Public Procurement
Public procurement is the purchase of goods and services by the public sector and it generally accounts for a large share of public expenditure in a domestic economy. Public Procurement can be defined as ‘the purchase of goods and services by governments and state-owned enterprises. It encompasses a sequence of related activities starting with the assessment of needs through awards to contract management and final payment.
eAuction or Reverse Auction
A procurement tool is eAuction which is conducted by using web-based software whereby the suppliers submit price bids through online bidding event to obtain a contract being let by a procuring entity in the traditional auction, the price of buyers bid increase whereas in the eAuction the price of (cost of goods and services) suppliers bid decrease, which is why the eAuction is sometimes called as a reverse auction.
An eAuction provides a platform to arrive at an accurate market price for the goods or services being contracted and this tool can be used when the contract specifications can be determined with precision.
In a typical auction, the seller is seeking to get the highest price possible by having different buyers outbid each other. In a reverse auction, the buyer is seeking to get the lowest price possible by having different sellers bid less than each other. As applied to public procurement, “the government” is the buyer in a reverse auction. The sellers are various vendors jockeying for a public contract. The idea is for these vendors to compete against each other by offering their lowest bid in a transparent, competitive marketplace. In the end, the government gets the best price, with the savings going to fund other priorities, like education, roads and tax cuts.
A reverse auction is defined as a dynamic, real-time negotiation between a purchasing organization and several pre-qualified suppliers competing against one another to win the opportunity to supply goods or services to the purchasing organization.[1]
eAuction is the process in which all the selected bidders are logged to the e-procurement system during the designated time on a designated day and will be submitting multiple bids for the item(s) for procurements. Each bid of the bidder shall be lower than his previous bid. The rank status during the reverse auction process is dynamically displayed to the bidders as 1. Rank 1 means the bid is the lowest and rank “-” means the bid is not the lowest. As the ranks status is displaced dynamically to the bidders, the bidders whose bids are not the lowest reduce their bids to the extent possible which in turns generate further competition. A bidder will not be able to see the details of the bids submitted by the other vendor. He can only see his own bids submitted and his own rank status.
Reserve auction can be conducted with a start price or without the start price. Thus, the start prices are optional. Reverse auctions can provide benefits to both buyers and suppliers, with the primary benefit being time savings.
Benefits for Buyers
In the era of strategic sourcing, reverse auctions are a useful tool to get good, fast results within the sourcing and negotiation phase of a project. There are several reasons for a buyer to opt for a reverse auction in the purchase of goods and services or assist in sourcing a commodity.
The reverse auction stand ideal for the industries that relied on RFx tools – such as a request for proposal (RFP) or a request for quote (RFQ) processes to share information about products and services. The added advantage is Cost savings, as buyers are able to obtain the lowest possible price from a set of suppliers.
By using reverse auctions, companies have found that it plays an important role in corporate cost reduction programs and by using reverse auctions they get greater insight into overall market pricing. Moreover, purchasing in a big of corporations comprises the largest portion of annual spend, even a small percentage saved in a reverse auction event can mean a much greater impact on the expenditure of the corporation.
Further, reverse auction software are is also inexpensive to install and easy to operate Some companies have also found that by using reverse auction software, the total cost of ownership of the product or service decreases.
Reverse auction software makes it possible to more quickly consolidate suppliers by enabling buyers to easily expand their reach to new potential suppliers who may be able to supply a more diverse set of products or services. Furthermore, by conducting reverse auctions the competition among the suppliers also increases to provide the best value of products and services to outbid competitors.
Benefits for Sellers
Though reverse auctions lower the purchasing prices, the sellers can also benefit from the mechanism. Like buyers, it saves suppliers time in negotiations and bidding. Furthermore, the pre-validation process is faster for suppliers than the traditional RFx process,as they do not have to spend as much time typing up formal RFPs or RFQs.
The most important advantage for sellers is the transparency in the mechanism. The sellers can keep a close watch on the bidding process and can stand relative to others competing for business. Also, they can easily opt out of the auction at any time. Further, it enables the suppliers to keep track of trends in pricing and bundled services, allowing them to counter the competitor pricing quickly by lowering their bid.
