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Reverse auctions as a tool have been around since the late 1990’s. They have been used in the Fortune 2000 to obtain more favorable pricing, to reduce cycle times, and to lower overall supply costs. For organizations that are thinking about whether to implement and how to implement reverse auctions, this article is designed to […]

Reverse auctions as a tool have been around since the late 1990’s. They have been used in the Fortune 2000 to obtain more favorable pricing, to reduce cycle times, and to lower overall supply costs.

For organizations that are thinking about whether to implement and how to implement reverse auctions, this article is designed to provide some guidelines.

“It will explain the strengths of reverse auctions and will address some common criticisms that are often leveled at reverse auctions. It proposes a balanced view of reverse auctions that recommends their use as one of many sourcing tools available.”

It also describes situations when reverse auctions should be used and when they should not be used and provides some direction to sourcing personnel seeking to implement them as part of an overall sourcing program.

Reverse Auctions Critics

There are two common criticisms that are directed against reverse auctions. One is that they are not strategic and do not facilitate long term relationships with suppliers. The second criticism is that suppliers do not like them. To address the first criticism, reverse auctions should rarely be used in relationships with strategic suppliers or suppliers where there is a good degree of collaboration or integration of supply chains that takes place in a long-term relationship. Reverse auctions are best targeted toward relationships that are more transactional in nature and are highly focused on obtaining favorable pricing. They are designed for purchases that feature little collaboration, shorter term contracts, products with common specifications and little complexity, and purchases where there are savings opportunities. Strategic relationships with suppliers rarely meet these criteria.

The second criticism of reverse auctions is that supplier do not like them. This criticism is not leveled directly at reverse auctions but it applies to any sourcing methodology that aims to lower the price that the organization pays for goods or services. When suppliers need to lower their prices, it reduces their profits. If you asked 100 suppliers if they liked reducing their profits, they would probably all say “No!” Reverse auctions are very effective at lowering prices when they are used well. To our knowledge, no supplier has ever been forced to participate in a reverse auction event. They all participate voluntarily because they are motivated to win the business. A rational supplier would not take the time to participate in an event if the supplier thought it wouldn’t be worth it. Reverse auctions also provide other benefits for suppliers. They provide real time feedback on the competitiveness of a bid. The supplier does not need to wonder if the bid was too high or too low. Reverse auctions also shorten the time it takes for a supplier to win the business. For these reasons, the criticism that suppliers don’t like reverse auctions does not hold a lot of weight.

Balanced View of Reverse Auctions

While some people recommend using reverse auctions for every purchase and others do not want reverse auctions to be used at all, we are proposing a more balanced view. Reverse auctions are not always the best tool or even a desirable one for some purchases. However, for other purchases they are extremely powerful and will produce the best results. The trick is to use reverse auctions in situations where their use would deliver more value than the use of other tools. For most companies, these situations occur quite frequently. For example, reverse auctions are ideally suited for purchases of raw materials, processed goods, travel, printing services, capital equipment, components, and many other items. Reverse auctions work best when price is a key point of negotiation for the buying organization.

Balanced View of Reverse Auctions

Balanced View of Reverse Auctions

Balanced View of Reverse Auctions

While some people recommend using reverse auctions for every purchase and others do not want reverse auctions to be used at all, we are proposing a more balanced view. Reverse auctions are not always the best tool or even a desirable one for some purchases. However, for other purchases they are extremely powerful and will produce the best results. The trick is to use reverse auctions in situations where their use would deliver more value than the use of other tools. For most companies, these situations occur quite frequently. For example, reverse auctions are ideally suited for purchases of raw materials, processed goods, travel, printing services, capital equipment, components, and many other items. Reverse auctions work best when price is a key point of negotiation for the buying organization.

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    Martin Gracka, CEO and founder

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