January 2008, Government Fleet - Feature
San Diego County 'Sold' on Reverse Auctions
By Cindy Brauer
Reverse auctions, an increasingly popular purchasing tool for all manner of commodities from toilet paper to firearms, can cut costs and save time while providing transaction transparency. Now, one public sector fleet is using the Web-based process to acquire vehicles.
According to Fleet Manager John Clements, San Diego County is one of the first public sector fleets in the U.S. to hold reverse auctions for multiple-unit vehicle purchases. With a $12 million vehicle acquisition budget and a 3,800-unit fleet, the County single-sources most of its administrative, light-duty, and public safety vehicles with Ford.
Purchasing Director Winston McColl introduced an e-sourcing model of reverse auctions to the County in 2004. He considers it one tool in a kit of procurement strategies for supplies used by county departments.
Lower Price Secured in Real-Time
"A reverse auction is a Web-enabled competitive pricing tool that allows the buyer, on one hand, to open up its procurement requests and obtain a lower price on a real-time basis. Suppliers, on the other hand, can now tailor their bids to the real-time online bidding process," McColl explained.
Unlike sealed bids, he added, in which the seller gets one chance to submit a best price, the reverse auction technique allows the bidder to submit bids online based on other bidders’ responses.
"This dynamic pricing tool provides significant savings to the public buying entity by ensuring the prices submitted by competing suppliers are real-time, lowest possible, visible to all participants, and auditable," said McColl.
Reverse auctions are different from an eBay sale, according to McColl. "On eBay, one product is offered to many buyers. A reverse auction involves one buyer and many suppliers."
He has tracked total cost savings achieved 2004-2007 through reverse auctions held for the purchase of goods (including vehicles), and selected services. "These events have saved more than $25 million in verifiable savings to County departments, providing a return on investment of more than 100 times greater than the cost to the County of $200,000," McColl reported.
San Diego County uses a software program, Procuri, now Ariba, to run the reverse auction and pays an annual $50,000 software license fee for its use. Among the savings the internal reverse auction produces is the elimination of the cost of a live auctioneer.
Specs & Bidder Volume Critical
"What’s critical to the process are tightly-written specifications and at least 2-3 bidders to start," said McColl. In addition, publicizing and communicating bidding details are crucial to a successful auction.
The County’s fleet operations holds 2-3 reverse auctions per year, depending on the bid cycle and when the purchase volume is significant, said Clements. "For the one- or two-vehicle purchase, for example, when we buy undercover cars, purchasing will do a quick quote on BuyNet." Typically, the County’s vehicle reverse auctions draw about 10 bidders.
Specifications can be created for an item with multiple line items and levels of bid items. Multiple line items also may be included in a single auction event.
A multiyear bid is usually structured with two years of fixed pricing and two option years with an escalator factor, Clements explained.
Fleet and purchasing work closely during the specification process, said Clements. "The way we buy vehicles is a very interactive process with purchasing," he said. "Purchasing practically lives in our building or we are in their building when we go through a vehicle bid because of tasks such as bid analysis that we have to do together."