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Procurement Choice: E-auction or RFP?

by Beroe Inc.

20 September 2020

With inputs from Ddivya Kumar, Senior Analyst

procurement-choice-e-auction-or-rfp

E-auction, or reverse auction, involves real-time electronic competitive bidding where the buyer requests for quotation and suppliers bid for business, in an attempt to decrease the selling prices until a true market price has been reached. It is the opposite of the forward auction wherein the buyers compete to secure the goods or services by bidding the price upward.

E-Sourcing tools offers flexibility as well as better price discovery, but the question that continues to face Procurement teams is when to use E-Auction as opposed to when it would be best to take the RFI/RFP route.

In case of E-Sourcing, Best-In-Class companies start with RFP process followed by E-Auction.

In the RFP process, all the details pertaining to the requirement is collected from the potential suppliers and analyzed to get market pricing. This process ensures less risk and success of auction even; whereas, E-Auction is used for standardized products.

E-Auction is used for categories that involve standardized product specification.
RFX is used for categories involving high level of complexity and limited supplier base.
Best-in-Class companies follow a hybrid approach where initial RFI, RFP is done via the tool followed by E-Auction of components once requirements are fixed.

To E-auction or Not

E-auctions have their own advantages, but at the end of the day it does not offer “one size fits all” type solution. If not seen only from the prism of price, a well calibrated approach to e-auctions can still deliver benefits.

Highly standardized products or services with less differentiation are the categories that could be successfully sourced through E-Auctions.

On the other hand, indirect categories and products/services that require after-sale services are least sourced through E-Auctions.

Below are the indicative list of key categories that can be successfully sourced through E-Auctions.

Direct Categories	Indirect Categories
Raw Materials	Temp Labor & Recruitment Services
MRO & Equipment	Telecom and Courier
IT Hardware	Consulting
Packaging Supplies	Legal Services
Freight & Transportation	Creative Agencies and Advertisements
Office Supplies	IT Outsourcing, IT Software Licensing, IT hardware - Servers, desktops, laptops, printers etc.

Below is the table that indicates when each E-Sourcing tool is more appropriate.

Characteristics	E-Auction only	Use of RFP Process and E-Auction	Use of RFP Process only
Category Appropriateness	In categories that involve standardized products, buyers can directly run an auction by inviting the suppliers to the event	For categories with less customized specifications, and variables other than the price, buyers can use eRFP to pre-qualify suppliers and obtain quotes before running E-Auction event.	Buyers can opt for RFP process for categories with highly customized specification where only a limited number of suppliers have the capabilities.
Critical Variables	Predominantly price/ volume	Value and price	Value only
Industry competition	High competition	Medium competition	Less competition
Supplier availability	Large pool of suppliers	Many	Few
Supplier relationship	Transactional	Limited	Strategic
Supplier Capabilities	Low	Medium	High
Supply lead time	Short	Medium	Long