Friday, 14 March 2014

Why Buyers should embrace Japanese Auctions

'We have the pleasure of a guest post from one of our clients, Terri Hudson, who represents Baker Wanless and eQuiddity.  She is has many years experience of running auctions and has shared her thoughts on the Japanese auction format.'





Many people often question the use of Japanese Auctions with me.  Why use them?  What are the benefits?  How is this fair?  So I thought I would share my views on Japanese Auctions to illustrate the benefits of this auction type and when and why to use it.

So what is a Japanese auction?  A Japanese auction is where there is no free bidding by suppliers.  The software drops the price automatically (typically 1% every 5 minutes) and the supplier simply needs to ‘Accept’ or ‘Decline’ that price drop.  The Market Dojo platform makes it very easy for bidders to take part.  The screen is fresh and bright.  Accept is coloured black and Decline in red to avoid mistakes and the screen refresh is fast so bids are received in no time at all.  The platform also gives the buyer the ability to adjust the decrements and time gaps during the live auction so as suppliers get familiar with the process the buyer could look to reducing the time between drops from 5 minutes to 3 minutes.

Throughout 2013, Baker Wanless / e-Quiddity ran between 45 and 50 Auctions through the Market DoJo platform and 90% of those were deployed as a Japanese build and identified savings in the region of €20m for our clients.  Some would argue that you could achieve the same or similar results through more traditional auction builds, however this is debatable.

To begin with, Japanese auctions provide a level of commercial confidentiality on categories that sit under goods for resale.  For example, one bidder would not find it difficult to work out what another bidder’s margins are if they were given full visibility of the end result and positioning during the live event, because the retail selling price is in the public domain.  This is particularly sensitive with incumbent suppliers.  In many cases, the time between the live auction to award of business and the first delivery of the goods can often take around 3 to 4 months and it is important that the buyers maintain healthy relationships with their suppliers during a tender process.

The other benefits include the fact that when a supplier has reached their exit price, they are free to exit the auction and leave.  It does not stop the auction for others, only for them, and means there is no benefit to them watching the auction further.  Other methods may result in the supplier continuing to watch the auction whilst it continues with the other bidders in order to gain free market information.

As a buyer, you would notice that in more traditional eAuction methods, incumbents don’t tend to perform well.  They typically will tailgate the leading bidders and remain 2nd or 3rd ranked in an attempt to demonstrate a competitive yet non-leading bid.  This is because they feel they don’t need to be the best price. If the difference between them and another bidder is not significant the buyer is unlikely to change supplier.  The Japanese format removes visibility of the ranking meaning that they are unable to tailgate and must put their best foot forwards when bidding.

Why not give it a try?  We are experts at running them now and would be delighted to work with you and show you how it’s done, so get in touch.

3 comments:

  1. This comment has been removed by the author.

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  2. TOTALY disagree:

    1) the same result you get if you ask supplier to input their best bid without any auction. All the "benefits" you mentioned will remain.

    2) why to ask suppliers to jumping to that final price by many price drops??? Please give me at least one logical argument.

    3) Japanese auction is not an auction by definition - there is no feedback for the supplier, no reason why to decrease price, no real competition.

    Tomas Koutek, KRC partners

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    Replies
    1. Hi Tomas,

      Thanks for commenting. Like you, I was very sceptical about Japanese Auctions when I worked in Procurement. In fact, I had many colleagues who were sceptical about any form of auction, as a supplier's BAFO is their best offer right? Why put them through online bidding when you can just ask them over an email?!

      But as we all know, a BAFO can always be pressed a little further. It's what makes eBay a success. But there needs to be all manner of psychology, negotiation and game theory behind it. These factors are what drives Japanese Auctions.

      We were a little reluctant to add the concept into Market Dojo, having broadly shared your viewpoint. But, having seen the results they've generated in scenarios where other auction formats would simply not have worked (and failed in the past), we've been converted, particularly when there are just a few bidders that can supply the requirements. The competition is real, it's just its not highlighted, but it certainly drives behaviour to decrease price. In terms of why ask them to iteratively make their move: it creates bid momentum, which feeds the psychology to push beyond the BAFO. It also gives every bidder the opportunity to drop out where they wish to, which is useful when perhaps not all bidders are like-with-like or for mass negotiating rebates for example.

      Have you run many Japanese Auctions yourself?

      There are many purchasing professionals who take a BAFO as the final offer, but the better ones know there's always one more lever to pull.

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