Automated Vendor Selection Outperforms Reverse Auctions
Written by William Gindlesperger, Chairman and Chief Executive Officer, e-LYNXX Corporation
Reverse auctions were touted as the way to go if you want to save procurement costs and gain efficiencies by a report released by the IBM Center for the Business of Government on Oct. 20, 2011. However, there is a better path to even greater savings and efficiencies, and that path is made possible by the automated vendor selection (AVS) procedure and related procurement process.
AVS Technology is a patented procedure for procuring custom goods and services – one that creates a competitive bidding environment that results in discounted pricing. All participating vendors are thoroughly vetted by the buyer to ensure quality and on-time delivery, regardless of pricing. The deep discount pricing of 25 to 50 percent occurs because vendors bid low to fill downtime, avoiding non-revenue producing holes in their production schedules. The computerized automated vendor selection process only invites vendors from the buyer’s vendor pool who are qualified to produce a particular job. All vendors stay in the pool for consideration to bid on other jobs. Improved efficiencies occur with a proprietary web-based communications and workflow system that ensures total transparency, full accountability, strengthened controls, complete documentation and archiving of all tasks. Best procurement practices also must be applied.
An author of the IBM Center report, David Wyld, professor of management and director of the College of Business’ Strategic e-Commerce/e-Government Initiative at the Southeastern Louisiana University, observed: “Reverse auctions are indeed coming of age in both the private and public sectors, as organizations are rapidly discovering that (the reverse auctions) can be a ‘faster, better, cheaper’ method of procurement.”
His work, though, did not compare reverse auction findings with AVS.
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Had the report researchers included AVS in their study, they would have learned that while reverse auctions and the proliferation of other e-procurement competitive bidding techniques have resulted in attractive pricing, these methods typically result in vendors pricing work at the equivalent of a 3 X estimating factor (resulting in end price comprised of 33 percent materials, 67 percent value add). The AVS Technology enables organizations to achieve a new level of cost-effectiveness including previously unachievable pricing in the range of a 1.7 X estimating factor (resulting in end pricing comprised of 59 percent materials, 41 percent value add). The chart to the right provides a comparison of procurement methods.
Professor Wyld writes that using reverse auctions for appropriate commodities and selected services could save the federal government between $7.5 billion and nearly $15 billion annually. Reviewing past auctions by federal agencies, the competitive bidding competitions have saved 11.9% per purchase. With AVS, those savings would climb to between $11 billion and nearly $22 billion annually for the federal government and the savings per purchase would average 42%. In government speak, this means between $110 billion and $220 billion in savings would be achieved over 10 years.
Given this data, AVS Technology is an option that should be included in any thorough study of procurement methods. The results would show clearly that the best option for optimal savings and efficiencies is AVS.
Edited by Kevin Scarpati