Which eAuction Type is Right for You?
Most people are familiar with Forward Auctions. We know them from eBay and Auction Houses where multiple buyers bid on a product or service by offering increasingly higher prices. The most common type of e-auctions however, are Reverse Auctions where the roles of buyer and seller are swapped so that multiple sellers compete to earn the buyer’s business by incrementally lowering the price of the product of service.
Types of eAuctions
Reverse Auctions
Reverse Auctions are generally the preferred eAuction type because they generate the largest savings in conditions with sufficiently high competition. In this eAuction type, the participants compete directly against each other online by submitting lower and lower bids. Compared to a Forward Auction (as we know them from Auction Houses), the roles of buyer and seller are swapped, so that multiple sellers compete to earn the buyer’s business by incrementally lowering the price of the product of service.
- List Auctions are useful if you want one supplier for all products and you have a competitive environment on the total price. If a supplier wants to participate in the Reverse List Auction, they must bid on all lines.
- Cherry Picking - Cherry Picking Auctions are useful to acquire the best price per product and strong competition exists on the individual product lines. This way, suppliers can participate on individual lines. Cherry Picking Auctions are useful if you are not sure how to group the products and/or if the grouping depends on the final winner for each product.
- Cherry Lot Auctions are useful if you have several lots (subtotals) and you want one supplier per lot. If a supplier wants to participate on a lot, they must bid on all lines within the lot.
Step Auctions
Step Auctions have no transparency regarding the supplier's position. Suppliers don't know how many other suppliers are participating nor other suppliers' pricing. The supplier can only see when their bid as been accepted or rejected. For this reason, a Step Auction can take place with only one supplier. Suppliers are motivated to submit bids in Reverse Auctions in order to improve their position. The opposite is true for Step Auctions. In this format, the lack of transparency is the key driver to submit bids. The insecurity about what other suppliers might be willing to accept drives each supplier to submit more bids.
- Japanese Auctions are a type of Step Auction with price decreases in intervals during the auction. The buyer defines a start price (typically each supplier’s individual RFQ price), a price step, a time interval, and a maximum number of allowed rejections. The Japanese Auction can be set up as a multi-lined auction with the above specifications defined on each line. In a Japanese Auction, savings are generated because there is no transparency between the suppliers. The buyer, however, will get a complete overview of what each supplier can offer. This makes Japanese Auctions suitable for situations where you have a strong preference for a specific supplier but cannot quantify your preference via a score or percentage.The Japanese Auction is therefore characterized as a risk-free in comparison to Reverse or Dutch Auctions.
Dutch Auctions put maximum pressure on suppliers because there are no second chances. A Dutch Auction is a type of Step Auction where the price increases during the event. The format is first come, first served, so the first supplier to accept the price wins. It is important to qualify suppliers invited into a Dutch Auction as you will only get one price per line, and that is the winning price. This means you must be able and willing to do business with all participating suppliers as any supplier in the auction may be the final winner.
