What is a Japanese Auction? Characteristics and Process

Robert
Jan 19, 2022
8 min read

Updated: Jun 12

Curious about Japanese auctions and how they can benefit your procurement strategy? This article breaks down everything you need to know about this unique bidding format.

You'll discover the defining characteristics of Japanese reverse auctions, understand their process, learn about their key benefits, and get practical steps for implementation. We also cover when to use dedicated Japanese auction software and how Prokuria can support your specific needs.

Table of contents:

What is a Japanese Auction?
Main Characteristics of the Japanese Reverse Auction
The Process of a Japanese Auction
Benefits of Using a Japanese Auction in Procurement
How to Implement a Japanese Auction Solution?
Reasons to use a Japanese Auction Software
How can Prokuria's Software Help with Your Japanese Auction Needs?

Prefer to listen while you work? Our podcast breaks down all the details from the article.

What is a Japanese Auction?

A Japanese Auction, also known as a Japanese Reverse Auction or reverse descending price auction, is a dynamic pricing event where the price starts high and gradually decreases at predetermined intervals.

Unlike traditional reverse auctions where suppliers actively place bids against each other, in a Japanese auction, suppliers must accept each price point or drop out of the bidding process. Once a supplier exits, they cannot rejoin the auction. This creates a transparent competitive environment where suppliers must quickly decide their absolute lowest price point.

Want the simple version? Think of it as musical chairs in reverse, but with prices dropping instead of chairs disappearing. Suppliers in a Japanese reverse e-auction only see the price and a countdown timer. As the price lowers at set intervals, some suppliers will "opt out" when they can't meet the displayed price. The last supplier standing wins the contract.

Main Characteristics of the Japanese Reverse Auction

Japanese Reverse Auctions have several distinct characteristics that set them apart from other auction formats:

Descending Price Model: The auction begins with a high price set by the buyer, which decreases in predetermined increments. For example, a buyer might start an auction for office supplies at $10,000 and decrease by $500 every two minutes.
Binary Decision Making: At each price point, suppliers face a simple decision: accept the current price or exit the auction. This simplifies the decision-making process and creates urgency.
No Bid Visibility: Suppliers can't see how many other participants remain in the auction. This reduces the possibility of collusion and encourages suppliers to focus on their own cost structures rather than competitor behavior.
One-Way Exit: Once a supplier leaves the auction, they cannot return. This characteristic forces suppliers to carefully consider their minimum acceptable price before dropping out.
Timed Intervals: Price decrements occur at fixed time intervals, giving suppliers time to evaluate each new price point against their margins and determine whether they can remain competitive.
Equal Treatment: All suppliers face identical price points and rules, creating a level playing field that fosters fair competition.
Real-Time Feedback: The buyer can observe which suppliers remain at each price point, providing valuable market intelligence about supplier pricing thresholds.

The Process of a Japanese Auction

The Japanese Auction follows a structured process:

Pre-Auction Preparation: The buyer identifies qualified suppliers, determines starting price, decrement amounts, and time intervals between price drops. Clear specifications and terms are communicated to all participants.
Auction Setup: The buyer configures the auction platform with the starting price (typically higher than expected market value), decrement size, and interval duration. In this auction type, the buyer specifies three key values: the starting price, the number of steps by which the price decreases, and the value (amount or percentage) of each price drop.
Supplier Invitation and Training: Qualified suppliers receive invitations with auction rules, timing, and access instructions. Training sessions ensure all participants understand the format. This often involves using questionnaires, focus groups, or supplier conferences to discuss needs and expectations of the process.
Auction Start: The event begins at the predetermined time with the initial high price. All invited suppliers are active participants.
Price Decrements: At fixed intervals, the price automatically decreases by the preset amount. For instance, starting at $100,000 with $5,000 decrements every three minutes. Suppliers must submit bids during the interval between price changes to stay in the competition.
Supplier Decisions: At each new price point, suppliers must decide whether to accept or decline. If they accept, they remain in the auction until the next price drop. If they decline, they exit permanently.
Auction Conclusion: The auction ends when either all suppliers except one have exited (creating a clear winner), all remaining suppliers exit at the same price point (indicating a market floor price), or a predetermined reserve price is reached. Buyers can customize settings to extend auctions even after all suppliers have dropped out.
Award and Contracting: The buyer evaluates the results, considering not just price but other factors like supplier reliability and quality, then proceeds with contract finalization.

