How Not To Conduct Reverse Auction

Reverse Auction is one of the most important tool used for negotiation during execution of Strategic Sourcing Projects. At the same time it should also be noted that conducting Reverse Auction is not the only remedy or solution for achieving savings, in-fact the success also depends on how well the other steps are executed. These steps again can be classified as those before the Reverse Auction, those involved during the actual conduct of the Reverse Auction and also the steps that are involved after the Reverse Auction. The subsequent section of this article talks about the sub steps involved during the above listed 3 phases. For each sub step the points have been listed which can negatively or positively affect the results:

Steps Before the Reverse Auction:

1) Supplier Research or Market Making

This is one of the most important steps as half the battle is won if all the right suppliers have been identified. Higher the number of suppliers better can be the result. Again this should also take into consideration the criteria for selecting these vendors, care should be taken to ensure that only right suppliers, those eligible to cater to the requirement are selected for the Strategic Sourcing Process. If the number of suppliers are low the entire Reverse Auction process will lack competitiveness and hence will adversely affect the results. Hence it is very important that all eligible suppliers are included for the process.

 2) RFP Preparation

During this step the scope is shared with the shortlisted vendors and also the process that would be adopted is disclosed to all the participants. A typical RFP Package can include sections like Scope Document, Qualitative Questionnaire and Pricing Worksheet. The scope document usually elaborates on the Scope for Service or Product, desired SLA’s, Important Contract Terms, RFP process and the associated timelines. It is advisable that at this stage, as part of the RFP process, the vendors should be informed that online negotiation may or may not be conducted, as the decision for conducting or not conducting Reverse Auction is usually taken after the bids are analyzed. The vendors may not quote their best price if it is known to them that the next step is Reverse Auction. They would usually keep some buffer and this can lead to wrong decision and lower savings if the vendors are not competitive during the actual Reverse Auction. So to avoid this scenario it is also advisable to inform all participants that the first round of price bidding will be an important criteria for shortlisting for the next phase.

3) Pricing Worksheet Creation and Lot Creation

This sheet captures the Total Cost of Ownership and hence should list down all cost components with breakup. The key success factor for any Reverse Auction is the Lotting Strategy adopted. Lotting strategy is all about logically grouping the SKU's so as to ensure maximum participation. Refer the link (http://www.empoweringcpo.com/index.php/blog/lotting-strategy-key-to-successful-reverse-auction/) for more information about the best practices around Lotting Strategy. The pricing worksheet creation and Lotting strategy go hand in hand. Example if there are 5 SKU's in an RFP and there are total 10 suppliers. If out of 10 suppliers only 5 suppliers are capable of supplying the first 3 SKU's, in this scenario it is advisable to have two lots, the first lot can represent the first 3 SKU's and the second lot can represent the other two SKU's. This is an over simplistic example but the idea is to ensure maximum participation.

5) RFP Analysis

The objective of any RFP analysis is to rank vendors on both qualitative as well as pricing front. It is strongly advisable that the focus of analysis should also be data crunching so as to identify the lots and help in designing the right Lotting strategy. The analysis is incomplete if it is not able to present the right Lotting Strategy. 

Steps During Reverse Auction:

1) Practice Auction / Vendor Training:

It is important that the vendors are well trained before the auction so that they are familiar and comfortable with the process. This will allow them to focus on the price front and they won’t have to worry about the technicalities.

2) Live Auction:

During the live auction it is advisable that the duration of the first lot is longer compared to other lots as this will allow the participants some breathing space and will allow them to settle down. Also the market making team should reach out to the vendors on phone as this will boost their confidence and help them realize that the team is there to help them in case they face any problems during the process.

Steps After the Reverse Auction:

1) Collecting Pricing Worksheet

After the Reverse Auction process is over, all the vendors should be asked to resubmit their bids in the format as defined as per Pricing Worksheet. This will allow the Sourcing team to have written record of the final bids, this can help in avoiding any disputes at a later stage.

2) Informing Vendors About the Award Decision:

As a best practice after the analysis is complete and the bids are analyzed the vendors should be updated about the award decision.

 To Summarize The Main Questions:

1. Do not limit the number of vendors during the initial phase of strategic sourcing process.
2. During the RFP process do not share with vendors the upcoming online negotiation (Reverse Auction), because after bid analysis you may decide not to conduct.
3. Do not structure the pricing worksheet so as to be unfair to some of the vendors. (Example pricing worksheet has a lot with 3 SKU’s and some of the vendors are able to supply only 2 SKU’s in this scenario the pricing worksheet or lot creation methodology is unfair to these vendors).
4. RFP analysis process should not be left incomplete, the output should help in lot creation.
5. Reverse Auction participants should not be left to manage the process technicalities on their own, proper support should be given to them.
6. The sourcing team should not only bank on the bids quoted online, instead a written confirmation should also be collected after the auction.

EmpoweringCPO (www.empoweringcpo.com) is a strategic sourcing service provider with vast pool of experience, they have plenty of case studies to elaborate on how Reverse Auctions should not be executed. Since last 4 years they have been helping their clients achieve higher savings with Strategic Sourcing process. According to them the key is all about right methodology and process compliance. For more information they can be reached at info@empoweringcpo.com.