Procurement Goes Online with Reverse Auctions	
By Thorn McCloud,
Chief Operating Officer Public Technology, Inc.

I
magine sitting in your office, working on a project, while on your computer vendors are vigorously competing against each other in an online auction for your business. Later that day, the auction is over and you see that by using reverse auctions as a method of procurement you suddenly saved hundreds or thousands of dollars on a commodity your city needs by selecting the vendor who bid the lowest price. Sound too good to be true? Well, if you actually were hosting a reverse auction, you would get the best price for whatever your city needs. You would also save countless hours of time and energy normally spent on searching for a supplier and requesting bids for your procurement. What used to take months, from finding the supplier to product delivery, now takes hours or days. Hosting reverse auctions for your procurement can create a more efficient workplace and save your jurisdiction potentially millions of dollars.
"Sourcing" is the overall method of establishing the purchasing plan. This involves instituting approaches to procuring materials and services, identifying and assessing potential suppliers to meet the needs of the organization, evaluating, and improving ongoing supplier relationships. E-procurement can streamline sourcing tools.

One such procurement innovation is the emerging trend of online auctions: specifically, reverse auctions. This procurement method shifts the power from the vendor to the buyer, putting the procurement professional in the driver's seat. Now, buyers can pit vendors against each other to compete for business. Through reverse auctions, buyers can set a price for a product they want to purchase and the vendors compete against each other by bidding lower and lower until the auction is over. The winning vendor is the one who places the lowest bid for the product. Buyers can securely and privately fulfill their procurement needs in a matter of hours, minimizing costs and improving efficiency. There is a host of e-sourcing suppliers who provide the tools and software necessary for implementing a successful procurement plan. They work with the buyer in establishing an online procurement plan that will help government realize the millions of dollars that can be saved through reverse auctions.
WHY REVERSE AUCTIONS?
A reverse auction is one where the client wants to purchase supplies and/or raw materials at the lowest price possible without sacrificing quality. Bidders (suppliers) are pre-qualified through the auction site. When the auction begins, bidders bid what they will charge to supply a

commodity. As the auction proceeds, the bidders compete with each other, and the price of the commodity begins to decrease. Vendors are anonymous to each other, known only by screen names, but can see what the other bids are. They are free to jump in or pull out at any time during the auction. At the end of the auction, the final price is the lowest price at which the winning supplier will provide the material to the client.
Reverse auctions level the playing field for suppliers, putting small businesses and minority-owned businesses on the same court with large companies. They also give more companies exposure to government business and therefore provide the government with a wider pool of vendors to select from. Many auction sites and providers offer more than just the lowest price for a product. Vendors can also offer terms and conditions, warranties, and past performance specifications. But purchasers must make their selection criteria known to the vendors in their request for quote before the auction begins. Thus, vendors are free to bid or not to bid.
CASE STUDIES
The federal government is actively using reverse auctions to purchase anything from computers to aerospace materials. The Army Communications-Electronics   Command

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even hosted a reverse auction to purchase electronic parts for the patriot missile and paid 35 percent less than they had previously. The GSA, Postal Service, Veterans Affairs Department, Army, and Navy, among other government agencies, have all hosted a reverse auction for purchasing and have saved time and money on every auction.
Reverse auctions are rapidly becoming a procurement method of choice for some local governments. With every success story, reverse auctions are getting a stronger foothold in establishing a secure place in local government purchasing methods around the country.
The State of Georgia recently entered into a contract with Procuri, Inc., a leading provider of strategic e-sourcing tools and services, for the Department of Administrative Services (DOAS). Procuri will manage and conduct reverse auctions with suppliers on behalf of the DOAS and will aid the state in identifying appropriate uses for reverse auctions. Procuri, Inc. provides services to federal, state, and local governments and large corporations.
The State of Texas has a purchasing entity that provides reverse auction capabilities solely for the state and local governments. PTI has partnered with the Texas Procurement Center (TPC) to facilitate a one-stop shop for purchasing micro-technology products and services. TPC exists to help state and local governments make the best, most cost-effective use of technology. Samuel Litzler, Business Development Manager at TPC, has seen Texas local governments benefit from reverse auctions through robust competition, lower prices and less time and resources spent in putting together bid packets. Instead of

local governments receiving five or six bids, they now have 40 or more bids from vendors. Some of the most frequently purchased products on the TPC site are IT products and school supplies such as books, desks, and art supplies. The City of Fort Worth has utilized the TPC reverse auction technology to procure everything from trash bags to 55-gallon steel and fiber drums, realizing substantial savings each time.
The City of San Antonio has entered into a contract with Orbis, Inc., another leading provider of dynamic competitive pricing tools. This city used its real-time online auction tools to purchase radios, firefighter saws, and pocket PCs. They saved up to 86 percent of what the prior lower bid was for the radios and 25 percent on the firefighter saws. San Antonio is pleased with the result of the auction, as it saved money for the city and taxpayers and enabled the city to do more for less.
Chesapeake, Virginia, saved almost $100,000 on motor pool vehicles using Orbis, Inc. e-commerce dynamic pricing tools. The real-time reverse auction, originally 30 minutes, lasted 65 minutes. Chesapeake paid $325,000 last year for the tires, saving $99,541.
BENEFITS OF REVERSE AUCTIONS
Reverse auctions reduce costs. Using an auction format - putting business out to bid and allowing suppliers to compete against each other - allows buyers to discover and obtain the most favorable market prices. Automating the sourcing process reduces administrative overhead and the cost of finding and securing products and services. Aggregating and directing various governmental departments' purchasing through auctions gives the jurisdiction greater leverage with suppliers and a stronger position for

