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F E AT U R E R E P O R T

F E AT U R E R E P O R T Vol. 3 No. 3

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19 JANUARY 2005

19 JANUARY 2005

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Vol. 3 No. 3

Reverse Auctions – Driving Down Transportation Costs within the DTMA GEOFF O'FLANAGAN, HEAD OF BUSINESS DEVELOPMENT (COMMERCIAL) AT THE DEFENCE TRANSPORT & MOVEMENTS AGENCY (DTMA), PROVIDES AN OVERVIEW OF THE USE OF REVERSE AUCTIONS.

R

GEOFF O’FLANAGAN HEAD OF BUSINESS DEVELOPMENT (COMMERCIAL), THE DEFENCE TRANSPORT & MOVEMENTS AGENCY 26

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MoD DEFENCE CONTRACTS BULLETIN

everse Auctions (RAs), also known as electronic or online auctions, are a means of buying goods or services against a published specification or customer requirement where a number of pre-selected suppliers are invited to bid against each other in an online auction. However, the twist here is that, unlike traditional auctions, the bidders are using ever-decreasing bids to win the desired lot! Such auctions have been in existence since the late 1990s, having been developed through the continuing advancements in internet-based applications. They have grown rapidly within the private sector due to the buyer savings that have been produced, which have been found to be somewhere in the region of 15-22%. Alongside this, an estimated 2500 successful auctions were executed in 2002. Nonetheless, until recently, uptake within the public sector has been slow. More on that later!

There are three different types of RA model: • Model one: This model concerns the award being based solely on the auction phase (price only). The winning bid is evident to participants during the auction phase, although the identity of the winning bidder remains privileged knowledge to the auction organisers. • Model two: This model concerns the award being based on aspects of tenders assessed before and during the auction (quality). Again, the winning bid is evident to participants during the auction, but not the identity of the successful bidder. • Model three: This model concerns the award being based on aspects of tenders assessed before, during, and after the auction and during the auction (quality). The winner is not evident during the auction process, as the results of the online auction need to be combined with other aspects of the tender. The infrequent use of RAs within the public sector to date has been due, in part, to concern regarding their legality under current EU Directives, which do not permit repetitive tendering (the underlying concept behind RAs). However, EU Directives are no longer regarded as an impediment, due to the transparency of such auctions.

With the above models in mind, and in light of confirmed EU legislation, the Defence Transport & Movements Agency (DTMA), an agency within the Defence Logistics Organisation (DLO), opted to use the RA format as its preferred tool to tender, and subsequently award, a contract for freight services between the UK, North-West Europe and the Balkan States. Within the contract, three service requirements were identified as suitable for the RA process: • Lot 1. The movement of general Ministry of Defence (MoD) stores and medical equipment between the UK and Germany, including a daily express run from the Defence Storage & Distribution Centre (DSDC) Bicester in the UK to DSDC Dulmen in Germany. • Lot 2. The movement of MoD stores within North-West Europe. • Lot 3. The provision of transport services for the movement of MoD stores from the UK, to Germany, to the Pan-Balkan States. Historically, the majority of DTMA surface freight contracts are let for a three-year period with options to extend by further periods, usually 2 x 1-year lengths. The first obstacle the DTMA experienced was the sheer number of rates associated with the numerous routes, which spanned www.contracts.mod.uk

many pages within the pricing matrices of the contract. This method of pricing was simply not compatible with the RA concept, and did cause some headaches for those involved in the process. The DTMA went on to retain the services of Group Supplies plc (GSp), located in Cheltenham, to conduct the RA on behalf of the agency. GSp was able to provide expert advice and guidance on how the agency could best realise its aim of awarding contracts through the RA. A ‘Future Opportunities’ advert was placed, and 20 interested companies responded in the first instance. This number was boosted by a further 20 companies found by GSp, who were unknown to the DTMA, the majority of which were situated in and around Europe. The pricing matrices were reduced to a more manageable number in order to concentrate on the core routes, with supplements and surcharges for the less-frequently www.contracts.mod.uk

