STATE transportation departments are using electronic downward auctions to stock their fleets with equipment that is less costly and is delivered in a much more timely fashion.
But the Pennsylvania Department of Transportation (PennDOT) doesn't make any attempt to hide the reality of the auctions: They're hard work and require painstaking homework.
It's not simply a matter of assembling some competitive bidders in a real-time online scenario and then watching them bid the price down into dramatic savings for the fleet.
Ray Rugh, appearing along with Rick Dolbin and Larry Allen in a convention session, “Join the Online Bidding World — Invitation to Quality,” said there is not necessarily an overnight or immediate savings.
“You have to do your homework,” Rugh said. “But I think you can, over time, show significant time and cost savings.
“It's going to go smoother in the future. It's so new to everyone. Yeah, we've struggled. We get frustrated and we scream and we holler. But all of us are able to maintain and get through this process. You have to want it. If somebody would say to me today, ‘Would you go through all these struggles again?’ I would have to say yes, because we have saved our company four months' worth of delivery time. The savings behind this thing is much greater than the savings on the cost of the equipment. Much greater. That's why you have to look at the big picture.”
Setting a Trend
In 1999, PennDOT teamed up with FreeMarkets Online to become one of the first states to use downward auctions to purchase commodities. That saved PennDOT so much money that it decided to become the first state to use the process to purchase new equipment.
FreeMarkets OnLine, based in Pittsburgh, claims to be the world's first company to organize and manage online, real-time auctions for purchasing departments. Using advanced electronic commerce software, it conducts reverse auctions in which industrial suppliers submit competitive bids in an interactive environment.
PennDOT saved $3 million on salt in 1999. And it has experienced big savings on equipment: $1,000 per dump truck (which will translate into $200,000 this year); $57,000 per chassis for line stripers (which, with a purchase of three, saved a total of $171,000); and $500 per loader.
The presenters showed their dump truck bid results for this year. On a tri-axle unit, PennDOT estimated that bids would be $111,800, but the low bid actually came in at $93,000.
“We thought, ‘I'll buy them all day long,’ ” Dolbin said, “because that's a bargain. I think the vendor just had a sneeze when he wrote it down, and he wrote down the wrong price.”
One of the problems for PennDOT was making the auction transition from commodities to equipment. The specifications section of the equipment division annually processes an average of 75 purchase requisitions and 30 field limited purchase orders for an average of 1,500 pieces of equipment. It has a $30 million capital equipment budget. Its 2,200 dump trucks cover 44,000 miles. And it has 23,500 pieces of equipment — third nationally. It's a whole different animal than commodities.
Rugh said one of the negatives is that FreeMarkets requires a minimum purchase of $1 million and charges a $35,000 fee.
Another Negative
Another negative: The bidding doesn't always work. PennDOT, in an attempt to increase the GVW on its crew cabs from 11,000 to 15,000, ended up with two Ford dealers bidding against each other, because GMC does not offer 15,000 GVW chassis. PennDOT canceled the bid, but still ended up saving half of what it originally expected to pay.
A member of the session's audience proposed a potential negative that could have severe ramifications for the industry, and not just for the fleet orchestrating the bidding. He wondered if the vendor, in an attempt to win the bid and deliver the units on time, might “cut corners” to boost its diminishing profit margin. He asked if PennDOT had noticed any quality issues.
“Absolutely none,” Rugh said emphatically.
Dolbin said true market value can be realized and inflation rates can be held stable.
“The day of the bid, we found the true market value of those trucks,” he said. “Is it going to be the same next year? We're not naive enough to think that. And we'll have to do our homework to make sure.”
He said the new procurement process has the potential to cut six months from the purchase-order cycle. Early delivery means savings in maintenance costs for old trucks that are being phased out of the fleet and ensures that trucks are received in the fall, ready for winter service.
Rugh said in the old paper process, requisitions would not be acted upon until the new fiscal year — a delay of three or four months.
“Most people would rank cost No. 1,” Rugh said. “I put delivery No. 1.
“By delivering these trucks to the department in an August-September time frame, we're taking trucks out of our fleet at least four months early. You have to look at what it's going to cost to own and operate that piece of equipment that is ready to be recycled out of your fleet. You can figure on an average of $5,000 to $8,000. You can auction them off. We have three auctions a year for $500,000. We put that money back into the equipment fund, and the counties have the option to spend it.”