Time holds the key in best approach to multistage-bidding process, study finds

George Diepenbrock, KU News Service

Two men shake hands over a pile of papers

LAWRENCE — A team's new research led by a University of Kansas School of Business professor will help companies determine the best way to solicit bids from suppliers in a multistage reverse auction.

The journal Manufacturing & Service Operations Management recently published findings by the group that included Wei Chen, assistant professor of decision sciences and supply chain management.

In recent years, firms began utilizing a reverse auction to award contracts to suppliers. Typically in this setup, a contract can only be awarded to qualified suppliers who passed a multistage qualification process. This qualification of suppliers is crucial, because no firm wants to award a contract to one unqualified supplier that later fails to meet its technical requirements, for example. This would cost the firm valuable time and resources.

"We found that instead of qualifying suppliers beforehand and only conducting auctions among qualified suppliers, it might be in the buying firm's best interest to integrate the qualification process into the auction process," Chen said. "The buying firm can solicit bids from unqualified suppliers first and then use these bids to conduct the qualification process intelligently. The idea is simple; because qualification can be costly to the buying firm, it makes sense for the firm to test the suppliers selectively."

Specifically, depending on the buyer's urgency — or lack of it — for completing the qualification process and procurement, the researchers obtained cost-minimizing auction mechanisms for two testing environments. First, simultaneous testing, where in each stage, the buyer selects a subset of those suppliers who have passed all the previous stages and tests them simultaneously. Second was sequential testing, where the simultaneous-testing requirement is not imposed.

"If a company has a lot of time before the final procurement, it makes sense for the company to use the proposed auction with sequential testing. After receiving bids from suppliers, it can go to the cheapest supplier and qualify them stage by stage and pay the testing cost along the way," Chen said. "If this supplier fails, then just go to the second cheapest supplier and keep doing this until it finds some qualified supplier."

However, if the company is under pressure to complete the procurement process soon, it would be better for the company to use the proposed auction with simultaneous testing, he said.

To develop the result and conduct their study, the researchers interviewed supply chain and buying professionals at large U.S.-based global corporations.

"Mostly this would be beneficial for large firms because to gain from cost-benefits of a reverse auction, you need economies of scale," Chen said. "In small firms, they can still benefit, but likely not as much."

Chen's co-authors are Milind Dawande and Ganesh Janakiraman, both of whom are professors at the Naveen Jindal School of Management at the University of Texas at Dallas.

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