Tuesday, 27 August 2013

Are Japanese auctions a 'Bad Thing'?


A Japanese auction is a reverse auction where the price drops incrementally over time and the participant must to decide whether to accept or decline each price level.  If they decline they are out and if they accept they progress to the next round.  The auction finishes for the participant when they decline and the whole auction is complete when all the participants are out.

Japanese auctions were first developed to break monopolies or price cartels as they don't give the feedback on position or the lead bid.  They are also very useful as negotiation techniques when you have low participant liquidity or even one participant.

Japanese auctions are a contentious topic.  A bit like Marmite, you either love them or you hate them.  

Recently we have been involved in some negotiations where our potential client has made it clear that they feel our price is too high and that there is a competitor at a lower price. I know!  You may ask how could this be? Well, this customer has a very specific need, and as a result we are talking about a limited capability and offering.  Well back to the story.... They suggested we needed to reduce our price, but wouldn’t give us a ball-park figure.  In essence this is very similar to a Japanese auction, how low will you go?

The price that we ended up submitting was a fair and comfortable figure for the requirement.  As we were not pushed by direct feedback on rank or seeing the lead bid we did not feel compelled to reduce our price even further.  Viewing a Japanese auction as somewhat comparable to this, where a participant is not directly pressured to reduce their price,  it actually seems a rather fair way to collect the lowest price bidders are comfortable with.

Of course it is not quite that simple.  Bidders have to be aware of the situation, they must not get caught up in the furor of an auction and should know their margins beforehand.  If a supplier is particularly desperate for the business then this might mean they act irresponsibly.  If they do not understand the workings of a Japanese auction then this could also lead to issues.  

By and large though the Japanese auction is just another tool in the procurement persons toolset and just as viable to use as any other type of auction.

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