How Many Suppliers is Enough For an Auction? It's Not That Simple ...
Alan Buxton recently penned a short post examining how many suppliers is enough to drive optimal competition in a reverse auction environment. One chart that Alan includes suggests that the more suppliers that participate, the greater the savings potential. However, after suppliers, you begin to hit the point of diminishing return. As Alan notes, this finding suggests "that 4 bidders is a good number for a reverse English auction ... [but you can] do better than the model by ensuring that when you select potential suppliers that you are selecting suppliers who have a lower price rather than selecting suppliers at random from the marketplace."
Good thoughts, but I'd say there is no simple equation for the number of suppliers to drive savings in a reverse auction. It depends on a number of factors including the auction format used (e.g., rank bidding), category complexity / number of lots, supply market capacity, and perhaps most important, the amount of marketing you've done to the supply base prior to the event. I can't emphasize this last point enough. If you have three qualified suppliers that you've been able to get sufficiently jazzed about an event, you might get far greater savings -- accounting for similar formats, categories, market conditions, etc. -- than if you got a dozen to show up on bid day.
- Jason Busch
Good thoughts, but I'd say there is no simple equation for the number of suppliers to drive savings in a reverse auction. It depends on a number of factors including the auction format used (e.g., rank bidding), category complexity / number of lots, supply market capacity, and perhaps most important, the amount of marketing you've done to the supply base prior to the event. I can't emphasize this last point enough. If you have three qualified suppliers that you've been able to get sufficiently jazzed about an event, you might get far greater savings -- accounting for similar formats, categories, market conditions, etc. -- than if you got a dozen to show up on bid day.
- Jason Busch
Jason - yes there are a whole bunch of other factors to a successful auction, of which number of suppliers is only 1; supplier conditioning, supply market conditions, auction start prices, etc etc etc. One thing that often gets overlooked is having a sound messaging strategy to maximise competitive activity in the auction: http://esourcingplace.com/2008/04/02/does-procurem...
To come back to the number of suppliers. Sure you might get a good auction with 3 excited suppliers. But don't you think it would be better if that same auction had 4? Or 5?
• Most important is to lock down the specs - yes, RAs are not for lazy buyers.
• Secondly, determine that market conditions actually favor the buyer - current contract terms might be better in a rising market. Other factors have been mentioned already.
Without getting to Porter-focused, let's not overlook the nature of competition? If you have two suppliers that want to kill each other - that's all you need. Computer purchasing would be a clear example.
Finally, the more you can signal a firm commitment to award to the winning supplier - the better the outcome.
Again, RAs are not for lazy buyers, the specs have to be beyond perfect.
On the other hand, I recommend to every purchaser only to invite suppliers to an auction, who you would award after the bidding without any further discussions the contract. This behaviour will let you succeed on the long run with your e-Auction agenda (otherwise, some suppliers stop attending your auctions, because they see it as a complete waste of time).
Perhaps this report from the Efficient Purchasing Magazine is for you useful as well: http://www.efficientpurchasing.com/?id=2951&ci...
3 suppliers bidding - 13% savings
4 suppliers bidding - 18% savings
5 suppliers bidding - 19% savings
6 suppliers bidding - 20% savings
7 suppliers bidding - 20% savings
Another interesting observation was the number of suppliers invited was much higher (sometimes 2X) than the number of suppliers who actually placed a bid.