Reverse Auction for Small Business

I read this article elsewhere and thought of putting here for my readers.
Small businesses generally need to make every penny count. When keeping the budget lean and mean is a must, but there is still a need to purchase products and services to keep the company running, a reverse auction is a great option to explore.
The benefits of giving a reverse auction a try for even a relatively small purchase are many. Some of the top reasons companies often cite for using reverse auctions for purchasing include:
Ease: A reverse auction in an online arena happens to be a very easy way to locate product or service providers from all over the world. This type of buying scenario can take a great deal of time out of the effort of finding a decent price on products or services.
Expediency: Unlike a closed bidding process that can take weeks or months, reverse auctions can take place in hours. This means a small business does not need to dedicate a ton of staff time to the endeavor.
Cost savings: On average, businesses report up to 30 percent in savings over traditional buying methods. Since reverse auctions enable real-time competition between potential providers, this arena can provide a real edge for a savvy small business owner that needs to make dollars stretch as far as they can.
Providing the ultimate experience in comparison-shopping, an online reverse auction is ideal for even the smallest of businesses. If products or services are required, a reverse auction can enable a company to shop far and wide for the best price without having to dedicate more than a few hours or days of staff time doing so.

When to use reverse auction

Listing down the pre-requisiteds of a successful reverse auction,
- Proposed Spend:when proposed spend is large enough to attract supplier communities interest. More the value, chances of getting more suppliers.
-Adequate competition:The product/commodity should have adequate suppliers in the same geography. Reverse auctions can be successfully executed between two suppliers, wherein the participating suppliers are dependent on same client for their survival.
-Clear Specification:The purchase specs should be clearly defined without any ambiguity which will allow to release the cushion price at the fag end of competition.
-Availability: The product should be available with out any market distortion.

Benefits of Reverse Auction

For Buyers:

-Easy to use web-based tool to streamline the competitive bidding process
-Reduces time and effort related to RFP/RFQ creation and distribution
-Speeds up competitive bidding & contract award process
-Promotes fierce competition for client’s business
-Average events savings is 10-20%
-Great use of technology

Standard Specification of an auction engine

1. Dynamic Pricing Engine Reverse Auctions
Reverse auction is an alternative to sealed commercial bids in a tendering system. However the complete tendering process involves various steps that lead to reverse auction as a mode of bidding online. TMS includes a Dynamic Pricing Engine to encompass a complete tendering / pre-qualification - reverse auction process in a unified and consistent structure.
1.1. Capabilities of Dynamic Pricing Engine
1.1.1. Forward or reverse auctions
Both are supported. Forward auctions are used in case of sale (of scrap etc) and reverse auctions are used for sourcing material. Architecturally, reverse and forward auctions are same except that in forward auction prices are ranked highest first and in reverse auction ranking is lowest first. So all features of reverse auctions are available for forward auction (sale) as well.
1.1.2. Type of Auction / Reverse Auction
Associated with each auction is an auction method. The method of auction determines what the auction initiator sees and what the auction respondent sees during bidding round as well as method of ranking and so on. The buyer can decide on the type of auction as forward, reverse, multi-lot, standard, English, multi-parameter, etc. The features that can be ‘seen’ by the buyer and the bidder are dependent on the Auction rules chosen.
1.1.3. Auction / Reverse Auction Business Rules
An entire set of business rules governing an auction or reverse auction can be chosen. The method of auction determines the various rules that should be applied to an auction - for example, anonymous, masked, rank, landed price, base price, exit price bidding, etc.
Refresh Rate
This is the rate at which the respondent browser refreshes the data visible. This can be set during auction initiation. The refresh rate is predefined in the application, which can be changed as per the requirement by the administrator. However, bidders and buyers can manually refresh the screen by clicking on the refresh option provided.
Tick size
This is the minimum amount by which the respondent has to increase or decrease the governing price parameter of the bidding round. This needs to be provided at the time of auction creation
Bidding Sequence
Whether respondents can bid at random, all respondents must put their starting bids in before real time random bidding takes place. Whether each respondent is allowed only a limited number of tick changes is determined by the bidding sequence selected. Whether bidding can be random but the price has to be less than in the case of reverse auction, the opening price defined and should follow the bid decrement rule. Whether equal number of (sealed) bidding rounds for all respondents (dynamic sealed bids). In case of a forward auction, the bidder can start bidding from a price higher than the opening price.
Closing criteria
Whether auction / reverse auction closes with pre-determined number of rounds or after a pre-set “no change” time or explicitly on initiator closing the bidding round. The auction can be concluded whether manually or on reaching a preset end time. However the buyer has the option of extending the auction manually at any point of during the auction.
Anonymity
This determines whether respondent identities are revealed to other respondents as well as the initiator during real time bidding. The buyer has the option to configure the system to either reveal or not to disclose the identity of the bidder during the auction.
Currency
Determines whether bids will use a single or multiple currencies. In case of multiple currencies conversion is carried out on exchange rates specified. Multiple currency option is available - however the bid prices quoted by the bidder can be converted into the required currency by using the loading factor option available in the application.
Business rules categories available in the Software
The business rules can be classified in three broad categories –
· Price Parameters
. Auction Strategy Parameters
· Time Parameters

