Sourcing and procurement can be complex endeavors. This is why alternative negotiation approaches have been devised.
In an ever-increasingly competitive business environment, chief procurement officers and their teams must be familiar with more than a handful of negotiation options if they hope to get the best possible prices.
Now, in this blog, we’re going to look at one such negotiation option – the Japanese Auction.
Let’s get into it.
Japanese Auction Defined
What is a Japanese Auction? When do you use it? And why do you use it?
A Japanese Auction is simply an auction whereby the opening bidding price is reduced in intervals incrementally as the auction progresses.
Japanese Auctions typically take place after the issuing of RFI and RFPs as only previously identified suppliers are invited to the auction.
When to Use Japanese Auctions
Japanese Auctions are best employed when:
· A buyer is looking for a single quote supplier.
· A buyer is faced with a difficult competitive market.
· A buyer wants the most favorable prices for various products.
· A buyer has a potential bias toward a particular vendor.
· A buyer’s procurement journey is complex because of varying demands.
· The services or products offered by vendors cannot be easily compared.
Why Use a Japanese Auction?
There are different types of auctions that procurement teams can resort to. Why should they settle for a Japanese Auction?
Well, this type o auction can be advantageous when you wish to establish the lowest price at which a supplier is content to do business.
Japanese Auctions allow buyers greater visibility into the price margins of each participant in the auction and provides them with an opportunity to ascertain the lowest possible offer.
The Mechanism of a Japanese Auction
The main characteristic of a Japanese Auction is that it is run by the buyer as a sort of game of elimination. It is a game where the last supplier standing wins the contract.
The buyer defines the starting price upon which each participant will enter the auction. This price is most often determined by the information provided from the RFI and RFP sent back to the buyer by the vendor.
When the auction starts, the price is decreased in increments or at a fixed percentage. Suppliers are given the chance to remain in the auction or to ‘opt-out’ when the price is no longer favorable for them to do business.
The auction will continue for as long as there remain participants willing to accept lower and lower prices.
The auction only stops when there is either:
· One supplier remaining or,
· A fixed number of suppliers (if the buyer wants to work with more than one vendor)
The objective of this entire auction is to uncover the lowest price each bidder is willing to be contracted for.
The Ethics of Japanese Auctions
While Japanese Auctions can certainly be useful, they aren’t without controversy.
The main concern that suppliers have with this type of negotiation is that they are bidding blindly.
They are not told the number of participants in the auction. And neither are they informed about the prices their competitors are bidding.
This of course raises a lot of ethical questions about the behavior of buyers during these tendering processes.
It’s not unusual to find that the best price achieved by a Japanese Auction is typically less than that achieved in a reverse auction.
So, knowing this, why are Japanese Auctions still employed?
Benefits of Japanese Auctions
Buyers that initiate a Japanese Auction can look forward to the following advantages:
This happens because of the lack of transparency between suppliers during the bidding stage.
The buyer is able to get a complete picture of what each supplier is capable of offering in terms of pricing per product and service.
Using the information gleaned during the auction, the buyer can formulate a directory of which suppliers they would like to do business with in the future.
Unlike the reverse auction or the Dutch auction, the Japanese Auction is relatively risk-free for the buyer.
As with all things, there are also disadvantages.
Disadvantages of Japanese Auctions
Without the full commitment of the suppliers, the auction may not produce the desired results.
Because vendors have no visibility during the auction, they may not feel the pressure to better their bids to secure the contract.
Japanese Auctions are a great alternative to Dutch and reverse auctions. With the advent of technologies such as reverse auction software, setting up e-auctions has never been easier.
CFOs and their teams can employ a series of auctions in order to find the best suitable contractors for varying products and services. This type of auction assists in finding the best deals and most reliable vendors.
Thanks to software from procurement companies like ProcurePort, using analytics to make better sourcing decisions is now possible. Award contracts with confidence and build a comprehensive vendor database.
Equip your team with optimum procurement technology: spend analysis software, procure-to-pay solutions, contract management solutions, purchase requisition software, RFP RFI RFQ solutions, and robust reverse auctions software.
To discuss your enterprise needs with a consultant or to schedule a demo of our reverse auction procurement solutions contact us today.