Running an eAuction allows the buyer to negotiate with multiple suppliers simultaneously in order to achieve the most competitive pricing. In addition to helping generate greater savings, online auctions allow buyers to manage their procurement in a fair and transparent way. Sourcing decisions can be made almost solely on auction results, or bids can be considered as part of a wider tender process.
Market Dojo provides its users with the opportunity to run three types of auction, all of which operate slightly differently and should be considered under different circumstances.
This is our most popular auction type. Ranked auctions, as the name suggests, assign each supplier a rank based on where their bid compares to other live bids. For example the lowest bid in a reverse auction would rank as number 1. This ranking system can encourage competitive bidding between suppliers as only the supplier with the leading bid is aware of what the current best price is.
Ranked auctions are often used where the host expects a number of suppliers to bid around the same price point and it can be a very effective way to identify each participant's best price. This auction type will generally result in many of the participants' bids moving closer together than they started. It is therefore a useful tool in situations where the business will be awarded based on more than just price, as where pricing is more similar, the other factors can be given more consideration.
Pros: It promotes a very close auction with a number of participants on a similar price level; it gives clear feedback to the participants; only the leading participant knows what the final price is.
Cons: A participant in second or third position, for example, may be content with their rank and may cease to compete for the lead unless you have sent a clear message beforehand that the top ranked participant shall have first refusal.
Open
In this auction-type, each supplier is able to see the leading competitor’s bid. A bid can only be submitted if it betters the current best price.
An open auction allows all suppliers to see where they stand and creates an open playing field. This is a good option when decisions are purely based on price as participants can clearly see the price they need to beat. However, this auction type will not encourage participation for those who cannot better the winning bid, so may not be the most appropriate where there are other important factors to consider.
Pros: It can quickly settle the negotiation, as participants can only bid for the lead; it is very effective if you do not mind who wins the Event.
Cons: There can be large price gaps between each participant, leaving you with less choice than a Ranked Auction. A participant may have been able to offer a slightly more improved bid, but couldn't as they could only bid against the leading bid. This particularly comes into play if there are multiple Lots and you wish to make the award decision after the Auction based on grouping the Lots together, as you may find your choice is constrained.
Japanese
The Japanese Auction allows you to create an atmosphere of competition, even when there are only one or two suppliers participating. In a Japanese Auction, bids are driven by the host who releases an ever-decreasing sum that needs to be matched by suppliers to remain in the process. The auction begins with the host providing an opening price to suppliers, who can then decide to agree to the price and remain in the running, or to leave the auction. The auction will continue in the same format with the host sending through updated prices for suppliers to match until all bidders have left the process.
Most auctions rely on competition between suppliers and require a minimum number of participants in order to be successful. In a Japanese auction however, as the supplier receives no information about other participants, their experience will be identical, whether there is 1 participant or 100. This approach can therefore be used as a negotiation technique in situations where you do not have sufficient competition for the more well-known auction types.
Pros: You can run this auction type with a minimum of one participant, since participants have no idea who they are competing against. It is also effective when you think the leading participant still has margin to play with yet is unlikely to be challenged in a conventional auction.
Cons: Is it least popular with participants as they receive very little market feedback, as in essence they could be competing against themselves.
Choosing your Auction Type
When choosing your auction type, you should consider:
How many suppliers you expect to participate in the event
How close together your participants are likely to be in pricing
Whether your decision is based purely on price or on other factors
Generally, if you expect there to be a good level of competition (3 or more suppliers bidding per item), with bids being made in a similar price range, we would recommend either a Ranked or Open auction.
In most cases, our recommendation here is Ranked, as this method is the most likely to identify the best price for all suppliers involved, hence giving you more options, and gain you the greatest savings.
As a general rule, we only recommend Open Auctions in scenarios where all participants are of the same standard in all other areas and the decision will be made purely on price, or where there is a specific need for a very high level of transparency.
Where there are only one or two suppliers involved, or your suppliers are all expected to quote at very different levels, we recommend considering running either one Japanese Auction (where there are one or two suppliers involved) or multiple Japanese Auctions (where the suppliers involved are likely to have drastically different final prices). This should allow you to identify the best price for each supplier, without requiring the level of competition that is necessary for Ranked or Open auctions.
Weighted Auctions
In many cases, price is not the only factor that needs to be considered as part of a tender. Where the level of importance that price holds in relation to other factors is clearly defined, it is possible to run a weighted auction. With this option you can choose the percentage of the final score that is related to each supplier’s price, and the percentage related to their score in a chosen questionnaire.