Reverse Auctions Explained
You might be wondering what a Reverse Auction is and how it applies to you? Let me tell you a little about what I’ve learned about these type of auctions. The “reverse” is precisely as one would guess – the role of the buyer and seller are indeed reversed. But why? The main goal of Reverse Auctions, also referred to as e-sourcing or procurement auctions, is for the sellers to compete with one another to bring the final sale price to the buyer down. Obviously, in a regular auction, the buyers are bidding against each other to see who can out-bid the other, with the highest bidder winning the item up for sale. Not true in Reverse Auctions. The seller with the lowest bid price essentially wins the buyer’s business.
Some critics of online reverse auctions purport that they are a bad idea. Critics say reverse auctions seldom live up to their advertised bargain-basement pricing promises, while others speculate whether anyone can get an accurate measure on the bottom line savings to companies engaged in the process. Through this delicate seller-buyer exchange, conflict often arises, though it doesn’t appear as though there is a conflict management resource to model the importance of resolving the problems together. Therefore, one could say that reverse auctions are pure poison for buyer-supplier relationships.
While online reverse auctions may not be just the panacea seen by those donning rose-colored glasses, we can’t believe they are the devil’s work either. Objectively, we can certainly find that gray area in between the two sides of this debate that can see reverse auctions for what they are. Here’s some advice that might help you decide if reverse auctions are for you.
Consider value, not just price. The lowest price doesn’t always reflect the quality or reliability of the product purchased. Buyers should avoid focusing on the price, and think about other value-added factors. Some sellers have created reverse auctions where the suppliers and the buyers can favorably negotiate non price factors opposed to price.
Consider when. Use reverse auctions only when necessary and when it is to your advantage. Typically, it’s most appropriate for single use or one-time purchases, like commodity products available from a wide assortment of suppliers. Reverse auctions aren’t so advantageous when you’re looking to purchase specialized components and parts because it limits the number of suppliers who can meet the mark on reliability and quality. Building and maintaining relationships with essential suppliers in more strategic sourcing situations is significant. Buyers always have to be mindful of weighing the risk of damaging these relationships, and overuse is one quick way to to do just that.
Consider the full cost picture. Buyers need to be aware of the direct and indirect losses that are generated from these events. It’s not as simple as looking at your cost savings at the time the auction closes because every auction has unique rules and fees associated with the sale. Read and understand the terms of the transaction thoroughly before entering the auction as an active buyer. That way, when the transaction closes, you’ll know exactly what it’s costing you. Also, pilot auction programs generate an increased savings because new suppliers are working hard to gain your business. Just like fisherman seeking the ultimate catch, this lure-motivated pricing is not sustainable. The bait will be replaced later with higher costs or hidden fees once the sellers have earned your business.
Consider treating others how you would want to be treated. Tightening the screws on suppliers because you are in a position of buying power can be risky. With current economical fluctuations, the power position can shift to the seller in a heartbeat. If you’ve abused your power, don’t expect those suppliers to forgive and forget so soon. They’ll be looking to tighten the screws on you. Play fair. Both sides of these transactions are looking to make money, and it can be a win-win exchange when sellers and buyers keep their power in check.
With all the controversy and debate circling about reverse auctions, just remember you can choose to focus on the advantages and savings found in the middle ground. By using reverse auctions in a calculated and sparing manner, you will find it can be a great resource to help your sourcing experience yield positive results.