Reverse Auction Definition – A type of negotiation process used in Strategic Sourcing; and is exactly the opposite of a forward auction. E-bay auctions are forward auctions initiated by the Seller in which the Buyer bids the price up.
In a reverse auction, the roles are reversed; the auction is initiated by the Buyer and the Supplier bids in real time driving the price down. It is a type of competitive bidding conducted on reverse auction websites, which is suitable when the only point being negotiated between the Buyer and the Supplier is price.
Always ensure that all other points such as supplier capability, quality of service, timelines of delivery, financial stability, etc. have already been confirmed as per your company satisfaction.
Reverse auctions occur when suppliers compete for business in an online event by submitting the lowest bid during a specific timeframe. Reverse auctions can either be open or closed/private and are forms of Dutch auctions (also known as open descending-bid auctions where an initial price is set and progressively lowered until a bidder is prepared to accept the amount offered).
The purpose of a reverse auction is to allow business owners or procurement managers to purchase construction services at the lowest price. It does not take into consideration the experience or qualifications of the bidder.
History
This form of service procurement originated in the US the 1990s as businesses began to incorporate Internet-based methods to increase the speed of their procurement processes. The approach was initially used to purchase items such as office supplies and manufacturing equipment, and services such as tech support. It was not until 2000 that reverse auctions were used construction services in the US by large retailers, pharmaceutical companies and automobile manufacturers.
Reverse auctions were introduced in the UK in the early 2000s when the Office of Government Commerce (OGC) tested it as a procurement method for negotiating contracts for products and services not specifically associated with construction. It became more popular within the government and is still used today.
Details of reverse auctions
For the project owner, the outcome of a reverse auction will depend several factors:
Is the marketplace competitive?
Does the bid include all of the specifics of the project?
Have contracting firms been properly pre-screened before being permitted to participate in the auction?
Is there an understanding of how change orders will be handled once the project begins?
Suppliers must consider the following criteria before submitting their bids:
Will the bid allow them to deliver the results as promised without compromising issues such as safety or timeframe?
Will the delivery of the project have a negative impact on the outcome of other projects – whether it be profit margin or reputation?
Will the bid cover the costs of all subcontractors on the project?
Is there a limit to how low they will bid before walking away from the project?
By treating construction projects as commodities (such as office supplies or manufacturing equipment), the reverse auction process can fail to properly consider external variables such as weather, personnel, site conditions and other so on. This method has generally not been popular within the construction industry.
Top-performing companies go beyond e-RFIs/e-RFQs. They create a sourcing culture where competition between suppliers is encouraged, transparently, through e-auctions.
These companies reap the benefits of a streamlined, efficient, and fair sourcing process, ensuring significant cost savings (e-auctions generally provide savings of >10% compared to previously negotiated prices).
There are six main types of e-auction examples companies can use:
- British Reverse;
- Vickrey Reverse;
- Dutch Reverse;
- Japanese Reverse;
- Sealed Bid;
- Weighted/Multi-attribute.
Let’s take a look at each one and discuss their advantages and disadvantages.
British Reverse E-Auctions
The British Reverse e-auctions are the most frequently used ones. In this type of e-auctions, suppliers can either see their position compared to the other bidders, either the best price offered, or both.
We always encourage buyers to experiment with different strategies to achieve the best results. The outcome can be different depending on the specific setup of the event.
When setting up a British Reverse e-auction, you can decide on the information suppliers will see, as well as the auction step – the minimum amount between two successive bids a supplier can place.
If you choose to launch your event using Prokuria, you can choose from two types of British Reverse e-auctions:
Per Total: When bidding on multiple items in the same e-auction, suppliers’ rank is determined by the total quote. This type of auction is used when buyers want to close a deal as a single package composed of multiple quotation lines.
At Item Level: When bidding on multiple items in the same e-auction, suppliers’ rank is determined at item level, and they can see how they rank compared to other suppliers for each item. This variation is used when buyers want to close a deal where various items in the e-auction can be awarded separately, to different.
Vickrey auction:
A Vickrey auction is a type of sealed-bid auction. Bidders submit written bids without knowing the bid of the other people in the auction. The highest bidder wins but the price paid is the second-highest bid. This type of auction is strategically similar to an English auction and gives bidders an incentive to bid their true value. The auction was first described academically by Columbia University professor William Vickrey in 1961 though it had been used by stamp collectors since 1893.In 1797 Johann Wolfgang von Goethe sold a manuscript using a sealed-bid, second-price auction.
Vickrey’s original paper mainly considered auctions where only a single, indivisible good is being sold. The terms Vickrey auction and second-price sealed-bid auction are, in this case only, equivalent and used interchangeably. When either a divisible good or multiple identical goods are sold in a single auction, however, these terms are used differently. In the case of multiple identical goods, the bidders submit inverse demand curves and pay the opportunity cost.
