Reverse or forward … auctions save dollars - online auctions

Navy Supply Corps Newsletter, Jan-Feb, 2003 by Steve Dollase

On Sept. 5, 2002, the Naval Inventory Control Point conducted the Navy's first two online forward auctions. These forward auctions were Web-based versions of what one typically thinks of as an auction--items are put up for sale.

These first two forward auctions were conducted in two phases, with each phase consisting of the sale by NAVICP of two stricken CH-53D helicopters and associated parts packages.

Three firms were registered to participate as bidders in the two auctions. The winning bidders are expected to refurbish the aircraft for commercial applications such as firefighting.

The two contracts resulting from the auctions are valued at nearly $5 million. The Naval Air Systems Command will receive the portion of the proceeds applicable to the aircraft and NAVICP will retain the remaining proceeds for the purchase of similar or like parts.

These forward auctions were part of NAVICP's innovative strategy to reduce U.S. Navy potential excess inventory, which consists of weapons system parts that the Navy might need to use later but will most likely replace with modified or state-of-the-art versions in the future. Internet-based forward auctions are NAVICP's revolutionary tool for turning this potential excess material into budgetary resources for future procurements; mining parts and weapons systems that might otherwise decay and become obsolete into funding for the next generation of weapons systems.

Auction of the aircraft also creates a commercial marketplace for future sales of NAVICP's potential excess material. In fact, both of the winning bidders will have the option to buy additional CH-53D helicopters and more parts within six months of contract award.

"The forward auction of the CH-53s and associated parts is part of the continued advancement of the science of Naval Logistics and furthers our commitment to e-Business initiatives," said RADM Michael E. Finley, then Commander, NAVICP. "This tool will be of great use to us in the future, just as reverse auctions are being used to drive down our costs," he added.

Indeed, these forward auctions are just the latest success story in NAVICP's Internet-based action program. In May of 2000, NAVICP conducted the first Internet-based reverse auction in the federal government. This auction, which lasted 51 minutes, provided the competitive pricing mechanism for NAVICP to award a contract for aircraft ejection seat recovery sequencers (the "brains" of the ejection seats). The auction saved an estimated 28 percent off the historical price for the recovery sequencers, and NAVICP awarded the contract within an hour of the auction's closing, a significant time savings.

NAVICP conducted four more auctions under its pilot reverse auction program, resulting in total average estimated savings of approximately 21 percent, or $14.8 million.

Convinced of the power of the concept, NAVICP, with Naval Supply Systems Command sponsorship, awarded two five-year, competitive, best-value contracts for auction services--one to Procuri for a self-service, desktop tool and the second to eBreviate for a full service tool. In its first year, the NAVICP contracts were used by NAVSUP activities as well as 12 other federal government agencies to conduct 43 auctions valued at over $144 million with typical savings of 8 to 24 percent.

The NAVSUP/NAVICP auction tools are available for use, free of charge, to Navy and Marine Corps activities, and on a fee-for-service basis to other federal government activities.

Internet-based reverse auction technology allows online bidders to compete in real time for contracts by lowering their price offers (or raising them in the case of a forward auction) as they see other bids posted. Bidders, however, are unable to identify their competitors in the auction, only the value of the current low bid.

The auctions are conducted in a secure, Web-based environment. Ail potential participants are screened in advance before being granted access to participate in the auctions. This includes screening potential bidders to ensure that they are a qualified source of supply for the items under consideration.

Auctions work best where there are three or more bidders and where specifications permit easy comparison between the products being offered by the participants.

The NAVSUP/NAVICP Reverse Auction Team earned an FY 2000 Department of the Navy Competition and Procurement Excellence Award for their reverse auction success.

NAVSUP/NAVICP auction program is working on a new Navy auction Web site.

Interested in applying this revolutionary pricing tool at your command? Give us a call at (215) 697-2850.

CDR Steve Dollase holds an M.S. degree in management from the Naval Postgraduate School and is currently pursuing an M.B.A. from the University of Pennsylvania, Wharton School.

Commander Steve Dollase, SC, USN Director, Acquisition Policy, Naval Inventory Control Point