It’s time you try something new with your eAuctions Choosing the right eAuction format If you ever want to start a heated debate in procurement circles, for your project: just start talking about auction strategy. While eAuctions are a proven strategy for conducting negotiations, there are miscon- Reverse vs. Dutch vs. Japanese ceptions about their efficacy and applicability. It’s always worth addressing these questions head on because the benefits of eAuctions are significant: Lower prices eAuctions generally provide savings of more than 10% compared to previously negotiated prices. The primary reason for the large savings is increased competition Time savings Market intelligence from previous auctions and the use of tem- plates saves a significant amount of time. Negotiations are con- ducted simultaneously with all suppliers, and full negotiations are typically completed in less than an hour, including extensions. Market transparency All bidders receive the same information and are bidding against the same target. Process improvement When all potential suppliers are approached the same way, the buying organization appears more professional. Bids are only accepted within the system, and the use of templates ensures structured and uniform corporate working procedures. All data and communications are stored in one place and automatically compiled. Additional read: Get our latest eAuction statistics report 1 To get the best results, eAuction practitioners will vary their strat- Consistency of Specifications and Qualifications egy depending on market conditions. However, even with orga- Despite efforts to standardize specifications, do some of your nizations that have eAuctions as an established negotiation tool, qualified bidders have unique capabilities? These can be both most have barely scratched the surface to explore all options positive (e. g. superior service) and negative (e.g. suspect qual- with regard to strategy. Most eAuction programs rely heavily on ity). standard reverse auction formats. While this is certainly a good approach for many categories, it is definitely not a one-size-fits- Risk Mitigation all solution. Within some categories, reliability of delivery weighs higher than the absolute best price. In such cases it may be necessary to en- Choosing the right eAuction format will have a significant impact sure that the volume is split between several suppliers, increas- on the outcome. Here is a list of factors a buyer needs to consid- ing the likelihood of delivery in case one supplier proves to be er strategically to get the most of eAuctions: unreliable. Commitment to Results When looking for alternate approaches, be sure to consider us- The buying company’s commitment to the eAuction results has ing different eAuction formats. In addition to the typical stan- a significant impact on the format they should choose. Full com- dard reverse auction, every organization should be using Dutch mitment will result in the suppliers having to fight harder to get and Japanese auctions in some situations. the business. Number of Qualified Bidders How many bidders are you expecting to participate in your event? Expected Bidding Approach Based on your interaction with suppliers, how aggressive will each be in its bidding approach? Are there specific suppliers that you know, perhaps from RFI and RFP responses/pre-bids, who Additional read: could bid substantially lower than others? Top 5 Things You Can do to Better Manage Your Categories 2 Dutch and Japanese auctions are both “step” auctions. They STEP differ from standard reverse auctions in that changes in pricing (bids) are driven by the eSourcing platform at specified time in- AUCTIONS crements rather than bidding activity by suppliers. DUTCH JAPANESE DUTCH VS. JAPANESE 3 eSourcing eAuction Reverse Auction Step Auction Cherry Picking List CherryLot™ CherryDutch™ Japanese Suppliers can bid on Suppliers must bid Suppliers must bid 1st bid per line closes The supplier must one or more products. on all products. The on all products within the line. $ is increasing, accept/reject the price The winner is the sup- winner is the supplier a Lot. The winner is time is decreasing. interval per line within plier with the lowest with the lowest TOTAL the supplier with the a certain time interval. cost per line. cost. lowest TOTAL cost per $ is decreasing, time is Lot. decreasing. Product/Service 1 Total Cost Lot 1 Product/Service 1 Product/Service 1 Product/Service 2 Product/Service 1 Product/Service 1 Product/Service 2 Product/Service 2 Product/Service 3 Product/Service 2 Product/Service 2 Product/Service 3 Product/Service 3 Product/Service N Product/Service N Product/Service N Evaluated per product/ Evaluated on Total Lot 2 X sec X sec X sec X sec X sec X sec Service price $$$ $$$ Product/Service 1 $$ $$ SUM {1}, SUM {2}…. SUM {1+2+…. N} => SUM {N} => one or One winner $ $ more winners Evaluated per Lot SUM