What are eAuctions - Theory & Best Practice

eAuctions are a Best Practice for Strategic Sourcing Teams

“eAuctions are online, real-time dynamic negotiations between a buying company and a number of pre-qualified suppliers who compete directly against each other to win the right to supply the specific goods or services.”

Electronic Auctions - A New Way to Source

eAuctions are an improved way to negotiate with suppliers in a global marketplace. In the past, many negotiations were conducted face-to-face, via email, and phone calls. Now, with sourcing technology, buyers and suppliers throughout the world can connect to bid and sell products and services competitively.

There are many benefits to eAuctions for both buyers and suppliers. Regardless of your company’s industry, it can utilize eAuctions to obtain the best value on a variety of products and services across categories.

Auction Types and Formats 

Most people are familiar with Forward Auctions (like we know them from eBay and Auction Houses), in which multiple buyers bid on a product or service by offering increasingly higher prices. The most common type of eAuctions however, are a Reverse Auctions; here the opposite takes place. 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.

There are two types of eAuctions: 

1. Reverse Auctions
2. Step Auctions

Each auction type have their own templates and sub-categories including:

Reverse Auctions:

• List 
• Cherry Picking 
• Cherry Lot 

Learn more about Reverse Auctions here.

Step Auctions:

• Japanese 
• Dutch

Learn more about Step Auctions here.

Benefits of Auctions for Sourcing Teams

1. Reduced Cycle Times

Reducing the cycle time to source and award and services is one of the main benefits of eAuctions over traditional, face-to-face negotiations. eAuctions can be conducted in as little as an hour instead of days or even weeks. More importantly, future sourcing events become more standardized and streamlined with the data collected from running eAuctions.

Standardize Processes

Standardizing eAuctions as a sourcing best practice will expedite the entire source-to-contract process from set-up to award and provide a documented way for sourcing teams to communicate value creation and savings to stakeholders.

Streamline Negotiations

The negotiation time in an eAuction is shortened from several weeks to around 45 minutes on average through streamlined communications – including Q&A – through the eAuction tool’s messaging functionality. Face-to-face meetings by phone or email should be reserved for clarification of the most critical details.

Succinct Post-Event Reporting

Instead of reviewing notes from multiple face-to-face meetings with several suppliers, a detailed report-out of the Total Cost of Ownership (TCO) prices expedites the evaluation phase.

2. Continuous Process Improvement

eAuctions provide structure and uniformity around the sourcing process, which makes it easier to create a best practices playbook for your team. Buyers can reuse each other’s eAuction templates and create new benchmarks to improve sourcing activities. This ensures a smooth experience and better eAuction outcomes.

Reduce Friction

Uniform negotiation procedures reduce friction between buyers and suppliers, resulting in stronger partnerships. When suppliers are approached in the same way regardless of the individual buyer, it helps the supplier know what to expect so both players can come to the table with better-informed expectations.

Improve Compliance

With a consistent sourcing process, it becomes easier to coach new buyers on the company’s sourcing best practices, which will increase compliance and reduce costly mistakes. Importantly, new buyers have access to previously run eAuctions so teams can cross-train on multiple categories.

A uniform process of evaluating suppliers also improves compliance. Parameters such as switching costs, penalties, and preferences will be visible in the eAuction, as these must be quantified to run the eAuction on TCO.

3. Global Market Insights

Multiple bidders in an eAuction give the buyer better insight into the real price of the product or service. This kind of transparency requires minimal resources and facilitates better planning for future sourcing strategies.

Comparable Bids

Every incoming bid in an eAuction is directly comparable (as long as the auction is created according to best practice), which makes the buyer’s job of evaluating the bids easier. Suppliers in an eAuction know exactly what they are bidding on. No additional factors can be brought into play during the negotiation.

On the contrary, there are many different factors (service levels, payment terms, quality, lead times, etc.) brought into play during a face-to-face negotiation, which makes it difficult for the buyer to objectively compare suppliers’ prices in the final analysis.

Supplier Innovation

The market insight derived from an eAuction is also 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 eAuctions.

4. Better Value

While the lowest cost is often the goal of running an eAuction, obtaining the best value ought to be the primary goal. Cost-savings are part of the value proposition of eAuctions when suppliers compete with each other. Research shows that eAuctions on average generate savings of 11.10%.

Increase Competition

In an online marketplace, more suppliers can participate in the eAuction process. The increased global competition results in significant cost savings for both the buyer and supplier over traditional negotiations. When sourcing is limited to only local or regional suppliers, options become scarce, and so do savings.

Avoid Cost Increases from Incumbent Suppliers

eAuctions provide significant leverage for buyers with their 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.

Traditional vs. Dynamic eAuction Negotiations

Traditional Face-to-Face Negotiation

The duration of a traditional face-to-face negotiation process is typically no less than 3-4 weeks, during which the buyer negotiates with approximately 3-4 suppliers. This results in a process, where each new bid is followed by an analysis in order to determine how to proceed in relation to the negotiations with the remaining suppliers.

The cycle time for a face-to-face negotiation is extensive due to the necessity of having several negotiation rounds with each supplier individually. The comprehensive process limits the number of negotiations rounds, as it is not feasible for either the buyer or supplier to travel back and forth constantly.

Dynamic eAuction Negotiation

The structure of an eAuction differs significantly from the traditional process, as all the suppliers are gathered in one virtual negotiation room and submit bids simultaneously. The supplier can immediately respond to another suppliers bid, and the buyer can immediately see the impact on the bid hierarchy.

The duration of an eAuction will on average last 50 minutes with 5-6 participating suppliers, who on average improve their bids 23 times during the eAuction.

eAuctions Over The Years

Over the years, eAuctions have developed into a bidding approach with wide applicability and acceptability in the procurement industry. This is borne out by the usage statistics.

At Scanmarket, we have seen dramatic increases in eAuction usage including +100% increases in events consecutively since 2017. 

Several factors have led to this increased adoption, acceptance and usage:

• The software platforms are significantly more advanced providing new functionalities for incorporating information, process and feedback. This has been done through more structured user design and development approaches
• Much more information is readily available about the process and how to make eAuctions successful and standard process now emphasizes bidder inclusions, information and transparency
• New strategies have been developed to make eAuctions not just viable but successful in areas that previously were more difficult such as limited supplier competition, incorporation of factoring for non-price variables, switching charges and alternative eAuction formats such as Japanese and Dutch
• Non-savings benefits such as compliance, audit trail and efficiency have encouraged usage 
• Statistics and intelligence are now widely available to help users identify likely categories for success based on current market trends and what’s been successful for others
• New categories in services, transportation and others have become “hotbeds” of eAuction activity with thousands of events conducted on the Scanmarket platform
• Process improvements have made it even easier for bidders to participate and more bidders means more bids means more savings
• Why not instead of Why? It used to be that the event needed to be perfectly suited in order to be put through an eAuction. Now, the more typical approach is defaulting to an eAuction unless there’s a reason not to. A rule-of-thumb that works well is the 3 C’s. If there is a:
  • Competitive supply base 
  • Comprehensive specifications, and
  • Compelling spend, it’s probably a good candidate for an eAuction

These changes in technology, information and process have greatly opened up the acceptability and adoption of eAuctions. As eAuction specialists, we at Scanmarket are involved in events every day. Unlike the early days, it’s rare that we hear participants, especially bidders, express surprise or dismay when they are invited to an eAuction.

eAuctions should be used by all organizations as an important part of their overall eRFx program. While they’re not suitable for every project, they’re appropriate a lot more times than most people think.