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Using Reverse Auctions for Energy Procurement

Reverse auctions are seen as providing a new tool for companies that helps them shave expenses and better document their procurement transactions.

Reverse auctions are becoming very popular because they are seen as being fair to all bidders and eliminating bias, thereby creating a more competitive arena. Competition between bidders drives the pricing down and buyers see this as extremely beneficial. The federal government is leading the way on reverse auction procurement and its use is growing rapidly.

Basics of a reverse auction:

  • Usually hosted by an “e-commerce” third party that hosts the software (Full service, Self-service or Hybrid format refer to the level of administration and technical support provided by the host)

  • Invitations to bid are sent in advance to potential bidders; bidders are often pre-qualified

  • Take place online over a prescribed period; length of time varies from an entire day to 15 minutes

  • Bidding process is dynamic; bidders can view and respond to other competing bids; buyer can communicate with individual bidders while bidding is underway

  • Price is usually not the only factor in bid selection

 

The process usually begins with the buyer creating a project description and posting it online. Invitations to bid are then sent out to potential bidders, and they are notified of the scheduled future date for the auction. The auction usually takes place over a 15-30 minute time period, and the buyer then reviews the bids and selects the lowest bid that meets their needs. Both the buyer and bidder will have decided their own price limits before the auction.

 

Reverse auctions work best when:

  • Specifications and quality standards are clear and quantifiable; works well with commodities and generic goods

  • Suppliers have well established reputations for their reliability and product

  • There are minimal contingencies and/or layers of complex requirements involved in the product or service being purchased

  • There is a high level of rivalry among suppliers

  • Product shortages are rare

  • It is unlike that additional services will be required after purchase

  • Distance/delivery is not a problem

  • The product is not readily available by other means

  • The product is of high value and minimum risk

 

The downside of reverse auctions:

  • An established relationship between the buyer and seller is diminished; the bidder is often not identified during bidding

  • There is little communication between buyer and sellers about buyer needs Bidding process is compressed into a defined time frame

  • Large established suppliers may choose not to participate; won’t help to build a means of driving their price down

  • Suppliers find the “price transparency” unacceptable

  • Changing suppliers frequently adds cost and time; suppliers are less likely to add value to their products

  • Resistance to change (by both buyers and sellers) can be difficult to overcome

  • Failure to award to the lowest bidder impugns the credibility of the buyer; buyers may use reverse auctions as a means to gain leverage over an incumbent vendor with no intention of switching vendors

 

Benefits to buyers:

  • Cuts time and costs of both the product and the process (savings 5 to 15%)

  • Companies focus on lowest cost and best value supply relationships; eliminates bias and opens bidding to new suppliers

  • Transaction information is standardized, organized, time-stamped and trackable; provides an ability to confirm pricing and leverage previous agreements

  • Data bases, queries and reports are flexible; they can be organized by supplier, pricing, product, time, etc…

  • Process provides documentation for accounting and legal requirements; provides a paper trail for meeting Sarbanes-Oxley

  • Buyer maintains security over product and process information and lessens both internal and external fraud and theft

  • Allows for tighter, faster scheduling and reduction of inventory levels and loss

  • Low level of expertise needed to implement; increases sourcing skills and knowledge across the organization

  • Vendors may add value to their bid by including other services

 

Benefits to sellers (bidders):

  • All bidders have a fair and equal opportunity to bid; eliminates bias

  • Sellers have easy access to all the information necessary for them to bid

  • Technology opens the bidding to a greater number of vendors, but this makes it more important that vendors are truly qualified to meet the specifications

  • Bidding process is quick and easy; bids are standardized and anonymous Notification of winning bid and purchase take place soon after bid

  • There is no cost to bidders; fees, postage, printing, etc…

  • Information included with the bid is confidential and secure

 

Reverse auctions require the buyer to clearly establish the balance and priority between price and other factors in the bidding process. The primary benefit of reverse auction is boiling bids down to a limited number of easily comparable selection criteria such as price and scheduling. Oversimplifying the specifications can result in a low price but unsatisfactory bid selection.

It is extremely important that buyers evaluate up front whether or not a reverse auction will work for the product or service to be purchased. Generally, the more suppliers participating in a reverse auction, the better it works.

 

As with the traditional RFP process, planning for a reverse auction should include careful planning and consideration of the following:

  • The project or product description should be quantitative, detailed and specific Invitations to bid should go to as many potential suppliers as possible, but suppliers should be pre-qualified as reliable and able to provide the product or service

  • The event should be structured (sealed bid, percent over cost, etc…) appropriately for the industry and type of product

 

Goods and services that require a complex set of contingencies, or that have many subjective or qualitative specifications can be much more difficult to evaluate in a reverse auction. Goods and services with a limited number of suppliers are problematic with reverse auctions because vendors have the leverage to actually drive the price up instead of down. Buyers can also find costs pushed up if a vendor, in order to win the bid, cuts corners on services and materials, or can’t actually meet a deadline.

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