Reverse auctions, when conducted properly, can be a massive success as part of procurement management. The role of reverse auctions in strategic sourcing has diminished in recent years but is seeing a comeback in 2020 as companies look to find more savings in the pandemic. With recent advancements in procurement technology, eSourcing software has become more intelligent and intuitive to individual users and specific company’s needs.
Most everyone is familiar with how a regular or standard auction is run, as online auction marketplaces have been popular since the early days of the internet.
Read on to learn more about the differences between reverse auctions and bidding, the reverse auction process, and how to integrate reverse auctions into your current strategy.
The Differences Between Reverse Auctions and Bidding: What Is the Reverse Auction Process?
In a standard auction, buyers compete for an item with bids. The seller is the “host,” and the bids go higher and higher until the auction ends (as it is typically on a timer), and the highest bid wins. A reverse auction is the reverse of that situation. The buyer is the host; however, the way the auction is conducted is different, which is one of the differences between reverse auctions and bidding.
The Differences Between Reverse Auctions and Bidding: Price-Based Competition
If you’re looking at a reverse auction vs. a regular auction, in a regular auction, the bid is often binding. In a reverse auction, once a supplier enters a quote, they typically know where they stand amongst the other suppliers and can change their bid if necessary. This may sound like a bad thing, but this real-time competition adds to your savings and also provides the supplier with the opportunity to be more competitive if desired.
The Differences Between Reverse Auctions and Bidding: It’s in the Supplier’s Court
A reverse auction places all of the responsibility on the seller to meet all of the specifications. If it’s a good or service that’s highly competitive, this takes some stress and strain off your shoulders and completely puts the ball in their court.
The Differences Between Reverse Auctions and Bidding: Gaining Suppliers
In a reverse auction process, you should pre-qualify suppliers before adding them to the auction. If you don’t—and have a non-qualified supplier,—they could drive the price down to an unrealistic level considering the services or delivery requirements you may have, which could be disastrous.
So, do make sure that you have qualified suppliers in your auction and allow all suppliers to participate in the pre-auction approval process so all know it. However, if you’re starting out, looking for qualified suppliers alerts everyone to your presence, which could gain you more suppliers.
The Differences Between Reverse Auctions and Bidding: True Market Prices
In a regular auction, you may end up paying more for a good or service because there’s a tendency to overpay because of the process of a standard auction. In a reverse auction, there’s a better chance that you’re paying true market value for a good or service because of the nature of how they are run. With a bidding event, without an auction or without a second-round bid, you may not know if you are paying true market prices—certainly, savings will be higher with a reverse auction versus a regular bid or sealed bid event.
The Differences Between Reverse Auctions and Bidding: Timing
With a reverse auction, the auction will last an hour or so and all suppliers will be bidding during that hour. In a bidding event, you may give the suppliers an additional week to bid in a secondary bid round or “Best & Final Bid”.
In some cases, you might even give the suppliers two weeks to bid.
When to Use Reverse Auctions
Reverse auctions are of great benefit, but it’s important to know when to use them. For example, they’re not often used with strategic suppliers or strategic categories. Reverse auctions work best with:
- Raw materials
- Printing services
- Capital purchases
- Processed goods
Once you get a feel for the reverse auction process, you’ll know when to tap into this strategy.
To learn more about the differences between reverse auctions and bidding, or to hear about how we can streamline your procurement management process, contact us at EC Sourcing Group today by calling 973-936-9672 to speak to a member of our team.