Monday, 29 July 2013

Which reverse auction type should I use?


Great! You have decided that you are going to save time and money by running a reverse auction to negotiate. One of the decisions you will need to make is which format of reverse auction will work best for you.

There are several different types to choose from, each one has strengths and weaknesses which you should consider.  I am going to focus on the three types which Market Dojo supports – Ranked, Open and Japanese. Both Ranked and Open auctions can also be referred to as 'Reverse English Auctions'.



Ranked Auction

In a Ranked Auction participants see their position for each Lot relative to the other participants.  Generally it is the most popular auction type as it works for the majority of situations.  This is the default option in Market Dojo.


What a participant sees in a Market Dojo Ranked Auction
Pros
  • A Ranked Auction promotes a very close auction when you have a number of participants on a similar price level.
  • It gives clear feedback to the participants.
  • Only the leading participant knows the best price.
Cons
  • A participant in second or third position, for example, may be content with their rank and may cease to compete for the lead unless you have sent a clear message beforehand that the top ranked participant shall have first refusal.


Open Auction

In an Open Auction participants see the Lead Bid per Lot and can only submit a bid that beats it.
What a participant sees in a Market Dojo Open auction
Pros
  • An Open Auction can quickly settle the negotiation, as participants can only bid for the lead.
  • It is very effective if you do not mind who wins the Event.
Cons
  • There can be large price gaps between each participant, leaving you with less choice than a Ranked Auction and some participants might be scared off.
  • A participant may have been able to offer a slightly more improved bid, but couldn’t as they could only bid against the leading bid. This particularly comes into play if there are multiple Lots and you wish to make the award decision after the Auction based on grouping the Lots together, as you may find your choice is constrained.


Japanese Auction

For each Lot, a Bid Level, which begins at a level you choose, is shown to all the participants. Each participant must either Accept or Decline the Bid Level within a set time period, e.g. two minutes. Once accepted and the time expires, the price drops by a specified amount and the participants must repeat the process. It continues in this fashion until the participant declines the Bid Level or is timed out.
What a Participant sees in a Market Dojo Japanese Auction



Pros
  • You can run this auction type when you have low supplier liquidity and even with a with a minimum of one participant, since participants have no idea who they are competing against.
  • It is also effective when you think the leading participant still has margin to play with yet is unlikely to be challenged in a conventional auction.
  • This type of auction has been deemed effective if you are trying to break a cartel.

Cons
  • It is least popular with participants as they receive very little market feedback, as in essence they could be competing against themselves.


I hope this overview of different reverse auction types is informative, let me know what you think in the comments below.


3 comments:

  1. In answer to a LinkedIn question on the type of auction we'd recommend for the (a) materials and equipment for construction sector and (b) components (parts) for automotive industry

    "What I will add is that given the two industries above, I would say it is the construction industry that poses the bigger challenges. There seems to be more resistance to auctions there so you must ensure that the auctions start off simple and with enough to attract the suppliers to bid.

    The type of auction though is generally driven by the supplier market and the aims of the exercise rather then the industry. For instance, if you will definitely award to the lowest bid, then use an open auction. If you have enough supplier liquidity for interaction but dont want to suppliers to know the best bid then a ranked auction is best. If you have low supplier liquidity then a Japanese auction is best. Some industries favour certain types of auction but it mainly depends on the market situation at the time

    For an automotive auction, without knowing more details, a simple ranked auction would be my preference and this is probably the most used in the UK. It is very flexible and if you have bidders from around the world, which is normally the case for these type of event, then you are not showing the lead bid which could put some global suppliers off and you have enough interaction for the rank positioning to drive the auction. For the construction industry you could use the ranked for the same reasons although if the bidding is very similar and you are ok to award to the lowest bidder then I might suggest an open auction. There are many websites now for B2C and finding tradesmen and these use a more open format so there may be more acceptance to this. As I said above it really depends on the market situation and what you want to achieve and how you will award."

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  2. Have a strong, competent bidder to front your effort during the auction. Your lead should be completely familiar with the auction technology in use and most importantly be clear when to bid and when to fold.

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  3. I hope each auction type resemble separate functionality. My suggestion is go for ranked auction.

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