Multi-attribute, Online, Descending-Price, Procurement Auctions

Eli M. Snir Introduction Online, industrial, procurement auctions are becoming a standard component in many companies’ purchasing toolbox. Companies seek to enjoy the benefits of the marketplace by implementing competitive bidding strategies among their supply base. Recent surveys of industry practices indicate that up to 52% use some form of online auction (Beall et al, 2003), with an average contract price above $2 million. One popular configuration for these auctions are the parallel of the English auction, conducted as online, descending-price, auctions. Industrial auctions are most suited for products with a need for moderate levels customization. A rigorous vendor qualification process is oftentimes quite selective with only a few qualified vendors invited to participate in the auction. A second unique attribute of industrial procurement auctions, and one that justifies the current analysis, is that even when using pre-qualified vendors, vendors differ on many attributes. Clearly, price is an important differentiator among vendors. But other factors that differ across vendors and have an impact on total cost of ownership include transportation, payment terms, quality control requirements, delivery times, financial strength, and use of multiple locations. While the cost of these non-price factors may be small, relative to the scope of the contract, the difference in non-price factors may be larger than price differences. While non-price factors are clearly important, including them explicitly in reverse auction has not been thoroughly studied. Two important aspects of non-price factors are a buyer’s disclosure policy and the method of incorporating these costs in bid evaluation. The focus of this paper is to evaluate the impact of different disclosure and evaluation policies on vendors’ bidding behavior and expected buyer cost. Using three different auction mechanisms, chosen because of their practical attractiveness, it is shown that the most common auction mechanism, the parallel of the English auction, does not lead to truthful revelation of vendor costs. Moreover this article shows that a buyer would prefer not to disclose non-price information to vendors, even if this is part of the buyer’s total cost of ownership. In those cases where the buyer discloses non-price factors, it is shown that it is in the buyer’s best interest to shave the cost disclosed to each vendor, reporting a lower cost than would actually be incurred. Three different auction mechanisms are studied here: