Reverse Auctions - Top concerns in relation to your supply chain
Table of contents
In case you don't have time to read the entire article, here is a short video summary:
Starting to run reverse auctions with your suppliers might seem like a big change in your procurement process. And, although the benefits are obvious, there are also natural concerns that something might go wrong.
Here’s a list of top concerns procurement specialists have when considering to implement a more competitive process for their suppliers.
#1 Reverse auctions will hurt suppliers
During reverse auctions, suppliers compete for the buyer’s business by underbidding one another. This increased competition should lead to lower prices for buyers, but it also runs the risk of undermining a supplier relationship that has taken time and effort to build.
Before you pull the plug and decide to give up on organizing a reverse auction, you need to stop and ask yourself: what’s the point of developing a strategic supplier relationship if you’re not going to use it?
Competitive bidding isn’t something new. It’s been happening in one form or another in almost all procurement organizations. Some suppliers might feel offended, but that would be because they are not competitive, or they are incumbent companies who have not had their contract openly and actively competed for several years - or more.
“Any supplier who can't figure out how and when to be competitive and maintain an overall acceptable profit margin is probably not a supplier you want to do business with over the long term,” says Gregg Brandyberry, president of RDPE Inc. “Buyers need to remember suppliers sell the same goods and services to different companies at different prices. Those companies with good procurement pay less!”
Also, take into account that online reverse auctions have been increasing in popularity. Larger companies are more likely to use reverse auctions extensively. As reverse auctions become mainstream, the idea that their use reflects indifference toward maintaining good buyer-supplier relationships may decrease.
#2 Due to scale and size, reverse auctions benefit the largest competitors
Big companies may have scale and size on their side, but smaller companies often have the upper-hand through lower overhead and a more efficient cost structure. They also have a higher desire to win new business.
A rational supplier would not take the time to participate in a reverse auction if he thought it wouldn't be worth it. And reverse auctions can provide other benefits as well - real-time feedback on the competitiveness of a bid.
To organize reverse auctions, you would also want to invite suppliers that are somewhat equal in pricing power and ability to lower the price. The market’s structure is also very important: you don’t want to run a reverse auction if the market is composed of a few tightly-knit suppliers.
#3 Reverse auctions will create tension with the suppliers and will weaken the company's supply chain
Generally, reverse auctions portray buyers as villains preying on the competitive nature of suppliers, striving for a competition to successfully bid on a sourcing event.
While this may have been the case years ago, suppliers and buyers alike have now become more comfortable with the technology.
Buying organizations will often relieve any fears a supplier might have about participating in a reverse auction by:
educating suppliers on the methods and tools used before a sourcing event takes place;
using 3rd party hosts to administer the event.
Once the auction is complete, companies will publish results and ask for feedback to continue perfecting the process.
Reverse auctions do not necessarily apply across the board to all types of acquisitions. Strategic suppliers should be supported and nurtured through a strong partnership. Most of the suppliers, however, will not be in that category.
Some suppliers might feel disadvantaged by the transparency of reverse auctions, but others will appreciate it as it helps gain more business. On the long term, you want to work with the most competitive of the bunch, the ones that can adapt and be efficient.
#4 Reverse auctions are perceived as a way of exerting power over suppliers
Reverse auctions have been characterized as “the technology that has triggered more ethical concerns in the e-commerce arena than in any other segment of activity”. Some criticize reverse auctions as being “coercive” in nature, due to the power being exerted by the buyers to force suppliers to participate and reduce prices.
Some suppliers can feel pressured to participate in a process where they are pitted against one another to lower their prices. From this perspective, reverse auctions can cause an exploitative relationship between buyers and suppliers, rather than allowing procuring organizations to partner up. Yet such tensions are inevitable since buyers and suppliers have conflicting needs, goals, and expectations.
However, many suppliers actually benefit, rather than suffer, from their participation in reverse auctions. That’s because of the need for specificity and clarity in agreeing on the goods and services being auctioned. This need causes buyers and suppliers to communicate better and work more closely together in the process.
For suppliers, the environment of reverse auctioning also provides them with immediate feedback on their ability to deliver the right good or service in a real-time market environment.
As such, if a supplier loses the reverse auction, he has the opportunity to refine its operations to reduce costs, produce better products, or otherwise meet the buyer requirements in a more efficient way.
Moreover, due to the short time in which they take place, reverse auctions significantly reduce the amount of time necessary to win a customer’s business. They also minimize time spent on business prospects that do not end up choosing your company for that specific procurement.
Reverse auctions represent a tool to open up the competitive process and create a fair, transparent, and efficient process for all interested suppliers to compete for a contract on a level playing field. In many industries, actually, they are seen as “best practice”.
Keep in mind, though, that the best strategy is always to start with small, easy projects and go incrementally to larger acquisitions, more diverse categories of products, and more difficult suppliers. The experience acquired from one reverse auction to the other will help you to successfully handling increasingly complex situations.
All in all, reverse auctions are here to stay and benefit both buyers and suppliers alike. Make sure your company doesn't fall behind by using reverse auctions to improve competition and maintain a healthy supply chain.