A reverse auction is a type of auction in which the roles of buyer and seller are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service by offering increasingly higher prices. In a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers undercut each other. Wikipedia on Reverse Auctions
A reverse auction (also called procurement auction, e-auction, sourcing event, e-sourcing) is a tool used in business-to-business procurement. In this process, the role of the buyer and seller is reversed, with the primary objective to compete purchase prices downwards. In an ordinary auction (also known as a forward auction), buyers compete to obtain a product or service. In a reverse auction, sellers compete to obtain business.
A Reverse Auction is an event usually used as the last leg of sourcing and tendering to obtain the best price by encouraging competition among bidders on price. It is hosted by a single buyer and features two or more suppliers competing for business. It is called reverse because during the auction, the price can only come down.
A Reverse Auction has a number of advantages. It is very time efficient as the awarding decision can be taken in weeks instead of months, as is the case in traditional tendering. They provide an insight to the bidders on how competitive they are and indicate their ranking amongst their peers. It reduces paperwork and increases transparency in the award process; something quite appreciated and required in the public sector. It also helps in breaking cartels. Reverse auctions should not be universally used for all procurement. They should only be carried out for commodities which; are not core strategic to your business, have many suppliers thereby producing a competitive market, and for which the key awarding decision is price.
Route to success as a supplier in reverse auctions includes:
- Thorough preparation - it's essential to know your costs, your suppliers, your requirements, and your market to the greatest extent possible - tiny details can make the difference between winning and losing business. Our advice would be to calculate your initial prices and the very lowest price you would go to secure the business, then create a series of bids in between the two figures to submit during the auction
- Have a strong, competent bidder to front your effort during the auction. Your lead should be completely familiar with the auction technology in use and most importantly be clear when to bid and when to fold.
Guide to Success for Online Reverse Auctions
- Successful online reverse auctions need technology and more importantly reinforced people issues between Suppliers and Procurers. Remember, online auctions are a tool, rather than a strategy.
- Gain senior leadership sponsorship/approval within Your Company and ensure that the sourcing professionals take on a personal responsibility for the process.
- Have appropriate infrastructure internally to run the events effectively - ensure suppliers are well trained and have a failsafe backup plan with the ability to default back to the traditional paper-based RFP process if necessary. If necessary conduct a mock auction ahead of the real event.
- Professionals often like to focus on cost - speed often resonates more - auctions can effect complex price negotiations with multiple suppliers in an afternoon.
- Emphasise that you are NOT obligated to accept the lowest bid in a reverse auction - there are likely to be multiple factors for supplier selection - emphasise equally to suppliers.
- Prepare internally for negative supplier reactions, eg auctions don't work for their products - Some suppliers aren't used to giving price concessions. E-sourcing tools are effective at shocking some suppliers into the new reality.
- Provide clear, unambiguous product specifications and service level requirements and ensure that supplier participants are "fit for purpose". It is a good idea to require pre-bids before the actual event and an "intent to participate" message from suppliers is also important.
- A successful reverse auction should have realistic bid decrements eg 0.25% or 1/400th of auction value.
- Have parallel communication routes during the auction - landline telephones, mobile phones and e-mail.
- Assuming your first event is a success, it is important to publicise the event as a "procurement win."