2017 was a record year for the electronic auctions carried out on Logintrade Procurement Platform. The result of 20 538 carried out auctions is almost 40% higher, in comparison with the past year. Keeping in mind that more and more often auctions are used in the public sector, 2018 may bring another record increase in the number of carried out auctions and actual companies’ savings. Electronic auctions are based on using the market’s competitiveness in order to help decrease the prices and the costs of businesses functioning.

Auctions may be a very good tool, which helps finding market bargains. As studies show, more and more procurement managers can’t imagine procurements without using auctions. Creating electronic auctions is not complicated, however, it is good to use a reliable methodology, which helps us in succeeding in this particular field. One of the main rules an organiser should specify is the starting price, which means the price an auction begins with.

The methodology states that the starting price, as known as “the reserve price”, should be lower than the best offer received at the first stage of the proceeding by the minimum change of the price. Following this rule reduces some significant risks.

The first risk is certainly receiving higher offers than the best offer before the auction. The second risk is a tie. If after the auction, the offer was equal to the offer received, in the situation where besides the price, there are no other factors deciding on a choice of supplier, there appears a tie. The solution is carrying out the third stage, which should definitely settle the outcome of the proceeding. However, it extends the time of the project’s duration and causes the buyer to have more work to do, than originally assumed. In our times, when most of the things need to be bought very fast, avoiding such risks secures not only the buyer, but also the internal customer, who cares the most about the time of delivery.

It would be good now to think, if our methodology has any weaknesses. Being aware of them will help us prepare better. Surely, an unresolved auction is something undesirable in electronic auctions. It may turn out that at the stage of settling a minimum change of the price, which directly impacts the starting price, we were too optimistic and therefore we have exceeded the suppliers’ threshold of pain. It means that none of the suppliers was interested in taking part in the auction, because the price was so low, that the auction was no longer profitable. To avoid such a situation, a good idea would be to set a small increment so that the offerors could slowly lower their prices. Relating to a particular line of business, specialist knowledge of certain procurement categories and familiarity with the margin on the suppliers’ market will be helpful in doing proper calculations of an increment. If we do not have such knowledge, setting a small increment is even more important.

The methodology of specifying the starting price brings many benefits, however, some auction situations may determine using a different methodology. Sometimes, the organiser does not want to reveal the level of prices from the first stage by specifying the starting price, because they fear that it might not have a positive impact on the progress of the whole auction. Another element, which may have an impact on the buyer’s decision to not specify the starting price is the methodology of calculating savings, which are the most important part of procurements. Leaving the opening of the auction to the suppliers may cause the auction to begin at a high level, but as a result of direct competition between the buyers, it may decrease to lower levels quickly. After such an auction the savings expressed as a percentage might be higher, so in reality our effectiveness is judged to be high in the reports. The most common reason of not specifying the starting price, however, is the fact, that the organiser did not collect offers at the first stage, but began the proceeding right away from an electronic auction. It is of course possible in procurements, where there is a market, on which there is a lot of suppliers and we are certain that our invitation to an auction will arouse great interest.

During meetings with practitioners, who carry out many electronic auctions daily, I meet with different opinions on not specifying a starting price. Many of them don’t use this option, but others see significant advantages of this solution in certain proceedings. The decision is always made by the person, who is responsible for the procurement process. However, it is good to know the advantages and disadvantages of both solutions and find out in practice which one is the most profitable in a certain situation.

Electronic auctions in the Logintrade Procurement Platform in 2016/2017