Reverse auctions also invite new opportunities for suppliers. Small companies can participate in the reverse auction mechanism to know more about the larger competition, and how to effectively compete against larger business enterprises. Suppliers who win auctions in one division or unit of a company have the opportunity to gain business in other parts of the company or enterprise-wide.
There are a number of erroneous assumptions generally made by suppliers about reverse auctions, the two most common assumptions being, firstly, the low bid always wins and that value adds services aren’t considered when a decision is being made. Some suppliers who view themselves as contributing a considerable amount of value added service refuse to take part in reverse auctions as a “matter of principle”. Other reasons given for dislike of reverse auctions are the perceived discounted value of after the sale service, a personal business relationship with the supplier and other value-added services. One article goes so far as to say that reverse auctions are unethical and go against many corporate codes of conduct.While some organizations do use price as the sole determining factor in awarding business, such as government entities or some international clothing manufacturing many companies have incorporated reverse auctions into a total cost of ownership model which factors in supplier quality, delivery performance, availability, technical support and other criteria Proper communication from the buyer is vital to the success of reverse auctions. By sharing the company’s overall strategy and keeping the supplier informed, a buyer can ensure a healthy level of competition to get the best overall value for the event in question.
Reverse Auction in U.S.
In the United States, every state uses reverse auctions for public procurement. Pennsylvania used a reverse auction to save $17.5 million on road salt. Florida agencies and localities use reverse auctions to buy everything from office supplies to cement. Texas school districts use reverse auctions to save money on trash service.
The U.S. government also uses reverse auctions for many purchases, saving taxpayers millions. Typically, agencies use a commercial provider, who is paid a fee (no more than 3 per cent) calculated against the winning bid. As the U.S. Government Accountability Office (GAO) remarks, “Reverse auctions are one tool used by federal agencies to increase competition and reduce the cost of certain items.” At the same time, the GAO recommends agencies use multiple bid facilitators and urged the executive branch to develop clear guidelines and safeguards for agency use of reverse auctions.[2]
Frequently Asked Questions (FAQs)
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What is a Reverse Auction Mechanism?
A reverse auction mechanism is a procurement tool, wherein sellers meeting certain minimum criteria, submit non-negotiable price bids. The buyer then selects the sellers who bid the lowest price, and signs non-negotiable standard contracts with the selected sellers, incorporating the prices bid by that seller.
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What is the request for proposal (RFP)?
RFP is the document used in sealed-bid procurement procedures through which a buyer advises the potential suppliers of the certain things pertaining to how the bid should be formatted and presented., such as the statement and scope of work, specifications, schedules or timelines, contract type, data requirements, terms and conditions, description of goods and/or services to be procured, general criteria used in evaluation procedure, special contractual requirements, technical goals, instructions for preparation of technical, management, and/or cost proposals. RFPs are publicly advertised and suppliers respond with a detailed proposal, not with only a price quotation.
Illustration: the Uttar Pradesh State Road Transport Corporation issues a request for proposals for financing, designing, constructing, operating and maintaining the Agra-Lucknow Expressway. The interested parties submit their proposals meeting the requirements outlined in the document. Based on the proposals received by the deadline, the corporation establishes committees for further review and development of the proposals. The proposal most encompassing its goals is chosen and hired to carry out the work.
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What is a request for quote (RFQ)?
A request for quote (RFQ) is a type of procurement solicitation in which a company asks outside vendors to submit a quote for the completion of the project. An RFQ provides comprehensive information to the bidder detailing the project’s requirements. In RFQ, the bidder labels the costs for each phase of the project allowing the soliciting company to compare several bids for like services.
[References]
[1]Craig L. Williams, “An Overview of Reverse Auctions”https://mafiadoc.com/an-overview-of-reverse-auctions-swdsi_599886061723dd97bdd00e07.html
[2]https://www.clarionledger.com/story/opinion/columnists/2018/02/22/reverse-auctions-tool-save-money/363204002/
