NIGP’s 57th Annual Forum and Products Exposition Electronic Reverse Auctions Presented By: Mr. Thomas E. Youngs Jr., C.P.M. Chief Purchasing Officer County of Allegheny 412-350-4495 August 14, 2002
Allegheny County Moves Ahead • Change in the form of government from a Second Class Pennsylvania County to a Home Rule County • New Administrative Code and Purchasing Manual explicitly allow for electronic reverse auctions • Newly elected County Executive chooses, for the first time, to have a purchasing professional rather than a political appointee
Buyers use an auction format platform to obtain prices from a number of suppliers Prices go incrementally down as suppliers continuously place bids against one another on specific items Bidders are anonymous to one another Only the buyer conducting the purchase can view their identity Detailed digital bidding logs are generated to facilitate the tabulation process What is a Reverse Auction?
Value of a Reverse Auction • Accelerated bid evaluation process • Increased savings through intensified competition • Redirection of supplier inquiries to online management • Automated online delivery of solicitations, RFQ’s and amendments • Complete bid histories, line-item by line-item, in spreadsheet format for efficient tabulation • Can be simple and cost-effective to implement
Hurdles to Overcome • Supplier resistance/non-participation • Supplier technology sophistication • Internal buy-in and technology sophistication • Accurate historical pricing/usage records are important • Market price movements from previous contract years make evaluating success difficult • Suppliers can undercut to their eventual detriment
The Reverse Auction Provider • Selecting a provider involves striking a balance between cost, customization, experience and customer service • Technology is important but not necessarily the key differentiator • Customer service/compatibility is key in early “learning” stage for bidders and buyers • Consider how much work provider does for buyer • Consider program flexibility and evolution
Provider’s Costs • Several payment options: • Straight transaction fees, upfront fees, software purchases, supplier fees, % of savings calculations, subscriptions, etc. • Upfront fees can range from $0 to $100,000 and can also involve additional event-specific fees • Transaction fees can range from one to five percent, but are simple and straightforward to quantify • Percentage of savings is more difficult to quantify, requiring solid market intelligence and accurate price history records • Subscription fees usually apply to do-it-yourself format options
F.A.Q. • Contracts with uncertain order quantities present a challenge. A possible solution is to to offer an “estimate” for the bidding event to give scope to the project but base the transaction fee on a “pay as used” system whereby purchases are confirmed through the life of the contract and the fee is billed periodically. It is up to the service provider to set appropriate fees. • What about “requirements” type contracts?
F.A.Q. • What about small businesses/suppliers? • While all purchasing professionals would like their suppliers to be progressive, many small “mom & pop” companies have yet to become fully connected to the Information Highway. These companies cannot be overlooked, however, as they are oftentimes important and competitive suppliers for the public buyer. It is important to ensure that the service provider offers a solution to allow these suppliers to participate in the process even if they do not have an active Internet capability. One solution is the “proxy bid” submission, established with the supplier prior to the event.
F.A.Q. • How many bidders are required? • The larger the field, usually, the more competitive the event. It is important to select those purchases which can be directed at a wider number of suppliers. Successful bidding events can be held with two or three suppliers, however a field of at least six to eight is preferable. Purchase specifications and market data are important considerations when selecting appropriate candidates.
F.A.Q. • Are electronic bids/reverse auctions allowed in your agency? • Not all legislation has evolved to accommodate reverse auctions. It is important to review the concept with your legal department and other oversight authorities to ensure your current codes and regulations allow you to host such an event before expending resources on the project.
F.A.Q. • What about traditional bid requirements, for example - paper documents and “live” signatures? • As mentioned earlier, customization is important and there is no reason why programs cannot include traditional requirements if necessary. The online reverse auction is a price submission step only. All traditional steps can be included. Of course, it can also be an opportunity to begin evolving your system to take advantage of the new environment (paperless office and electronic RFQ's).
F.A.Q. • How does the service provider interact with the suppliers? • The answer is really dependent on the service provider, their structure and remuneration. Initially, enthusiastic and positive supplier support is necessary; online, in person or by telephone. This support can be provided by either the buyer or the provider. Over the coming years however, online reverse auctions will become a standard business tool with which most suppliers will become familiar and the requirement for training and education will diminish.
F.A.Q. • What purchases are suited to reverse auctioneering? • As the process is refined and experience gained, more complex purchases will be possible. At the start, the best purchases involve relatively simple, commodity-style items. Contracts requiring little in the way of service components or sampling, and items that have relatively stable markets and a well developed supplier base are best. Higher dollar volume purchases and long contract terms also attract a more competitive field of suppliers.
Key Components • Simple, easy to use, browser-based technology – no software or significant training • Proxy Bidding: Bidders can set price points and allow the system to bid for them to those levels • Dynamic Close: System monitors event within moments of the close and if a bid is placed, the event is automatically extended to allow for a responding bid • Variables/Factors: Introduces other variables into the bid value determination to better reflect true value, for example - warranty, incumbency, service rates
Reverse Auction Examples • Janitorial Supplies • Pool Chemicals • Linens • Printed Envelopes • Rock Salt
Example Auction A Duration: 1 hours, 22 mins. Bidders: 6 Savings results: $13,136.50 - 27% Linens: Sheets and Pillowcases Dynamic Close - Extension Start Bid: $49,026.00 Final Bid: $35,889.50
Example Auction B Duration: 1 hours, 43 mins. Bidders: 7 Savings results: $10,894.30 - 13% Swimming Pool Chemicals Dynamic Close - Extension Start Bid: $83,500.10 Final Bid: $72,605.80
Provider / Buyer relationship is all-important Understand that reverse auctions are a strategic tool, not an e-commerce silver bullet Technology and platforms are still evolving Realistic expectations: eight to ten percent savings average Look for solid auction tools and support As always, common sense is key Reverse auctions will yield significant savings when applied appropriately Closing Remarks
NIGP’s 57th Annual Forum and Products Exposition Presented By: Mr. Thomas E. Youngs Jr., C.P.M. Chief Purchasing Officer County of Allegheny 412-350-4495 August 14, 2002 Thank You