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Consider Auctions

During the Develop Sourcing Strategy task of Process Step 2: Evaluate Sources, there is an opportunity for the Postal Service to examine whether an auction would be an appropriate method for purchasing a good or service. Auctions are not stand-alone events; they are an integral part of the overall purchasing process, so it is critical that any electronic auction process fit within an overall purchasing strategy. Successful auctions require careful planning. The Postal Service must ensure that spend, market, and business analyses have been completed to have a successful auction experience.

Forward Auction

The most traditional auction to consider is the forward auction. A forward auction is usually referred to simply as an "auction." During a forward auction, the supplier (auctioneer) is the host in the transactions, and buyers (bidders) are invited to bid for the purchase of a product or products from the seller. The auction usually starts with a low price that the buyers will bid up until a set time has expired or no other buyer wishes to place a higher bid. Forward auctions are most typically used when organizations would like to sell off excess inventory, machinery, or equipment that is no longer in use to maximize revenue.

Reverse Auctions

From a purchasing perspective, the most common type of auction is the reverse auction. In a reverse auction, the buyer (auctioneer) is the host of the auction and is the party soliciting bids for goods or services that it wishes to purchase from a supplier (bidder). The auction process is an important factor in the determination of best value. Some auctions, such as those hosted by reverse auction service providers, can support very complex auctions that enable businesses to better align auctions with their business practices.

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Postal Service Benefits

Reverse auctions benefit the Postal Service in three ways:

Price benefits

Process benefits

Precision benefits

The most obvious benefit is the price savings that can be achieved by using the online reverse auction process. This ensures that the price paid is the best available in the market and that there are savings in comparison with current contracts. Price savings achieved through reverse auctions often exceed the estimated savings predicted before the commencement of the reverse auction.

Process savings come by way of the streamlined purchase process employed during the auction process. By reducing the cycle time and effort involved, the time-efficiency savings alone can be dramatic. The Postal Service has been using reverse auctions for several years and turns to it as a dynamic means of receiving prices for performing best value purchases.

Precision benefits involve the capabilities to electronically track information involved with the purchasing cycle. By having the electronic record of who bid, what the bid was, when the bid was placed, and where the bid was placed from, the Postal Service has a greater assurance of consistency and validity of the process. In addition, the auction framework provides an assurance that the playing field is level and that everyone has the same access to the same information throughout the process, which reduces the potential for challenges of the award.

State of the Marketplace

An examination of the marketplace should be conducted, which will determine whether conditions favor the use of a reverse auction. Factors for consideration include:

Number of qualified suppliers

Commodity vs. specialized product

Buyer's importance to suppliers

Excess capacity in industry




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Number of Qualified Suppliers

Reverse auctions identify materials, equipment, or services required and request carefully prequalified suppliers to submit bids. More qualified suppliers participating are better than fewer, but, the fewer the number of qualified suppliers the less chance the Postal Service has of selecting the best supplier. However, the total number of suppliers should be manageable.

Commodity Product

These are purchases of commercial commodities that have well-defined specifications and universally accepted standards. For example, a specialty chemical company used an electronic reverse auction to buy packaging material. The product was considered a commodity, and the need was not urgent. The supply base included many suppliers; some were prequalified and some were not. Two suppliers won the reverse auction, one of which was prequalified and the other was not. The prequalified supplier was awarded 100 percent of the business, while the other was offered the opportunity to become qualified. A purchase price decrease of 20 percent was achieved, plus one new supplier was later qualified.

Specialized products have requirements that may not be accurately specified and do not have universally accepted standards. A reverse auction would not be the best sourcing strategy for the purchase of a specialized good because the market is not competitive. A proprietary good or service would not be appropriate for reverse auction, because there may be only one potential supplier that holds a trademark/copyright/patent.

Buyer's Important to Potential Suppliers

A buyer being important to the supplier implies that the potential supplier values the relationship with the buyer and thus will participate in reverse auctions. The Center for Advanced Purchasing Studies research has shown that there is a 2 to 1 ratio of buyers who feel that reverse auctions have improved their supplier relationships. Relationships have improved based on an increase in trust, greater access to supplier data, and greater amount of business for suppliers.

Suppliers generally prefer to maintain a close relationship with large companies well known in the market, rather than with smaller companies. As a result, suppliers tend to value the relationship with a smaller company less and may not participate in reverse auctions hosted by smaller companies.

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Excess Capacity in Industry

Excess capacity in industry implies that there is a large supply, which is inverse to demand, and will result in potentially lower price options.


If price is the key selection criteria for the buyer, then conducting a reverse auction may be the right strategy to implement. In a reverse auction, multiple sellers of products or services are competing for the business of a single buyer, driving the price down. The supplier with the lowest bid in a reverse auction typically wins the auction.

Conversely, if the buyer is focused on the total life cycle cost and not just on the cost of a particular good or service itself, a reverse auction would not be the appropriate sourcing method, because price is not the driving factor.


In a flexible environment, innovation is preferred over the predetermined or standardized product/service. Therefore, a reverse auction would not be a good fit for this situation because a reverse auction caters to predetermined products/services.


