I often deliver talks and workshops about eAuctions: when to use English, Japanese, Weighted, Multi-Attribute eAuctions, when not to use them, why Dutch eAuctions are rarely a better idea than sealed bids, what is effective eAuction design etc.
The following questions come up time and time again:
- How do I know if the lowest price is a sustainable price?
- How do I know that the lowest priced supplier is bidding for exactly the same items as the more expensive suppliers?
- What if the lowest price supplier is not as good quality as the more expensive suppliers?
- What if my preferred supplier/incumbent/etc turns out not to be competitive?
- What do I do if the incumbent offers to match the leading price after the auction?
It is interesting to me that these are all often treated as “auction questions” when, apart from question 5, all the questions are about sourcing decisions in general. Whether you negotiate via a sealed bid, via an online auction, or by locking yourself and your supplier in a darkened room …. the issues are all the same. Perhaps eAuctions have the dubious distinction of bringing these issues more out into the open, but they have to be addressed nonetheless.
Seasoned pros will have different advice on the general questions, so I’ll leave a detailed analysis up to them, but simply put it boils down to Specifications and Decision Criteria. Specifications need to be clear so that suppliers know exactly what you want; and Decision Criteria need to be clear so that you have some justification for your final decision (single source, dual source, switching costs, preferred suppliers etc). If your Specifications and Decision Criteria are hazy then you will have trouble sourcing, whether you use an auction or not. If they are clear then you will probably get some benefit from introducing a kind of auction into your process.
As for question 5 – this one brings into play a host of ethical dilemmas and the short answer is that the short-term fix (accepting the incumbent’s offer) is storing up problems for the long term. The short-term solution saves you money immediately, of course, but there are two problems, the first one tactical, the second one more long-term:
- you are not giving the other suppliers a chance to respond to the incumbent’s offer
- other suppliers will get wise that you are using the eAuction just to beat down the incumbent and so will be unwilling to compete next time
The ethical approach is to be absolutely clear in the auction rules that there is no price negotiation outside of the auction. The good news is that the ethical approach is also best for competition in the longer-term.
Don’t you love it when idealism makes commercial sense?