which you are constantly changing rank?
- The bid improvement criteria need to be correctly set.
The bid improvement criteria are the criteria, which determines how much the suppliers must improve their own bids as well as whether the lead bid should be protected. These criteria determine the speed of the e-auction.
- Will the best ranking supplier by definition win (all) the business?
Some will say yes, but it might be a good idea to consider to add a sentence into the e-Auction that you reserve the right to award against the rank. Doing this should obviously be avoided at all times but it does give you a way out in case of any last minute bidding errors etc.
- You should consider setting up an internal ‘War Room’ from which you centrally cover all e-Auction related questions. This way, the suppliers know whom to contact and you avoid confusion on what is being communicated to whom during the event.
- And last but not least; Always, always, always run a test e-auction before your real e-auction!!!
This way you get to filter out any set up mistakes and the suppliers can get used to what is coming.
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