Auctions have been around for about five millennia, but electronic auctions open up new possibilities – including the opportunity to experiment with different auction formats. Kemal Guler, an economist at HP Labs, began exploring electronic auctions as part of a larger effort at HP Labs in business-process innovation, a means of finding smarter ways to manage tasks such as supply chain planning and business procurement, which increasingly involves auctions.
In recent years HP has used online bidding to purchase $21 billion worth of materials at an estimated savings of $1 billion. U.S. businesses are expected to use online auctions for more than $660 billion worth of procurement operations in 2006, according to an IDC report.
Auction format
For HP, the goal was not just to reduce costs or speed up the procurement process. It was to use auctions intelligently – without straining its supplier relationships.
Today people make ad hoc decisions about such auction attributes as whether bids will be open or sealed, the order in which items are auctioned, lot sizes and the amount of information buyers receive.
But “ad hoc” auctions aren’t necessarily the most successful. Changes in auction format and bidding rules can affect auction outcomes. Electronic auctions make it easier to change these rules, set up more complex auctions and collect data on the results. In an electronic auction, for instance, bidders can offer different discounts for different quantities.
Winning bids
HP has put the same tool to use when it has been bidding to win business from a prospective customer. In one instance, a large telecommunications firm held a reverse auction (in which sellers lower their prices until the buyer accepts one) to purchase workstations, desktops and notebooks.
HP not only beat rivals, but also won the $15 million contract at a higher-than-anticipated profit margin. Now, researchers are exploring applying this knowledge to HP’s overall pricing and sales policies.
HP is also putting its expertise to work for selected partners. Researchers’ auction analytics work has shown a major car manufacturer how it can reap more revenue from wholesale car auctions to dealers by adjusting the order in which cars are put up for bid.
Better business processes
So far, HP has 20 patents pending on various aspects of auction analytics.
Researchers have created an early version of software that can help procurement professionals design better auctions. They’re now working to collect and analyze more data so the tool can be customised.
“There are volumes of scholarly literature on these topics and, at the same time, there are emerging business needs,” Guler says. “We want to bring science to business decisions.”
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