We have done it quite a few times. In a traditional reverse auction there is a high risk of loosing the dynamic bidding you have with many suppliers.
In my opinion the most efficiceint way of doing an auction with 2 suppliers is to use the reverse Dutch auction format. We have used that with 2 suppliers a number of times with very good results!
As a sourcing services consultant, I've faced this situation a handful of times in my 6+ years here at Ariba. I agree with Jacob that Dutch Auctions can work great for 2 bidder auctions. For example, I ran one last year for black car and limo services and it was very successful. In addition, you might want to consider the following information when determining how to handle this:
Online markets with only two participants are inherently more risky than markets with three or more participants. The first place to start when evaluating any market is what Ariba considers the “Six Cs” of successful online bidding. See below and attachment for more information. These considerations take on even more importance when dealing with a two-bidder market, because right from the start you have a less than optimal answer to one of them – “Competitive Supply Base”. It is important to ensure that the answer to the others is Yes.
Do the products to be sourced via the reverse auction represent a New Product Introduction (NPI) or Re-sourcing? NPI bids can be more competitive, since there is more margin to give early in the development process, and suppliers are interested in establishing themselves as the key source for the product, early in its life cycle. Re-sourcing can be difficult, depending on the perception of past negotiations by suppliers, how you awarded business, how much margin is left in the product or service, etc.
It is important to know how likely it is that the two suppliers will interact in the online market. Where their prices currently stand, such as based on RFP results, is an important indicator. If there is a considerable delta between them, it is less likely that the suppliers will cross each other in the market and interact dynamically. Be sure to compare the percentage difference in prices relative to the expected remaining compressible margin for the products. If the price gap is far greater than the possible compression, risk of a stalled market will be very high. For example, if suppliers are 10% away from each other and the expected savings is 5%, it is unlikely that they will interact. If they are 10% away and the expectation is 30%, then it is less of an issue.
Much like a price gap, a tangible difference between suppliers in quantifiable non-price factors is also an important consideration in evaluating a two-bidder market. It is critical to quantify any non-price differences among suppliers, and then compare them to any known price gap, keeping in mind that the name of the game is to create an event where suppliers will interact online and compete for first place. Important metrics here are similar to those for a price gap. You must understand and consider the size of any non-price delta relative to price gap between suppliers, relative to the expected compressible margin (savings expectation), etc. You should determine whether a handicapped supplier will be able to overcome the non-price difference to compete for first in a transformation event.
Mitigating risk is critical to real time, online negotiation with two bidders. Using a regular downward aggregate bidding strategy reveals too much market information to the bidders and may put your long-term negotiation strategy at risk if the online market is not successful. Therefore, two-bidder markets should almost always be executed using a “rank only” bidding strategy.
The most effective way to minimize risk is to have a competitive market. Creating competition between the two suppliers requires a commitment on your part to award to either of the participating suppliers. If both suppliers are equal on non-price factors, have adequate capacity to meet your requirements, and you have confidence in qualifying and awarding to either supplier, a low bidder wins strategy will provide an added incentive to the two bidders to bid as competitively as possible for first place.
Hope this helps.
The 6 Cs.ppt 128.5 K
I would highly recommend not executing a reverse auction with only two suppliers. As stated in the previous post, it can be done, but with risk.
Unless the item you are sourcing is limited to the amount of suppliers that can produce/supply the product, try to build your supplier base first.
I use the Ariba Network Discovery to search for qualified suppliers. This process is quick and is very productive for my team.
Your cost savings results can be positively impacted by adding more competition to the process.
Also, the additional feedback from multiple suppliers could help you with the project.
Best of luck.
I'm not sure how often we have done auctions with only two bidders, but every time we have observed that from a group of suppliers there were only a handful of suppliers really competitive in pricing.
Some more minutes into the auction, this handful of suppliers decreases in size and decreases and decreases...
So finally after supplier #2 has given up, the auction closes.
In the final phase of an auction you should generally encounter a situation with two suppliers, agree? (Of coures it's a bit different all the time.)
If you invite only two suppliers, you will be bearing the risk of picking the appropriate competitors. (Of course, only if there are suppliers readily available and qualified.)
If possible, I personally like to ensure competition is at a maximum.
For a recommendation on having two suppliers, it seems beneficial to select suppliers on a similar level.
(E.g. supplier with revenues of $ 1 Bn vs. supplier with revenues of $ 1 Mn. does not feel right.)
I always desired to do a forward auction for sponsoring of a large event (e.g. FIFA Soccer Worldcup Pepsi vs. Coca Cola), I would assume it might work well.
Thank you all for the feedback. We too follow the 6C's process and as a person with 3 years experience in RA's, I believe I have a viable opportunity. It is my peer who is reluctant and that I need to convince. Any more advice I appreciate.
Additional background: My scenario allows for winner-take-all, therefore creating a sense of competition immediately, however again, I am limited to two suppliers (reason: qualification and approved sources). Pricing per each supplier is already somewhat low and close to one another, but I believe there is room for some/little margin. My savings expectations aren't high, but still, how can I make the most out of the auction with my constraints?
Thank you again,
What about making it a blind auction where only the rank is shown? The participants would not be aware that there were only 2.
with those constraints, I would definitely follow Rob's advice "don't use ranking".
Are both suppliers comparable based in size?
If there are other non-approved suppliers available, I would do the following:
(1) Run an Auction (non-binding) with non-approved suppliers first and establish a non-approved price tag.
(2) Run an Auction (non-binding) with those 2 suppliers and set a target price, which is the non-approved price tag.
Doing that, you are able to increase price pressure on those 2 suppliers.
Let them know, what you did, and what you might want to to do, if they are not able/willing to meet target price - x%.
If you know the cost of approving other suppliers and switching, you could also run a parameterized non-binding auction. Simply communicate, what you are doing and you will be fine.
To discuss other levers, it would be necessary to know further details.
Anyway, I need to prepare an Auction now :-)
Thanks Rob and Florian on the suggestion to not disclose ranking. So in this case, I assume you would show low bid only? Have you had any success with this?
I say try the Dutch Auction! It really seems like a nice fit for this event, assuming the suppliers are not ones to collude.