March 25, 2020 | 3 min read
Are you confused about the difference between reverse auctions and regular auctions? Let’s clear that up first. Organizations use regular online auctions (also called forward auctions) to invite bids from buyers who may wish to purchase their goods. The seller offers an item and buyers place bids until the auction closes, at which time the item goes to the highest bidder.
A reverse auction is the opposite of a regular auction. It is where sellers bid prices at which they are willing to sell their goods and services. It is used where the price is of prime importance, especially in sourcing services; the competition drives the price down. The seller offering the lowest price at the auction close is the “winner”. Most reverse auctions are concluded electronically online in real-time.
Yes - it works for both. It is particularly useful for high volume, low-value commodities. This includes, for example, office supplies, packaging and medical consumables such as gloves and other disposable hygiene items. Online reverse auctions are also used extensively to source suppliers for cleaning and janitorial services, maintenance, temporary labor and fleet management. Reverse auctions are increasingly used in selecting distribution and transportation services, especially courier and “last mile” deliveries.
The real benefit comes in cost savings. Much time is wasted drafting RFQs, waiting for responses, manually processing offers and conducting face-to-face negotiations. e-Auctions can produce 10-15% more savings than other methods.
Other benefits are:
Transparency and fairness in the sourcing process
More efficiency in the sourcing process
Better compliance by suppliers
Increased integrity in the data
Improved supplier relationships
In the past, there has been some criticism of reverse auctions. Suppliers were suspicious of the motives of the buyer and the reverse auction software was cumbersome, difficult to use and expensive. That situation has now changed; there is more confidence in e-auctions as many successful events have been documented by satisfied users.
Using the Kraljic matrix, we can identify where we can best use a reverse auction to source goods and services. It is preferable to apply it to transactional and routine purchases that are low risk and have a low business impact. Some leverage items or services may be good candidates. Reverse auctions are not suited to strategic or bottleneck items. We should also not use this method where there is a limited supply or at a time when the price is fluctuating rapidly.
The Kraljic Matrix
Reverse auction solutions are available from companies that specialize in providing managed services so there is no need to be an expert on the software. There is a range of services available in the market. Full-service solutions providers take you from setting the strategy through managing the auction to providing the final results.
Proven experience in end-to-end management of reverse auctions
A user-friendly software interface
Responsive customer support
Design options for different types of e-auctions
Reverse auctions have the potential to streamline a company’s value chain and improve its competitiveness. According to the Anklesaria Group, “The application of reverse auctions has many benefits such as cost savings through a reduction in the purchase price, increased efficiency and greater transparency in the procurement process, and access to a larger supply base. However, if used incorrectly, it can reduce the suppliers' trust and cooperation thereby jeopardizing long-term relationships.”
ProcurePort provides state of the art reverse auction software to assist organizations of all sizes in capturing the savings produced by the unique negotiation method.