used lanes and various vehicle types. In typical fashion, an industry day was held to enable interested parties to be briefed on the requirement. In an interesting twist to the event, the DTMA was auctioning three individual lots, but retained the right to award one contract to one company, should it be successful in winning all three lots. Paper-based tenders were issued, received and evaluated as per the normal commercial process. Following both technical and commercial evaluations, the original 40 companies had been reduced to six. These companies were then invited to take part in the first DTMA Reverse Auction, scheduled for 29 April 2004. GSp hosted the RA, and invited a contingent of DTMA personnel to witness the day’s events, as the bidders came online to stake their bids for the advertised lots. As is the norm with RAs, the bidding started slowly, with bidders playing a

cautious game, waiting to see what rival companies would do. Whilst some of those taking part were used to the process, others took time to warm up. Towards the end, however, bidding became increasingly frantic, with bids reducing literally by the second. Unlike other internet auction sites where bidders can be ‘gazumped’ at the last second by others, the RA concept has built-in procedures to safeguard against such actions. Basically, every time a ‘last minute’ bid is received, the cut-off time is extended by an agreed amount of time. In this instance a period of three minutes was added to the RA. The bidding was so hectic at the end of the auction that a total of two hours was tacked onto the official end time. Apparently, this is a record within the RA environment! At the close of the auction, the final result saw three separate companies awarded one lot each.

Lot 1 was taken by Eddie Stobart Ltd; Lot 2 by NYK Logistics; and Lot 3 was retained by DFDS Transport. Overall the MoD saved £2 million by using the RA concept. The DLO has managed to save 10% on the five-year costs of these contracts.

n CONCLUSION

The use of the Reverse Auction was a brave step for the DTMA, and one which did cause some concern. Indeed, as it had not been championed amongst the public sector, there was a general feeling that such a process would be difficult to monitor, let alone reap any benefits from. Following the auction, it was clear to those involved that the realised savings were far greater than expected. It also provided a true reflection of why Reverse Auction technology should be firmly established within the public sector, and its use encouraged at every opportunity. MoD DEFENCE CONTRACTS BULLETIN

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27


F E AT U R E R E P O R T

F E AT U R E R E P O R T Vol. 3 No. 3

nnn

19 JANUARY 2005

19 JANUARY 2005

nnn

Vol. 3 No. 3

Reverse Auctions – Driving Down Transportation Costs within the DTMA GEOFF O'FLANAGAN, HEAD OF BUSINESS DEVELOPMENT (COMMERCIAL) AT THE DEFENCE TRANSPORT & MOVEMENTS AGENCY (DTMA), PROVIDES AN OVERVIEW OF THE USE OF REVERSE AUCTIONS.

R

GEOFF O’FLANAGAN HEAD OF BUSINESS DEVELOPMENT (COMMERCIAL), THE DEFENCE TRANSPORT & MOVEMENTS AGENCY 26

nnn

MoD DEFENCE CONTRACTS BULLETIN

everse Auctions (RAs), also known as electronic or online auctions, are a means of buying goods or services against a published specification or customer requirement where a number of pre-selected suppliers are invited to bid against each other in an online auction. However, the twist here is that, unlike traditional auctions, the bidders are using ever-decreasing bids to win the desired lot! Such auctions have been in existence since the late 1990s, having been developed through the continuing advancements in internet-based applications. They have grown rapidly within the private sector due to the buyer savings that have been produced, which have been found to be somewhere in the region of 15-22%. Alongside this, an estimated 2500 successful auctions were executed in 2002. Nonetheless, until recently, uptake within the public sector has been slow. More on that later!

There are three different types of RA model: • Model one: This model concerns the award being based solely on the auction phase (price only). The winning bid is evident to participants during the auction phase, although the identity of the winning bidder remains privileged knowledge to the auction organisers. • Model two: This model concerns the award being based on aspects of tenders assessed before and during the auction (quality). Again, the winning bid is evident to participants during the auction, but not the identity of the successful bidder. • Model three: This model concerns the award being based on aspects of tenders assessed before, during, and after the auction and during the auction (quality). The winner is not evident during the auction process, as the results of the online auction need to be combined with other aspects of the tender. The infrequent use of RAs within the public sector to date has been due, in part, to concern regarding their legality under current EU Directives, which do not permit repetitive tendering (the underlying concept behind RAs). However, EU Directives are no longer regarded as an impediment, due to the transparency of such auctions.