Vickrey auctions are much studied in economic literature but uncommon in practice. Generalized variants of the Vickrey auction for multiunit auctions exist, such as the generalized second-price auction used in Google’s and Yahoo!’s online advertisement programmes (not incentive compatible) and the Vickrey–Clarke–Groves auction (incentive compatible).
Dutch reverse auctions
While a traditional Dutch Auction starts at a high bid which will then decrease, a Reverse Dutch Auction works the opposite way as it starts at a low price and then gradually increases over time. It contains a list of items that buyers want to procure and the price rises after fixed intervals until a reserved price is reached. Before the reserved price is reached, if a supplier places a bid for the item, it is allocated to the supplier and the item closes for bidding.
In this auction, the buyer specifies a starting price, price change value, time interval between price changes, and the reserved price.
The auction opens with the first item with a specified start price and increases by the price change value (amount or percentage) after a fixed interval. The start price keeps on increasing until any supplier places a bid or the start price reaches the reserved price. After the bidding is closed for the item it moves to another item sequentially.
Auction is closed when the bidding for all items is completed.
Japanese reverse auctions
Although the history of the Japanese reverse auction is unknown, they are widely used in the world of business-to-business procurement as a form of cost negotiation.
A Japanese auction is where the host of the auction states an opening price and participants have to accept that price level or withdraw from the auction. Acceptance indicates that the participant is prepared to supply at the stated price. When all participants reply to a certain price, the software lowers the price level by a predetermined amount and again asks participants to accept or decline at the new price level
This kind of auction continues until there are no more participants bidding.
Comparison of Japanese and Dutch reverse auctions
The major difference between Japanese and Dutch reverse auctions is in putting suppliers in two different position. While in Dutch reverse auctions suppliers opt-in at intended price point and thus end the auction immediately, in reverse Japanese auctions suppliers explicitly opt-out of a given market at their intended price point.
The benefits of the Japanese reverse auction are based on the fact that the buying organization has greater transparency to the actual market itself. In this regard, the format more closely mirrors that of a traditional reverse auction by providing greater visibility to each participant’s lowest offer.
But in contrast to a Dutch auction format, Japanese auctions do not put what one Dutch auction users describes as “maximum psychological pressure” on the supply base and especially on the incumbent suppliers. This can put the buyer in a better position regarding with potentially earning more than he should based on the market.
What Is a Sealed-Bid Auction
A sealed-bid auction is a type of auction process in which all bidders simultaneously submit sealed bids to the auctioneer so that no bidder knows how much the other auction participants have bid. Sealed bid refers to a written bid placed in a sealed envelope. The sealed bid is not opened until the stated date, at which time all bids are opened together. The highest bidder is usually declared the winner of the bidding process.
KEY TAKEAWAYS
A sealed-bid auction is a type of auction in which bids are not viewed until the auction date.
The bids are sealed, often physically in an envelope, and are all opened at once.
Sealed-bid auctions are generally used in bidding for government contracts.
Unlike an open bid, where buyers can make multiple bids and compete against each other actively, in a sealed-bid auction, they only get once chance.
Understanding Sealed-Bid Auction
In a sealed-bid auction, bidders can only submit one sealed bid and therefore cannot adjust their bids based on competing bids. This sets it apart from the more common English auction, also known as the open ascending price auction, where participants can make multiple bids and bid against each other. A sealed-bid auction process may also not be as transparent as an English auction. The seller retains a tremendous amount of control in a sealed-bid auction because they can see how each bidder values the property up for sale. Sealed-bid auctions are generally used in bidding for government contracts.
Multi-Attribute Auction
Auctioning multi-dimensional items is a key challenge, which requires rigorous tools. This study proposes a multi-round, first-score, semi-sealed multi-attribute reverse auction system. A fundamental concern in multiattribute auctions is acquiring a useful description of the buyers’ individuated requirements: hard constraints and qualitative preferences. To consider real requirements, we express dependencies among attributes. Indeed, our system enables buyers eliciting conditional constraints as well as conditional preferences.
However, determining the winner with diverse criteria may be very time consuming. Therefore, it is more useful for our auction to process quantitative data. A challenge here is to satisfy buyers with more facilities, and at the same time keep the auctions efficient. To meet this challenge, our system maps the qualitative preferences into a multi-criteria decision rule. It also completely automates the winner determination since it is a very difficult task for buyers to estimate quantitatively the attribute weights and define attributes value functions. Our procurement auction looks for the outcome that satisfies all the constraints and best matches the preferences. We demonstrate the feasibility and measure the time performance of the proposed system through a 10-attribute auction. Finally, we assess the user acceptance of our requirements specification and winner selection tool.
Reverse Auction, eauction, ebidding, etender
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