Electronic auction

The electronic auction / reverse auction is a dynamic process of online price negotiation between pre-selected suppliers to get a piece of the business. It is a manifestation of B2B (Business to Business). It is a new negotiation system in which, in a certain way, the personal relationship with the client disappears to turn it into a negotiation through the Internet. These are called reverse auctions. Electronic auction is also known as electronic negotiation, auction, reverse auction, or Internet bidding. Contrary to the traditional system, the lot that bids the lowest price wins. Electronic auctions have grown by 75% from 2000 to 2003, having been implemented in numerous productive sectors: automotive, energy, aerospace, public procurement, etc.

The traditional trading system is perverted for various reasons:

• The terms of the contract are not negotiated but are imposed by the customer and must be accepted as a precondition for participating in the auction.
• The administrative work required to the supplier is very superior and the time to do so, generally brief.
• In principle, other considerations of the price are not addressed at the auction.

Some complaints traditionally exposed by providers are the following:

• The conditions for the award of lots are not always clear which gives an unfair advantage to the buyer.
• The product specifications sent are not always correct or complete.

Some advantages for the client

• It increases the spectrum of potential suppliers as it can invite suppliers geographically away.
• Generates savings on your purchases
• It reduces negotiation time by 50% (30% in preparation and 95% in the quote).
• Companies get a Return on Investment (ROI) up to 10 to 1 organizing electronic auctions.
• 80 per cent of vendors charge a price drop as a result of auctions.
• It depersonalizes the offer by avoiding possible treatment of favour between the local buyer and the usual supplier.
• They reduce the errors of offers.

Some concepts

• Cost. Departure price above which cannot be quoted.
• Booking price. Minimum price to be reached for the customer to change from supplier.
• Decrements of price. Minimum reduction level to be made in each bid. It can be set in percentage or in value. It varies from 0.5% to 3%. Maximum decrements may also be indicated.
• Duration of the auction. The auction has a specified duration that can be prolonged by the so-called 'Time of extension' or 'Time pending'. The auctions usually last 30 minutes.
• Extension time. Time to extend the auction if an offer is introduced at the last moment (last one or two minutes) It can be established only for winning offers or for any type of offers.
• Time to go. Security time that is granted once the auction is finished in which the customer can reopen it for exceptional reasons (e.g. a supplier has failed the software)

Some unfair practices

• Quotation from the client. Sometimes they have denounced 'phantom offerings' introduced by the customer to lower prices.
• Buyer's call. It is common practice for the buyer to call the suppliers during the auction to press on the price drop.
• Vendor agreement. It's illegal practice.

Types of auctions

A. For the Feedback they provide to the participant.

There are two main types:

1. Open Allows you to see the evolution of the prices through a diagram. It is the fairest for the bidder since it allows an analysis of the evolution of the auction. There are two modalities:

• Individualized. It allows to see the individual evolution of each participant.
• Generic. Only the quote points are shown but no differentiation from the quotes.

2. Of position. Only the position of our offer is shown (example: 'Third parties'). Modalities:

• Our position is shown.
• It shows our position and the price of the previous position.
• It shows our position and the price of the winning offer.

b. Auction Formats

• Normal.
• Winning decrease. You can only enter a winning offer.
• Indexed. Percentages are reduced over a previously reported index.
• Transformed. On the introduced offer, the customer will enter a correcting value according to some cost parameter. It usually refers to transportation.

C. Variations

• Only the lowest price wins.
• You can win any of the offers introduced even if you are not the least. This is the procedure most used by customers as a number of factors are taken into account.
• Double auction. First the batch is auctioned and then an aggregation of all batch taking as an exit price the smallest of each batch.

Auction process

1. Preparation of batches. The client asks his regular suppliers for a complete dossier on the products supplied:

• Price.
• Delivery conditions: packaging, palletized, etc.
• Technical specifications: characteristics, design, measures, etc.

Subsequently, it will divide the references into the lots that it wants to be quoted.

2. Pre-selection of participants. The client selects from three sources:

• Suppliers known to the customer.
• Type A suppliers (the most important in your portfolio).
• Customer database (many times provided by the internet operator itself)
• New suppliers.

The difference with a traditional negotiation is that these last two groups go from 20% to 40%. Once the participants have been selected, they will be sent a dossier that will include:

• Dates of the negotiation process.
• Terms of contract.
• Acceptance of the quote process. This is a form that is returned to the signed client.

2. Request for information - RFI. The client sends (usually by email) a dossier to the bidder in which he requests information from some of the following areas:

• Physics: name, address, phone, contact person.
• Economic: evolution of sales, number of employees, market share, etc.
• Financial: immobilized, evolution of benefits, etc.
• Commercial: implementation markets, effective sales network, marketed products, main customers, competitive advantages, etc.
• Productive: machinery park, available production capacity, possibility of cutting, delivery time.
• Quality: quality controls, certificates obtained, contingency plan, reaction to a claim, etc.

This allows the client to do a quick benchmarking among the bidders and make a pre-selection of the most interesting ones. It should be noted that many clients do not answer some questions that they consider confidential (eg, earnings evolution).

3. Request for prices - RFQ. The buyer sends the bidders a template with the references to quote for each lot. Generally, a breakdown of costs per reference is requested:

• Raw material.
• Cost of transformation.
• Transport cost.
• Margen. The customer does not always answer this point.
• Final price.

The shipment is accompanied by a dossier with the technical characteristics of the products that allows for correct pricing. Otherwise, bidders are invited to pick up physical samples of the product at a specific point. It helps define the auction strategy and serves as a qualifying round for participants.

4. Electronic auction / reverse auction / bid / electronic negotiation The client sends information to the selected suppliers that includes:

• Auction information: date, purchase portal, auction conditions, contact telephones, etc.
• Name and password. They are sent in different emails for security reasons.

Generally, the internet provider offers an online course on how to list in the auction, additional simulations of the real negotiation are carried out. Information on the products to be quoted and other observations or recommendations appears on the portal itself. The electronic auction process, among other things, helps the customer to find the best market price for their products.

5. Award.

• Winner participant decision for each batch.
• Not necessarily the lowest offer is the best, therefore the price is not the only factor to take into account.
• Request for the breakdown of prices. The customer has a deadline to send the prices of each reference.
• Implementation of the contract.

Traded goods and services

• Computer equipment (PC, Portables, Servers)
• Offices
• Communications equipment
• Financial Services (credits of treasury and long-term)
• Office supplies
• Raw materials
• Packaging material (cartony / folding)
• POP Material
• Consulting services
• Transport (Third and Air)
• Agrochemicals
• Electrical plants
• Security equipment
• Surveillance and private security services
• Medicines
• Other
• It can also be used for the sale of company assets.