Making the case for reverse auctions

Are you confused about the difference between reverse auctions and regular auctions?   Let’s clear that up first.  Organizations use regular on-line auctions (also called forward auctions) to invite bids from buyers who may wish to purchase their goods. The seller offers an item and buyers place bids until the auction closes, at which time the item goes to the highest bidder.

So what is a reverse auction? 

A reverse auction is the opposite of a regular auction. It is where sellers bid prices at which they are willing to sell their goods and services.  It is used where the price is of prime importance, especially in sourcing services; the competition drives the price down.  The seller offering the lowest price at the auction close is the “winner”. Most reverse auctions are concluded electronically on-line in real-time.

Can I use an e-auction for goods or services?

The answer is that it works for both. It is particularly useful for high volume, low-value commodities.  This includes, for example, office supplies, packaging and medical consumables such as gloves and other disposable hygiene items.  Online reverse auctions are also used extensively to source suppliers for cleaning and janitorial services, maintenance, temporary labor and fleet management. Reverse auctions are increasingly used in selecting distribution and transportation services, especially courier and “last mile” deliveries.

It’s mostly about price

Reverse e-auctions are all about achieving the best price.  It is therefore important for buyers to establish that the other elements of the proposed purchase are already satisfied, i.e. quality, delivery dates, supplier capabilities etc. Reverse auctions are often used as a follow up to an RFP or RFI to firm up the pricing. Smaller suppliers can compete better with large suppliers when there is equal opportunity on a fair and transparent playing field.

Benefits of e-reverse auctions

The real benefit comes in cost savings. Much time is wasted drafting RFQs, waiting for responses, manually processing offers and conducting face-to-face negotiations.  E-auctions can produce 10-15% more savings than other methods.

Other benefits are

  • Transparency and fairness in the sourcing process.
  • More efficiency in the process
  • Better compliance by suppliers
  • Increased integrity in the data
  • Improved supplier relationships

In the past, there has been some criticism of reverse auctions. Suppliers were suspicious of the motives of the buyer and the software was cumbersome, difficult to use and expensive. That situation has now changed; there is more confidence in e-auctions as many successful events have been documented by satisfied users.

When to use a reverse auction

Using the Kraljic matrix, we can identify where we can best use a reverse auction to source goods or services.  It is preferable to apply it to transactional and routine purchases that are low risk and have a low business impact. Some leverage items or services may be good candidates.  Reverse auctions are not suited to strategic or bottleneck items.   We should also not use this method where there is a limited supply or at a time when the price is fluctuating rapidly.

Reverse auction software and managed services

Reverse auction solutions are available from companies that specialise in providing managed services so there is no need to be an expert on the software.  There is a range of services available in the market. Full-service solutions providers take you from setting the strategy through managing the auction to providing the final results.

What to look for in a solutions provider

  1. Proven experience in end-to-end reverse auctions
  2. A user-friendly interface
  3. Responsive customer support
  4. Design options for different types of e-auctions

Reverse auctions have the potential to streamline a company’s value chain and improve its competitiveness.   According to the Anklesaria Group, “The application of reverse auctions has many benefits such as cost savings through a reduction in the purchase price, increased efficiency and greater transparency in the procurement process, and access to a larger supply base. However, if used incorrectly, it can reduce the suppliers’ trust and cooperation thereby jeopardizing long-term relationships.

This articles was first published in www.procureport.com