hi, would like to share few things that we've experienced....
- reverse auctions can be very powerful tools for driving down prices, however, it's important to use them for the appropriate sourcing strategy. It works best for commodity products for which there are a lot of suppliers. For complex goods and/or services with only limited suppliers, you might run into situation where one of your key suppliers refuses to participate (... 'cause they know it's putting prices under pressure);
- we've used it for certain engineered products for which we had >5 suppliers;
- some internal stakeholders also show some resistance to reverse auctions, this process needs sufficient clarification and test upfront
- we believe it's best to be clear from the start to internal stakeholders and suppliers from the start that you intend to run a reverse auction. It's not a good practise to first run an RFP and then "without pre-warning the suppliers" convert it in a reverse auctions. It's kind of changing the rules of the game during the game.
- make sure to have perfectly clear specifications / requirements
- extremely important to run a test event upfront, suppliers should give it a try upfront
hope it helps a little...
Let me share some of the best practices Ariba has identified along with my experiences to help answer some of your questions:
2 & 3) I have had multiple customers experience resistance internally when beginning to use reverse auctions. A good method to navigate this resistance is to identify a few key projects to run as examples. If you can find one or two internal supporters who have a good candidate project (see #4 below) this is a great place to start. Showing a positive example or two definitely helps encourage others to try a reverse auction.
4) Yes, I would consider auctioning both products and services. While some categories may present a more straight forward auction – I would not eliminate a project simply because of the category. Ultimately, you need to ensure that there is going to be competition (multiple willing and qualified participants), and the bids must be comparable (participants bidding on the same products / SOW / terms). General guidelines on when to use a reverse auction include:
- 2 or more suppliers
- Competition is the key factor that can be utilized to the buyer’s advantage
- Preferred or Competitively Based Relationship
- Competitive visibility will have a positive impact on competition
- Requirements can be effectively presented to maximize “auction effect”
- Best Value Opportunity is moderate to high.
5) I would always recommend holding an RFP prior to running a reverse auction. This helps you understand the market, ensure competition and restructure your bid requirements as needed based on participant RFP responses. The initial visibility into market pricing also helps you strategically set up your auction to maximize competition. Erwin does present a good concern, and I agree that it is best to be upfront with suppliers about your intention to potentially run a second round of bidding. The second round may be individual negotiations, a second RFP or a reverse auction depending on the RFP responses. Of course, be prepared for suppliers to pad pricing a bit in the RFP stage as they anticipate a follow-on round.
6) I believe you may have been asking how long to open the auctions for. This depends on the level of pricing you are requesting. You want to ensure that participants will have enough time to enter in their pricing, and respond to market feedback. I would recommend asking that all participants submit a pre-bid prior to the auction beginning. This ensures their first bid is entered into the market immediately, and also lets you confirm that you have competition and the suppliers are entering bids correctly. The overtimes in the Ariba system will prevent time from running out while participants are still actively bidding. Make sure to set overtime rules appropriately depending on the number of participants, number of price points and market feedback being given.
7) Keys to a successful auction focus on preparation, proper planning, effective scheduling, communication and practice. You should run an internal test event prior to publishing your auction to ensure everything is set up correctly. A second test event should be used for supplier practice to prepare participants for the live auction. The supplier practice event should be set up with the same format and rules as the live event, but using fake items and pricing. This allows participants to become familiar with the auction format and tool so they can focus on pricing during the live event.
Finally, I want to add that in most cases I suggest adding a requirement explaining that the lead bidder at the end of the auction does not automatically win the award. Awards are typically based on a number of factors; not just price. Supplier qualification and evaluations should continue to take place as normal, and you may need to negotiate additional terms that were not included in the auction. The auction is used to negotiate price, and unless the reserve price was not met you should award based on the prices quoted.