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January 21, 2018 12:45 pm
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  Reverse Auction - An Overview   Help Index  
Reverse Auction Overview
Overview

eCommerce Online business to business Reverse (B2B) Auctions have been around since the late 1990's. Reverse Auctions have been used by the Fortune 2000 companies such as IBM and General Electric to obtain more favorable pricing, to reduce cycle times, and to lower overall supply costs.

Reverse auctions are ideally suited for purchases of raw materials, processed and manufactured 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.

A reverse auction offers more than just cost savings potential for the buyer and more than just the opportunity to win new business for the seller.

Buyers get increased market transparency, decreased error rates, easy apples-to-apples bid comparisons, cycle time reductions, and a platform for supplier improvement.

Suppliers (Sellers) get increased efficiency, process transparency, more communication, a lower cost of sale, and more benefit from knowing the buyer did upfront planning and is capable of comparing bids apples-to-apples, and will be able to present the supplier with a solid reason as to why the supplier did, or did not, receive an award.
When to Use

There are several factors that go into the decision on whether to use reverse auctions. These factors include: the specifications of the products, the structure of the supply base, the market pricing structure, projected lead times, contract status, the distribution complexity, the savings opportunity, the size of the purchase, and the strategic nature of the supplier relationships.
Product Specifications

The specifications of a product are an important factor in determining whether this product is an appropriate purchase for reverse auctions. Reverse auctions are generally more conducive to a purchase where the specifications are simple and there are not a lot of differences between supplier offerings.

This is especially true if the items being purchased are commodities or if the specifications for the items are defined by a well accepted industry standard.
Structure of Supply Base

One of the most important elements needed for conducting a reverse auction is a large competitive supply base. As a general rule, if you do not have at least 3 strong, qualified, and competitive suppliers that will participate, you should not conduct a reverse auction to make the purchase.

Without enough competitive suppliers, the force of competitive bidding may not be sufficient to drive pricing lower and produce the desired result for the buyers.

It is also helpful if the suppliers have excess capacity since they will be more incentized to bid lower in order to fill their capacity. To use reverse auctions, you would also want to see suppliers that are somewhat equal in pricing power and ability to lower the price.
Pricing Structure

Reverse auctions work well as a means of price discovery. You generally want to use reverse auctions when the pricing trends are somewhat stable or falling and suppliers can actually make forecasts and pricing projections for the value of inventory that they hold or plan to produce.
Delivery or Distribution

The reverse auction process is more conducive to purchases that have straightforward distribution requirements as well as a predictable and easy to understand delivery schedule.

For purchases with an irregular and complex delivery requirements or where logistics is a substantial portion of the purchase, reverse auctions may not be the best option or should be used in conjunction with other purchasing tools.
Size of Purchase

Reverse auctions are often suited for higher dollar purchases because they do take time to set up and organize. For smaller purchases, it may be easier and more cost effective to negotiate directly with the suppliers or to use another tool. If the purchasing organization has a reverse auction process in place that is set up to run periodic reverse auctions already for these suppliers, then reverse auctions could be used for lower dollar purchases.
Conclusion

Auctions serve markets for buyers and suppliers. Continued use brings knowledge for building strategic action plans and clearer differentiation for suppliers. For incumbent suppliers, statistics show there is a high likelihood of retaining the business even after an auction.

Buyers continue to do business in both types of auctions for market price discovery, but more importantly, auctions are proving to deliver better results for both buyers and suppliers with savings up to 20% or more realized.

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