In the typical business auction, many different buyers will offer to buy from a single service provider or supplier, bidding the price higher until one business purchases the selling agreement. In a reverse auction, many suppliers bid to offer services to a single buyer. This often lowers the price considerably, as suppliers offer increasingly better deals so the buyer will choose them.
Such reverse auctions have become much easier through online communication, so much so that they have been dubbed “e-auctions” or “e-sourcing.” One of the most common types of reverse auctions occurs when contractors bid for government projects through established marketing channels. These reverse auctions are often successful because the government can be trusted to contract the final provider, and a large number of suppliers are often willing to take part in the auction. Businesses, however, may find it difficult to implement an effective reverse auction over the Internet, due to marketing and time constraints.
ADVANTAGES OF A REVERSE AUCTION
The benefits possible with reverse auctions are clear: lower costs, better quality of production, and increased opportunities to find a better supplier relationship. For suppliers, reverse auctions over the Internet allow them to keep track of ongoing bids, often seeing what their competitors are offering and thereby gaining a clearer understanding of the market. Reverse auctions also offer suppliers more flexibility to move in and out of markets. If a supplier has no chance in a particular bid, then they usually find out early on; this can save them money they would have spent on winning a normal contract.
By this same principle, suppliers are often able to successfully enter markets not normally open to them, as reverse auctions tend to level the playing field between suppliers. In addition to market benefits, the process involved in winning reverse auctions is usually simple, saving the costs associated with paperwork and lengthy negotiations.
For buyers, a competitive reverse auction will result in lower prices, saving them time and cost. Sometimes a reverse auction can even lower the price below market
standards. Buyers, too, can benefit from the efficient process of gathering all interested suppliers into one system of negotiation that often lasts for a set amount of time, allowing companies to consolidate their contractors and judge contract possibilities much more easily.
DISADVANTAGES OF A REVERSE AUCTION
On the other hand, critics of the reverse auction process claim that they endanger supplier relationships in the production line, provide loopholes through which to conduct unethical activity, and overturn accepted supply contract traditions that companies have come to depend on. Because the practice of using reverse auctions has grown so rapidly among Internet-savvy companies, analysis of these effects is still ongoing, and clear data is still being collected. One common complaint is that reverse auctions put unfair pressure on suppliers already situated within the market, forcing them to respond with lower bids and decreasing their profit until it becomes difficult for them to sustain business. According to these dismayed sellers, buyers can make demands of the suppliers within their reverse auction, threatening to drop them unless they lower their prices or agree to other set conditions. These types of reverse auctions can violate corporate codes of conduct and lead to suspicious, worried relations along the supply chain.
In addition to mistreatment by buyers, the Internet-era reverse auctions are seen as a danger to product quality. Suppliers argue that qualifications are most important when choosing a contract source, not price. These suppliers say that the focus on lower prices in reverse auctions distracts buyers from who has the experience and talent to fulfill the position; instead, too much value is placed on who will operate at the least cost. This can be especially important in government contract jobs, where there may be only a few firms that have the expertise required for the job, but many who choose to bid themselves at a lower cost in the auction.
CONDUCTING A REVERSE AUCTION
Lee Crane, in a 2008 article in Purchasing magazine, offers seven important questions for organizations to consider before setting up a reverse auction to improve their product and costs:
- “Is there enough competition?” Reverse auctions are only successful when there are enough suppliers to bid the price down to a level where the company will save money on the venture.
- “Are the suppliers really qualified?” Quality is a vital facet of a good supplier, and suppliers should be vetted for qualifications before they enter the reverse auction.
- “Is the value worth the supplier's time?” Is this purchase going to attract capable suppliers?
- “Is the product/service speculation clear?” All service requirements should be stated, and complex topics fully explained so that suppliers are aware of necessary tasks and communications.
- “How does the auction fit in the big picture?” If a reverse auction may disturb existing partnerships or endanger other supplier contracts, it may not be the best idea.
- “What's the benefit?” The idea of a reverse auction is to save costs without sacrificing any other important attribute, such as quality of service. It should be clear that enough efficient suppliers are a part of the auction to ensure an overall benefit to the company.
- “Can you translate evaluation factors into numerical values?” Specific analysis tools are very important to accurately estimate supply factors.
Crane, Lee S. “Seven Questions to Ask Before Running Your Next Reverse Auction.” Purchasing, 2008. Available from: http://www.purchasing.com/article/CA6537987.html?q=reverse+auction.
Giempietro, C. and M.L. Emiliani. “Coercion and ReverseAuctions.” Central Conneticut State University, 2007. Available from: http://www.technology.ccsu.edu/personnel/information/emiliani/ra_papers/ra_coercion.pdf.
Martinez, Rick. “The Reverse Auction Dilemma.” The Triangle Business Journal. America City Business Journals Inc., 2008.
Parente, Diane H. Best Practices for Online Procurement Auctions. Hershey, PA: Idea Group Inc, 2008.
Sanborn, Stephanie. “Reverse Auctions Make a Bid for the Business World.” InfoWorld, 2001. Available from: http://www.infoworld.com/articles/hn/xml/01/03/19/010319hnetrend.html.
“SO77 Using the Reverse Auction Procurement Method to Save Millions.” California Performance Review, 2008. Available from: http://cpr.ca.gov/report/cprrpt/issrec/stops/proc/so77.htm#10b
"Reverse Auction." Encyclopedia of Management. . Encyclopedia.com. (November 13, 2018). https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/reverse-auction
"Reverse Auction." Encyclopedia of Management. . Retrieved November 13, 2018 from Encyclopedia.com: https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/reverse-auction