Japanese vs. Dutch Reverse Auctions

In a recent post, I examined some of the pros/cons of Dutch auctions (or reverse Dutch auctions to be specific). But Reverse Dutch auctions aren't the only type of alternative negotiation formats out there. Reverse Japanese auctions, another competitive bidding format, offer an alternative for those sourcing organizations looking to maximize the number of potential award candidates at a particular clearing price. But what is a Japanese auction? The E-Sourcing Wiki does a decent job explaining the basics noting, "In a Japanese reverse auction, after every bid, each seller must signal their willingness to remain in the auction at the current price. The auction is over when only one seller remains, or when only a pre-set number of sellers remain (when the buyer has indicated the need to source from a minimum number of sellers)."

If you read between the lines here, especially relative to a reverse Dutch auction format, the major difference is rather than constraining award options by having suppliers opt-in at a given price point (thus ending the auction), reverse Japanese auctions require suppliers to explicitly "opt out" of a given market. Put even more simply, Japanese auctions provide for the maximum number of award options at a given price point. The benefits of this are simple relative to the Dutch format. For one, the buying organization has greater transparency to the actual market itself. In this regard, the format more closely mirrors that of a traditional reverse auction by providing greater visibility to each participant's lowest offer.

But in contrast to a Dutch auction format, Japanese auctions do not put what one Dutch auction user describes as "maximum psychological pressure" on the supply base -- especially the incumbent suppliers. Still, depending on the level of market feedback that one configures with a Japanese auction format (e.g., do suppliers only see that there are competitive offers at the same price point rather than X number of competitive offers), the format does provide a degree of market transparency across the participant base.

Personally, I remain a believer in the portfolio approach to sourcing and negotiation formats. Even though we all might have our favored formats, the existence of multiple negotiation approaches (e.g., reverse auctions, multi-attribute reverse auctions, Dutch auctions, Japanese auctions, Vickery auctions, optimization, optimization with feedback/multiple rounds, etc.) is what makes sourcing and negotiation the most interesting part of Spend Management, at least in my view. But unfortunately, however, I doubt that 80%+ of procurement organizations are familiar with more than a couple of competitive negotiation options available to them.

I'm curious if anyone in the Spend Matters audience has had experience with Japanese auction formats. Moreover, has anyone used either traditional (i.e., non reverse) Dutch or Japanese auctions for asset recovery or surplus sales?

Jason Busch

First Voice

  1. Peter:

    I have a fairly good experience with Dutch auction but now we are considering developing the Japanese auction. Using this format, do you share the number of participant(s) left with the suppliers? Do you stop the auction when only one supplier is still “up” or do you keep going until everybody is out or you reach a certain number of steps?
    Thanks.

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