eAuctions are a way to accelerate negotiations between a buyer and seller, and conclude the bidding process with a dynamic alternative to final negotiations. But what are the different types of eAuction and when should you use them?
The buyer sets a starting price from which suppliers start, and also potentially a reserve price at which the buyer will not purchase above. This is usually the current price being paid for the goods or service. Bids then lower either by suppliers providing revised bids, or through pre-defined decrements or at the control of the buyer. Suppliers are often given full visibility on the current bid prices, but there is no obligation to take the lead. The auction generally ends after a pre-determined time.
Classic Reverse Auction
This can be useful if there is a difference in the perceived quality of the goods or services, or there are other considerations to the auction other than price. These conditions, such as a scoring system based on price and supporting qualifying information, are normally defined as part of the procurement process.
Examples of where this could be used: Waste Management services, Recruitment or Lease Cars
English Reverse Auction
Similar to the classic reverse auction except that there is an obligation for a supplier to take the lead – each bid must be lower than the current lowest bid. The auction ends when the leading bid remains unbeaten for a specified period of time. Both this and the classic auction tend to work well where there are a larger number of suppliers bidding – the suppliers can see other bids and this creates a more competitive environment than providing quotes and negotiating in isolation.
This is often the case where price is the most important factor.
Examples of where this can be used: Office Supplies, Catalogue Industrial Equipment and other commodity based categories
This is a very different type of auction. The buyer sets a low starting bid and at pre-determined intervals the price increases until one supplier accepts that price. There is less transparency in this type of auction as a supplier cannot see the number of competitors or any activity until the first bid is placed and the auction ends. The reverse of this process is also used when selling products.
This type of event can work well where there are less suppliers (as there is no knowledge or visibility of what others are doing and therefore no pressure on moving with the pack) and also where a quick event is required (as it ends after the first bid – although with the advent of eAuction software for English and Classic auctions, this time saving can be negligible).
Examples of where these can be used: Credit, Asset Sales or Produce
This type of auction is the reverse of a Dutch auction where the buyer sets a high price and this price decrements at pre-set amounts at pre-set intervals e.g. $1000 reduction every 1 minute. If a supplier is happy to provide the goods and services at that price they generally click an acceptance button. The price decreases until there is only one supplier left willing to provide their goods or services at that price. The cruel twist to this event type is that there is no obligation on the buyer to inform the supplier that they are the last party bidding – therefore the supplier could be bidding against itself eroding its margin.
This type of auction should be used with caution – while it can be very effective it can also leave a sour taste in the mouth of the supplier who finds out they ‘gave away’ too much of their profit.
The bottom line is that there are a variety of eAuction types available, and understanding which is the right one to use in any given situation can be tricky – and daunting. Making the wrong choice could be a costly mistake. Luckily, Xoomworks Procurement can help. With our Sourcing-as-a-Service proposition, we can guide you through the process of selecting the right eAuction to achieve the very best savings for you.