Types of Reverse Auctions
If you’ve ever bought something from an online auction site, you’re well aware that you compete against other bidders to get the item that you want. In procurement, a regular auction works the same way—a buyer will place bids on the seller’s (supplier’s) goods and services. In a reverse auction, it is the exact opposite.
A buyer will put up a request for goods and services and the suppliers compete for the business. This type of reverse bidding works out well for many buyers and suppliers, particularly in certain industries, such as raw materials, transportation services, and government entities.
Read on to learn more about the different types of reverse auctions, and their advantages and disadvantages.
Types of Reverse Auctions: Other Names
If you’re relatively new to reverse bidding, there are several names that a reverse auction can go by. To avoid confusion, it’s wise to be familiar with the terms.
You may hear a reverse auction referred to as reverse sourcing, procurement auction, eSourcing, eAuction, sourcing event, eRA, and a B2B auction, among others. However, there are approximately four types of reverse auctions to be familiar with.
Types of Reverse Auctions: Four Popular Types
A prominent reverse auction example is a ranked reverse auction, which works well for a majority of industries. In a ranked reverse auction, many suppliers will bid similarly on a project, but the only supplier who knows the price of the winning bid is the supplier who made it. If a supplier’s merchandise is of superior quality, it allows the supplier to feel confident, as the lowest bid does not always win the job.
What is another reverse auction example? A Japanese reverse auction is another option. In this type, the buyer places an opening bid for the suppliers. The suppliers have a choice as to whether to participate or not based on that opening bid. The price will go down, and suppliers can either accept or reject the terms. The last bidder left wins the auction.
In a Dutch reverse auction, the buyer’s request will include a list of products/services needed in addition to the price they are willing to pay. Suppliers will then decide whether they are agreeable to that price or not. Sometimes the buyer will choose one supplier, or in other cases, the supplier may end up awarding the winning bid to more than one supplier to meet the needs of the project.
An open-outcry (also known as an English reverse) auction is very transparent. This type of reverse auction works well when the price is an important factor. Every supplier can see the leading bid (as opposed to a ranked reverse auction, where only the winning bidder sees the bid). Each supplier has an equal chance of winning the auction, provided their price and quality are acceptable to the buyer.
Types of Reverse Auctions: Benefits and Disadvantages
Reverse auctions can be very beneficial, but they are also controversial. Reverse auction technology plays a pivotal role in any type of eAuction to help streamline the process.
If you’re unsure about the software or which cloud-based portal you should use, perusing reverse auction software reviews is a good idea to discover which type meets your needs.
Some of the benefits of reverse auctions include:
- It can be a time saver
- Significant savings for the buyer
- Helps to streamline the procurement process
- A buyer has access to a much larger pool of suppliers
There is not a large list of disadvantages when it comes to reverse auctions, but two drawbacks include situations where the buyer may look only at price and not the quality of goods/services and a vendor can hurt themselves by bidding too low.
Also, ranked reverse auctions can alienate some vendors, because of the lack of transparency.
To learn more about the different types of reverse auctions, or to schedule a software demo, contact EC Sourcing Group today at 973-936-9672. We want you to reimagine how you think about procurement.