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What are eAuctions?
A procurement auction executed electronically
eAuctions are real-time dynamic negotiations conducted online between a buying company and a number of pre-qualified suppliers who compete against each other to earn the buyer's business.
eAuctions help procurement professionals negotiate with more suppliers using a structured process that removes the need for time-consuming one-on-one discussions.
They are much more efficient than traditional negotiations and provide process transparency as well as reduce the final price due to increased supplier competition.
Focus on innovative solutions to your sourcing challenges through a true partnership with your suppliers. eAuctions ensure you achieve true market pricing for goods or services, regardless of whether the market itself is rising or falling.
All About eAuctions
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, is Reverse Auction where the role of buyer and seller are flipped so multiple sellers compete to earn the buyer’s business by incrementally lowering the price of their product or service.
There are two types of e-auctions:
1. Reverse Auctions
2. Step Auctions
Each auction type has its own templates and sub-categories including:
- Cherry Picking
- Cherry Lot
eAuction Types and Formats
What is a Reverse Auction?
Reverse Auctions are the most popular e-auction type as they generate the largest savings in conditions with sufficiently high competition. The role of the buyer and seller are flipped from what we typically know of auctions from the likes of eBay or auction houses which function as a Forward Auction. The participants compete directly against each other by submitting lower and lower bids.
Reverse Auctions are often used in e-procurement as part of a broader spend management strategy with savings generated through competition between suppliers. Suppliers improve their position in the auction by submitting increasingly lower bids.
When to Use Reverse Auctions
Reverse Auctions are generally used in B2B transactions to source highly competitive products or services. They are not appropriate for all sourcing events, but they are appropriate for categories with strong competitive environments among many qualified suppliers or when there is a low level of procurement complexity, and specifications are well-defined industry standards.
A Reverse eAuction is not the best time to test a new supplier for a large spend category. When making the final selection based on the e-auction result, price should not be the only factor.
How Reverse Auctions Work
Reverse Auctions are typically run on an e-sourcing platform that automates the process, and the sourcing team should be trained on e-auction best practices and ethics. Suppliers can typically see their position after submitting the first bid, and the buyer decides what should be shown to suppliers during the Reverse Auction.
The Reverse Auction will have a pre-determined duration, but each time a bid is placed within the last two minutes of the Reverse Auction, it will automatically extend by two minutes. The Reverse Auction will continue until no further bids are placed in the final two minutes of the auction.
Advantages of Reverse Auctions
While cost-savings are typically the primary objective of Reverse Auctions, value can be generated in various ways. Savings can also be realized in terms of efficiency, and Reverse Auctions can reduce the negotiation cycle compared to traditional supplier negotiation. The autonomous nature of Reverse Auctions allows smaller and more diverse suppliers to compete on a level playing field with larger suppliers.
Types of Reverse Auctions
List auctions are useful if you want one supplier for all products, and you have competition on the total price. If a supplier wants to participate in the Reverse List Auction, they must bid on all lines.
CherryLot Auctions are useful if you have several lots (subtotals) and want one supplier per lot. If a supplier wants to participate in a lot, they must bid on all lines within the lot.
Cherry Picking Auctions are useful to acquire the best price per product, and strong competition exists on 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 the grouping depends on the final winner for each product.
What are Step Auctions?
In a Step Auction, savings are generated because suppliers are unaware of their competition with other suppliers. If you are sourcing for a category that has a limited supply base, you may want to consider a Step Auction. The Step Auction is named for the pre-determined steps or intervals with regard to price and time.
There are two types of Step eAuctions, Dutch and Japanese. Dutch and Japanese Auctions are very similar in regard to setup but very different in how suppliers bid.
Step Auction Format
Suppliers have no transparency regarding their position in the Step Auction format. They are not aware of how many suppliers are participating or the other suppliers’ prices. The supplier can only see when their bid has been accepted or rejected. For this reason, a Step Auction can take place with only one supplier.
Seeing one’s own position is a key driver to bidding in a Reverse Auction. Suppliers are motivated to submit bids in order to improve their position in the auction. The opposite is true in a Step Auction. In this format, the lack of transparency is the key driver to submit bids. The insecurity about what the other suppliers might be willing to accept drives each supplier to submit more bids.
What are Dutch Auctions?
Dutch Auctions put maximum pressure on suppliers because there are no second chances. A Dutch Auction is a 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 research all suppliers (using an eRFx) to ensure only qualified suppliers are invited to a Dutch Auction. 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.
When to Use Dutch Auctions
Dutch Auctions are ideal if you have a challenging competitive environment but still would like to challenge the RFx prices. The highest savings are typically generated in Dutch Auctions with few suppliers, and savings are generated based on the supplier’s insecurity. As a buyer, you guarantee full commitment to the winner.