Additional information on conducting reverse auctions can be found in the Conduct Reverse Auctions Where Appropriate topic of the Perform Solicitation-Related Activities task of Process Step 2: Evaluate Sources. Additional information on awarding contracts can be found in the Produce Contract Award Recommendation topic of the Perform Preaward Activities task of Process Step 2: Evaluate Sources and the Award Contract and Notify Suppliers topic of the Make Final Decisions task of Process Step 3: Select Suppliers.

Supplier Perspective

One of the strongest ways to obtain supplier support of the process is to ensure that price is not the only driver for the contract award. Because the model is built upon competition, a lack thereof could lead to even higher prices or to alienating or harming relationships with current suppliers. It is important to remember that for a new process or technology to be successful, all parties must benefit from their participation.

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Auction Services and Technology

Commercial off-the-shelf (COTS) auction software packages are readily available for purchase. There are three levels of auction technology available, and the level of investment is up to the Postal Service:

Full-Service - a full-service provider hosts the auction process from start to finish

Hosted - the technology is hosted by a third party, but the auction is organized and run internally by the user

Self-Service - the user oversees all aspects of the auction, including implementing the auction technology internally

Figure 2.8

Auction Technology

image of figure 2.8 auction technology

As Figure 2.8 illustrates, the level of investment and value obtained from an auction solution is generally related to the amount of purchasing forecast through the reverse auction process over time. The following analogies illustrate the differences between the three models:

Full-Service model - when a person needs to drive infrequently or is unsure of how to get to a certain location, he or she can hire a taxicab. The customer needs to know only the origin and destination. The taxi company provides the driver, the car, and even the directions on how to get from the origin to the destination. The customer needs only to make the initial phone call. This works well for infrequent purchases, or while a person is learning his or her way around town.

Hosted model - although less costly early on, the more the customer relies on the taxi, the more that the customer realizes that he or she knows his or her way around town and that it is cost-prohibitive to continue traveling by taxi. The person realizes that he or she can drive himself or herself to work, the grocery store, etc. However, the person is not prepared to purchase a car, because the total cost includes having to pay full insurance premiums, car payments, maintenance, and generally ensuring that the car is in working order. Because the person really needs the car only on weekends, it makes better sense to rent the car; now the person is paying only to use the service and can drive the car where and when he or she wants.

Self-Service model - once the person realizes that he or she is driving the car every day and that it is becoming expensive to consistently rent a car to drive around town (yet less expensive and with more control than using a taxicab service), the person decides to purchase the car. This involves a larger initial outlay of cash to pay for the car and its maintenance, but because the person now owns the car, he or she has the ability to drive it when and where he or she wants and no longer has to pay for added services and overhead for others to take care of the car for him or her. Because the person is using the car frequently and driving many miles, over the long term, the costs of ownership are much lower than the alternatives.

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Key Considerations


This model provides a low cost in the short run.

There are few barriers to entry because the technology is hosted off-site and the service provider assists with all aspects of running the actual auction - from setting up the auction rules and timeline, training bidders (suppliers), monitoring the event, etc.

With more time on hand, the Postal Service is able to focus its attention on other aspects of the SCM process and award the contract.

Hosted Service:

Auction logistics are left to the third party.

The model works for those looking to handle additional logistics, but not wanting the technology within their environment.


This model works best if the Postal Service purchases frequently and has the information technology (IT) infrastructure available to implement and support the application.

The model provides the lowest total cost of ownership (TCO) over the long term, although the initial investment is much higher than that of the other options.

Quadrant Approach

A quadrant approach classifies all Postal Service purchases into four categories, depending on their impact on Postal Service core competencies (noncore versus core) and complexities (standard versus custom). Reverse auctions rely on competition driving prices down, so the less complex or specialized the good or service to be purchased, the greater the chance for a successful auction. Simple commodity items or services that can be clearly defined and have a wide range of potential suppliers will be best suited to the auction process. Reverse auction suitability may be dependent on the quadrant the need falls into, illustrated in Figure 2.9.

Figure 2.9

Quadrant Approach

drawing showing four quadrants for figure 2.9

Quadrant I: Custom/Noncore Purchase

Reverse auctions would be less suitable for these purchases because the supply market is very restricted. To have an effective reverse auction, a large supplier base is preferred.

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Quadrant II: Custom/Core Purchase

Reverse auctions would be less suitable for these purchases because the products and services are complex and specialized. Reverse auctions rely on competition driving prices down, so the less complex or specialized the good or service to be purchased, the greater the chance for a successful reverse auction.

Quadrant III: Standard/Noncore Purchase

Reverse auctions would be less suitable for these purchases because the focus is on reducing purchase effort and associated costs.

Quadrant IV: Standard/Core Purchase

Reverse auctions are suitable for purchases in Quadrant IV because there are many supply market options.

Other Topics Considered

Develop Preliminary Total Cost of Ownership (TCO) Estimate topic, Conceptualize Need task, Process Step 1: Identify Needs

Conduct Reverse Auctions Where Appropriate topic, Perform Solicitation-Related Activities task, Process Step 2: Evaluate Sources

Produce Contract Award Recommendation topic, Perform Preaward Activities task, Process Step 2: Evaluate Sources

Award Contract and Notify Suppliers topic, Make Final Decisions task, Process Step 3: Select Suppliers

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