Benefits of Using a Japanese Auction in Procurement

Japanese Auctions offer numerous advantages for procurement teams:

Price Discovery: This format efficiently reveals the true market price for goods or services by forcing suppliers to make decisions based on their actual cost structures rather than competitor behavior.
Reduced Bid Collusion: Since suppliers can't see who remains in the auction, the risk of collusion is minimized. In a recent industrial equipment procurement event, this benefit helped a manufacturing company achieve 12% greater savings compared to their previous negotiation approach.
Simplified Supplier Decision Making: The binary "stay in or drop out" choice reduces complexity for suppliers compared to calculating optimal bid amounts in traditional auctions.
Faster Completion Times: Japanese auctions typically conclude more quickly than other auction formats because suppliers make rapid decisions at each price point rather than strategizing multiple bid submissions. This speeds up the time to market, as the supplier selection process is streamlined and several phases of bid solicitation and negotiation can be automated.
Lower Transaction Costs: The streamlined process requires fewer resources from both buyers and suppliers, reducing the overall cost of conducting procurement events.
Better Supplier Preparation: Knowing they must make quick decisions about minimum acceptable prices encourages suppliers to thoroughly analyze their cost structures before the event.
Transparent and Fair Process: All suppliers face identical prices and rules, creating a level playing field that builds trust in the procurement process. This transparency extends throughout the entire supply chain, giving companies access to detailed information about what each supplier offers.
Competitive Rate Increase: The format helps buyers receive more competitive prices by lowering barriers to entry for businesses in terms of price, features, and other aspects. This is particularly effective for goods with significant supplier differentiation.
Improved Supplier Relationships: The process gives both sides a clear idea of what they're looking for ahead of time, providing transparency throughout the procurement cycle from sales through contract and payment to delivery deadline.
Better Rate Negotiation: Businesses can establish a maximum price they're willing to pay before beginning contract talks, giving them more leverage during negotiations.

How to Implement a Japanese Auction Solution?

Implementing a Japanese Auction solution requires careful planning and execution:

Define Clear Objectives: Establish specific goals for the auction, such as achieving target savings, increasing supplier competition, or establishing market prices for new categories. Analyze your current situation to accurately determine where you stand, how your supplier base is performing, and what steps are needed to improve efficiency and streamline processes.
Select Appropriate Categories: Identify procurement categories well-suited for Japanese auctions, typically those with multiple qualified suppliers and standardized specifications. For example, indirect categories like office supplies, IT hardware, or standard services work well. Also consider scenarios where there's little supplier differentiation and products are easily understood, or when building a quick shortlist of interested suppliers.
Prepare Detailed Specifications: Develop comprehensive, unambiguous requirements that allow suppliers to accurately evaluate their costs. For instance, when sourcing transportation services, specify exact routes, volumes, frequency, and service levels.
Qualify and Educate Suppliers: Screen potential participants based on quality, capacity, and reliability. Then thoroughly train them on the Japanese auction format, emphasizing the irreversible nature of declining a price point. Identify your target supplier list through a screening process using questionnaires, focus groups, or conferences.
Determine Optimal Auction Parameters: Set appropriate starting prices (typically 15-20% above expected market price), decrement sizes (usually 1-5% of starting price), and time intervals (commonly 2-5 minutes) based on category complexity and market conditions.
Conduct a Test Run: Before the live event, run a simulation with internal stakeholders or selected suppliers to identify potential issues and ensure smooth execution. Consider starting with a pilot project that satisfies the goals established in your initial analysis.
Execute the Auction: Manage the live event, providing real-time support to suppliers and monitoring progress against objectives.
Analyze Results and Award Business: Evaluate outcomes against objectives, considering price and non-price factors, then finalize contracts with winning suppliers.
Review and Refine Process: Gather feedback from stakeholders and suppliers to identify improvements for future events.