How Dutch Auctions Work
The buyer defines a start price, an end price (the best RFQ price), a price step, and a time interval. The e-auction can be set up as a multi-lined auction, where the above is defined per line.
Example: Start price ($85), end price ($100), price step ($1), and time interval (60 sec.). The auction will start at $85, and all suppliers will have 60 seconds to accept the price. If no supplier accepts $85, the price will then increase to $86, and all suppliers will have 60 seconds to accept this price, and so it continues. The first supplier to accept a price will close the line and thereby win the Dutch eAuction.
There is full commitment to the winner in a Dutch Auction as the buyer will only get the price from the winning supplier. The buyer does not know what prices the other suppliers could have accepted, only that they would be higher than the winning supplier's price.
Advantages of Dutch Auctions
Dutch Auctions are optimal in situations with a limited supply base but a need to test the true market price.
For example, you have a group of equally qualified suppliers, but limited competition. One supplier’s RFx price is more than 10% lower than the others. A Dutch Auction can be used to allocate specific projects to suppliers (i.e. incumbent suppliers) without going through an extensive sourcing process each time.
Disadvantages of Dutch Auctions
A disadvantage with Dutch Auctions is that you can only run a limited number of lines (max of 5) per auction. Another disadvantage is that you cannot determine the overall best supplier. This is because Dutch Auctions only provide a line-per-line perspective, and different suppliers can close out individual lines.
What Are Japanese Auctions?
A Japanese Auction is a type of Step Auction in which the price decreases in intervals during the auction.
When to Use Japanese Auctions
Japanese Auctions are ideal if you have a challenging competitive environment, and want the best possible price across several products. They could also be helpful if procurement complexity is high, maybe because the product or service cannot be fully specified, or offers by the suppliers vary too much to be compared. Or, the buyer could simply have a strong preference for one supplier.
How Japanese Auctions Work
With Japanese eAuctions, the buyer defines a start price, price step, time interval, and the maximum number of allowed rejections. The starting price is typically each supplier’s individual RFQ price, and Japanese auctions can be set up as multi-lined auctions with the above specifications defined on each line.
- Start price: $100 for Supplier 1 and $130 for Supplier 2
- Price step: $1
- Time interval: 60 seconds
- Maximum allowed rejections: 2
In this scenario, the price will start at $100 for Supplier 1 and $130 for Supplier 2. Both suppliers will have 60 seconds to accept their start price. After that, the price decreases by $1 to $99 for Supplier 1 and $129 for Supplier 2. Each supplier will again have 60 seconds to accept. This continues until one of the suppliers rejects the price.
When a supplier reaches the predefined maximum number of rejections (2 in this scenario), the supplier will be excluded from further participation and can then see the last accepted price. The Japanese Auction continues this way until the end price is reached or until the buyer manually stops the e-auction.
Advantages of Japanese Auctions
In a Japanese Auction, savings are generated because there is no transparency between the suppliers. Suppliers can only see their own accepted prices. They cannot see anything about their position in the bid hierarchy or the level of the other suppliers’ bids.
The buyer, however, will get a complete overview of what each supplier can offer per product or service line. This makes Japanese Auctions suitable for situations where you have a strong preference for a specific supplier but cannot quantify your preference with a score or percentage. Also, if you want to keep all options open in strategic categories after the e-auction, the Japanese Auction is your best bet.
The Japanese Auction is therefore characterized as a 'risk-free' auction type in comparison with a Reverse or Dutch Auction.
Disadvantages of Japanese Auctions
A disadvantage of Japanese Auctions is that you can only run a limited number of lines per auction in order to avoid suppliers losing overview and potentially risk missing a price submission on a line. Another disadvantage is that suppliers may perceive the Japanese Auction type as weak because they do not feel pressured to improve their bids.
What are eAuctions?
eAuctions, or electronic auctions, are an improved way to negotiate with suppliers in the global marketplace. In the past, many negotiations were conducted face-to-face, by email, or by phone. With advanced digital sourcing technology today, buyers and suppliers connect across the world to bid and sell products and services competitively.
There are many benefits to e-auctions for both buyers and suppliers. Regardless of industry, e-auctions can be used to obtain the best value on virtually every product and service offering across all categories.
Categories that Can Benefit from Using eAuctions
eAuction Strategy Workshop
Scanmarket’s eAuction Strategy Workshop provides a framework for utilizing e-auctions as a negotiation method. Learn how to conduct certain e-auctions for different strategies and objectives.
Reduce Cycle Times
Standardizing e-auctions expedites the entire source-to-contract process from set-up to award. They are considered a best practice for negotiations in the sourcing industry and provide a documented way for sourcing teams to communicate value and savings to stakeholders.
