In a recent Northside Sun article Hastings Puckett criticized the Mississippi Legislature's chosen means to bring increased competition and transparency to the procurement process of state agencies – a procurement process known as reverse auction bidding. In the article Puckett claims that “requiring use of a reverse auction model will not only not save taxpayer money, but will actually end up costing more taxpayer money in many situations ... tens of millions of dollars annually.” I would like to offer a different perspective and opinion about reverse auctions and point out a few of the deficiencies of the current method of public procurement.
My company, Mid South Machinery, is also a heavy equipment dealer. As such, we regularly compete with Puckett and other heavy equipment dealers for public agency business. Based on our experience with reverse auctions, I can attest unequivocally that this innovative process will fully achieve the intentions of our Legislature – saving taxpayers money through greater transparency and increased competition.
The procurement process used by state agencies today is the time honored but long-in-the-tooth “sealed bid” process in which awards are made to the supplier considered as “lowest and best.” The lowest and best standard too often is used to justify awarding business to a higher priced supplier even as other suppliers were offering equal products at lower prices. Obviously, taxpayer money is wasted when this occurs. However, this practice also narrows the pool of competition as suppliers begin to lose interest. The legislation set to take effect January 2018 institutes a Public Procurement Board that would review and discourage awards attempting to be made under these circumstances.
Reverse auctions work best when the pool of suppliers is expanded rather than narrowed. To that end, the legislation attempts to eliminate another means favored by agencies that without merit restricts competition – tailoring specifications around specific suppliers and/or products. It may be that this is appropriate in the solicitation of complex construction contracts or highly specialized services. It is not the case with today's cutting edge design and manufacturing quality of heavy equipment manufacturers across the board. It is rare the exception that might merit excluding suppliers of heavy equipment from consideration. Again, the Public Procurement Board will work to ensure that specifications are written to expand – not restrict – the supplier pool. Agencies that restrict access usually get what they want but the taxpayer always loses.
Recently Geoff Pender, political editor of the Clarion-Ledger, wrote of our state's contracting laws, “Mississippi has a contracting problem,” and “Mississippi's contracting and purchasing laws have holes large enough to drive a dump truck full of tax dollars through …” Throughout our state, agencies are failing to deliver to taxpayers the best deals available by restricting competition.
Expanding pools of suppliers is but one aspect that this legislation addresses. But the hallmark aspect is the dynamic pricing environment of the reverse auction process. To understand how reverse auctions drive prices down, here is a brief explanation of the process:
Reverse auction bidding is conducted over the internet with each supplier participating from its own location. Suppliers login and place an initial bid. After placing initial bids, the rank of the individual supplier is the only feedback the automated process indicates. At no time during the auction do suppliers know the prices of their competitors or even which competitors are participating. After placing initial bids, each supplier is shown its rank and if not ranked lowest, may then begin incrementally lowering their pricing. As bids are lowered the ranking may change or not. Supplier's can continue lowering bids as many times as they want to achieve first rank. If a supplier is ranked first, it would simply monitor its computer display to see if its first place ranking changes to a higher ranking. Those whose rank is higher than first will submit ever lower prices to become the lowest bidder or winner. When suppliers stop bidding, the auction is over.
In a nutshell the currently practiced sealed bid process can be described as vendors submitting the highest price which they estimate will not lose the business. The reverse auction process turns this approach on its head by enabling sellers to drive prices down to the lowest price at which they are willing to secure the business.
It is interesting to note that Mr. Puckett chose sealed bid examples rather than an actual reverse auction. Since the basis for his illustrations were sealed bids, he had to put forward his own set of hypothetical figures to determine a (theoretical) cost to the owner.
Specifically, he supposes the “floor” of the participating suppliers although it is highly unlikely he knows either his competitor's actual cost or their pricing strategy for any given product. Then, building on that set of hypothetical assumptions, he further supposes just how the individual suppliers will react to one another's bidding behavior. Puckett would presume little pricing movement among suppliers. In so doing he adds one set of faulty assumptions upon another in piecing together a set of numbers unfavorable to reverse auctions. Had Mr. Puckett participated in more reverse auctions, he would be aware of the significant price movements and that the movements are quite unpredictable.
Rather than guessing as to how suppliers may or may not react in a dynamic pricing environment, look at the results of an actual reverse auction event and compare them with the MDOT tabulations.
Sealed Bid - MDOT
Backhoe Loaders 10 percent difference in High/Low bidders, 4 Vendors, 4 seal envelope bids, 10 percent difference in High/Low bids
Reverse Auction Bid - Hinds County
Backhoe Loaders, 5 Vendors, 90 different bids, 20 lead changes, 25 percent difference in High/Low bids
Sealed Bid to MDOT
Wheel Loaders, 9 Vendors, 9 sealed envelope bids, 24 percent difference in High/Low bids
Reverse Auction Bid to Hinds County
Wheel Loaders, 7 Vendors, 123 different bids, 37 lead changes, 31 percent difference in High/Low bids
From the Hinds County examples we can see that supplier's are highly active reacting to each others' changing bids. Clearly, the dynamic nature of reverse auctions drives prices down.
The Mississippi Legislature got this one right - reverse auctions are appropriate for public procurement especially with regard to commodified products such as heavy construction equipment.
But don't just take my word for it. The Harvard Business Review wrote that, “these (reverse) auctions not only save buyers money but can also increase the competitiveness of the supplier base. … By forcing suppliers to bid for contracts, such auctions can produce dramatic reductions in the cost of supplies.” And from the IBM Center for The Business of Government, “This (significant cost savings) has been proven in several recent studies in which purchasing research has found competitive bidding to produce cost savings of between five and 30 percent.”
Mr. Puckett gets some things right, particularly his recognition that the “intentions and motives of legislators are pure” in their attempt to set more responsible purchasing policies. Yet, I believe the game-changing rules to expand competition and actual reverse auction data show his assertion of unintended consequences costing taxpayers tens of millions of dollars is self-serving and grossly misplaced.
Mark Henry is president of Mid South Machinery in Jackson.