LOT 1 {1+2+….N}, SUM LOT 2 {1+2+….N} =>One winner per Lot 4 In a Dutch auction, the opening bid price for all bidders is set (based on pre-bid intelligence) by the auction manager at a pric- ing level that is too low for any bidder to accept. At pre-deter- mined intervals (e.g. each minute), the system will increase the bid price by a moderate increment (e.g. 0.1%). This continues until the first bidder accepts the bid price. At that point, the event closes. Advantages → Maximum bidding pressure on participants → Fosters FOMO (Fear Of Missing Out) in the supplier community, driving better bids → Can be run efficiently as there are no extensions or re-bidding Disadvantages → There is no second place in Dutch auctions. Only one bid is received from suppliers during the course of the event. DUTCH → Limited award scenarios are based on limited data, and AUCTIONS the buyer is obliged to commit to the winner Best for → Scenarios where pre-bid intelligence has indicated that one of the bidders has a significant cost advantage over other bidders. Benefit vs. Standard Reverse Auction → In a standard reverse auction, there’s no incentive for the bidder with the best pricing to submit their very best bid. Instead, they only need to submit a bid that puts them in first place. Additional read: eSourcing Events From The Suppliers Perspective 5 In a Japanese auction, the opening bid price for all bidders is set (based on pre-bid intelligence) by the auction manager at a pricing level that is so high, all bidders will accept. Each bidder is required to signal their assent by accepting the bid in the system. At pre-determined intervals (e.g. each minute), the system will decrease the bid price by a moderate increment (e.g. 0.1%). At each step, the bidder needs to accept the bid to signal their as- sent. This continues until there is only one bidder remaining who accepts the bid price. At that point, the event closes. Advantages Japanese auctions force all bidders to participate by accepting each new bid in order to continue. Supplier bids can be combined with specification differentiation into multiple award scenarios. Disadvantages JAPANESE The fear of missing out is limited compared to Dutch auctions, and Japanese auctions can lead to long events if decrements AUCTIONS and time intervals are not set correctly Best for Japanese auctions are best for scenarios where there is limited bidder participation. They are also good for projects where there are different specifications/qualifications between the bidders or situations that require extra confidentiality (e.g. public sector) Benefit vs. Standard Reverse Auction By continuing the price decrements, bidders must provide their pricing across a broader range than just bids relative to compet- itors’ pricing 6 One easy way to remember the difference between Dutch and Japanese auctions is to focus on what triggers the end of the event: DUTCH → Dutch auctions end when the first supplier places a bid. VS. → Japanese auctions end when the last supplier places JAPANESE a bid. Regardless of which eAuction format you use, it is imperative to execute the project according to a rigorous, structured process to deliver the best results. Additional read: How a Japanese auction provided one of Europe’s largest grocery distributors with annual savings of 49.3% 7 Suitability Strategy eAuction Supplier Live eAuction RFx analysis selection creation training eAuction evaluation Prequalify suppliers Evaluate the Evaluate the available Notify suppliers about Select training method Monitor eAuction Evaluate eAuction procurement eAuction types the upcoming eAuction result Collect start prices for complexity Make necessary Manage potential eAuction Agree on the eAuction Create eAuction training preparations supplier questions Give feedback to Analyze the market & strategy specifications and suppliers Information about competitive situation guidelines Conduct training Increase supplier qualitative differences Select the eAuction sessions activity Share lessons learned between suppliers Agree on the eAuction type and template Enabled required suitability functionalities There are multiple options for your eAuction program to incorporate new techniques, approaches and formats. The most important step in any successful eAuction takes place long before the event: understanding the market dynamics and what will drive suppliers to provide you with the very best bids. 8 Scanmarket is an industry leading Source-to-Contract software provider that delivers superior results in savings, transparency and efficiency to hundreds of organizations globally. Known for its ease of use and expert support, Scanmarket increases user adoption by more than 300% on average. Whether it is Spend Analytics, eRFx, eAuction, Contract Management, Project Mana- gement, Supply Base Management, or Consultancy Services, we can help your organization get the results you need. 9.