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Supplying Principles and Practices > USPS Supplying Practices Process Step 2: Evaluate Sources > Conduct Reverse Auctions Where Appropriate
Conduct Reverse Auctions Where Appropriate
Whether to conduct a reverse auction for the purchase of goods or services
was determined during the Consider Auctions topic of the Perform
Solicitation-Related Activities task of Process Step 2: Evaluate Sources. If
determined appropriate, a reverse auction is conducted between a buying
organization and a group of suppliers who compete against each other to
supply goods or services. Such goods and services must have clearly
defined specifications for design, quantity, quality, delivery, and related terms
and conditions.
Reverse auctions rely on competition driving prices down, which means a
greater likelihood of success when purchasing less complex or specialized
goods or services. Simple commodity items or services, which can be clearly
defined and often have a wide range of potential suppliers, will be best suited
to the auction process. Although, in some circumstances, there may be only
a few eligible suppliers, their market share tends to be great enough to make
an auction a viable purchasing option.
In a reverse auction, participating suppliers bid against each other, via
specialized Internet software, by submitting successively lower prices during
a scheduled time period. Typically, the lowest bid wins in a reverse auction;
however, some full-service auction providers can support very complex
auctions to better align the auction with an organization's business practices.
Bidders are able to introduce new or improved values to their bids in a visible
and competitive environment. The procedure and duration of the event will be
defined before the reverse auction commences, and a starting value that
suppliers will bid against until the competition closes will be determined in
advance. When used, the auction will be a key stage of the purchasing
process.
The five steps involved in conducting a reverse auction are illustrated in
Figure 2.12.
Figure 2.12
Reverse Auction Process
Having a clear purchase specification is critical, and should be evident in all
sourcing decisions. The better the purchasing description (e.g., consisting of
clear specifications for products or statement of work [SOW] for services), the
better the sourcing results. A well-planned buy will always provide better
sourcing results.
Generally, in a reverse auction, the buying organization should set a dollar
amount higher than the desired final cost for the initial bid. A high dollar
amount usually leads to a more favorable outcome for the buying
organization in a reverse auction because suppliers bid against each other
and drive the price of the product or service down. If the Item Manager(s)
decide to source enough of the organization's requirements to attract
suppliers, the requirements must be robust enough so that the volume can be
managed and leveraged by the supply base to drive savings and efficiencies.
However, the dollar amount should not be so high as to create potential risks
for the organization. The key deciding principle for the appropriate level of a
starting bid is the return on investment (ROI), and it is easier to gain a larger
ROI on a larger purchase. In some cases, the suppliers may provide
something innovative; therefore, they may have some input into setting the
preliminary price.
The second step in the reverse auction process is to determine the software
platform or reverse auction service provider to run the auction. As mentioned
earlier in the Consider Auctions topic of the Develop Sourcing Strategy task
of Process Step 2: Evaluate Sources, the three levels of auction technology
available are:
• 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
auctions are organized and run by the buying organization
• Self-Service - buying organization oversees all aspects of the
auction, including implementing the auction technology internally
Many companies specialize in reverse auctions. It is critical to choose a
Reverse Auction Service Provider with a good reputation and experience in
the business. Item Managers should examine each firm's functionality by
mandating demonstrations of past auctions run for other companies over a
wide range of goods and services.
Once selected, the Reverse Auction Service Provider should also aid the
Client and Purchase/SCM Team in the establishment of auction parameters.
For example, the Item Manager decides the duration of the auction, the level
of visibility given to suppliers, and establishes bid increments. Reverse
Auction Service Providers can support the Item Manager in these decisions,
even if the purchase is only for reverse auction software.
The preauction communication and training process between the Postal
Service and its suppliers is the key success factor to launching an effective
reverse auction. A clear strategy for communicating the purpose, rules, and
award criteria to suppliers is imperative. To clarify any misconceptions,
suppliers must have the opportunity to ask questions regarding the reverse
auction process before the actual auction takes place. Daily communication
must be maintained with the suppliers to ensure their continued participation
in the auction.
Training is a key enabler for the successful implementation of reverse
auctions. This includes training for both Postal Service employees and
suppliers participating in the auction. Participating suppliers should be
adequately trained in both the use of the software and the rules in place to
run the auction. Training can be conducted either by the Purchase/SCM
Team within the Postal Service or by contracting it to a Reverse Auction
Service Provider. During training, employees learn how to use the software
and the rules associated with running a reverse auction. Hands-on training
for Postal Service employees, including conducting mock auctions under
various scenarios, is necessary to generate familiarity with the reverse
auction process.
Reverse auctions are conducted online with a starting value that suppliers bid
against until the competition closes. A reverse auction is open for bidding for
a fixed duration of time that should reflect the value of the purchase (i.e., the
greater the value of the purchase, the greater the duration of the auction).
Each successive quote must differ from the previous quote by an amount
known as the "minimum quotation increment," which is predetermined by the
Item Manager and will be different for each auction, depending on what is
being auctioned.
Primary reverse auction activities of the Purchase/SCM Team include:
• Participate in the reverse auction system at the scheduled time
• Verify that the product specifications meet expectations
• Discuss appropriate adjustments with the suppliers
• Evaluate new bids versus the project costs, and rerun costs with
new supplier data, if available
• Capture the screens through the operating system to document
the pricing
• Conclude auction when a bid posted by a competitor falls below
the lowest price the Item Manager determined to be fair before
the auction
During this stage, the Contracting Officer would assess any issues that might
arise and define next steps in completing the reverse auction. When the
Contracting Officer is satisfied with the most advantageous bid to the Postal
Service and when all business conditions are met, he or she then considers
awarding the contract to the supplier who placed the winning bid. Discussions
or negotiations may be entered into following the acceptance of a winning bid
to ensure that the Postal Service receives best value. Additional information
on conducting discussions and negotiations can be found in the Hold
Discussions topic of the Evaluate Proposals task and the Negotiate With
Suppliers topic of the Perform Preaward Activities task of Process Step 2:
Evaluate Sources.
For further information on awarding contracts, see the Produce Contract
Award Recommendation topic of the Perform Preaward 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.
Other Topics Considered
Consider Auctions topic, Perform Solicitation-Related Activities task, Process
Step 2: Evaluate Sources
Hold Discussions topic, Evaluate Proposals task, Process Step 2: Evaluate
Sources
Negotiate With Suppliers topic, Perform Preaward Activities task, Process
Step 2: Evaluate Sources
Produce Contract Award Recommendation topic, Perform Preaward 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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