RFQ Auctions with Supplier Qualification Screening
Abstract
We consider a manufacturer using a request-for-quotes (RFQ) reverse auction in combination with supplier qualification screening to determine which qualified supplier will be awarded a contract. Supplier qualification screening is costly for the manufacturer—for example, involving reference checks, financial audits, and on-site visits. The manufacturer seeks to minimize its total procurement costs, i.e., the contract payment plus qualification costs. Although suppliers can be qualified prior to the auction (prequalification), we allow the manufacturer to delay all or part of the qualification until after the auction (postqualification). Using an optimal mechanism analysis, we analytically explore the trade-offs between varying levels of pre- and postqualification. Although using postqualification causes the expected contract payment to increase (bids from unqualified suppliers are discarded), we find that standard industrial practices of prequalification can be improved upon by judicious use of postqualification, particularly when supplier qualification screening is moderately expensive relative to the value of the contract to the manufacturer.