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May/June 2010

Reverse auctions revolutionize purchasing
by Jim Headlee

Jim Headlee is chief executive officer of BidBridge, a procurement agency based in Louisville, Kentucky.

Many districts have experienced firsthand the depth and duration of the current recession. Layoffs and budget cuts have been drastic in many schools.

To combat financial problems proactively, many districts are looking for technological innovations and new strategies to cut costs and run more efficient operations. Ultimately, the more strategic financial planning Illinois school districts can do to keep costs low, the better chance they will be prepared for the next economic downturn.

One area that has particular room for strategic thinking and innovation is procurement. Purchasing methods have remained largely the same for years and many of them don’t provide the environment for competition that drives product prices to market value and ensures that taxpayer dollars are spent as wisely as possible. In other words, the one price per supplier response process of traditional public bidding does not afford suppliers the opportunity to compete in a dynamic environment to earn the business of our school districts.   

One innovation in particular that has been slow to reach the procurement processes of our schools is reverse auction, a tool that has been a key part of private sector purchasing strategies for more than 20 years.

A reverse auction is a variation on a typical auction: rather than a buyer receiving multiple competitive bids from a pool of potential suppliers, potential suppliers com­pete for the business of the buyer on a specified good or service to be purchased, thereby lowering the price of the goods or services. Each supplier has multiple opportunities to place bids in an effort to win the business, and the purchasing organization gets the opportunity to buy with the knowledge that the purchase is being made at true market value.

Reverse auctions provide visibility for the purchasing organization, true competition between suppliers, standardized buying methods and reduced overall spending. Implementing a reverse auction platform and strategy can greatly reduce both purchasing costs and transaction processing costs, while helping Illinois organizations to more closely comply with new bid regulations.

The Illinois School Code was amended in December to allow for electronic bidding. Representative Roger Eddy, superintendent in Hutsonville CUSD 1 who introduced House Bill 613, recognized the need for school districts in Illinois to have the option of using a purchasing process with the potential to deliver meaningful results. The bill allows for “communicating, accepting, and opening competitive bids” as well as allowing an “electronic bidding process.”

The two-step process of an e-auction purchase event meets the standards set forth in Public Act 96-0841:

1) The public opening of bids received is still an act that occurs (per the statute), but without a price included in the submission of a bid at that time.

2) After bid specs have been reviewed by the school district and bidders have been qualified, the “electronic bidding process” occurs. Participants in this process must participate by logging “onto a specific database using a unique username previously assigned to the bidder.” Furthermore, the “electronic database must be on a network that: (i) is in a secure environment behind a firewall; (ii) has specific encryption tools; (iii) maintains specific intrusion detection systems; (iv) has redundant systems architecture with data storage backup, and (v) maintains a disaster recovery plan.”

Many higher education institutions have already recognized the benefits of reverse auctions and have used them to purchase items like dorm mattresses and furniture, food service contracts, library furniture, swimming pool covers, computer/IT equipment and video surveillance equipment.

The potential for K-12 schools to save on a variety of items is enormous; the reverse auction process could potentially help lower the price on products like copy paper, technology, office supplies and more. In fact, a large city recently saved $1.1 million against budget for a purchase using a reverse auction platform. While education-based organizations will naturally have scaled down savings, schools can expect to save an average of 14 percent on purchased goods and services — usually in comparison to an allotted budget or a previous contract.

Saving on paper

One progressive Illinois district has already implemented the reverse auction process in its procurement strategy — with extraordinary results. This past summer, St. Charles CUSD 303, in partnership with a company that specializes in running reverse auctions, purchased copy paper in bulk.

The copy paper bid included five suppliers. Suppliers competed via the Internet for a contract that would consist of 7,132 cases of paper. The contract further broke down into six different line items — products that varied in color, size and recycled/non-recycled styles.

Accounting for all line items, the ensuing 52-minute bid event returned a 12 percent savings against CUSD 303’s existing copy paper contract. The savings on some of the individual line items was even more significant. For instance, CUSD 303 was able to realize a 20 percent total savings on non-recycled products.

The 8½x11 white copy paper item saw 50 total bids, 20 first place turnovers and 21 time extensions — all solid indicators that a much more competitive bid environment was achieved in comparison with the traditional public bidding process.

“With help, we were able to complete the bid in an efficient, professional manner,” said Cathy Koch, CUSD 303’s director of business services. “The electronic reverse auction process is truly a step forward in public procurement across the country, especially for schools and school districts.”

The value of proactively bolstering long-term efficiency for a school or district cannot be understated. School leaders should seek out and evaluate all cutting-edge measures that could potentially help school districts operate more efficiently and better prepare them for the next time the economy is in trouble.

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