RFQ Auctions with Supplier Qualification Screening

We consider a manufacturer using a Request For Quotes reverse auction in combination with supplier qualification screening to determine which qualified supplier will be awarded a contract. Supplier qualification screening is costly for the manufacturer, for example involving reference checks, financial audits, and on-site visits. The manufacturer seeks to minimize its total procurement costs, i.e. the contract payment plus qualification costs. While suppliers can be qualified prior to the auction (pre-qualification), we allow the manufacturer to delay all or part of the qualification until after the auction (post-qualification). Using an optimal mechanism analysis we analytically explore the tradeoffs between varying levels of preand postqualification. While using post-qualification causes the expected contract payment to increase (bids from unqualified suppliers are discarded) we find that standard industrial practices of prequalification only can be improved upon by judicious use of post-qualification, particularly when supplier qualification screening is moderately expensive relative to the value of the contract to the buyer.