E-Sourcing Forum » Two stage reverse auctions

Two stage reverse auctions

January 29th, 2007 at 06:14am David Bush - Iasta

Sometimes, I like to troll websites from respected educational institutions so I can feel like an “Ivy Leaguer”, instead of my rightful position, with the unwashed masses and a public degree. Doing this, I ran into research written by Tunay Tunca, a professor at the Stanford Graduate School of Business.

To summarize, he suggests that value can be driven further in complex sourcing projects by implementing a two-stage process of reverse auction. This means to execute an eRFx, short list the top bidders, add more specifications, and reverse auction. I also interpreted his explanation another way: run an auction first on simple specs, then discuss more issues in person or in an eRFx while going deeper on the contract negotiation.

Differentiating between simple lot/price driven projects and multi-stage events, they describe:

“..when things are a little more uncertain and complicated—when there are few suppliers, when those suppliers can easily fill the orders without any extra investments, and when buyers are not so sure of what suppliers’ actual costs are—then a simple reverse auction makes the purchaser more vulnerable to losing out on pricing. In this case, says Tunca, buyers are better off instituting a two-stage process, in which they hold an initial auction to identify the lowest bidders, but then add an additional contracting stage to negotiate further with those bidders.”

At Iasta, we do see this and some times will recommend or encourage these tactics, but only under the proper, tightly controlled conditions:

Communicate what is happening with the suppliers! Do not surprise them with an alert that “oh by the way, we are doing this again”.
Focus the specifications clearly at the appropriate stage but do not hold back important information for the second stage. You never want to introduce unwanted surprises in the process.
Know yourself. Does your company have the ability to throw weight around and make more work for the suppliers? This process will work better for larger companies and large spends than for mid-market companies trying to over-complicate a $500,000 bid.
Have plenty of time reserved. This process will extend the normal sourcing lifecycle and will increase the amount of work. This is normally fine when dealing with strategic and complicated sourcing events, but be aware upfront.
Incorporate e-RFx technology at each stage to have all the information tied into the same project system. This helps capture all the needed information in a single location and make adjustments on the fly if suppliers respond with interesting alternatives.

There are many ways to approach auctions to get the best results and I am always interested to hear opinions from other users. This article does not go into enough detail to really dissect the procedures that are being recommended and it would be nice to see the mathematical models that the Stanford team developed for evaluation.

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Entry Filed under: Analysts/Research, General, Reverse Auctions, Supply Management Best Practices

5 Comments Add your own

1. Eric Strovink | January 29th, 2007 at 9:40 am

The two-stage approach to auctions is very old news, of course, but it is nice to see academics finally catching on. And, I wouldn’t be so disparaging about public degrees. The best programmer I ever hired was from SIU/Carbondale, and tied for worst were an MIT and a Carnegie Mellon grad.

I like your caveats; important for businesses that can’t throw their weight around like the F500.
2. David Bush - Iasta | January 29th, 2007 at 10:49 am

Thanks Eric, of course my comment is VERY strongly tongue in cheek. I went to public school my whole life and the software industry is littered with the wreckage of people who think they are smarter than everyone and fail miserably. I guess you have to give credit that most of the time they play with other people’s checkbook, which is pretty clever when you cannot execute.
3. Michael Lamoureux | January 29th, 2007 at 4:34 pm

This is going to sound like an arrogant PhD venting, and it probably is, but if it were only that simple. Litter can simply be picked up and discarded by anyone with the patience and willpower to do so.

And it’s not just the ego-inflated ivy leaguers you refer to that cause all the problems … it’s also the academics who don’t leave their ivory towers long enough to understand what the problems truly are, who nonetheless attempt to lead the way with their advice based on their perception of the problem, which is not necessarily the right advice to be doling out.
4. reverse auctions | March 3rd, 2007 at 10:28 pm

Suppliers that want open relationship and that are fair in their pricing will never get upset if you invite them for a reverse auction. If they do, that means that they thought they have the frozen market share just for themselves and that is not good.
5. reverse auctions | October 14th, 2007 at 9:28 pm

I cannot understand the frozen market ideal. It is not fair to offer someone an opportunity to list items to the benefit the buyer? I think it is about time.

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