Top-performing companies go beyond e-RFIs/e-RFQs. They create a sourcing culture where competition between suppliers is encouraged, transparently, through e-auctions.
These companies reap the benefits of a streamlined, efficient, and fair sourcing process, ensuring significant cost savings (e-auctions generally provide savings of >10% compared to previously negotiated prices).
There are six main types of e-auctions companies can use:
Let’s take a look at each one and discuss their advantages and disadvantages.
British Reverse E-Auctions
The British Reverse e-auctions are the most frequently used ones. In this type of e-auctions, suppliers can either see their position compared to the other bidders, either the best price offered, or both.
We always encourage buyers to experiment with different strategies to achieve the best results. The outcome can be different depending on the specific setup of the event.
When setting up a British Reverse e-auction, you can decide on the information suppliers will see, as well as the auction step - the minimum amount between two successive bids a supplier can place.
If you choose to launch your event using Prokuria, you can choose from two types of British Reverse e-auctions:
Per Total: When bidding on multiple items in the same e-auction, suppliers’ rank is determined by the total quote. This type of auction is used when buyers want to close a deal as a single package composed of multiple quotation lines.
At Item Level: When bidding on multiple items in the same e-auction, suppliers’ rank is determined at item level, and they can see how they rank compared to other suppliers for each item. This variation is used when buyers want to close a deal where various items in the e-auction can be awarded separately, to different suppliers.
Vickrey Reverse E-Auctions
Vickrey e-auctions are a particular case of traditional British e-auctions. They work by allowing bidders to instruct the platform to bid on their behalf.
This particular type of e-auctions was heavily promoted by platforms such as eBay. Here, users wishing to buy a product could indicate the maximum price that they’re willing to pay.
When the e-auction closes, the winning buyer doesn’t necessarily pay the amount they indicated, but the price indicated by the closest competitor, plus a small “step”.
For instance, if someone indicates that the maximum price they wish to pay for a widget is 100 EUR, and the closest competitor indicates 50 EUR, the winning bidder will be the user who was willing to pay 100 EUR, but they will only pay 50 EUR plus a small step (usually 1 EUR or less).
During Vickrey e-auctions, competitors are incentivized to declare the real price from the beginning instead of strategizing along the way. When used with suppliers, this type of e-auctions can be a very powerful instrument; suppliers will indicate the minimum price they’re willing to accept.
When the e-auction closes, the winning supplier will get a better (i.e., higher) price than the minimum specified. This will be the price of the closest competitor, minus a small step decided by the buyer when setting up the e-auction.
For example, if supplier A bids 10 EUR / widget, and supplier B bids 15 EUR / widget, supplier A will win the bid, but at a price of, for instance, 14 EUR (where 1 EUR is the step decided by the buyer).
This type of e-auction is usually carried in a single step. While the e-auction is open, suppliers input their best prices. Once the e-auction closes, the system determines the winner and the price according to the algorithm described above.
Using Vickrey e-auctions implies, of course, that the e-auction platform hides from the buyer the price indicated by suppliers, and that both buyers and suppliers trust the platform to correctly and confidentially calculate best prices.
Other versions of Vickrey e-auctions allow for multiple rounds or creating a hybrid Vickrey / British Reverse e-auction where suppliers can see their rank and price and adjust their best bids according to their strategy.
Dutch Reverse E-Auctions
The Reverse Dutch e-auction is a type of auction where suppliers can only see a price and a countdown timer. As the price goes up at the specified time intervals, eventually, one of the suppliers will be able to meet the displayed price.
This type of auction works best when there’s a small number of suppliers. When setting up the auction, you get to decide:
the starting price (usually an extremely low one, so that none of the participants can meet it);
the increments (how much the price will increase at each step);
the validity of an increment (how long a price will be valid before changing upwards);
the number of price changes (how many times the price will increment).
The first supplier to claim the price gets the deal. Once a price gets claimed by a supplier, the event ends.
In a Dutch Reverse e-auction, suppliers are motivated to claim the best price they can offer, being aware that a competitor may potentially claim the deal before they do.
One tweak you can apply to this type of e-auction is adding quantity into the mix. This means that depending on the rules you set, only limited quantities can be claimed by suppliers on various price floors. (for example, for 100 EUR, the supplier can only claim 20%/500 units of the total quantity)
Japanese Reverse E-Auctions
The Japanese Reverse e-auction is similar to the Dutch one, meaning suppliers can only see a price and a countdown timer. However, instead of starting from a very low price, the auction starts high, and it’s lowered at predetermined intervals.
As the price goes down, some suppliers will not be able to meet the displayed price and will “opt-out” of the auction. The last supplier standing wins the deal.
When launching a Japanese Reverse e-auction with Prokuria, you can set different levels of competition visibility. For example, they can choose to show potential suppliers that there are other offers at the same price, without specifying how many (in which case the psychological pressure on suppliers is higher), or that there are X other offers at the same price - in which case suppliers have some room for employing different bidding strategies.
Sealed Bid E-Auctions
The Sealed Bid e-auction is a particular case of an e-RFQ. During this type of auction, you can’t see what suppliers have submitted until after closing the event.
You can also think of the Sealed Bid as a particular case of a British Reverse e-auction where there’s only one round of submissions from the suppliers, as it addresses the same fundamental issues:
for suppliers, it ensures that the competition is fair;
for buyers, it ensures that the suppliers provide the best conditions they can offer.
However, this type of e-auction has one big disadvantage for suppliers: they can’t adapt their offer to their competition.
For this type of e-auctions, non-price factors are rolled up into a total “merit” score. Suppliers can change prices whenever they want, and their rank will be determined based on the weight of the price factor, combined with the weight of the other factors set up by the buyer.
The main difference between weighted e-auctions and multi-attribute e-auctions is that with the former, suppliers can only modify the prices. In a multi-attribute e-auction, suppliers can also modify other factors, such as the delivery time or payment terms.
How To Choose The Right E-Auction Format
Now that you’re aware of the six types of e-auctions you can choose from, you’re probably wondering which one’s the best for your organization. Here’s how you can decide:
check your spend analytics: where can you reduce your costs?
determine the number of bidders that will join your event;
factor in the market competition: is the competition between suppliers pricing strong?
evaluate the expected bidding approach: are your potential suppliers very aggressive in their bidding?
consider the consistency of specifications and qualifications: do some of your qualified bidders have unique capabilities?
Based on your answers, you can choose the right e-auction format for your organization by taking into account the advantages and disadvantages of each type of auction:
Top-performing companies usually use a multiphase strategy by using multiple e-auction types successively. For example, you can use a British Reverse e-auction, followed by a
Dutch Reverse e-auction, to make sure you get the best offer.
Regardless of your strategy, it’s considered best practice to execute sourcing projects according to a rigorous and well-defined strategy to get the best possible outcomes.
It’s also important to note that the best outcomes for any sourcing projects are usually obtained through thorough preparation, well before the event starts. Understanding market dynamics, and what will determine suppliers to place their best offers, is key.
Are you ready to become a top-performing company? Request your FREE Prokuria demo today.