An online negotiation tool that’s proven to reduce material costs is now the Defense Logistics Agency’s preferred method for price negotiations on all competitive contracts valued at more than $150,000.
DLA Director Navy Vice Adm. Mark Harnitchek directed that reverse auctions be used for new procurements in a memorandum sent to the agency’s primary-level field activities in June. DLA recently awarded a new contract for an updated online reverse auction tool provided by Procurex.
The agency has saved more than $34 million through reverse auctions since fiscal 2010, when contracting officers began tracking savings from reverse auctions. Most of the savings stems from about 400 auctions held so far in fiscal 2012, said Charles Howerton, a procurement and systems analyst for the DLA Acquisition Programs and Industrial Capabilities Division.
The tool is one of several expected to drive DLA toward Harnitchek’s goal of saving $8.6 billion in material costs by the end of fiscal 2018.
“The current fiscal environment, where we have to do more with less, forces DLA and a lot of other folks to be very careful with how we spend public funds. A big chunk of the savings we’re expecting to achieve in the next five years will come from reverse auctions,” Howerton said.
Unlike traditional bidding, where suppliers don’t know who is competing for a contract or how much they’re bidding, reverse auctions allow suppliers to see what others are bidding, thereby encouraging them to propose a lower figure. The actual bidding process only takes about 30 minutes to an hour.
Reverse auctions were designed specifically to increase competition and reduce government costs, Howerton said, adding that contractors who say the tool diminishes profits are wrong. Rather, it forces contractors to be more efficient and offer items and services at the best possible price.
“Reverse auctions provide incentive for suppliers who are able to restructure their internal operating procedures and costs,” he said. It can help them make their operations more efficient and cost effective. It’s a win-win.”
Enabling contractors to see the amount others are bidding often leads to tough decisions on the contractor’s end, Howerton continued. For example, a contractor that’s been doing business with DLA for several years and sees another contractor bidding for the same business at a lower cost will have to reconsider everything from production processes to prices.
“That contractor will have to ask, ‘Can I make money selling my product at the same price as the lowest bidder or not?’ If they’re thinking long-term and strategically, they’ll make the best choice to get their internal operations as efficient as possible if it means keeping their business,” he said.
Reverse auctions are better suited for commercial and competitive items such as pens and light bulbs, but also for new long-term contracts because of the economies of scale they produce. Only commanders and directors of primary-level field activities have the authority to make exceptions for not using the tool on procurements above $150,000.
“In those cases, the field activity commander must approve the exception, and documentation will be required to explain why a reverse auction was not used,” Howerton said.