The negotiation time in an e-auction is shortened from several weeks to around 45 minutes on average. Streamline communications, including Q&A, through the e-auction platform's messaging functionality. Face-to-face meetings by phone or email should be reserved for clarification of the most critical details.
Instead of reviewing notes from multiple face-to-face meetings with suppliers, run a detailed report of the Total Cost of Ownership (TCO) prices, and expedite the evaluation phase.
Uniform negotiation procedures reduce friction between buyers and suppliers, resulting in stronger partnerships. When suppliers are approached in the same way, it helps the supplier know what to expect so both players can come to the table with well-informed expectations.
With a consistent sourcing process, it becomes easier to coach new buyers on the company’s best sourcing practices and will increase compliance as well as reduce costly mistakes. New buyers have access to previously run e-auctions so teams can cross-train on multiple categories. Parameters such as switching costs, penalties, and preferences will be visible in the e-auction as these must be quantified to run the Total Cost of Ownership.
Global Market Insights
Every incoming bid in an e-auction is directly comparable as long as the auction is created according to best practices. This makes the buyer’s job of evaluating the bids easier. Suppliers in an e-auction know exactly what they are bidding on, and no additional factors can be brought into play during the negotiation.
On the contrary, there are many different factors such as service levels, payment terms, quality, and lead times to consider during face-to-face negotiations which makes it difficult for the buyer to objectively compare suppliers’ prices in the final analysis.
The market insights derived from e-auctions are beneficial for suppliers too. Suppliers that don’t win the buyer’s business may optimize and innovate supply chains to increase the chances of a successful outcome in future e-auctions.
In the online marketplace, more suppliers can participate in e-auctions globally. The increased competition results in significant cost savings for both the buyer and supplier compared to traditional negotiations. When sourcing is limited to local or regional suppliers, options become scarce, and so do savings.
Avoid Cost Increases from Incumbent Suppliers
eAuctions provide significant leverage for buyers with incumbent suppliers. Not only will the supplier know that the buyer is exploring alternative suppliers, but it also keeps the supplier’s rates competitive with current market prices.
Conditions for Running an eAuction
Competition is determined by the number of qualified suppliers and the price difference between them. Strong competition is a necessity in order to optimize savings in Reverse Auctions.
The e-auctioned volume must be sufficiently attractive to motivate suppliers to bid aggressively. The suppliers must be ready to compete for the business.
The products or services must be well specified with documents, pictures, and/or product testing. Suppliers need to know exactly what they are bidding on so the evaluation during the e-auction is completed on fair and equal terms.
Traditional Face-to-Face Negotiations
Traditional face-to-face negotiations can take weeks, and the buyer can only negotiate with a few suppliers. The cycle time is long and limits the number of negotiation rounds.
Dynamic eAuction Negotiation
With e-auctions, all suppliers are gathered in one virtual negotiation room and submit bids simultaneously. The supplier can immediately respond to other suppliers' bids, and the buyer can immediately see the impact on the bid hierarchy. The average duration of an e-auction is 50 minutes with 5 to 6 participating suppliers who improve their bids 23 times.
Over the years eAuctions have developed into a bidding approach that is considered best practice and widely accepted in the procurement
At Scanmarket, we have seen a dramatic increase in the use of e-auctions including 100% increases in events consecutively since 2017. Several factors have led to this increase in adoption.
Software platforms are more advanced with new advanced functionalities through a structured user design and development approach.
New strategies have been developed that make e-auctions more rewarding in situations with limited supplier competition. The secondary benefits are also becoming more popular as efficiencies are built into negotiation processes to factor in non-price variables such as compliance and audit trails. Process improvements have made it even easier for bidders to participate, and more bidders means more competition and savings.
Intelligence is now widely available through hard data and statistics to help users identify likely categories for success based on current market trends and what has been successful for others. New categories such as Services and Transportation have become hotbeds for e-auction activity with thousands of events conducted on the Scanmarket platform.
In the past, a negotiation needed to be perfectly suited in order to be executed as an e-auction. Today, e-auctions are the default with few exceptions. If you are questioning whether or not to run an e-auction, consider these 3 C's:
- Competitive Supply Base
- Comprehensive Specifications
- Compelling Spend
If those three criteria are met, your negotiation is a good candidate for an e-auction.
At Scanmarket, we are involved in e-auction events every day. They should be used by all organizations as an important part of their overall eRFx strategy. While they’re not suitable for every project, they’re appropriate for far more projects than not.
Let Us Guide You to Success
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Maximize Savings with eAuctions
Placing suppliers in the highly competitive environment of an e-auction is a proven method of driving supplier bids down.