Keeping procurement e-auctions simple is crucial

Keeping Procurement e-Auctions Simple

Introduction

This blog explores Linus Boman’s insights on auction structures, cost models, and best practices for running effective and credible e-auctions while keeping Procurement e-Auctions simple. Additionally, for procurement professionals looking to establish their e-auction skills, Learn How to Source offers a getting started course on procurement e-auctions: Explore the Course.

The Power and Pitfalls of Reverse Auctions

Reverse auctions are widely applied across various procurement categories (see examples from Market Dojo) Their appeal lies in their ability to drive competitive pricing, increase supplier engagement, and reveal true market costs. However, when non-price factors—such as quality, service levels, or technical capabilities—are introduced, auctions become more complex and less transparent (Boman, 2025).

Boman outlines three simplified auction scenarios to illustrate the effects of pitfalls and complexity in cost modeling:

1. The Price-Only Auction

In a basic price-only auction, suppliers compete purely on cost. Consider two suppliers:

  • Supplier A: Initial bid of $100
  • Supplier B: Initial bid of $150

Both suppliers can reduce their bids by 10%. However, Supplier B is unlikely to drop their price enough to outcompete Supplier A. This highlights a core debate in e-auctions:

  • Proponents argue that auctions force suppliers to reveal their best prices, even when competition is minimal.
  • Critics warn that “single-supplier auctions” can lead to distrust, causing suppliers to shade their bids or refuse to participate altogether.

As Jacob Gorm Larsen notes in A Practical Guide to e-Auctions for Procurement, single-supplier e-auctions have damaged credibility, much like phantom bidding (Larsen, 2021). If suppliers perceive an auction as artificially constructed, they may bid conservatively or disengage entirely.

2. The English Auction with Handicap

To account for non-price factors, procurement teams sometimes apply a cost handicap to bids. For example, if Supplier A’s technology incurs a $42 cost for the buyer, this amount is added to A’s bid. The auction might then unfold as follows:

  • Supplier A starts at $100 (adjusted to $142 with the penalty)
  • Supplier B starts at $150 and lowers to $135
  • Supplier A lowers further, winning at $93

But is this fair?

Two concerns arise:

  1. Trust Issues – If suppliers perceive the handicap as artificial rather than a true cost adjustment, they may bid conservatively or avoid participation.
  2. Unintended Consequences – If the penalty is set incorrectly (e.g., $46 instead of $42), Supplier A could drop out prematurely, resulting in a worse financial outcome for the buyer.

Key Takeaway: Artificially increasing competition through cost model adjustments can backfire, leading to higher costs and reduced supplier engagement.

3. The Price-Dependent Handicap

Some auctions use dynamic handicaps, where technical scores and pricing fluctuate throughout bidding. For instance, a 20% better technical score might require a supplier to price X% lower to remain competitive.

The issue? Breaking the principle of independence of irrelevant alternatives (IIA). This means that a supplier’s ranking can change even when they do not improve their bid—a serious flaw that undermines auction fairness(Boman, 2024).

As Boman explains, ranking suppliers based on competitors’ activity introduces distortions similar to phantom bidding or “rabbit” suppliers, which is considered unethical and counterproductive (Larsen, 2021).

Best Practices for Keeping Procurement e-Auctions Simple

Based on Boman’s insights and industry best practices, procurement professionals should prioritize simplicity and transparency:

  1. Avoid Single-Supplier Auctions When Possible – If only one supplier is likely to win, negotiation may be more effective than an auction.
  2. Use Static Handicaps – If adjusting for non-price factors, set a fixed value rather than allowing it to fluctuate during bidding.
  3. Align Cost Models with Reality – Complex formulas do not compensate for poor cost visibility. If actual cost differences are unclear, a simplified pricing model is preferable.
  4. Prioritize Supplier Trust – Auctions must be perceived as fair and transparent to encourage full participation.
  5. Do Not Overvalue Activity – A competitive-looking auction with frequent bids does not guarantee better pricing. The ultimate goal is true cost reduction, not just increased bidding volume.

Learn More: Mastering e-Auctions with Learn How to Source

To develop a first understanding of e-auction capabilities, auction execution, and supplier engagement, procurement professionals can explore the Procurement e-Auction Course available at Learn How to Source: Access the Course.

This course provides practical frameworks, real-world examples, and best practices to help procurement professionals establish e-auction capabilities while maintaining simplicity and assure keeping Procurement e-Auctions simple.

Conclusion

As Linus Boman’s analysis demonstrates, complexity in e-auctions can often do more harm than good. While cost models and scoring mechanisms may aim to create fairness, overly intricate structures can reduce supplier trust, distort competition, and lead to suboptimal procurement decisions. The best approach? Keep it simple.

By focusing on clear cost models, transparent processes, and supplier trust, procurement professionals can harness the full power of e-auctions while avoiding unnecessary pitfalls.

For those looking to refine their e-auction expertise, Learn How to Source provides the Basic level training, in co-operation with Market Dojo, to help you execute successful, simple, and effective procurement e-auctions.

References

Note: Illustration to the blogpost “Keeping Procurement e-Auctions Simple” was created in February 20, 2025 using Chat-GPT.

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