Price / Quality reverse auctions make it possible for buyers to handle negotiations on several but similar products at the same time. This is the case for office paper purchases when two different sites must be delivered and when the buyer wishes to include some quality criteria in the decision making.
The score system will be used but it is now calculated for two lots according to the following criteria:
Price offered to deliver each site
Delivery lead-time for each site
Bonus to incumbent suppliers.
Score before the reverse auction are the following
Lot 1: 100
Lot 2: 115 (incumbent supplier)
Lot 1: 105
Lot 2: 105
Lot 1: 110 (incumbent supplier)
Lot 2: 100
Prices evolution during auction.
Supplier B wins lot 1 since he offered the best quality / price ratio to the buyer. As for lot 2, supplier A remained the supplier thanks to the quality mark he was given.
This kind of auction allows buyers to handle two negotiations including quality at the same time. This kind of auction is also valuable for suppliers too since they know that the quality they offer is taken into account by buyers. Since two lots are auctioned at the same time, suppliers who have made a wrong assessment about their position among competitors on a given lot are given the opportunity to submit proposals for another lot and maybe win the contract. In addition suppliers can win two lots through a single auction if they can offer returns on scale to buyers.
Situation A manufacturing company needs cardboard packaging to pack its products when they are manufactured in its production site. Three kinds of packaging are required; each one is adapted to a product in particular.
Pre qualification The buyer as usual checks the finance of suppliers and the one without enough guarantees are eliminated. What's more, all proposals that do not correspond to what was described in the RFP are not taken into consideration and suppliers who submitted them are not allowed in the reverse auction.
Criteria used to measure the suppliers scores:
Price for each product
Delivery lead time
Cost change supplier: can be measured by the cost of cardboards samples needed to check that cardboards packaging will fit in the manufacturing line. This cost is null for the incumbent supplier.
A weight is given to each criterion according to its importance in the decision process.
Delivery lead time: 25%
Change cost: 15%
Reverse auction Three suppliers are selected to participate in the auction. The only parameter that suppliers can change during the auction is the price for their products.
Suppliers' scores before the auction
Supplier A: 100
Supplier B: 105
Supplier C (incumbent supplier): 110, this supplier is the leader since he has the highest score.
During the auction, suppliers are informed about the leading price. The leading price given to suppliers includes quality.
Prices during the auction.
Suppliers' scores rise according to the prices they submit.
Supplier B won the auction in spite of a lower score than supplier C at the beginning. Supplier B has done a greater effort on price than supplier C to win the contract. Even if supplier A submitted the lowest price, he did not win the contract because the quality he offered was too low compared to his competitors.