Insights / Auctions / Decisive Benefit Factors for Using Reverse Auctions

Decisive Benefit Factors for Using Reverse Auctions

October 24, 2019 | 4 min read

Federal agencies bought $1.5 billion of goods and services in 2017 using reverse auctions. (GAO)

Reverse auctions have become an integral way that companies buy products/services. Just like the name suggests, reverse auctions are the opposite of a traditional auction. Instead of buyers seeking out sellers, companies invite suppliers to bid for their business with the objective to capitalize on the lowest supplier prices. A recent report from the University of Arkansas’ Information Technology Research Institute stated that Fortune 500 companies saved 10%-40% on their purchases of products and services when using auction software. Their procurement cycle times also decreased by 90% when auction management was handled using an automated system. Because of cost savings and real-time negotiation processes, reverse actions have become “best practice” for procurement departments.

5 Factors for Using Reverse Auction Software

Factor 1 - Overall Increased Cost Savings

The most obvious benefit of reverse auctions is the cost savings for buyers. Taken from a report by Semantic Scholar, Rio Grande Regional Hospital reduced its cost for contract nurses from $850,000 to $300,000 by using reverse auction software. Instead of hiring nurses through agencies that charged as much as $75 per hour, the hospital reached out directly to qualified nurses. Nurses then bid for available shifts, with the lowest bids winning the employment opportunities. The hospital was able to lower its cost for contract nurses to an average of $25 per hour. Reverse actions achieve these lower purchasing rates by creating competitive environments that encourage suppliers to outbid their competition.

Factor 2 - Increased Cost Savings as a Result of Procurement Process Efficiency

Reverse auctions also produce cost savings through a streamlined procurement process. Because reverse auction management is conducted at a much faster pace than traditional procurement processes, company savings are banked more quickly. A United States Government Accountability Office (GAO) study found that due to reductions in acquisition processing, reverse auctions saved government buyers 23% in 2015. These savings are achieved by eliminating multiple rounds of negotiations that occur by phone calls, faxes, through paperwork, and mail; when using traditional procurement practices. The outdated styles of communication can take up to six weeks (Semantic Scholar). Conversely, reverse auctions can be finished in 3 to 8 hours (Semantic Scholar).

Factor 3 - Increased Cost Savings Through a Fair and Transparent Process

Time and money are saved because suppliers are able to see the offers from others, creating a more transparent, real-time selling environment. Once a company posts the Request For Quote (RFQ), the date and time of when the auction will take place is communicated to preferred/selected sellers. On the scheduled date, suppliers log in to the auction software and then cast their bids repeatedly, trying to beat out the competition, The report from the University of Arkansas found average companies save 15% on their acquisition of goods and services through reverse auctions. Also, the time saved from reverse auctions progresses a company’s procurement process, eliminating the threat of work stoppage. Any hold-ups in work can cause a ripple effect, ultimately wasting company dollars.

Factor 4 - Increased Cost Savings due to a Larger Supplier List

Geographical limitations are erased by using auction software. No longer does a supplier need to be physically present in order to gain a buyer's business. With traditional bidding, companies felt limited to suppliers in their geographic area. Technology allows companies to globally search for the best prices. Technology can also help lower costs of products/services by providing opportunities for small/new suppliers to compete. Small businesses have benefited the most from governmental reverse auctions, with 85% of government spending contracts awarded to small businesses (govloop). The high percentage of contract awards could be due to small/new suppliers offering lower prices to build their client base as well as hold their own in the competing markets.

Factor 5 - Increased Cost Savings from Real-Time Market Pricing

As stated throughout, reverse auctions save companies money through the purchase of products/services at lower costs. Companies also take advantage of lower prices because reverse actions lend themselves to the “demand pricing” strategy. Demand pricing happens when suppliers set flexible costs for products/services based on current market demands. These real-time market prices mean that a buyer and seller will meet at a price point that reflects the true “fair market value” for a product/service. Additionally, when an increase in price, due to an increase in market demand is expected, sellers can choose to lower the percentage of increase in order to compete with other suppliers.

Auction Management

The competition of supplier bidding is at the center of the reverse auction. Companies also expend less time and labor on procurement; with technology being a great equalizer, companies find reliable suppliers with lower prices at greater ease. Nonetheless, when using reverse auctions companies need to take caution and consider the following:

• Pay attention to quality of product, customer service, delivery terms and times.

• Consider the flexibility of a supplier. Will they be willing to offer new pricing or proposals based on later market demand?

• Refrain from pushing suppliers to go too low in costs. Supplier relations are equally important and can be destroyed if there isn’t a win-win situation.

ProcurePort’s reverse auction software can help your business achieve cost savings. Contact our expert team to learn how to manage your own reverse auctions today.