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| Two stage reverse auctions by David Bush January 29, 2007 | Go Back |
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Sometimes, I like to troll websites from respected educational institutions so I can feel like an "Ivy Leaguer", instead of my rightful position, with the unwashed masses and a public degree. Doing this, I ran into research written by Tunay Tunca, a professor at the Stanford Graduate School of Business.
To summarize, he suggests that value can be driven further in complex sourcing projects by implementing a two-stage process of reverse auction. This means to execute an eRFx, short list the top bidders, add more specifications, and reverse auction. I also interpreted his explanation another way: run an auction first on simple specs, then discuss more issues in person or in an eRFx while going deeper on the contract negotiation.
Differentiating between simple lot/price driven projects and multi-stage events, they describe:
"..when things are a little more uncertain and complicated—when there are few suppliers, when those suppliers can easily fill the orders without any extra investments, and when buyers are not so sure of what suppliers’ actual costs are—then a simple reverse auction makes the purchaser more vulnerable to losing out on pricing. In this case, says Tunca, buyers are better off instituting a two-stage process, in which they hold an initial auction to identify the lowest bidders, but then add an additional contracting stage to negotiate further with those bidders."
At Iasta, we do see this and some times will recommend or encourage these tactics, but only under the proper, tightly controlled conditions:
- Communicate what is happening with the suppliers! Do not surprise them with an alert that "oh by the way, we are doing this again".
- Focus the specifications clearly at the appropriate stage but do not hold back important information for the second stage. You never want to introduce unwanted surprises in the process.
- Know yourself. Does your company have the ability to throw weight around and make more work for the suppliers? This process will work better for larger companies and large spends than for mid-market companies trying to over-complicate a $500,000 bid.
- Have plenty of time reserved. This process will extend the normal sourcing lifecycle and will increase the amount of work. This is normally fine when dealing with strategic and complicated sourcing events, but be aware upfront.
- Incorporate e-RFx technology at each stage to have all the information tied into the same project system. This helps capture all the needed information in a single location and make adjustments on the fly if suppliers respond with interesting alternatives.