negotiating favorable financial contract terms including unit price, delivery charges, insurance, and other types of fees. Procurement professionals from every sector have reported that their purchases from online reverse auctions have saved their agency or department a significant amount of money.
Time efficiency. Auctions streamline the sourcing process, greatly decreasing the time it takes to accomplish a single sourcing cycle and freeing the procurement staff for other work. Automating the sourcing process, by eliminating manual processes and paperwork, reduces the opportunity for human errors, inaccuracies, and reworks. Testimonies from government officials all point out the time that was saved by using reverse auctions. The Small Business Administration noted that bid requests that normally take two months of administrative time now take less than ten hours using reverse auction tools from FedBid.com.
Maximized value. The variety of available auction formats elicits the best offers from suppliers, maximizing the overall value received by the buyers where value can be measured by all contract terms including price, quality, lead times, location, customer service, and more. They also allow buyers to discover new and optimal sources of supply beyond their existing base of suppliers. Some auction providers offer the buyer auction analysis and decision-making tools as part of their auction software that help buyers evaluate competing bids based on weighted criteria that include both price and quality attributes to discern the most value-maximizing offer.
Contract awards do not have to be solely based on the lowest price. Most government agencies and businesses do not always want the lowest price for a commodity. They also

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want a reputation of past service, warranties, product quality, and efficiency, among other qualities, for their purchases. Many competitive online auction companies offer such contract terms with their online auction tools.
Reverse auctions level the playing field. All types of vendors, from minority-owned or small businesses to large companies, can equally participate in a reverse auction. The buyer has access to a larger group of suppliers instead of just the one they've been using. Another added benefit of government-hosted reverse auctions is that they open up doors for all vendors to participate. This benefits the government, in that it has new suppliers bidding for a contract.
SOME THINGS TO KEEP IN MIND
Reverse auctions may not be appropriate for all purchases. They are good where competition exists and for items that are in high demand. Road salt, coal, military items, IT services and software, tires, school and office supplies, PCs, and other large bulk purchases are all examples of commodities bought with a reverse auction. It may not be a good idea to use a reverse auction to purchase products that demand detailed attention, product training or instruction, and follow-up service. Products that are manufactured by a single source or site-specific products such as construction projects do not have competition and, therefore, do not lend themselves well to reverse auctions.
It is important to understand how reverse auctions fit into the overall procurement plan. Use of this technology is not yet widespread, and there is some concern from vendors that the use of this technology could continuously

drive the prices so low on every contract that firms would be forced out of business, thus reducing the competition that keeps prices low to begin with. This is one reason that purchasers should be as knowledgeable about this technology as possible. Purchasers can become aware of the products and services for which reverse auctions are appropriate, and can determine when it's not worth the effort to hook up with companies that provide the software and set up agencies with reverse auction capabilities.
Requests for quotes can be posed with qualities other than the lowest price. Because auction providers have integrated more components on the request-for quote-form, buyers can purchase commodities not based solely on the best price. Best-price purchases are great for commodities such as office supplies. But buyers may want other standards like product quality, warranties, service plans, or past service reputation of a supplier for other products. These qualities can be added onto the request for quote, resulting in a contract with a supplier for the best price and best quality of a product.
The key to success in using e-sourcing tools such as reverse auctions for procurement is to establish a best-practices framework. This framework consists of three stages that need to be achieved in order to accomplish this goal. One, a study must be performed to determine how to acquire maximum value from supply in a particular industry and market position. Two, develop a plan to realize this goal. Three, the most difficult stage, execute the plan. Because no two organizations are alike, there is no  "cookie  cutter"  approach  to

establishing a procurement best practice. Therefore, it is important to identify your organization's unique qualities and develop a procurement plan that fits your needs. In order to establish an effective procurement plan, an understanding of advanced communications technology is necessary. While technology by itself will do nothing to improve procurement, the effective use of these technologies in conjunction with a procurement plan will prove to achieve the desired value. Along with smart use of technology, training and development programs for employees, and possibly suppliers, is essential. It is also important to develop an evaluation program in order to measure the success of the procurement plan. In order to see how the new procurement plan is cutting costs, improving efficiency, and maximizing value, an evaluation of the procurement plan is necessary. It will also show where improvement is needed to better improve procurement.
It has been shown that reverse auctions as an addition to local government procurement programs have benefited many local jurisdictions by saving time, cutting costs, and increasing efficiency. In order to achieve success and reap great value from reverse auctions, a procurement plan needs to be carefully established and executed. Not only should reverse auctions and the online sourcing companies be well researched, training and evaluations should be performed to best maximize the value of the procurement plan and obtain the best purchasing system for your needs.*
PTI is a non-profit technology research and development organization with the mission of bringing the benefits of technology to local governments. For more information, visit the PTI Web site at www.pti.org.

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