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- Sept. 28, 2006 -


Supply Chain Best Practice Tip: Using Two-Step Reverse Auction Processes in Procurement


Single stage on-line “reverse auctions” are fast and effective, but may not be best when the buyer has less information or control.



SCDigest editorial staff

On-line auctions can save companies millions of dollars in material costs as well as dramatically reduce the time and overhead associated with many supplier selection processes.

In a “reverse” auction process, a select group of suppliers bids competitively for an order posted by the buyer. The buyer may choose the lowest bid or split the purchase among several of the lowest-cost suppliers. The actual on-line event often takes just a couple of hours to complete.

Basic reverse auctions work best when the buyer is most in control. For example, when qualified suppliers are plentiful, when suppliers themselves have to spend money to ramp up enough to fulfill the order, and when purchasers have a good estimate of the total cost for the suppliers.

But what about more complex scenarios, where there is less information, the buyer has a less dominant position, or the procurement item has more complex attributes?

In these cases, says Stanford University professor Tunay Tunca, a two-step auction process will usually deliver a better result.

In this approach, an on-line auction is still used, but not with the promise of contract award at the end of the process. Rather, some number of the lowest bidders is then engaged for a more formal negotiation process, where the buying organization can gain more information about cost and better assess the more complex attributes.

“Although the purchaser accrues additional process costs associated with these negotiations, in many cases those costs are more than offset by the price savings they gain,” said Tunca in a recent issue of the Stanford Knowledgebase newsletter. “In some cases, it is possible that the net cost efficiencies obtained from running a two-stage process versus just a reverse auction can run into significant percentages.”

When do you think single stage and two-stage auction processes work best? Let us know your thoughts.

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