Ever wish you could simulate a competitive environment where suppliers battle it out between each other and you end up with cost savings, on average, between 10-20%? You most certainly can, and it’s called a reverse auction.
In contrast to a traditional auction, a reverse auction requires a supplier to place bids for the amount they’re willing to sell at for your specified good or service. At the end of the auction, the supplier with the lowest bid typically wins the business.
Buyers often conduct reverse auctions via software or an online platform, invite at least two suppliers, set the timer and watch the price tumble. I know what you’re thinking…what’s the catch? And rightfully so, there are a few things to consider before you conduct a reverse auction.
What You Should Know
- Commodities. Reverse auctions are typically used to purchase commodities. You don’t really want to use a reverse auction for goods or services that are core to or strategic for your business. In those situations, you’ll definitely want and need more control and contact with the potential supplier throughout the purchasing process.
- Research the market. A successful reverse auction will need at least two, if not more, suppliers. Ensure that the market has enough suppliers to fuel the competitive environment of a reverse auction.
- Focus on price. In addition to using reverse auctions primarily for commodities, it is also best to ensure that your key selection criteria boils down to price alone. If the product or service you’re considering putting up to reverse auction has a laundry list of predetermined selection criteria that can’t be removed, then it should it be purchased via your normal RFP process.
- Stellar specifications. To conduct a successful reverse auction, ensure that your specifications are airtight and leave no room for interpretation. This will ensure that suppliers are aware of what they’re bidding on and lessens the possibility of quality concerns.
With the basics out of the way, let’s address some of the advantages of a reverse auction for you … and the supplier.
Advantages for the buyer
- Saves time. Typically, in a reverse auction you can forego the formalized RFP process. Reverse auctions are conducted primarily online so all the manpower behind a formal RFP process can be redirected to more strategic purchases.
- Cuts costs. The nature of a reverse auction fosters a competitive environment in which suppliers outbid each other to gain the business, pushing prices down aggressively. As a result, the average cost savings that procurement departments have found conducting a reverse auction range from about 10-20%.
- More suppliers. Reverse auctions open the door for smaller, unknown suppliers that would have otherwise not been able to get a shoe in. This is beneficial for you because it provides you with greater options and, potentially, a new supplier that could exceed your expectations at a fraction of the cost. We’ve talked about supplier diversification before, reverse auctions can be an inroad to helping with that mandate as well.
Advantages for the supplier
- Saves time. Just as it does for you, a reverse auction also saves time for the supplier in terms of lead time and paperwork. Not only can reverse auctions shorten lead times from months to just weeks, but it also reduces the need to formally reply to an RFP.
- Transparency. One of the things suppliers often struggle with is transparency during the purchasing process. To enter a reverse auction, the suppliers must all meet minimum criteria and bids are submitted in real-time. This provides suppliers with a clearer picture of where they stand during the process.
- Competition. Because of the transparency of a reverse auction, suppliers also get a clearer idea of where they stand competitively in the market. If during the auction they find that they are being undercut in price, they can then take that information to innovate and become more competitive.
Using reverse auctions can certainly help you with your cost cutting goals, but keep in mind it’s only one spoke in the wheel of cost cutting measures you’ll employ to reach your goal.
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