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Reverse Auction

Contract Procurement and Optimisation Assignment 2
by

Benny Sullivan

on 7 October 2014

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Transcript of Reverse Auction

REVERSE AUCTIONS
by Chris Baker, Rahul Chhibber, Iain Daggers, Claire Nielsen, & Benny Sullivan
Auctions & Reverse Auctions
One seller
Multiple buyers
Highest price wins
Goods are commoditized – price determines the product’s complete value
Business-to-business context
One buyer
Multiple sellers
Buyer establishes scope
Total Cost of Ownership – price is only one component
Best Practice
References
Conclusion
Reverse Auctions
Auctions
Reverse Auction Process
RAs can produce a range of benefits for buyers as well as suppliers
Potential for RA’s to have a number of negative consequences for buyers and suppliers
Performance can be enhanced to improve the value proposition of RAs and to overcome the potential pitfalls
Advantages
Cost saving
Competitive market price results in substantial cost saving
Time saving on price negotiations
Several rounds of Price Negotiations are not required, thus saving time
Disadvantages
Administrative
Aloini, Davide, Riccardo Dulmin and Valeria Mininno. 2012. “E-reverse Auction Design: Critical Variables in a B2B Context.” Business Process Management Journal 18 (2):219-249. doi: 10.1108/14637151211225180.

Duck, Janet M. 2008. "Developing Trust-Based Relationships in Online Procurement Auctions." In Best Practices for Online Procurement Auctions, ed. Diane H. Parente, 77-91. Hershey, PA: IGI Global Snippet.

Engelbrecht-Wiggans Richard and Elena Katok. 2004. “e-Sourcing in Procurement: Theory and Behaviour in Reverse Auctions with Non-Competitive Contracts”.

Gattiker, Thomas F. 2008. "Internet Reverse Auctions: Listening to the Voices of Non-Adopters." In Best Practices for Online Procurement Auctions, ed. Diane H. Parente, 43-56. Hershey, PA: IGI Global Snippet.

HPW. 2014. "Procurement Guidance: Reverse Auctions." http://www.hpw.qld.gov.au/SiteCollectionDocuments/ProcurementGuideReverseAuctions.pdf.

Jap Sandy. D. 2007. “The impact of Online Reverse Auction Design on Buyer-Supplier Relationships”. Journal of Marketing, Vol. 71, January 2007, 146-159

Jap Sandy. D. 2007. “Interorganizational Relationships and Bidding Behaviour in Industrial Online Reverse Auctions”. Journal of Marketing Research, Volume 45

Major, Cornelia. 2013. "Reverse Auctions – A Suitable Procurement Tool for the WA Public Sector" Curtin University and Department of Treasury and Finance.
Maximise value for money
Costs of goods and services
Costs associated with the life of the goods and services
Innovation
Value-adding components
HPW. 2014. "Procurement Guidance: Reverse Auctions."
http://www.hpw.qld.gov.au/SiteCollectionDocuments/ProcurementGuideReverseAuctions.pdf.
Reverse Auctions in Use
Worldwide
Australia
Mid-1990s - first reverse auctions in the private sector
Early-2000s - US Public Sector
2004 – European Union issued a directive supporting reverse auctions
2005 – 30% of UK local governments had used reverse auctions
Large companies – Coles, Kodak, Chubb
Mining and Chemical Industries – Alcoa, Rio Tinto, BHP Billiton
Public sector - guidelines
Process overview
Define requirement
Determine appropriateness
Identify suppliers
Develop and communicate strategy to suppliers & internal stakeholders
Conduct Auction
Select supplier & place order
Reverse Auctions have matured over the years, with the adoption of common, clearly defined process steps by organisations that use this form of purchasing on a regular basis.
A review of the literature indicates that there is a range of best practices that should be incorporated at each key step of the process
Decide on what needs to be procured.
Areas of consideration include:
Spend analysis (past, present, future)
Market conditions
Procurement risks
Existing contractual obligations
Product Characteristics
Price-based commodities tend to be the most suitable as the value of the product can be expressed quantitatively.
Specificity. The required specifications are clearly defined in unambiguous terms so that suppliers fully understand the buyer’s requirements.