With the above models in mind, and in light of confirmed EU legislation, the Defence Transport & Movements Agency (DTMA), an agency within the Defence Logistics Organisation (DLO), opted to use the RA format as its preferred tool to tender, and subsequently award, a contract for freight services between the UK, North-West Europe and the Balkan States. Within the contract, three service requirements were identified as suitable for the RA process: • Lot 1. The movement of general Ministry of Defence (MoD) stores and medical equipment between the UK and Germany, including a daily express run from the Defence Storage & Distribution Centre (DSDC) Bicester in the UK to DSDC Dulmen in Germany. • Lot 2. The movement of MoD stores within North-West Europe. • Lot 3. The provision of transport services for the movement of MoD stores from the UK, to Germany, to the Pan-Balkan States. Historically, the majority of DTMA surface freight contracts are let for a three-year period with options to extend by further periods, usually 2 x 1-year lengths. The first obstacle the DTMA experienced was the sheer number of rates associated with the numerous routes, which spanned www.contracts.mod.uk

many pages within the pricing matrices of the contract. This method of pricing was simply not compatible with the RA concept, and did cause some headaches for those involved in the process. The DTMA went on to retain the services of Group Supplies plc (GSp), located in Cheltenham, to conduct the RA on behalf of the agency. GSp was able to provide expert advice and guidance on how the agency could best realise its aim of awarding contracts through the RA. A ‘Future Opportunities’ advert was placed, and 20 interested companies responded in the first instance. This number was boosted by a further 20 companies found by GSp, who were unknown to the DTMA, the majority of which were situated in and around Europe. The pricing matrices were reduced to a more manageable number in order to concentrate on the core routes, with supplements and surcharges for the less-frequently www.contracts.mod.uk

used lanes and various vehicle types. In typical fashion, an industry day was held to enable interested parties to be briefed on the requirement. In an interesting twist to the event, the DTMA was auctioning three individual lots, but retained the right to award one contract to one company, should it be successful in winning all three lots. Paper-based tenders were issued, received and evaluated as per the normal commercial process. Following both technical and commercial evaluations, the original 40 companies had been reduced to six. These companies were then invited to take part in the first DTMA Reverse Auction, scheduled for 29 April 2004. GSp hosted the RA, and invited a contingent of DTMA personnel to witness the day’s events, as the bidders came online to stake their bids for the advertised lots. As is the norm with RAs, the bidding started slowly, with bidders playing a

cautious game, waiting to see what rival companies would do. Whilst some of those taking part were used to the process, others took time to warm up. Towards the end, however, bidding became increasingly frantic, with bids reducing literally by the second. Unlike other internet auction sites where bidders can be ‘gazumped’ at the last second by others, the RA concept has built-in procedures to safeguard against such actions. Basically, every time a ‘last minute’ bid is received, the cut-off time is extended by an agreed amount of time. In this instance a period of three minutes was added to the RA. The bidding was so hectic at the end of the auction that a total of two hours was tacked onto the official end time. Apparently, this is a record within the RA environment! At the close of the auction, the final result saw three separate companies awarded one lot each.

Lot 1 was taken by Eddie Stobart Ltd; Lot 2 by NYK Logistics; and Lot 3 was retained by DFDS Transport. Overall the MoD saved £2 million by using the RA concept. The DLO has managed to save 10% on the five-year costs of these contracts.

n CONCLUSION

The use of the Reverse Auction was a brave step for the DTMA, and one which did cause some concern. Indeed, as it had not been championed amongst the public sector, there was a general feeling that such a process would be difficult to monitor, let alone reap any benefits from. Following the auction, it was clear to those involved that the realised savings were far greater than expected. It also provided a true reflection of why Reverse Auction technology should be firmly established within the public sector, and its use encouraged at every opportunity. MoD DEFENCE CONTRACTS BULLETIN

nnn

27


Driving Down Transportation Costs