Public Service Enterprise Group (PSEG) is achieving substantial cost savings by using online auctions as a regular part of its sourcing process across the enterprise. The company recently reported its successes in PSEG Outlook, an internal employee publication. Excerpts from the article appear below:
“Reverse auctions represent the free market economy at its best,” said Cecil House, Supply Chain Management vice president. “The marketplace itself determines the pricing levels in an electronic auction that helps organizations obtain low market prices in competitive bidding situations.”
At the time PSEG Outlook went to press, the company had reached a major milestone with the program by completing 34 reverse auctions with a total purchase value of more than $107 million. Preliminary figures indicate a savings of as much as $21 million off multi-year historical prices or project estimates.
In addition to competitive pricing that lowers costs, PSEG has realized other benefits through its electronic auction program.
“Auctions can introduce PSEG to additional qualified suppliers, thus resulting in quicker decisions,” said Tom Curry, supply chain project leader. Qualified suppliers are invited to submit bids through an online Request for Proposal. These suppliers are briefed in advance about the job specifications. All questions are answered prior to the event, giving all participants access to the same information and eliminating the need for one-on-one negotiations. While preparation time is about the same as for conventional auctions, online auctions can shorten total cycle time.
“The actual auction process can take minutes,” Curry explained. “For example, last year PSEG Power conducted an event for the demolition of a power plant, estimated in the millions. The entire event, which included eight bidders, consisted of 100 bids submitted within 50 minutes.”
What types of products or services are candidates for reverse auctions? “Markets where there are several competitive suppliers and where price is a key selection criterion create generally favorable conditions for these auctions,” Curry said. “So far, PSEG has held auctions in all lines of business for a healthy mix of products and services ranging from large-scale construction projects to industrial gases to bill collections and even carpet cleaning.”
Several examples illustrate the savings PSEG is achieving through auctions across the company:
- Multiple auctions were used in a combined cycle project to purchase systems, equipment and material for a new plant. “With numerous auctions completed to date, the results exceeded expectations,” said Dan Gershkowitz, director–projects.
- PSEG Power has successfully used the electronic auction process for more than $60 million in goods and services purchases, the highest total in the company. Abdul Dawlatazi, project engineer, reported that an electronic auction for a $1 million boiler replacement project was completed in one day, resulting in shorter cycle time and substantial cost savings.
- PSEG has used electronic auctions for gas main replacement construction projects. Brian Wagerman, project manager–transmission and distribution, said the competitive bidding resulted in a savings of $100,000 below the estimated price of $700,000.
What is the future for electronic reverse auctions? “The results we are seeing from using this new tool are very promising,” said Cecil House. “Supply chain management will continue to work with clients to evaluate opportunities for auctions to leverage the power of the electronic marketplace.”
PSEG built its successful auction program through Pantellos Premier Dynamic Services, a disciplined, programmatic approach that helps companies maximize their results and achieve the highest possible return on investment. For more details about Pantellos Premier Dynamic Services, please click here.
Excerpts from “Electronic ‘reverse’ auctions producing substantial cost savings” reprinted with permission from PSEG Outlook, October 2003.
Go back
