Some people use Excel spreadsheets as databases. When they discover their data is flawed, redundant or inconsistent, they balk. While Excel can perform many database functions, it lacks the efficiency and power a true database can provide. So what does this have to do with strategic sourcing tools? Like some folks do with Excel, some buyers misuse sourcing tools while contractors misunderstand them. Whether you are a buyer procuring national janitorial services or supplier providing handyman services, you need to know the tools that will affect your cost and revenues.
A greater understanding of the tools will help buyers use them appropriately so they don’t experience negative, unintended results. This post will explore the basic definitions and goals of the Reverse, Dutch and Japanese Auctions.
Let’s start with the Reverse Auction. This is one of the most common tools we encounter in our janitorial services. Reverse Auctions do as the name suggests—reversing the roles of the buyer and supplier. Instead of sellers auctioning a product or service amongst competing buyers and driving the price up, buyers auction a needed product or service amongst sellers driving the price down.
The objectives of the reverse auction are to expose the lowest market price point for a new category (service or product) and to quickly conclude the price discussion.
Strategic sourcing professionals will use this auction as one of many sourcing tools supported by a strong initial vetting process along with clear expectations and specifications. They will then use the tool as a guide. When a low point is reached, they will engage the contractor for specifics on how they will meet the expectations and specifications at the reached price. Reverse auctions are best for simple commodities with clearly defined specifications.
Reverse auctions are misused when the auction is used as a “blunt knife” to cut prices. Absence of proper vetting and clear specifications cause problems because the buyer has no idea what their getting for the price and suppliers will be all over the board with their base pricing. In addition, misuse occurs when, after the auction, buyers fail to validate whether the auctioned price has excluded value that was originally included in the base price. Assuming your supplier will fulfill what was bid at the base, once under contractual agreement, is a bad assumption.
I personally dislike reverse auctions as we cannot logically derive the final price point, and the low point tends to exclude all value-added intricacies of service such as dependability, responsiveness, etc. Based on LinkedIn conversations I’ve had recently with sourcing professionals, my understanding is that many sourcing managers and procurement people dislike them too, but they do see reverse auctions having a place in the procurement process, if used appropriately and effectively.
A Dutch auction starts with a high asking price, and is dropped by the auctioneer until the buyer reaches the low point. No actual bidding is involved. In procuring services, the Dutch auction starts with lowest price and then moves up until the first supplier says, “I want it”. The business is awarded to the first supplier. There are no counters to the offer. That’s what makes the auction effective because suppliers will reveal their “true” price point where in a reverse auction they will hold back if the competition is not dropping in price.
Dutch auctions are a good fit for commodities that need to move quickly. They work because the competition is at risk of a competitor accepting the bid at the lowest price.
I was not familiar with the Japanese auction but it got mentioned in a LinkedIn discussion so I researched it. I thought Wikipedia’s explanation was consistent with the other sources I found. Wikipedia explains a Japanese Auction as follows: “All bidders are considered in the auction with a continuously rising price. The only action that a bidder may take is to drop out of the auction. Once the bidder drops out of the auction, he or she may not re-enter the auction. The instant in which the second-to-last bidder drops out of the auction, the auction stops immediately, and the last bidder to remain gets the object at that price.”
From my experience, strategic sourcing folks will roll up these auctions into a common name such as: procurement auction, e-auction, strategic sourcing event, e-sourcing, eRA, eRFP, e-RFO, e-procurement or B2B Auction.
Regardless of what auction tool you use, or what you call it, make sure the auction hasn’t accidently reduced the value along with the price. Doing so will ensure the end users of your purchase reap the value of the product or service instead of headaches and frustration.
In 2011, Marc's team won the large company category, "Best in the Industry" marketing materials from the Building Service Contractor Association International (BSCAI). Marc also directs Varsity's proposal writing, sales process and tools development, marketing campaigns, corporate website SEO performance and customer support center.
Marc has spent his career developing strategic capabilities that enhance value to customers and the company. A Lean Sigma Green belt himself, he developed the company's Lean Sigma offering, providing an innovative solution to customers' need to lower cost while raising quality. He led the development of JanOPS, an industry-leading janitorial operating system, which brings standardization and service consistency to large campus and geographically disperse national accounts.
Prior to this position, Marc was responsible for strategic management at Varsity. He has initiated or directed multiple strategic technology initiatives, ranging from a corporate website, a corporate intranet, a web/smartphone based quality control system, a learning management system, a corporate content manager and knowledge wiki, salesforce.com deployment and customization, and an Android app which facilitates the GROW sales process he has developed.
Marc is the author of several leadership and management training manuals, field guides, marketing collateral and case studies. He speaks Portuguese and Spanish and holds a bachelor degree in English/Technical Writing and a Masters of Business Administration in Finance from Idaho State University. Marc enjoys mountain biking, skiing, fishing and golf. He is happily married, and he and his wife Victoria enjoy raising and spending time with their four children.
Latest posts by Marc Collings (see all)
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