Reverse auctions save Navy millions
- By Michael Hardy
- Apr 28, 2003
GSA Reverse Auction Enabler Services
The Naval Supply Systems Command (Navsup) has cut its acquisition costs by an average of 20 percent on some transactions with help from software to manage reverse auctions.
Reverse auctions, a relatively uncommon procurement method, allows vendors to compete directly against one another in offering best value, said Diane Lucas, a program manager at Navsup. The software, which comes from Procuri Inc., lets the Navy do it in real-time, turning a weeks-long process into one that can be accomplished in hours.
Navsup, which buys more than $5 billion in supplies each year for all branches of the military, has conducted more than 80 bid events with the software, Lucas said.
"We believe that reverse auctions are a proven tool," she said. "Our mission is to provide combat capability through logistics, and we are using this reverse auction tool to conduct online pricing discussions with the vendors that respond to our solicitations."
The command launched a pilot program in 2000 to test both the auction process and the software, she said.
"Our very first auction was for an item called a recovery sequencer. It's the brains of the ejection seat in an airplane," she said. "We saved [about] 28 percent from the original estimate. The original estimate was $3.3 million. The auction price was $2.3 million."
The organization has saved about $38.8 million since it began using the auction process, she added.
The pilot project went so well that the command extended its agreement to use the tool for $2.25 million for five years. Procuri, which touts Navsup as its flagship federal customer, got the Web-based product listed on the General Services Administration schedule this year.
GSA last year issued Reverse Auction Enabler Services contracts to four vendors, in an effort to popularize the concept. All four of the vendors can offer hosted reverse auction services, and three of them also can provide software to agencies.
The concept intrigues agencies but hasn't been a priority for them, said Mike Young, government programs manager at Rockville, Md.-based B2eMarkets Inc., one of the vendors.
"It was a hot new concept a couple of years back, in the 2000/2001 timeframe. Some of the [Defense Department] agencies were the first to try it," he said. "It is still of interest. Agencies are still calling. But with the war going on and the [formation of the] Homeland Security [Department], the auction piece is not necessarily the highest priority right now."
For Lucas, the process begins like any acquisition, with a solicitation posted on www.fedbizopps.gov.
"The vendors submit an initial offer," she said. "After the solicitation period ends, we contact the vendors, provide them with training on how to use the Procuri Web site, and we establish a day and time for the conduct of the auction."
Reverse auctions can be effective, but only for some procurements, said John Okay, president of J.L. Okay Consulting Inc. and former deputy commissioner of GSA's Federal Technology Service.
"Conceptually, it's a good way to get buys for certain kinds of commodities," he said. "In one sense, the multiple awards schedule already gives buyers a huge choice of sources. For [information technology] products and services, it seems to me it's a little bit redundant."
Navsup uses the process sparingly, Lucas said. "We have indicated to our people that in order to use the reverse auction effectively, you must have a firm, definitive, well-defined requirement so that everyone is on a level playing field," she said.
Navsup has an enterprise license for the system, so any naval organization can use it.
Procuri wants to expand its presence in the federal market, said Mark Morel, the company's president and chief executive officer. The small company started going after federal business right away when it released the first version of the software in May 2000.
"We always had it on the radar screen as a big part of the market we wanted to go after," he said. "We did know it would take a while. Something this new, and the way they do their purchasing, it would take them a while to get comfortable with this."
The Navy was a surprisingly easy win, Morel said. "They have a mind-set that it's important to spend citizens' dollars wisely," he said.
In a reverse auction, providers of a product or service bid directly against one another by improving their terms or lowering their prices.
In a traditional auction, a seller puts forward an item and bidders compete for that item. Reverse auctions flip those roles so the agency puts forward the concept of a product or service that it wants to buy and then vendors bid on supplying that product or service.
The auction takes place online and lets vendors compete for the contract by lowering their prices as they see other offers posted.