Market Characteristics
Highly Competitive market that will encourage a higher number of suppliers.
Volume of the purchase contract should be high enough to attract suppliers.

Buyer-Supplier Relationships
Often more suitable for transactional exchange (short-term supplier relationship) than relational exchange (long-term strategic).
Pre-qualify suppliers. 
Determine appropriateness
Suppliers must be pre-qualified before auction.
Reverse auctions must be restricted to the suppliers on that panel arrangement
all suppliers on the panel arrangement must be given equal opportunity to participate in the bid
In addition to price, define all relevant factors that are critical decision elements in seller selection.
Develop appropriate training programs for purchasing agents so that they pursue a mix of sourcing strategies and supplier selection methods.
Planning on how incumbent supplier relationships should be handled.
Ensure that open bid auctions are conducted with the right intention and are not used to survey market prices.
Avoid unethical behaviour such as posing as a seller in order to inflate the bids.
All suppliers on the panel arrangement must be given equal opportunity to participate in the bid
Conduct a review
Mabert, Vincent A., and Jack A. Skeels. 2002. "Internet Reverse Auctions: Valuable Tool in Experienced Hands." Business Horizons 45 (4): 6. doi: 10.1016/S0007-6813(02)00229-X.

Manoochehri, Gus, and Christy Lindsy. 2008. "Reverse Auctions: Benefits, Challenges, and Best Practices." California Journal of Operations Management 6 (1): 8.

NSW Department of Commerce. 2006. NSW Government Procurement Guidelines: Reverse Auctions – December 2006 – Version 2. NSW: Department of Commerce.

Parente, D.H. 2008. Best Practices for Online Procurement Auctions: Information Science Reference.

Presutti William D. 2003. “Supply management and e-procurement: creating value added in the supply chain”. Industrial Marketing Management 32 (2003) 219-226.

RCOE. 2007. How to Be Successful in E-Auctions. In RCE Procurement Programme. East Midlands: Regional Centres of Excellence. http://tradeinterchange.com.au/Downloadable/How%20to%20be%20successful%20in%20e-auctions.pdf.

SAP. 2006. Reverse Auction Best Practices: Practical Approaches to Ensure Successful Electronic Reverse Auction Events. SAP AG. http://scn.sap.com/docs/DOC-2705.

Standing, Susan, Craig Standing, Peter Love and Denise Gengatharen. 2013. “How Organizing Visions Influence the Adoption and use of Reverse Auctions.” Electronic Commerce Research 2013 (13): 493-511. doi: 10.1007/s10660-013-9133-0.

The State of Queensland, Department of Housing and Public Works. 2014. "Procurement Guidance: Reverse Auctions." Guidelines. Original edition, 2010.
The disadvantages to a reverse auctions are:
Shift in the timing of the “administrative tasks” forward.
Potential for a lack of flexibility in evaluation on the winner.
The effect that they have on the buyer and supplier relationship.
Flexibility
Relationship
Prequalify;
Pre-work – rules and framework of the auction
The potential for supplier collusion;
Suppliers margins may be eroded, resulting them in leaving the market
Kraljic's Matrix
Reverse auctions are held in real time.
Rules of the reverse auction determine the winner.
The relationship that the supplier can develop with the buyer can be affected by the reverse auction. Aspects of the reverse auction that may affect the relationship are the:
Degree of transparency of the auction;
Inability to receive feedback on the process;
Inability to gain an ongoing understanding of the products specification or requirements
Combining competitive and non-competitive contracts
While the supplier with the lowest price would often be awarded the contract, there are other factors to consider.
The decision to award the contract and inform unsuccessful bidders should be done promptly.
Savings made;
Effects on other suppliers;
Areas requiring improvement in the process and/or performance at any of the key stages.
Performance of winning supplier throughout the contract.
Transparency
Liability to claims of favoritism and breach of integrity are no more an question
Supplier's awareness
Suppliers know where they stand in the competition and current market prices
Widening of supplier base
Suppliers from around the world can participate
Thank you
HPW. 2014. "Procurement Guidance: Reverse Auctions."
http://www.hpw.qld.gov.au/SiteCollectionDocuments/ProcurementGuideReverseAuctions.pdf.
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