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.

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.

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.

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.

While cost-savings is 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 they negotiation cycle compared to traditional supplier negotiation. The autonomous nature of Reverse Auctions allow smaller and more diverse suppliers to compete on a level playing field with larger suppliers.

List 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

CherryLot Auctions are useful if you have several lots (subtotals) and want one supplier per lot. If a supplier wants to participate on a lot, they must bid on all lines within the lot.

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 the grouping depends on the final winner for each product.

In a Step Auction, savings are generated because suppliers are unaware about 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.

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 bid 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 is drives each supplier to submit more bids.

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.

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.

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.

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.

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.

A Japanese Auction is a type of Step Auction in which price decreases in intervals during the auction.

Japanese Auctions are ideal if you have a challenging competitive environment, and you 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.

With Japanese eAuctions, the buyer defines a start price, price step, time interval and a maximum number of allowed rejections. The starting price is typically each supplier’s individual RFQ price, and Japanese acution can be set up as multi-lined auctions with the above specifications defined on each line.

Example:

• 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.

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 Reverse or Dutch 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.

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.

Every incoming bid in an e-auction is directly comparable as long as the auction is created according to best practice. 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 a 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 an 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.

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.