The following table provides detailed information of various business rules available –

1.Historic Price
This is the price at which the same item is procured previously either through auction or otherwise
This price is used by the application for the purpose of calculating savings only
2.Opening Price
The price at which the auction starts
This can be higher or lower than the historic price but must be higher than the reserve price in reverse auction and vise versa in forward auction
3.Reserve Price
This price must be less than the opening price in reverse auction and vice versa in forward auction.This price has no relevance to any parameters and only used for calculation of savings
If the reserve price is not met during the auction, the auction creator has a choice to cancel the auction or re-initiate the auction.
4.Bid Factor
The minimum value by which the bid price has to be reduced (in case of reverse auction) from the opening price or the current bid price which ever is the lowest.

Auction parameters (Auction strategy)
Sl no
Feature
Details
1 Price
The price bid by each of the bidder is shown to all the participants
The bidding is always with reference to the current lowest bid in the auction
2 Rank
The price bid by the bidders is not displayed to all the participants
All the ranks can be displayed to all the bidders or
Only their individual ranks can be displayed to the bidders or
Up to a maximum of 10 ranks can be displayed to all the bidders
3 Decimal
The auction can be configured for decimal either price or rank
The number of decimals that can be configured is either 2 or 4
The bid prices if in decimals will not be rounded off in this case
4 Non decimal
This option can be used in high value auctions
The bid prices will be rounded of to the nearest absolute value
This option should not be chosen for the landed price auction or an auction where the loading factors are used.
5 Landed price
This option can be used when the buyer, in case of reverse auction, need to know the price at which the bidder is quoting and the price when the item reaches the location of his desire. The buyer has the option to specify the taxes, surcharges and any other additional factors that would get added in the transit.
The position of the bidder is based on the landed price and not on the base price (actual price quoted by the bidder) in this case
6 Base price
This option will decide the position (either for price or rank format) of the bidder based the price he quotes and not on the landed price
7 Anonymous
The login name of the bidder is masked and a alias name provided to the bidder is displayed in the auction hall to all the bidders
8 Masked
Neither the alias name nor the login name of the bidder is displayed in the auction hall. Each bidder will be able to see his alias name against his bid which will help him in identifying his bids and thereby identifying his position
This option can be useful in auctions having less number of suppliers
9 Bid factor enforced
Choosing this option will restrict the bidders to reduce the bid prices in multiples of bid decrement only. Otherwise, the bidders are compelled to reduce the bid price by minimum of one bid decrement or more than one bid decrement but need not be in terms of multiples of bid decrement
10 Exit price enabled
This option enables the bidder to bid a price that is not in compliance to the bid decrement rule
These bids as the name suggests will be the last bid prices of the bidder and the bidder wont be able to bid again in that auction after he has placed the exit bid
The exit bid price has to be less than the opening price (in case there are no bids placed by that supplier) or less than the previous price of the bidder who is trying to place the exit bid
The exit price can also be higher than the opening price provided the ‘allow exit bid higher than Opening price’ option is chosen while setting up the auction
11 Show number of ranks
This is applicable to rank auctions
The number of ranks to be displayed in the auction hall can be configured using this option.
Maximum of 10 ranks can be displayed
Minimum of one rank can be displayed (bidders own rank is displayed in this case)
12 Show Opening price
This option enables to either show or hide the opening price to the bidders in the auction hall
The buyer will see the opening price though this option is chosen
13 Show L1 Price
This option is applicable for rank auctions both multilot and single item auctions
For all the items in the multilot, the bidders can see the ongoing L1 price so that they can measure their positions with reference to the L1 price
This option is configurable and multilot rank auctions can also be conducted without this option
14 Modified rank
This option is applicable to rank auctions only
The budgetary prices quoted by the bidders can be set as their initial bids
The bidders will be compelled to start the bidding from the initial quotes they had provided
This option is useful in case of auctions where the bidders are not of same standards with reference to price i.e., the budgetary quotes of the bidders vary a lot.
15 Bidders (inviting participants)
The bidders can be chosen from the database of registered users
The bidders can be short listed at multiple stages based on the response from the bidders in the pre-event stage.

