““NIGP’s 2004 E-Procurement NIGP’s 2004 E-Procurement Symposium: Empowering the e-Symposium: Empowering the e-

Procurement Community”Procurement Community”

Reverse Auctions: Another Tool in Reverse Auctions: Another Tool in the Toolboxthe Toolbox

Thomas E. Youngs, Jr., CPPO, C.P.M., Chief Thomas E. Youngs, Jr., CPPO, C.P.M., Chief Purchasing OfficerPurchasing Officer

County of Allegheny, Department of County of Allegheny, Department of Administrative Services, Division of Administrative Services, Division of Purchasing and SuppliesPurchasing and Supplies

What is a Reverse Auction?What is a Reverse Auction?Buyers use an auction format platform to Buyers use an auction format platform to obtain prices from a number of suppliersobtain prices from a number of suppliers

Prices go incrementally Prices go incrementally downdown as suppliers as suppliers continuously place bids against one another continuously place bids against one another on specific itemson specific items

Bidders are anonymous to one anotherBidders are anonymous to one another

Only the buyer conducting the purchase Only the buyer conducting the purchase can view the bidders’ identitiescan view the bidders’ identities

Some Reasons for Private Sector Some Reasons for Private Sector Reverse AuctionReverse Auction

Customers said to do itCustomers said to do it

More efficient for both buyer and supplierMore efficient for both buyer and supplier

Increased foreign competitionIncreased foreign competition

Consistent process and a standard Consistent process and a standard presentation to supplierspresentation to suppliers

More ethical competitive bidding environmentMore ethical competitive bidding environment

Some Reasons for Public Sector Some Reasons for Public Sector Reverse AuctionReverse Auction

Elected official said to do itElected official said to do it

Efficient for both buyer and supplier (more?)Efficient for both buyer and supplier (more?)

Consistent process and a standard Consistent process and a standard presentation to suppliers (don’t we have this presentation to suppliers (don’t we have this already?)already?)

Ethical competitive bidding environment Ethical competitive bidding environment (more?)(more?)

Supplier second chance at bidSupplier second chance at bid

Value of a Reverse AuctionValue of a Reverse Auction

Accelerated bid evaluation processAccelerated bid evaluation process

Possible savings through intensified competitionPossible savings through intensified competition

Redirection of supplier inquiries to online managementRedirection of supplier inquiries to online management

Automated online delivery of solicitations, RFQ’s and Automated online delivery of solicitations, RFQ’s and amendmentsamendments

Complete bid histories, line-item by line-item, in Complete bid histories, line-item by line-item, in spreadsheet format for efficient tabulationspreadsheet format for efficient tabulation

Can be simple and cost-effective to implementCan be simple and cost-effective to implement

The Reverse Auction ProviderThe Reverse Auction ProviderSelecting a provider involves striking a Selecting a provider involves striking a balance between cost, customization, balance between cost, customization, experience and customer serviceexperience and customer service

Technology is important but not necessarily Technology is important but not necessarily the key differentiatorthe key differentiator

Customer service/compatibility is key in early Customer service/compatibility is key in early “learning” stage for bidders and buyers“learning” stage for bidders and buyers

Consider how much work provider does for Consider how much work provider does for buyerbuyer

Consider program flexibility and evolutionConsider program flexibility and evolution

Provider’s FeesProvider’s FeesSeveral payment options:Several payment options:

– Upfront feesUpfront fees– Straight transaction feesStraight transaction fees– Supplier feesSupplier fees– Percentage of savings calculationsPercentage of savings calculations– Software purchasesSoftware purchases– Subscriptions / DIYSubscriptions / DIY

Upfront fees can range from $0 to $100,000 Upfront fees can range from $0 to $100,000 and can also involve additional event-specific and can also involve additional event-specific feesfeesTransaction fees can range from one to five Transaction fees can range from one to five percent, but are simple and straightforward to percent, but are simple and straightforward to quantify quantify

Provider’s FeesProvider’s Fees

““Supplier pay” is initially less expensive for Supplier pay” is initially less expensive for agencyagencyPercentage of savings is more difficult to Percentage of savings is more difficult to quantify, requiring solid market intelligence quantify, requiring solid market intelligence and accurate price history recordsand accurate price history recordsSubscription fees usually apply to do-it-Subscription fees usually apply to do-it-yourself format optionsyourself format options

Current ProvidersCurrent Providers

Ariba / FreeMarkets / CovisintAriba / FreeMarkets / CovisintOrbis OnlineOrbis OnlineMoai TechnologiesMoai TechnologiesGlobal eProcureGlobal eProcureRFP DepotRFP DepotAlphaSourceAlphaSourceManagement Science AssociatesManagement Science AssociateseSGSeSGSNeoformaNeoformaFrictionlessFrictionless

Key ComponentsKey ComponentsEase of useEase of use

Proxy BiddingProxy Bidding

Dynamic CloseDynamic Close

Variables/FactorsVariables/Factors

F.A.Q.F.A.Q.

