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A reverse auction (RA) is an auction where a buyer makes a product or service available for bidding from different suppliers. The principle is the same as for normal auctions, but the principle is as the name indicates, reversed. It is the buyer who is in charge and the seller who gives the lowest bid, is awarded the business.
A reverse auction is commonly also called e-auction, e-sourcing, eRA (electronic reverse auction) or REA (reversed electronic auction) since they are carried out online on internet or on a system installed on the Buyers internal server. This site provide a reverse auction system for free. Read more and try here!
According to James Carbone1, savings gained by some OEMs by using reverse auctions is initially as high as 30%. And then later on 10-15%. Important here to note is that by just introducing the reverse auction you could gain a substantial effect on sourcing activities. By using online reverse auctions as a tool in sourcing work and as a part of a sourcing strategy there is a notable potential of cost reductions.
The reverse auction process
The reverse auction process and work flow should start with good background work to have all aspects cleared out. With good preparations, the potential success from using reverse auctions is maximized. A suggestion of workflow is as follow:
1. Submit RFI and/or RFQ. Collect initial information and/or quotes.
2. Select the suppliers that are pre qualified through the inital quotes.
3. Training of suppliers in how to use the reverse auction system.
4. Reverse auction.
5. Award decision.
Benefits for buyers by using reverse auctions
- Maximize competition on price
- Minimize negotiation time (skips what could end up in several negotiation rounds)
- Greater transparency in the selection of a supplier
- Minimize the influence of personal relations selection of supplier
- Low cost of supplier selection
- Shorten time for negotiation
Benefits for suppliers by participating in reverse auctions
- Easier access to potential customers
- Equal treatment of all participants
Problems with using reverese auctions and how to minimize them
- A focus on price that neglects quality and delivery performance.
- This risk can be minimized through a well prepared RFQ and signature on terms and conditions from all participants in the bidding process.
- Unserious bidding
- This risk can be minimized by only letting in prequalified suppliers to the reverse auction process.
- Lack of understanding from suppliers
- This risk can be minimized by conducting pre-hearsals, trainings, demos or tests
Recomendations when using reverse auctions
- Bring in enough suppliers into the bidding. Too few suppliers will give a bad competition. Too many will give a a way too high workload.
- Pre-qualify the suppliers. This will minimize the risks with supply after the RA.
- Keep the specification clear. The suppliers need to know they quote the same thing, and you as a purchaser need to know you compare apples with apples.
- Stay trustworthy - have a transparent selection and show how you rewarded the business. No negotiations on the side.
Further reading and references
15 tips for better reverse auctions - http://www.purchasing.com/article/CA6591829.html?q=reverse+auction
Seven questions to ask before running your next reverse auction - http://www.purchasing.com/article/CA6537987.html?q=reverse+auction
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Articles 
in General by dwight, 09-01-09 18:57
