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“REVERSE AUCTIONS CAN SAVE MONEY”
The Baltimore Regional Council Purchasing Committee
Public Schools Group held the first reverse auction
for a public school system in Maryland on November 24,
2003. Four school systems participated in the auction:
Anne Arundel, Baltimore County, Harford, and Howard.
The solicitation was for 1.25 million reams of xerographic
paper in several sizes and colors, valued at more than
$2.3 million.
In a reverse auction, buyers and sellers swap roles.
The sellers compete for the opportunity to supply a
product (in this case, paper) or service, and as bids
come in, the price goes down. A reverse auction allows
the client, i.e., auction originator, to purchase supplies
and/or raw materials at the lowest price possible without
sacrificing quality. By putting these auctions online,
buyers can streamline the process of collecting bids
and deal with many sellers at the same time.
Bidders (suppliers) are pre-qualified and delivery
requirements are specified prior to the date of the
auction. When the auction begins, the pre-qualified
vendors bid what they will charge to supply the specified
commodity. As the auction progresses, the best price
to the client is actually the lowest price, hence the
name “reverse auction.” At the end of the
auction, the final price is the lowest price at which
the winning supplier will provide the specified material.
For example, during the November 24 auction, prices
started at $2.50 per ream for premium #4 xerographic
paper, mill brand, white, 20lb weight, 8.5” by
11”, and dropped to $1.649 per ream during the
course of the bidding.
Future reverse auctions will allow us an opportunity
to reduce the cost of the supplies and materials we
purchase by pitting all potential, qualified suppliers
against each other. With the power of the Internet,
we can expand and qualify potential bidders from throughout
the world, thus ensuring that we would get the most
exposure possible so that we could purchase supplies
and materials at the lowest price.
Initially, we have had to bring in a consultant who
specializes in this process. The consultant we selected
for this first auction was Mr. Rick Bazaco with auction4Biz.net.
Fees can be set up in a variety of ways depending upon
the situation and the client’s preference. Normally,
the auction organizer will charge fees for reverse auctions
based on the value of what the client saves as a result
of the auction, or they can pass their costs onto the
winning bidder. It is also possible to negotiate a cap
to any fees, and for this auction, BRCPC did not pay
a fee.
While the preparation work for the reverse auction
took a little over a month to complete, the BRCPC reverse
auction bidding took place in a single day over a period
of four hours. We issued the bid through Anne Arundel
County Public Schools on October 29th, and held the
actual auction on November 24th. In order to ensure
that the suppliers and/or buyers were of the highest
quality, they were pre-qualified on or before November
20th. For this (and every auction), we started with
our current vendor’s list and then supplemented
that list with additional suppliers as they made their
intentions known to us. All suppliers then participated
in a pre-qualification process on the basis of the type
of firm and product to be supplied.
The auction was split between into two groups because
of delivery requirements. Anne Arundel, Harford and
Howard County Public Schools realized savings of up
to 9%, with an approximate dollar value of $114,000;
Baltimore County realized an approximate 3% savings,
with an estimated dollar value of $28,000. The total
savings for both groups was more than $142,000, or about
8% for all participants. We credit 3% to the effect
of the actual reverse auction procurement method.
Baltimore County Public Schools had bid pricing for
the same quantities that were only four weeks old, which
led us to conclude that the 3% savings was a direct
result of the actual auction. During an after auction
survey and review that included all firms participating
in the auction, we learned several things that would
help us conduct a better auction in the future:
- Two responses from unsuccessful firms indicated
that the auction should be “by the lot”
because they could then negotiate better pricing.
- One line item for 8.5” by 14” paper
was not awarded because it was the only line item
that the low bidder won. The quantities were too low
to hold the pricing. While the specifications stated
that the buyer reserved the right to award by line
item or group, the winner of all other line items
did not bid that line item. Those that did bid, offered
pricing that the mill would honor on a group award
basis only.
- The Anne Arundel, Harford and Howard Counties group,
accepted warehouse deliveries in bulk within sixty
days (with the exception of HCPSS, which will accept
delivery in March, 2004). Baltimore County Public
Schools accepts warehouse delivery over a twelve-month
period. The combined group of three systems realized
an approximate 9% savings based on prices that were
one year old. The auction demonstrated in our analysis
that, of that 9%, 5% was a deflationary factor as
compared to more current pricing received by Baltimore
County, 3% was the effect of the reverse auction,
and 1% was due to delivery requirements. We expected
to have a greater percentage of savings for accepting
bulk delivery within 60 days; this will cause us to
re-think the delivery strategy.
As a result of the success of this initial effort,
other “reverse auction” procurements are
planned. Potential commodity areas applicable to the
process include fuel oil, gasoline, electricity, milk,
bread, and frozen foods.
Richard L. Gay, Baltimore County Public
Schools
Deborah S. Groat, Anne Arundel County Public Schools
For more information, see:
“Smart Ideas on Reverse Auctions,” Kwak,
Mary; Harvard Business Review – Working Knowledge;
September 9, 2002
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