This week's Knowledge Nugget will touch on the benefits of auctions. This 3 part post will cover why auctions work, auction decision making, tangible benefits of auctions, proof of savings, when not to used auctions, and common misconceptions of auctions. Part 1 will begin with Why Auctions Work and Auction Decision Making.
Why Auctions Work!
These event types are more specifically known as reverse auctions in Ariba Sourcing. A reverse auction is a real-time online event during which participants submit competitive bids for specific goods or services. Since auctions require a lot of preparation to be successful, sourcing professionals typically prepare for them by running qualifying information-collecting events (RFIs and RFPs). Depending on how the event is configured, Ariba Sourcing can provide participants with feedback on how their prices compare with other participants’ prices, in the form of:
- The value of the lead bid
- Their rank in the auction
- A graph comparing the bids in the auction
Auctions are directly competitive and allow the real-time exchange of information between participants. You must carefully schedule your auctions so that all participants can participate at the same time. Auctions can be a great source of savings derived by the power of the dynamic online market. In order for the auction to be successful, there are some key considerations:
- How many suppliers will be attracted to participate in the online market?
- How should the goods and services be described to ensure all suppliers are bidding “apples to apples”?
- How can we use lotting to maximize supplier coverage and participation?
- Where should the ceiling be set for each lot?
Auctions can be run as standalone events, or following an RFP. The RFP can be used to assess the market place:
- Provides evidence of the number of interested suppliers.
- Provides the platform to leverage suppliers through negotiations.
- Allows refinement of the auction strategy.
Pre-bids are also recommended in advance of single round auctions. The type of auction format and set-up you select is determined by the level of market knowledge, and the number of participating suppliers.
Auction Decision Making
|Spend Characteristic||Opportunity for Project|
|Contractual Availability||No contractual or supplier restrictions during the proposed supply period|
|Large enough spend to attract attention of suppliers in the applicable industry|
|Competitive Supply Base||Enough suppliers to create competitive online dynamic markets|
|Clearly Defined Requirements||Buyer requirements can be clearly defined and easily conveyed to suppliers. A tight scope of work will gibe suppliers greater confidence in bidding.|
|Compressible Margin||Inherent opportunity for cost compression and/or savings. Cost avoidance also a consideration.|
|Commitment||Buyer supports the project in all internal and external communication.|
Next post covers the tangible benefits of auctions and proof of savings. The link below will take you there.
This has been another Knowledge Nugget post brought to you by Beverly Dunn.
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