15.19 : Pricing: Competitive Bidding

A common procurement strategy involves multiple suppliers submitting offers to provide goods or services. This approach, known as competitive bidding, allows the buyer to choose the best option based on factors such as price and quality in the B-2-B market.

This process can be categorized into two main types: closed bidding and open bidding, each with distinct characteristics and implications for buyer-supplier relationships.

Closed Bidding

Closed bidding involves inviting suppliers to submit sealed bids, which are kept confidential, ensuring that each supplier is unaware of competitors' offers. This approach promotes fair competition and protects sensitive pricing information. Typically, the contract is awarded to the lowest responsible bidder, enhancing cost efficiency. Closed bidding can be conducted online or offline, with only the buyer and each supplier having access to bid details. This confidentiality reduces pressure on suppliers to undercut each other, promoting more stable pricing. It is often used for projects that involve sensitive or proprietary information.

Open Bidding

Open bidding allows suppliers to submit bids in a transparent environment where all participants can see each other's offers. This approach encourages direct competition, as suppliers can adjust their bids in real time. Open bidding is commonly used in online reverse auctions to drive prices down. However, frequent use of open bidding can harm long-term relationships by focusing too heavily on price, potentially revealing sensitive pricing information. Firms need to balance immediate cost savings with the potential long-term impacts on relationships and supply chain stability.

Strategic Considerations for Firms

Strategic decision-making is essential for companies engaging in competitive bidding. Firms should evaluate bidding opportunities based on profitability, competitive positioning, and the nature of their products or services. Calculating the true incremental cost of fulfilling a contract, including special terms or conditions, is crucial for setting a "walk-away" price. This is particularly important in reverse auctions, where aggressive competition can drive prices to unprofitable levels. Suppliers of commodity products often fare better in such auctions, while those offering specialized products must carefully weigh the risks to avoid eroding profit margins and market positioning.