Reasons to use a Japanese Auction Software

There are several compelling reasons to leverage specialized Japanese Auction software:

Complex Event Management: Japanese auctions require precise timing of price decrements and supplier decisions that are difficult to manage manually. Software automates these critical functions.
Enhanced Data Security: Purpose-built platforms provide secure environments for sharing sensitive pricing information and protecting confidential supplier decisions.
Real-Time Analytics: Advanced auction platforms offer instant visibility into supplier behavior, allowing buyers to track which suppliers remain at each price point and identify market price thresholds.
Multiple Event Formats: Organizations often benefit from using various auction types for different categories. Good procurement platforms support Japanese auctions alongside other formats like English reverse auctions and sealed bids.
Integration with Existing Systems: Leading auction software integrates with ERP and other procurement systems, streamlining data flow and reducing manual effort.
Supplier Management: When sourcing complex categories with large supplier pools, auction software simplifies communication, training, and participation tracking. For example, a global retailer used auction software to manage a packaging event with 27 suppliers across multiple regions.
Audit Trails and Compliance: Software platforms maintain detailed records of all auction activities, supporting compliance requirements and enabling post-event analysis.
Flexibility in Setup and Customization: Good software provides options for setting up and customizing your own reverse auctions to match specific procurement needs.
Remote Participation: Hosting live online auctions eliminates the need for sellers and bidders to meet face-to-face, expanding the pool of potential suppliers.
Data-Driven Decision Making: The availability of data analytics helps you make better business decisions by understanding bidding patterns and supplier behaviors.
Real-Time Monitoring: The ability to monitor all bids in real-time makes it easy to manage numerous reverse auctions simultaneously.

Japanese Auctions are particularly useful when:

You're looking for a single quote supplier for a specialized product
You need to quickly build a shortlist of interested suppliers
You're facing a difficult competitive market with several similar suppliers
You want favorable prices across various products
You have a potential bias toward a particular vendor and want to ensure fair consideration
Your procurement journey is complex due to varying demands
The services or products offered by vendors can't be easily compared

How can Prokuria's Software Help with Your Japanese Auction Needs?

Prokuria offers a comprehensive solution for organizations looking to implement Japanese auctions. Our platform features intuitive auction setup, real-time event monitoring, and detailed analytics that help you maximize savings and efficiency. Prokuria's Japanese auction module includes customizable decrement settings, flexible timing options, and supplier management tools designed specifically for procurement professionals.

With Prokuria, you can set different levels of competition exposure when starting a Japanese Reverse e-auction. For example, you might choose to reveal to potential suppliers that there are other offers at the same price, without stating how many. This creates higher psychological pressure on suppliers. Alternatively, you can state that there are X additional offers at the same price, giving suppliers room for varied bidding strategies.

Prokuria's Japanese Reverse auction feature also provides:

Multi-Factor Auction (MFA) capabilities
Supplier Engagement Monitor to track engagements and reply status in real-time
Comprehensive Audit Logs that capture all background changes
A private and secure supplier webpage where suppliers can respond quickly without setting up their own account

With Prokuria, you gain access to expert support throughout the auction lifecycle, from initial strategy development through supplier onboarding and post-event analysis. Our solution integrates seamlessly with your existing procurement systems, creating a unified approach to strategic sourcing.

Contact us today to learn how our Japanese auction capabilities can transform your procurement outcomes and deliver measurable value to your organization. Explore our demo account to see how easy it is to get started with Prokuria's Japanese Reverse auction, no credit card required.