Updates from Enporion

Contacts Us

North America

Clark, NJ (Global Headquarters)
100 Walnut Avenue, Suite 304
Clark, NJ 07066
Phone: 732-382-6565
Email: info@gep.com

Beginner Auctions

This is part of a series of blogs regarding electronic auctions for the business-to-business customer.

Getting started is the most difficult part of conducting an auction, but once you get going, it’s hard not to realize the benefits. First, we’ll define auctions and then discuss the process, as well as misconceptions and pitfalls to avoid. Let’s discuss what an auction is and is not, how we evaluate a candidate for auction, how we conduct the auction, and how we make an award as a result of the auction. If proper consideration is given to these items prior to evaluation and award, the chances for success are much greater. To summarize the attributes of a reverse auction; instead of collecting a quote via a snail mail, fax, or email, suppliers provide the quote via an Internet browser in a reverse auction.

Auctions Process

People often define business-to-business (B2B) reverse auctions as, “eBay in reverse.” While that explains the fact that you are buying something (e.g. the reverse concept) rather than selling something, it raises a lot more questions than it answers. Let’s take a moment and contrast the two:

	B2B Reverse Auctions	eBay Auctions
Bidders	Only qualified suppliers are invited from your bid list	Anyone can bid as long as they have a user ID
Winner	Not necessarily the lowest bidder. Buyer has full discretion; can award to any participating supplier as a result of the auction. Although not recommended, buyer can even reject entire auction process.	Highest bidder wins auction (or item is removed completely, or re-listed)
Evaluation	Buyer can evaluate non-price proposals prior to auction. Buyer can evaluate on more than just price.	Highest price wins auction, no need to compare bids or evaluate.

Table 1: Differences between a B2B auction and an eBay auction

What is common to both types of auctions is the extensive information provided regarding the bid item. In eBay, bidders are provided a product description & condition, usually a photo, explicit freight terms and charges, and history/feedback about the seller. For B2B auctions, it is a good idea to provide complete requirements, including approved product numbers or other identification information, delivery terms and locations, prior usage quantities, and other specifications and work statements.

Selecting a Candidate

There are a number of factors to consider as you select a candidate for auction and before you decide to inform your purchasing director, your end-user customer and your potential suppliers.

Selecting a candidate: Consider the contract award

I know it sounds strange to start at the end of the sourcing process, but in this case, the ends help to justify the means. A term or blanket contract with PO releases is an ideal candidate for auction. A spot purchase with a specific pricing schedule or time and material schedule is an ideal candidate for auction.

Selecting a candidate: Consider the evaluation

Can you compare the resulting bid quotes side-by-side and easily identify the best bidder? Can you identify the majority of the evaluation criteria as something the qualified bidders can compete head-to-head?

Selecting a candidate: Consider the requirements

Be sure your bid package is an RFQ or RFP as opposed to an RFI. You want solid specifications and requirements; list a pricing schedule with estimated or exact quantities, clear delivery terms, fixed contract terms, and contingencies for things like, items that are not in the original specifications/scope of work (e.g. change orders, changing lease terms, and new product lines). For example, vehicles work great for auction. But consider this, there are a lot of four door sedans, Ford makes quite a few, and so does GM, but it isn’t until you identify the specific engine, transmission, safety features, options, delivery charges, lead time, and other factors, that your specifications become similar enough between manufacturers that you could compete the bidders and compare them equally.

Selecting a candidate: Consider the supplier

Always listen to your suppliers. If they have ideas about using an auction to collect pricing, listen to those ideas. They want to make sure that the price they provide you is both competitive AND comparable. No one wants to bid a price for the superior product and service, when the base line product and service is what you expected (don’t draft a fifth round draft pick in the first round). A bidder will be apprehensive to offer a price for a Cadillac when you were expecting the Hyundai.

Conducting the Auction

Auctions collect pricing. They can also collect other important factors such as discounts from list prices/MSRP, delivery terms, payment terms, optional items, alternative proposals, and other factors which contribute to an award.

The best approach for success is to select a solutions provider who can help you decide which rule to apply, what attributes of the quote and bidding that you want to display to the bidders, how to create line items, and what to use for an opening price, reserve price, and decrement. Your solutions provider should be willing to assist you with your bid package, including normalizing specifications, identifying suppliers and qualifying them based on your criteria, administrative tasks such as distributing the RFx and questions & clarifications, ensuring bidder auction preparation (training, signing participation agreements, obtaining access to bid package), and results reporting.

Awarding the Auction

Select and stick to your reserve and definitely award as a result of the auction unless there are serious issues with the results. Do not use that auction to collect pricing and then go off to negotiate with a different supplier. Do not use that auction to normalize specifications and then change the requirements and go out to bid again. Since collecting pricing through auction is not that much different than typical methods for collecting pricing, evaluation and award should happen quickly after the auction.

Here are things to watch for:

Your suppliers are telling you that you’ve forgotten important details
Your suppliers are telling you that they cannot compete against others in the marketplace
Resellers/Distributors vs Manufacturers/Volume pricing or tiered pricing
Scheduling, don’t ignore red flags because you have to stick to a schedule. Very easy to watch savings realized during the auction disappear when change orders become excessive because of ambiguity in specifications and/or because exceptions were not adequately addressed prior to the auction.
Assumptions; all parties will assume that the lowest bidder will win, the software can handle anything (run it through a business case scenario first), suppliers agreement to specifications (e.g. they can handle it), award will occur almost immediately after auction, purchasing has the final decision
You don’t have the right stakeholders/decision makers in the room

Creating Solutions for Sourcing Through Auction…When price is just one factor, or materials change throughout contract

Discount off of list price
Competing on indexes
Establishing a short list of qualified suppliers and then hosting an auction on a periodic basis to establish pricing
Host an auction to establish benchmark pricing (initial bids for sealed bids) on a portion of the spend/project to establish your capital budget projects
Collect other factors along with pricing that may affect the overall cost; e.g. delivery locations/pricing
Host multiple lots for alternatives/optional pricing; e.g. delivered assembled, delivered in 5 or more, etc.

Match the software with the need

Sure you could list your asset recovery items on eBay, but who’s going to write, support and ensure enforcement of policies that align with your corporate goals and policies? Who’s going to place that surrogate bid for your supplier who’s still using a rotary phone or never leaves his truck cause he’s constantly on the road and operates as both owner and contractor? You should ensure that the software provider you select is a SOLUTION provider. This goes beyond making sure they can host the auction with the appropriate rules and can attach files and pictures. This is about taking the worry and apprehension out of the deal. You want to get to a place where all you do is call the provider, give an outline of the requirements, and then wait for pricing to come back. You have the peace of mind that this provider did everything the same way you would have, maybe even better! Ever watch that episode of The Office (read about it or watch it) where Dwight and Jim visit a vendor who can’t decide between the small Dunder Mifflin and the large big box store? Dwight uses the speaker phone on the customer’s desk to call the “customer service” department of the big box store. The greeting is typical, “Your call is important to us, please wait while we help other customers before you.” Then Jim picks up his personal cell phone and calls the customer service line for Dunder Mifflin, which is answered before the first ring is even completed. The point is, who’s looking out for YOU?

Additional Reading

Check out President Obama’s Message.