Reverse Auctions 101: A Complete Guide For Buying Organizations
To help you take full advantage of online reverse auctions, we’ve put together this guide to show you:
why e-auctions are important and how they can help you;
what you need to do before your launch your e-auction;
what types of e-auctions you can choose from;
how to successfully launch your e-auction.
Top concerns Procurement Managers have regarding Reverse Auctions
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.
What you need to do before launching your first e-auction
One of the biggest mistakes Procurement Managers make when organizing e-sourcing events is that they publish the auction and then they wait for suppliers’ offers.
Using an e-sourcing platform like Prokuria doesn’t mean communication with suppliers should be neglected. On the contrary. While procurement automation platforms help streamline the process, there are a few communication strategies Procurement Managers need to consider before, during, and after a Reverse Auction.
Before publishing your e-auction, especially for larger projects, you should contact your suppliers (either by email or phone) and let them know you’re planning on organizing an e-sourcing event. Here are a few things to keep in mind:
Make sure you have suppliers’ contact details.
Have a brief initial discussion with suppliers to help anticipate possible issues regarding choices of data, requirements, or event parameters.
Organize a small initial training or test to ensure suppliers are clear of what is expected of them and minimize additional questions. Supplier training is particularly important if you organize Reverse Auctions, as they need to be comfortable with the technology and avoid any confusion during the actual bidding. If there are vendors who have never participated in such online events, they should receive special attention so that they don’t have a disadvantage to other suppliers.
Types of e-auctions top-performing companies use
Top-performing companies go beyond e-RFIs/e-RFQs. They create a sourcing culture where competition between suppliers is encouraged, transparently, through e-auctions.
These companies reap the benefits of a streamlined, efficient, and fair sourcing process, ensuring significant cost savings (e-auctions generally provide savings of >10% compared to previously negotiated prices).
There are six main types of e-auctions buying organizations can use:
Planning and successfully delivering a pilot e-auction
Ideally, with clear, measurable benefits.
Some organizations have in-house expertise. Others prefer to work with a specialized consultancy company that can help them lift the pilot project off the ground.
A pilot project should involve real users, real suppliers, and a real product to be purchased. Otherwise, you won’t be able to gather data, measure benefits, and put together a sound case for organization-wide implementation.
The planning phase is crucial. Many buyers acknowledge the preparation phase as being the single most important predictor of the success of an e-auction. After all, Abraham Lincoln is credited with saying “Give me six hours to chop down a tree, and I will spend the first four sharpening the ax.”
What to expect from suppliers: reverse auction bidding strategies
Starting very low
Whenever a supplier starts with a very low bid, he’s definitely trying to intimidate his competitors. However, this strategy is a double-edged sword: yes, it can work for them, but it can also do them more harm than good. Putting forward an extremely low bid before seeing how low other suppliers are willing to go is a dangerous bidding strategy as it can really minimize their chances of a high-profit margin.
You might think that this is a good opportunity for you as a buyer, but it might not be so. Often, suppliers will ask for a renegotiation of the contract, or they might lower the quality of their products to minimize their loses.