Just last year, we published a blog outlining the value of a particular auction type: the reverse auction. It listed 5 benefits, which included:
- Lower purchasing costs through increased competition
- The potential to gain better savings than a present ‘target’ amount
- Time savings through a reduced negotiation phase
- Increased ability to meet deadlines thanks to a set auction date
- Increased transparency for suppliers as they all have the same data at the same time
The reasons above are as valid now as they were a year ago, and will remain so in 2021. This has led in part to reverse auctions becoming synonymous with eAuctions and procurement auctions in general. However, they are not the only option. Let’s discuss reverse auctions and four alternatives.
Auction Types
Reverse auctions
As I’ve said, reverse auctions are the most popular type of eAuction. Under this auction design, buyers make requests for goods or services. The suppliers then place bids that reflect the amount they’re willing to be paid for providing the goods or services.
These types of auctions can be structured in several ways:
- Positional bidding: a type of descending price auction in which the supplier can the position of their bed in relation to other bids but not the value of the other bids.
- Leading price bidding: all suppliers can see the amount of the lowest bid but not the identity of the leading bidder, nor the positon of their bid unless it is the lowest.
- Descending clock: this auction runs for a predetermined time and can be either a positional bidding or leading price bidding auction.
Dutch reverse
In a Dutch reverse auction, bidding opens with a low price that increases in set values at fixed intervals. When the price rises enough to entice a seller, they place a bid and win the auction at that bid. Dutch Reverse auctions suit the procurement of multiple items, as each item can be auctioned separately. Suppliers can bid on as many or as few items as they wish to supply.
Japanese reverse
While the Dutch reverse auction starts at the lowest price point, the Japanese reverse auction starts at an initial entry point. Potential vendors must accept this entry point or drop out. The price then keeps dropping at predefined intervals until only one participant remains.
Best Value reverse
Under this auction structure, the suppliers provide the best value proposed solution, which is evaluated on weighted, price and non-price factors. The outcome is not determined at the lowest price. Therefore, Best Value reverse auctions are best suited for procurement objectives, where the price is secondary to other factors.
Forward auction
So far, all the auctions we have listed maximise the value for buyers. But as procurement professionals, we also need to be aware of auction structures that favour suppliers. One such structure is the Forward Auction, which encourages the suppliers to create their own marketplace. Bidders compete in real-time until the auction is complete. The item is awarded to the highest bidder. Procurement officers tasked with impact procurement to maximise social good prefer Forward auctions..
When are auctions appropriate?
As Buying for Victoria points out, there are no rules governing when to use procurement auction. However, if one or many of the following characteristics apply, it might be beneficial to go the auction route over using traditional tender processes. These characteristics are:
- the goods or services requirements can be clearly specified;
- standardised, commercial-off-the-shelf solutions (commodities) are available or possible;
- price is the primary or sole basis of competition;
- there is a competitive market with enough suppliers able to provide the good or service required who are willing to take part; and,
- there is an opportunity for savings.
Make sure you’re choosing the right auction types
Comprara can help you successfully conduct the most appropriate auction type for your needs. Get in touch with us today, take advantage of our extensive knowledge and experience, and let’s get the bids rolling in.
