The Reverse Auction from Hell: Procurement Horror Story from a Reader

[Note from the editor: Thank you to everyone who participated in our first-ever Procurement Horror Story contest. It was fun judging, not to mention we got to use some cool banners. We are not naming a winner; however, one anecdote in particular was too good not to share. The writer wishes to remain anonymous. Happy Halloween, and happy reading!]

“In 2006 I worked for a rural western county. In the midst of a dizzying climb in gas and diesel prices, we had to re-bid our fuels contract. Our supplier could no longer maintain his flat fee for deliveries to our pumps. As fast as the price of fuel was increasing, we needed a new contract with a responsive escalation clause for delivery.

New to the industry, I researched all options available: separate market differential and delivery bids, PPI auto-adjustments, pass-through delivery fees, etc. I found one model that made perfect sense, and was being recommended by some professional groups: rack price, plus a percentage of rack.

This model depends on the fact that the reseller fills its tanks using the same fuel it’s delivering, so when the rack rate for fuel goes up or down, the delivery price automatically increases or decreases proportionately.

I analyzed the different escalation methods and determined this one offered the fairest value for least effort. I discussed with other state and local agencies across the country that were already using this method with great success. I discussed with our County engineer, who appreciated its elegant simplicity. I discussed with our fleet and equipment managers, who understood and agreed. I scheduled an online reverse auction for the new contract, and at the appointed time we all logged in to watch the action.

I hadn’t discussed with the bidders.

I would be hard pressed to describe the horror I experienced watching the bidding in real time. There was a handy little graphic to the right of the auction, with a line graph that was supposed to show the bids dropping, but instead just showed an initial two or three outrageous bids from each offeror, then a flat line. My boss and all of the Public Works managers involved each called me every two minutes or so to ask me what was wrong, was the software broken, this wasn’t seriously what we were going to be paying was it? I assured them, no, the bidders were just waiting until the last minute, like e-bay. But they weren’t. The auction closed right on time with no fanfare. I forget exactly how much more we were now contracted for, but it wasn’t pretty.

Our local jobbers were not familiar with this escalation model. They were already skittish thanks to the crazy market. In speaking with them later, to put in a “safe” bid, they had projected the highest price they could imagine for fuel, the flat rate they would want for delivery at that price, and they had used that to calculate a percentage of current fuel costs, and they had bid that percentage.

It didn’t take us long to re-bid with a less innovative fee structure. And with my horror story I got an important lesson: I have never again tried anything new and exciting without talking to the supplier community first.”

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First Voice

  1. Market Dojo:

    Great story and a really valuable lesson for anyone to take away with them. Involving the suppliers during a negotiation is a must, especially prior to an auction. In many respects the auction is just the bolt-on for a typical contract negotiation. Therefore it is important to engage the market early, get their thoughts, commercial offerings via RFP/RFQ or Pre-Bid, even their own innovative ideas. Once you have all this, you are in a much stronger position for that final negotiation, and you greatly de-risk the auction itself.

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