Even those not involved in procurement or purchasing, are familiar with how a regular auction works. A seller has something they are trying to sell, and a buyer bids on the item. Typically, multiple potential buyers (bidders) bid on the item, and the highestbidder “wins” the item. If you’re wondering, “What is a reverse auction ,and how does it work?,” a reverse auction is exactly the opposite. In a reverse auction, the buyer and the seller flip roles, except in procurement, there are slightly different attributes. To be smart, you need a reverse auction procurement strategy to manage your procurement management process successfully.
Read on to learn more about the reverse auction system, and your best reverse auction procurement strategy options.
Reverse Auction Procurement Strategy: What Is a Reverse Auction in Procurement?
To define reverse auction, Investopedia’s textbook definition says, “A reverse auction is a type of auction in which sellers bid for the prices at which they are willing to sell their goods and services.”
However, in procurement, you wouldn’t use the term sellers, but these would be your suppliers. Reverse auctions can benefit you in procurement, because essentially you are looking for the lowest price from your suppliers to complete your project on time—and well within your budget constraints.
However, there is some worry that this reverse auction procurement strategy sacrifices long-term value for short-term gain. You want to make sure that the way you go about handling reverse auctions is mutually beneficial and that they benefit the supplier.
Otherwise, you’ll likely end up using rotating suppliers with often cheaply made goods or poor service quality.
Reverse Auction Procurement Strategy: Reverse Auction Process Flow
If you’re still wondering, “What is a reverse auction?,” to provide examples, let’s say you need a certain product to complete a project on time. You have six suppliers that you normally work with, and all six can provide this product.
You ask all six suppliers what their lowest price is for said product and all six come in with a bid. You can either take the lowest bid from the start or run the auction to see how much lower you can buy the item. Like regular auctions, the suppliers can continue to bid against each other if they want your contract.
Reverse Auction Procurement Strategy: Strategies for Success
For successful reverse auctions, there are reverse auction procurement strategy guidelines you should follow.
It’s also a good rule of thumb that you shouldn’t always have reverse auctions be your go-to. It would help if you had a mix of procurement strategies that you use to procure goods and services, including using a SoftAuction from time to time.
Reverse Auction Procurement Strategies include:
- Make sure you have enough suppliers to provide friendly competition. If you only have two suppliers competing against each other for the job, you may not get a great price, although two suppliers can be enough in certain instances.
- Be clear about your specifications and let suppliers know there will be a “no award” option if these are not met, even if they come in with the lower bid.
- Get to know your suppliers and introduce them to your process prior to the auction. If they are entirely unfamiliar with your process and your terms, you may get what you pay for with the lower bid.
- Make sure everyone is qualified by asking RFI questions or other qualitative questions before the auction. All suppliers appreciate this. They know that all auction participants are qualified.
- Don’t jump for the lower bid. Make sure you’re getting value for what you pay. Research suppliers thoroughly before you provide the award.
- Make sure it’s a level playing field and fair to suppliers. If a reverse auction isn’t mutually beneficial, your suppliers won’t participate.
To learn more about reverse auction procurement strategy, or if you have questions about procurement management, contact EC Sourcing Group today to see how we can help by dialing 973-936-9672, or fill out the contact form on our website.