[an error occurred while processing this directive]
Go to previous section of document Link to chapter contents   Go to next section of document

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

image of figure 2.12 reverse auction process

Plan and Define Auction Requirements

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.

Return to top of page

Determine Software Platform/Service Provider

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.

Communication and Training

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.

Return to top of page

Conduct Auction

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.

Return to top of page


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

Go to previous section of document Link to chapter contents   Go to next section of document