Auction timing parameters
Sl no
Feature
Details
1 Start
The auction start time can be set in 24 hour clock
2 End
The auction can be configured to end at a preset time
3 Preview
This option allows the auctioneer/ buyer to set up an auction anytime much before the auction but will be visible to the supplier only from the time that is set as a preview time
4 Extension time
The auction can be extended either manually or automatically.
The automatic extension can be configured based on the bids in the last minutes of the auction
Infinite extension can be set by configuring the auction for huge number of extensions like 1000
5 Serial lot dependency
The auctions within a project (auctions planned for one buyer in one project) can be set to start after preset gap of time from the end time of previous auction. For example the start time of lot 2 will be after 30 minutes of the completion of Lot 1.


1.2. Auction and Reverse Auction Formats
1.2.1. Standard English Reverse Auction Price and Rank Format
For a particular procurement requirement of a buyer, at least two or more suppliers would compete and decrease the prices with the set business rules. This particular format of the auction can be conducted in terms of price or a ranked format
In price format, prices are seen while in rank format only bid rank but not the price is visible.
1.2.2. Index Bidding or Discount Bidding
For a particular buyer’s requirement a market competition is created between various pre-qualified suppliers. Instead of placing a total price bid the suppliers would bid a discount percentage or price discount from an opening base line price. This caters to the decimal discounts or non-decimal discounts
Index bidding is a variant of discount auction, where in the bidding can move or upward but between a Lower Specification Limit and an Upper specification limit that has been pre defined.
1.2.3. Transformational/Multi-Variable Bidding
Many negotiations are not just price-only negotiations. When multiple parameters of evaluation like commercial parameters, technical parameters, quality and service parameters are to be evaluated and a decision needs to be taken then this format would help the buyers to arrive at a simple evaluation in a real time and create the competition in the market amongst the participants. The weighting given to each parameter is pre-determined and rank is automatically calculated.
1.2.4. Dutch Auction Format
This format is typically used for reverse auctions for perishable goods. The objective of this auction is to sell the quantity at the earliest possible time. The participant can negotiate only for quantity and not for the price in this auction. The seller will decide the price. The price drops after a preset period of time and this continues till the entire quantity is sold out. The quantity up for bid will be distributed to multiple participants till the entire quantity is sold
1.2.5. Japanese Auction Format
This Format is typically used for forward auctions. The objective of this auction is to identify the bidder who can quote the highest price. The participants cannot negotiate either on the quantity or on the price. The seller will decide both. The winner will buy the entire quantity.
1.2.6. Multi lot Auction Format
This is applicable to cases where there are multiple items to be procured and all items belong to same category. The supplier community can be same for all the items or different for each item. The bidders if, are participating in more than one item, then all the items will be displayed in one screen, which will avoid confusion for the bidders. Currently the software can support multilot rank auction up to 10 items in one screen. The alias name of all the participants should be same in multilot rank auction
Note: -
The system through its componentized architecture, easy work flow and intuitive design also provides ease to modify and customize programs so as to provide alternative formats for specific business scenarios.
1.3. Auction Initiation
The auction initiator “opens” the real time bidding process within the time constraints specified in the auction schedule. The bidding process is governed by the set of business rules chosen for the auction.
There is a knowledge repository and an advanced workflow based auction creation process. The system provides a lot of system generated prompts and has very friendly user interface through intuitive GUI design to facilitate easy auction posting mechanism.
There is host of formats made available in the system to provide a head start to the entire process of posting an auction. The market maker can choose a previously done auction and copy the template to create a new auction. There is a facility to modify/delete parameters from the source auction after copying.
1.4. Auction User interface – dashboard
There is a user dashboard feature to provide one single screen shot view to comprehensive auctions related information. The GUI is intuitive and provides a host of information depending on the user’s access rights into the auctioning information.
The user also has provisions to customize the information availability for himself based on the following –
Category management
The categories can be added, modified and deleted
The category amenability study can be done find out suitable items for conducting the auctions
Account Management
The buyer accounts can be added, modified and deleted
The buyer to category amenability can be carried out
Knowledge Management
· Post information to KM section
· Post auctions, category amenability studies etc to the KM section
· Search and retrieve

There is also provision to provide a host of information through the following features -
Auction Hall View and Bidding form for bidders
Auction hall View for buyer
Graphical Representation of in progress Auctions
Automatic Refreshing of the screen
Real Time saving analysis
Conversion of Bid History reports to excel or txt formats
Auto scaling graph
Message Tickers
Reverse clock timer
1.5. Closing
Closing takes place automatically or at the instance of the initiator as per business rules governing the auction.

reverse Auction in Brazil & UK

Electronic auctioning has been increasingly used in recent years to identify the best price possible in an online competition, for instance in Brazil and the United Kingdom. This method is generally used for homogenous products, where the decision on purchasing is mostly based on the price factor.

