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Supplying Principles and Practices > USPS Supplying Practices Process Step 2: Evaluate Sources > Consider Auctions
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.
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.
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.
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.
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
• Price
• Award
• Flexibility
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.
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.
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.
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.
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.
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
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.
Full-Service:
• 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.
Self-Service:
• 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.
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
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.
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.
Reverse auctions would be less suitable for these purchases because the
focus is on reducing purchase effort and associated costs.
Reverse auctions are suitable for purchases in Quadrant IV because there
are many supply market options.
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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