What are eAuctions - Theory & Best Practice

Use eAuctions to Conduct Final Supplier Negotiations

eAuctions Give You True Market Prices Regardless of Market Movements

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 that have clearly defined specifications for design, quality, quantity, delivery and related terms and conditions.

Utilizing eAuctions will enable you to streamline your procurement process, resulting in increased savings that reflects directly on your bottom-line. So not only will you save money on your products and services, you will save valuable time to use on creating more value by, for instance, sourcing new suppliers.

The advantages of using eAuctions are manifold, however, savings through optimization is key. Typical advantages of eAuctions include:

• Time Savings
• Cost Savings
• Achieving a Uniform Buying and Negotiation Process
• Greater Market Transparency

eAuction Types and Formats 

Most people are familiar with Forward eAuctions (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.

The Benefits of Electronic Auctions

eAuction Advantages

Time Savings

Time savings are a major benefit of utilizing eAuctions instead of face-to-face negotiations. Time savings are becoming increasingly important as companies become increasingly cost focused, and therefore have to ensure that the available resources are utilized in the best possible way.

• Preparation phase: Significant preparation efficiencies come from reusing templates and market intelligence from previous auctions.
• Negotiation phase: The actual negotiation time can be shortened from several weeks to around 45 min on average via an eAuction. In the negotiation phase, all communication including Q&A should happen through the eAuction tool’s messaging functionality, eliminating the need for clarifying practicalities/formalities over lengthy meetings. Face-to-face meetings should be reserved for clarification of the most critical details.
• Evaluation phase: After completing the negotiation, the buyer will also save time in the evaluation phase, as the system will provide him/her with a detailed report of the final Total Cost of Ownership (TCO) prices instead of having to go through notes from multiple face-to-face meetings with several suppliers over a long period of time.

Process Improvement

• Share Best-practice & re-use Templates: eAuctions also provide a structured and uniform sourcing process which, among other things, will make it possible to share Best Practices among the individual buyers. Buyers can reuse each other's eAuction templates, contributing to a continuous improvement of the negotiation capabilities.
• A more professional approach: Uniform corporate negotiation procedures will also make the buying organization appear more professional towards potential suppliers, resulting in suppliers being approached in the same way regardless of the individual buyer, the specific sourcing division and previous relationships.
• Full transparency: With a uniform corporate sourcing process, it also becomes easier to “train” new buyers in the company’s sourcing method and mentality. Furthermore, it is also easier for a new buyer to overtake a category from a colleague, as the buyer will have full transparency in regard to the previously run eAuctions.

Last but not least, it will become transparent how each supplier is evaluated, as parameters such as switching costs, penalties and preferences will be visible in the eAuction, as these have to be quantified in order to run the eAuction on TCO (Total Cost of Ownership).

Market Transparency

• Improved market data: In addition to finding the real, current market price for the product/service, the buyer also obtains information about the competitiveness of each participating supplier. This is due to the fact that it is possible to invite a higher number of suppliers to an eAuction compared to a traditional negotiation without the resource requirement tripling. The buyer gets in-depth knowledge about the market, which can be useful when discussing the future sourcing strategy for the particular product/service.
• Comparable bids: In eAuctions, incoming bids are directly comparable as long as the auction is created according to Best Practice. This increased transparency will ease the buyer’s job in the evaluation phase. The reason for the comparability is that in eAuctions, suppliers know exactly what they are bidding on and no additional factors can be brought into play during the negotiation. On the contrary, in face-to-face negotiations it can be difficult to compare each received bid, as many different factors (for instance service levels, payment terms, quality, lead times, etc.) often are brought into play during the negotiation making it very difficult for the buyer to objectively compare the suppliers' prices in the final analysis.
• Transparency for the suppliers: It is not only the buying organization that has the advantage of obtaining valuable market insight, so do the participating suppliers. Even the unsuccessful suppliers achieve a transparency that may help them optimize their own supply chain and thereby increase their chances of a successful outcome in the next eAuction.

Price Savings

• Lower Product Price: The most common reason for utilizing eAuctions is the wish to obtain product price reductions (i.e. savings). Current statistics show that eAuctions on average generate savings of 11.10% compared to current prices. The primary reason for the large savings is increased competition. The increased competition is due to the fact that more suppliers can be included in an eAuction compared to a traditional face-to-face negotiation, and the possibility of having a more global participation compared to local/regional negotiations. 
• Avoid Cost Increase from incumbent supplier: eAuctions are also beneficial in terms of cost increase avoidance as the incumbent supplier, when subject to an eAuction, will know that the buyer is exploring the current market pricing. The incumbent supplier may forgo the price increase altogether to avoid the eAuction, or reduce the increase in order to stay competitive during the auction.

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.