Variables in the Adoption of Auctions in Procurement by Kelly Barner & Alun Rafique

Posted on February 24, 2014


Editor’s Note: When Kelly Barner and Alun Rafique submitted this post on the variables in the adoption of auctions, they hit close to home in terms of an area of procurement about which I have a great deal of experience and expertise.

For several years my research into the utilization of advanced algorithms within the framework of an agent-based model was funded by the government’s Scientific Research and Experimental Development program.

From the early development phase through to the eventual introduction of a production system in the Department of National Defence, the model progressively demonstrated tangible savings while maintaining a high degree of supplier participation.  The key to success was not only in the flexible bid parameters that leveraged complex algorithms to assign the weighted values that resulted in the optimum supplier being picked 98 percent of the time, but was also achieved through an understanding of the market.  More specifically, the identification of commodity characteristics about which you can read in my May 2007 (reposted 2011) article Dangerous Supply Chain Myths Revisited (Part 7): Enabling Technology – The Emergence of the Metaprise.

Within this context, I found the Barner – Rafique post to be very interesting as I am certain that you will as well.  As always, your comments are welcome.

Utilizing advanced algorithms within the framework of an agent-based model key to properly setting bid parameters.

Utilizing advanced algorithms within the framework of an agent-based model key to properly setting bid parameters.

Late last year, the Market Dojo team and I started a dialogue about different perspectives on procurement by country, industry, and company.

In this post we will take one specific procurement tactic – auctions – and look for differences and commonalities in their adoption. There will always be companies that are leaders or laggards with regard to the use of procurement technology. And yet the opportunity still exists to look for centralized strengths in the application of auctions from which other companies and sectors can learn.

Market Dojo made their entry into the eProcurement solution landscape by specializing in auctions, and I spent time at Emptoris (which was acquired by IBM in December of 2011) where I made frequent use of auctions on behalf of clients who were sometimes enthusiastic, sometimes skeptical, sometimes a little bit of both. As a result of this shared background, we are probably more accepting of the value of auctions than most of our colleagues. In fact, many procurement organizations still regard auctions with an air of distrust, and not a small dose of misunderstanding.

First, a few basics to consider:

       Negotiating through auctions does not require that an award decision will be made on price alone. It is possible to incorporate qualitative factors and advantages or disadvantages such as switching costs through weighting and bid transformation. It also does not mean that the lowest bidder will walk away with the prize. The rules will be determined in each case by the buying organization and communicated to participants in advance.

       Auctions do not have to be short, fast paced, high pressure events where bidders are pushed into entering rates they can not sustain because they are swept up in a frenzy. The events themselves can be open for minutes, hours, days, or longer. The real benefit is using the auction to capture successive bids in response to direct feedback from buyers or exposure to the other bidders.

       Depending on the auction solution in place, there are a number of settings and options available to buyers to change the bidding environment. What suppliers see (including the number of bidders and their rates), the minimum decrement (or the amount by which a supplier must reduce their bid), as well as what will add time to the clock near the end of an event (any new bid, a new leading bid) should be customized to meet the specific needs and competition level of the category.

Now that we’ve level-set, let’s look more closely at usage and demand. The best way to track adoption is through the requests for new functionality from auction users. In 2010, Market Dojo launched their auction solution with just ranked and open auctions. Since then they have responded to requests to include more features and auction types, some of which reflect the needs of an industry, some the objectives of the auctioneer, and others the maturity of the buying organization.

Industry Driven Functionality: Retail

The retail sector pressed for Japanese auctions in response to low liquidity as a result of small margins. Japanese auctions gradually lower prices that bidders must accept or be eliminated from competition. Retail industry adoption of auctions in general is high, and buyers are far more aggressive, opting to give suppliers less feedback rather than more. Although this may reflect the relative power position of a buyer over suppliers, sacrificing higher interaction rates in response to feedback may cost retail organizations precious pennies in the end.

Flexibility Driven Functionality: Consultants

When consultants are using their own auction solution to run events on behalf of their clients, they are looking to optimize results as well as value. Consultants are far more likely to adjust parameters during an auction. Some of the resulting functionality requests are generally applicable, like the ability to pause an event, while others are more specific, such as the desire to reveal multiple bids to all participants. While each functionality request must be evaluated with an open mind, it is important not to make broad changes that will only be applicable in rare or very specific instances.

Maturity Driven Functionality: Variability

Companies that have a history of working with eProcurement solution providers have the highest and most varied functionality expectations. In general, providers based in Europe offer a greater variety of auction types such as ranked, open, Japanese, Vickrey, and Dutch. This variety of event types allows more kinds of transactions to be conducted through auctions, but it also presents the opportunity to keep suppliers from getting too comfortable with one format when the use of auctions is high.

A businesses’ need to create and defend a competitive advantage is the single greatest factor influencing if and how they will use auctions. Retail companies have to protect their margins in order to survive, and learned long ago to do whatever needed to be done. Consultants want to be (or at least look) more strategic than their clients could be on their own. High adoption companies, regardless of size or industry, tend to see the broad applicability of auctions and see more as more when it comes to auction functionality.

Does your company leverage reverse auctions in the strategic sourcing process? Do you feel that your usage, whether high, low, or non-existent, is tied to your industry, maturity or something else entirely? Share your thoughts by commenting below or by engaging with us directly on Twitter: @BuyersMeetPoint and @MarketDojo.