eAuctions, Benefits (Buyer & Seller) and Pitfalls.

After spending well over a decade implementing, training, conducting, researching the use of Auctions (electronic), I am still asked what it’s all about and how it can be used in businesses today. There is a wealth of information on the internet and research work that I have participated in which will help procurement departments really understand the use of the auction. In this blog I have brought together some of the more common items for the proper approaches to the eAuction. In terms of the research work I would like to direct the reader to research that I participated in with the Georgia State University, entitled “Buyers’ Perceptions of the Risks of Internet Enabled Reverse Auctions” and can be found at http://aisel.aisnet.org/amcis2011_submissions/352

So here we are in the next section as previously mentioned some of the more common items for the proper approached to eAuctions. I should also point out that there is also a plethora of acronyms for this activity. My preference is to stick with eAuctions, but the activity is also called e Bidding, online bidding. However, the auction is not to be confused with an eTender submission, these are extremely different in their approach. The best way to describe an auction is the ability to collect prices for goods and services in a short space of time, for example within 30 minutes from when the event started to when it closes.

Benefits to Buyers

  • removes the human factor from price negotiation not all buyers are good negotiators, and, by definition, only a handful of buyers can be selected as your best negotiators
  • higher average cost reduction especially when compared to a basic 3-bids-and-a-buy RFx process
  • increased efficiency and price transparency  what used to take months can now be done in a couple of weeks as long as you put in the effort
  • assists in the identification of the “best total cost” supplier  as you can also track “bids” on delivery terms and conditions
  • a foundation for supplier relationship development  not only are they open and fair (done right and ethically), but
    they require a great deal of communication up front and post auction (including to losing suppliers) to get right

Avoiding the Pitfalls

  • select items that exist in a naturally competitive environment if you only have a couple of sources, go for supplier development instead
  • select an item where the contract is ending bidders don’t want to win business for one or two years down the road; but more importantly, make sure you have no (other) contracts in place before advertising an auction
  • if you invite new suppliers, have the ability to switch if you have a long-term contract with an existing supplier, or the costs with switching are too high, you don’t have the right conditions for an auction
  • clear, complete, and well defined specifications since you need to be able to award the business to the winner
  • identification of relevant non-price factors this could disqualify some suppliers and indicate delivery terms that you need to track or have suppliers bid on
  • intend to award the business! not only is it unethical to hold an auction unless you intend to award the business, but if you get a reputation for not following through, you’ll have no suppliers bid next time

Ethics

  • clearly communicate your intentions, the process, and your ultimate goal if you just need to reduce cost, and you’re honest, suppliers will respect that
  • do not use auctions for Benchmarking or price discovery suppliers don’t want to be  used solely as a tool to beat down an incumbent
  • award must be to a supplier in the auction it’s really unethical to award to a supplier who didn’t bid but then struck a deal after the auction closed
  • set realistic starting prices if raw material prices haven’t dropped, asking for a starting price that’s 15% lower is not reasonable
  • allow adequate time to train and support the suppliers especially right before the auction
  • do not allow for after-the-fact negotiations in fact, if a supplier tries to negotiate after the fact, they should immediately be disqualified
  • properly qualify all suppliers pre-auction you must be able to award to all winning suppliers
  • contact ALL participants after the auction ends especially the losing one’s – taking just 5 to 10 minutes to explain why they lost goes a long way – and might help them shape up to provide you better bids and service the next time they are invited to a bid

Supplier Benefits

  • it’s a fair and competitive bidding environment everyone has an equal chance of winning
  • more efficient process they’ll have their answer quickly, and no paper to fuss with
  • increased business opportunities they could have more opportunities than they would otherwise
  • collaborative bidding environment they can ask questions, and get answers
  • even if they lose, they still get good information they can see what the market is bidding, and find out why they
    didn’t win (if you follow the ethics above)
  • open processes require trust even if they lose, they can get the information they need to potentially win your business in the future

Even though most of this should not be new to some of you, it’s a great all-inclusive high-level overview on how to succeed in an e-Auction!

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