Reverse Auctions – getting into the specifics Part II

September 7, 2018
REVERSE AUCTION SOFTWARE
Blogs, Best Practice

Part 2

In part one of this two-part series, I discussed the three different types of Auction available with Market Dojo; Ranked, Open and Japanese. You can familiarise yourself with these options here. In part two I will be discussing the additional settings and considerations you may wish to make with regards to your auction.

Time and date

Not the most interesting setting to start with, but perhaps one of the most important. When you choose to run your eAuction can have a huge impact on its success. There are some very general considerations; is the eAuction at a suitable time for the suppliers, particularly if you’re using an international base,  are there time zones to deal with?

The length of time that you allow your suppliers to analyse and prepare for the eAuction can depend on a number of factors; considerations should be made based on the complexity of the event (specifications, pricing structure and number of lots), the maturity of the participants (how familiar they are with eAuctions), and where you are in the tender process (have you already conducted an RFQ, or is this the first communication you have had with the suppliers?) I would typically advise you to give your suppliers a minimum of 1 week to prepare for the eAuction. However, if you get to the point where you are regularly conducting eAuctions with the same supplier pool, we have seen our clients build, invite, run and award the business to the winning supplier within a 45-minute window!

Bid direction

As an eSourcing tool for procurement teams, almost 100% of our auctions are reverse auctions. In a reverse auction, the bidding goes down in value, so suppliers will bid to win the business for an ever decreasing price.

A forward auction is where the price goes up. Historically, forward auctions are used for selling goods or services, but there is a use case for forward auctions within the procurement function. Forward auctions can be very effective for negotiating rebates. We have seen examples in the past where the procurement team have negotiated with their entire supplier database simultaneously with a forward Japanese auction (see Part 1). Another opportune time to run a forward auction for rebates is immediately after a traditional reverse auction for the good or service; so the rate is negotiated via a reverse auction, and then the forward auction takes place following a short interlude for the rebate.

Minimum duration

eAuctions are designed to be short, snappy engagements with suppliers to negotiate with the market in an interactive method. I would recommend that the eAuction minimum time is somewhere between 10 minutes and 30 minutes long, depending upon the complexity factors listed above. If it is a particularly complex auction, you may wish to opt for a 1-hour auction, but be mindful that the suppliers tend to wait until the end of the eAuction before any real activity takes place. If you have concerns that 30 minutes is not long enough, you can always add a dynamic close period to the event (see below).

Dynamic close period

The dynamic close period is the extension period you may want to apply to your eAuction event, if a bid is placed within that time frame from the end of the eAuction. For example, in a 15-minute auction, you may apply a 2-minute dynamic close period, meaning if any bids are placed in the last 2 minutes, the clock will reset back to 2 minutes remaining. This will happen indefinitely, providing that a bid is placed in that 2-minute window.

Dynamic close periods can be applied to ranked and open eAuctions, and can be really effective at drawing out the final margins and savings from the suppliers in the eAuction. It really turns up the intensity of the eAuction, as suppliers compete to win the business.

Typically we will see the dynamic close period extending the auction by an additional 50%, e.g. for a 30-minute auction, the dynamic close period will add an additional 15 minutes to the total time. However, the dynamic close period can sometimes extend the duration of the eAuction quite excessively, we’ve seen 30 minutes turn into over 2 hours. However, I would strongly urge you to let the eAuction run its course. As a client said the other day, “we negotiate this contract once every 2 years, we can afford to invest a further 15 minutes into the eAuction than cut it short”. At the end of the day, the eAuction is extending as you’re receiving bids, which should only be a good thing for the bottom line.

You can adjust some settings live during the eAuction to reduce the time, for example, shorten the dynamic close to 1 minute, or only apply it if a bidder within the top 2, 3 or 5 places a bid, should you wish.

Minimum and maximum bid decrement

You have the ability to choose how much you wish the suppliers to vary their bid by, in a ranked and open auction. The default settings are 0.5% and 10% as a bit of a safety net for both buyers and suppliers. 0.5% is there as you don’t wish for suppliers to come down 1p at a time, and 10% because if the value of the eAuction is large, you do not want them to misplace a ‘0’ or a decimal point when submitting a bid.

If you’re dealing with a supplier base who are familiar with reverse auctions, you may wish to make the maximum bid decrement higher, meaning the suppliers can come down in larger steps.

You can also change the decrements live during the eAuction, so if you’re getting to the latter stages of the eAuction and the minimum bid decrement is too high, e.g. 2.5% you can lower the value to allow the supplier to place a bid with a smaller change.

 

 

Why not put your newly acquired knowledge into practice and register for free to play around with our Sandpit software for yourself!

Market Dojo helps procurement professionals negotiate better with our on-demand eSourcing tools. If you’d like to find out more, get in touch here.

Connect with Lewis on LinkedIn here.

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