What are Dutch Auctions?
Dutch Auctions put maximum pressure on suppliers because there are no second chances. A Dutch Auction is a type of Step Auctions in which 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 that you research your suppliers first (using an eRFx), so that only qualified suppliers are 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.
How the Dutch Auction Work
The buyer defines a start price, an end price (the best RFQ price), a price step, and a time interval. The eAuction can be set up as a multi-lined auction, where the above is defined per line.
Example: Start price (e.g. 85 EUR), end price (e.g. 100 EUR), price step (e.g. 1 EUR), and time interval (e.g. 60 sec.).
The auction will start at 85 EUR, and all suppliers will have 60 seconds to accept the price. If no supplier accepts 85 EUR, the price will then increase to 86 EUR 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.
In other words, the Dutch Auction is characterized by the ”first come, first served” principle.
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; he/she only knows that they would be higher than the winning supplier's price.
When to Use Dutch eAuctions
Dutch Auctions are ideal if you have only one supplier, but want to challenge the RFx prices. The highest savings are typically generated in Dutch Auctions with only one supplier. However, the supplier must not know that no other suppliers are participating in the auction. In Dutch Auctions, savings are generated based on the supplier’s insecurity.
Benefits of Dutch Auctions
Dutch Auctions are beneficial in situations where you have a limited supply base and want to test the true market price. For example: You have a group of equally qualified suppliers, but limited competition, and one supplier’s RFx price is +10% lower than the others. A Dutch Auctions can be used to allocate specific projects to framework 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 five) per auction. Another disadvantage is that you can’t determine the overall best supplier. This is because Dutch Auctions only provide a line-per-line perspective and different suppliers can close out the individual lines.
Learn more about the other Step Auction type Japanese Auctions here.