Q What about “requirements” type What about “requirements” type contracts?contracts?

Q What about small businesses/suppliers?What about small businesses/suppliers?

Q How many bidders are required?How many bidders are required?

F.A.Q.F.A.Q.Q Are electronic bids/reverse auctions Are electronic bids/reverse auctions

allowed in your agency?allowed in your agency?

Q What about traditional bid requirements, What about traditional bid requirements, for example - paper documents and for example - paper documents and “live” signatures?“live” signatures?

Q How does the service provider interact How does the service provider interact with the suppliers?with the suppliers?

Q What purchases are suited to reverse What purchases are suited to reverse auctioneering?auctioneering?

Hurdles to OvercomeHurdles to Overcome

Supplier resistance/non-participationSupplier resistance/non-participation

Supplier technology sophisticationSupplier technology sophistication

Agency buy-in and technology sophisticationAgency buy-in and technology sophistication

Accurate historical pricing/usage records are Accurate historical pricing/usage records are importantimportant

Market price movements from previous contract Market price movements from previous contract years make evaluating success difficultyears make evaluating success difficult

Suppliers can undercut to their eventual Suppliers can undercut to their eventual detrimentdetriment

Reverse Auction ExamplesReverse Auction Examples

♦LinensLinens (Sheets & Pillowcases)

♦Swimming Pool Swimming Pool ChemicalsChemicals

♦Printed EnvelopesPrinted Envelopes

♦ Personal Personal Grooming KitsGrooming Kits

♦Janitorial SuppliesJanitorial Supplies

♦Rock SaltRock Salt

Example Auction AExample Auction A

$30,000.00

$32,000.00

$34,000.00

$36,000.00

$38,000.00

$40,000.00

$42,000.00

$44,000.00

$46,000.00

$48,000.00

$50,000.00

$52,000.00

$54,000.00

11:00:00 11:32:21 11:44:12 11:47:20 11:49:22 12:01:04 12:07:34 12:10:05 12:17:12 12:22:12

Time Placed

Tota

l Con

trac

t Pri

ce

Bid Price

Start Bid: $49,026.00Start Bid: $49,026.00

Final Bid: $35,889.50Final Bid: $35,889.50

Dynamic Close - ExtensionDynamic Close - Extension

Duration: 1 hours, 22 mins.Duration: 1 hours, 22 mins.

Bidders: 6Bidders: 6

Savings results: $13,136.50 - 27%Savings results: $13,136.50 - 27%

Linens: Sheets and PillowcasesLinens: Sheets and Pillowcases

Example Auction BExample Auction B

$70,000.00

$72,000.00

$74,000.00

$76,000.00

$78,000.00

$80,000.00

$82,000.00

$84,000.00

10:04 10:14 10:21 10:26 10:34 10:41 10:48 10:57 11:03 11:06 11:14 11:23 11:31 11:40

Time Placed

To

tal C

on

trac

t P

rice Start Bid: $83,500.10Start Bid: $83,500.10

Final Bid: $72,605.80Final Bid: $72,605.80

Dynamic Close - ExtensionDynamic Close - Extension

Duration: 1 hours, 43 mins.Duration: 1 hours, 43 mins.

Bidders: 7Bidders: 7

Savings results: $10,894.30 - 13%Savings results: $10,894.30 - 13%

Swimming Pool ChemicalsSwimming Pool Chemicals

Other Reverse Auction ExamplesOther Reverse Auction Examples

Printed Envelopes – 11% savings over Printed Envelopes – 11% savings over previous yearprevious year

Personal Grooming Kits – increase over Personal Grooming Kits – increase over previous yearprevious year

Janitorial Supplies – difficult to manage Janitorial Supplies – difficult to manage

Rock Salt – increase over previous yearRock Salt – increase over previous year

Swimming Pool Chemicals – limited Swimming Pool Chemicals – limited bidders, increase over previous yearbidders, increase over previous year

Closing RemarksClosing RemarksProvider / Buyer relationship is all-importantProvider / Buyer relationship is all-important

Understand that reverse auctions are a Understand that reverse auctions are a strategic tool, strategic tool, notnot an e-commerce silver bullet an e-commerce silver bullet

Technology and platforms are still evolvingTechnology and platforms are still evolving

Realistic expectations: eight to ten percent Realistic expectations: eight to ten percent savings averagesavings average

Look for solid auction tools and support Look for solid auction tools and support

As always, common sense is keyAs always, common sense is key

Reverse auctions Reverse auctions willwill yield significant savings yield significant savings when applied appropriatelywhen applied appropriately

Closing RemarksClosing RemarksCan we get as good savings through Can we get as good savings through effective sourcing?effective sourcing?

Can we get as good savings through better Can we get as good savings through better specifications and, when appropriate, specifications and, when appropriate, negotiations?negotiations?

Can we build strong supplier relationships Can we build strong supplier relationships with reverse auctions?with reverse auctions?