E-auctioning in the Federal Government of Brazil

In Brazil, the electronic reverse bidding is regulated by the Law of July 2002. The complete

procurement documentation is published on the Procurement Portal of the Federal Government – Comprasnet (http://www.comprasnet.gov.br), in the government’s Official Gazette and is also broadly disseminated in newspapers, in 2004, BRL 8 billion (Brazil reals) was spent on consumer goods and services – contracted through reverse bidding, according to studies of the Ministry of Planning, Budget and Management of the Federal Government of Brazil. Considering that the total amount used in this area was BRL 15 billion, the share of reverse bidding accounts for over 50% of total spending.

Electronic reverse bidding reduced the cost of participation in competitions, as bidders are not

physically required and only need to be connected to the Internet. One of the consequences is the higher number of suppliers. In the past four years there has been an increase of suppliers from 150 000 to 214 000, that is a 42% increase. Last year alone, 20 000 new companies became suppliers of the largest buyer in the country, the Federal Government. Electronic reverse bidding has also helped increase the transparency of negotiations. Contacts between suppliers and between the government and the administration have been avoided while citizens have monitored the procurement on line.

Applying e-auctions in the National Health Service in the United Kingdom

In 2005, the OGCbuying.Solutions, the Executive Agency of the UK Office of Government Commerce, used the key sector of national health as one of the pilots for e-auctions. It enabled specialists in the National Health Service (NHS) to source health framework agreements. In 2006, the NHS Purchasing and Supply Agency completed an e-auction transaction of a GBP ₤1.2 billion worth of temporary agency staff cost. Following a five month bidding and evaluation process, 176 employment agencies were identified as being successful at the evaluation stage and were invited to participate in the e-auction. These suppliers were given the opportunity to participate and bid in a fully transparent environment, with multiple opportunities to revise their pricing, while gaining an insight into the current level of market pricing. 70,000 bids were placed during the event which ran over three days and resulted in significant savings for the NHS. The e-auction contributed to an additional 10.3 percent saving in addition to the savings provided under the Best and Final Offer in the initial bid.

Even if reverse e-auctions speed up the price-discovery process and improve market transparency, they require an important initial investment to set up the technological infrastructure and supporting legal environment.

Sources: 

- Brazil, response to the OECD Questionnaire.

- Case study provided by the United Kingdom for the OECD Symposium: Mapping out Good

Practices for Integrity and Corruption Resistance in Procurement, November 2006.

Reverse auctions in Public Sectors-India

Among public sectors in India, BPCL,SAIL & BHEL are the first adopters of online reverse auctions as a procurement negotiation tool. The online events were conducted during end 2002 & beginning of 2003. While SAIL & BHEL have internalised the tool, BPCL has chosen their service provider through an open tendering process couple of months back. Indian oil, Mazagaon Dock, Coal India,Balmer Lawrie, Hindustan Copper, ONGC and most of the PSU banks are also using this tool.

In this article I would like to write about the pain points the PSUs' are facing on adoption of this tool.

1. Lack of CVC guidelines: While CVC has issued a circular (47/9/03 dated 11th sept'03) giving blanket permission for conducting reverse auctions, the modalities, process checks have not been deliberated as of now. So procurement professional are not sure which process or what kind of documentation to be followed. Mostly the process and documentation requirements are driven by service providers and service providers prepare these documents to suit the functionalities of their respective softwares.
2. New supplier addition: As per practices, adding a new supplier to any PSU vendor base is a time consuming activity. Most of them follow a due diligence process to take a new supplier on Board. This lack of adding a new vendor to the auction platform has effected the outcome of the auctions in many tenders. I have observed BHEL conducts events between two vendors for lot many items.
3. How to fix start bid price or initial auction price: Right Start bid price is one of key success factors for any reverse auction. It should be close to market price. However in many cases the internal estimates are either very high or low than the market price, thereby resulting into either not getting bids or ending the event at relatively high price. I have seen extreme case wherein the start bid price and auction result were 1:3 and 3:1.
4. Following a parallel process : Few clients follow a parallel practice i.e the vendors are also asked to submit sealed price bids before participating in an auction and lowest between two is declared as winning price. While one school of thought advocates for this to neutralise the effects of wrong start bid price, the other school of thought argues this as a wrong practice as it does not motivate a bidder to bid during auction till it reaches to his offline bid. 
5. Auto extension :Most of the auction software has a functionality to automatically extend the auction closing time if a bid comes during last few minutes of the closing time by a pre-determined time. The practice of allowing indefinite auto extension or auto extension for a fixed time has not been standardised. Both the practices have their own flaws.
6. Audit : While most of the PSUs' enter into an agreement with the service providers  to make the events available on line for a specific no. of years, this may not be a correct practice as due to low entry barrier few of these fly by night service providers may close their shop.
7. Manual process : Most of these auctions are carried on as a stand alone basis, without any integration to existing ERP, thereby limiting the scalabilty of the tool.

At the end, I would request the readers to share their experiences how to address the above pain points.