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A History of the Reverse Auction

Some believe that reverse auctions are the latest fad and at the forefront of modern thinking.

This is incorrect, as the following shows that even in the years before the birth of Christ, downward bidding was a well know practice.
Excerpt from Histories of Herodotus (born 484BC), translated by George Rawlinson.

“The richest of the Babylonians who wished to wed bid against each other for the loveliest maidens, while the humbler wife-seekers, who were indifferent about beauty, took the more homely damsels with marriage-portions. For the custom was that when the herald had gone through the whole number of the beautiful damsels, he should then call up the ugliest and offer her to the men, asking who would agree to take her with the smallest marriage-portion. And the man who offered to take the smallest sum had her assigned to him.”

Scholars have since argued that Herodotus was simply recounting a myth and never visited Persia yet there is no doubt he was describing – A Reverse Auction!

I conducted my first iterative supply competition in 1982 (a forerunner to reverse auctions).

I needed to obtain 50+ Heavy 360° excavators per annum for various UK locations and to source them at the most competitive prices.

These machines needed to be fully guaranteed and maintained and supplied complete with sophisticated attachments such as grapples and electro magnets.

The contract that I placed was for a £20 million rolling five-year contract and included guaranteed buybacks set at 85% of the purchase price.

It wasn't many years later and well before the Internet was created that I was undertaking reverse auctions for power supplies using Killer-Stream lines as the method of instant communication.

In the late 90’s I designed and my firm developed the most advanced interactive reverse auction software available in Europe and encouraged leading organisations to use reverse auctions to purchase all manner of goods and services.

These converts included prestigious organisations such as:

ThyssenKrupp, BMW, NHS Trusts, Ministry of Defence and our Office of Government Commerce.

I asked buyers if they had encountered suppliers questioning them why they had lost contracts when price was the issue. The feedback was that this did happen and disgruntled suppliers had often commented, “If only we had known the amounts you had been offered we would have reduced our prices by…”

In modern parlance, the reverse auction is the final part of an interactive and iterative process that allows suppliers to refine prices, in a fair and equitable way.

However buyers need to ensure ongoing harmony so it is unwise for a reverse auction to be used as a crude tool simply to reduce prices.

The commercial benefits of auctions is maximised when buyers interact with potential suppliers and procurement advisors to ensure that the tender and auctions processes address real commercial needs rather than historic perceived needs.

It is surprising how often competitions follow historic contract terms that do not involve the latest or the most commercial supply solutions. Reverse auctions are complex and should only be used when you are aware of all relevant factors including projected commercial costs. When you compete a supply by auction you need to understand the price level at which you should expect the contract to be placed before you start the auction process. All good purchasing software and buying consultancy’s have procedures that enable them to remove spurious bids that have forced prices to uneconomic levels and are able to reinstate bid prices submitted to the commercial bid level attained prior to the unrealistic prices being entered.

To understand the opportunity reverse auctions can bring to the buyer and the supplier it is essential to appreciate the way the processes work. I have conducted auctions covering hundreds of thousands of items and can say without contradiction that following my auctions:
· Every winning bidder has honoured their contract commitment
· No existing supplier has refused to take part in any auction.
· The savings were real and averaged over 30%
· The largest saving in a competition that I can publicise was over $165 million
· I was able to successfully conduct purchase auctions no matter how complex the need
· The largest auction my we conducted was for a supply valued at $2.4 billion +

Some of the basic auction facts: (there can be variances dependant upon the software)
· Reverse auctions can be live and held at any location
· Bids can be received using the Internet, phone or other controlled communication
· It helps when auctions follow a convention paper or e-tender
· In auctions suppliers can see their bid and the lowest bids
· You are able to view the bidding as it happens
· Auctions include rating factors to produce “Best Value” (not always the same as the lowest cost)
· Relationships with suppliers need not be affected provided the process is fair and open and all communication is 100% truthful and reliable
· No service or supply is exempt from benefits of the auction process
· Auction software is important, but often the auction itself does not create the majority of the savings
You can insist that your auction detail is confidential, however be mindful that you cannot restrict the distribution of information that you have put into the public domain during the tender/auction process.

The following is in the public domain so I am authorised to use the detail to demonstrate benefits auctions can generate and to help you fully understand how.

I refer to the first auction ever commissioned by the commercial arm of The UK Treasury. We were commissioned to undertake an auction to teach The Office of Government Commerce how reverse auctions worked. Our contract was with their operational arm, OGCbuying.solutions.

I was asked to evaluate current contracts for the supply of tissues for Army ration pacts. In this process I was requested to show them how I would commercially structured this competition at each stage.

Prior to competing this requirement I had to fully understand their procurement needs and they needed to understand the savings opportunity. To do this my team expended circa 20-man days researching the need prior to issuing the e-tender.
We had investigated the current supply including the product specification, the ordering process, quality of supply, labour usage, delivery and competition in the market place. We product-tested tissues offered by potential suppliers and recommended to MoD/OGC that the following contract changes be made.

· Increase the pack sizes from 9 tissues per pack to 10 tissues per pack
· The MOD order sizes be regularised
· Packaging should be simplified
· We should introduce additional suppliers
· The contract should be issued as a framework agreement.

A case study produced by OGCbuying.solutions highlights that we created savings of about £750,000 on a £1.1 million spend (66%) and produced a betterment of 80%. See http://dld.bz/cbJGD

What can be auctioned? I have been unable to find any supply or service that cannot be successfully auctioned and even a major refurbishment contract saved $17 million on a projected $32 million contract. Provided the purchase or supply can be specified in detail it can be auctioned and if you cannot accurately specify what you need then you cannot tender for the supply in any European country.

www.cygnetconsultancy.com

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