Eauction

This article describe the process of electronic auction (E-Auction),which is introduced to negotiate terms of contract between suppliers and buyers mainly in the industrial sector.

Definition

The electronic auction (eAuction) is an e-business between auctioneers and bidders, which takes place on an electronic marketplace. It is an electronic commerce which occurs business to business (B2B), business to consumer (B2C), or consumer-to-consumer (C2C).

The auctioneer offers his goods, commodities or services on an auction side on the internet. Interested parties can submit their bid for the product to be auctioned in certain specified periods. The auction is transparent, all interested parties are allowed to participate the auction in a timely manner.[1][2][3]

The two major types of the electronic auction are forward auction in which several buyers bid for one seller's goods and reverse auction in which several sellers bid for one buyer's order.

Forward auctions take the form of a single seller offering an item for sale, with buyers competing to secure the item by bidding the price upward (see Figure 1). Forward auctions are far-better understood by the public at large than reverse auctions as to how they operate, due primarily to the fact that they are widely used at the consumer level. In fact, forward auctions underlie everything from eBay and other online auction sites to auctions of art, wine, and other collectibles. They are also widely used for auctioning everything from autos, real estate, machinery, etc., where the goal is for the seller to receive the most money possible for the item being offered at auction. Thus, a forward auction should be utilized for sales of goods and services of all types, whether conducted online, offline, or a hybrid of the two.

This diagram shows the process of a reverse auction
This diagram shows the process of a forward auction

Reverse auctions are the other major form of auctions. In a reverse auction, a single buyer makes potential sellers aware of their intent to buy a specified good or service (see Figure 2). During the course of the actual reverse auction event, the sellers bid against one another to secure the buyer’s business, driving the price to be paid for the item downward. Thus, the winning bidder is the seller who offers the lowest price. Reverse auctions are most typically used for procurement by private companies, public sector agencies, and non-profit organizations.

There are several types of auctions possible, e.g.

Context

The auction itself follows clearly defined rules, being obeyed by all market participants. This is similar to any usual auction as the basic principle remains the same.

When we look at B2B markets, the heterogeneity and complexity of goods in the industrial sector at first require a detailed, published description from the purchaser before suppliers can respond.

After this tender process, there is a negotiation that allows flexible pricing and intensification of competition among suppliers. Mostly E-Auctions are Reverse Auctions, where the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers undercut each other.

But before the E-Auction takes place you have to define factors that directly act on the bidding.

Those factors are the specific bid amount, the historical price, the target price, the step size for the variation of the bidding and the extension of the auction period through the waiting period.

The historical price marks the price threshold, which should not be exceeded.

The target price is relevant for the contractually fixed surplus. It is the price threshold that bound the purchaser to order within the appointed dead line.

Both thresholds should be realistic otherwise the dynamic of the E-Auction and the interest of suppliers are ebbing.

At the end of the auction the waiting period is the time the auction will go on if there is a new bid. The duration of the waiting period has fundamental influence on the dynamic of E-Auction. In this period suppliers fear to lose the order, because of lower prices from competitors. Thus a rapid sequence of offers are set up.

Now, after the negotiation process, the E-Auction takes place in a specific period of time. Starting from this moment the bidders (=supplier) have the possibility to submit their bids (=price) for the items over the internet. All bids are public domain for the participants of the E-Auction, which moreover intensify competition. Based on the detailed description of the requirements the target price is calculated. When the time of the E-Auction is over the lowest bid (=price) gets the acceptance of the tender (Reverse Auction). The demander’s contract terms set the frame for the whole process. Renegotiations should generally been excluded in advance.[4]

After that, a mandatory contract is made. The purchaser is indentured to accept the good and pay the price while the seller is indentured to deliver the good.

7 Steps to eAuction success

There are many components to an eAuction success. Including good strategies, best practices, and inscrutable ethics. However, this overview shows another set of good process that one can follow to make sure that an auction runs smoothly, efficiently, and delivers on its expected benefits.

  1. Define Requirements and Goals. As with every other step of the sourcing process, good requirements, along with clear goals, are key. Be sure to understand what the strategy is for lowering or controlling costs, for optimizing the supply base, and for process improvements.
  2. Invite all Potential Suppliers to an Open RFI. Do not limit the organization's supply base to current suppliers as sometimes the best process and cost savings can come from new suppliers with streamlined processes, innovative production technologies, and lower production costs.
  3. Pre-Qualify Capable Suppliers. It is critical not to invite suppliers to an auction that are not capable of meeting the organization's needs. This will only garner resentment form other suppliers and possibly cause significant production delays of it is only discovered after the award that the supplier cannot deliver.
  4. Clearly Document All Requirements. Good documentation is the key to a successful sourcing project in general. With a global supply base, staffed by individuals of distinct cultures, each with their own internal understanding of what a (foreign) term or requirement could mean, there are really no common terms or definitions – but detailed documentation can avoid this problem and avert potentially costly misunderstandings.
  5. Hold a Q&A Training Session. Don't assume the auction tool is easy or natural for your supplier. Whereas your buyers have probably been trained on it, used it, and are accustomed to using it as part of the process, it might be a new tool, concept, or even business paradigm for one or more of your suppliers.
  6. Monitor the Auction. It's important to make sure that things run smoothly. If one or more suppliers fail to bid relatively promptly or the refresh rate is sluggish or non-existent, either the buying organization or one or more supplying organizations might be experiencing problems. A buyer should be ready to step in and offer help or remedy the situation at an instant.
  7. Follow Through and Award Promptly. It's important to be prepared to allocate awards and follow through on negotiations promptly and within the promised timeframe.

[5]

Limitations of eAuctions

Examples

Examples for the different types of e-auction

References

  1. ↑ Kleusberg, Peter (2009). E-Collaboration und E-Reverse Auctions. Saarbrücken. pp. 16–25.
  2. ↑ Engelbrecht-Wiggans, Peter (2006). E-Sourcing in Procurement. Management Science. p. 581.
  3. ↑ Wyld, David C. (2012). REVERSE AUCTIONS 101. Louisiana: Southeastern Louisiana University.
  4. ↑ Göpfert, I. (2005). Logistic Stories. München: Froschmayer. pp. 257–277.
  5. ↑ "Beispiele für B2B,B2C,C2C".
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