What is the Best Reverse Bidding Process and Strategy?
Reverse bidding is the process by which one company bids against another to secure a specific item or service. Instead of buyers bidding on a product or service, suppliers gather to bid for a contract. This procurement process is becoming more popular in today’s competitive business environment because of its advantages for buyers and sellers. It encourages competition and innovation while streamlining the process for suppliers and buyers alike. There are four common types of auctions used in the reverse e-bidding process, and reverse auction examples include:
- Ranked auction. The most common type used in the reverse bidding process. Buyers can rank their bids from highest to lowest to determine who gets the contract, and suppliers can see in real-time who has the winning bid.
- Open (English) auction. In this type of auction, the supplier submits a bid that is transparent from the start, and they can see other bids as the auction progresses.
- Dutch auction. This is another popular auction in eSourcing. In a Dutch auction, the buyer announces the product they want and the price they’re willing to pay, and suppliers can decide to opt-in or opt-out.
- Japanese auction. The buyer announces the price, suppliers agree to participate, and the price goes down as the auction progresses. Once the auction ends, the seller who offers the lowest price wins.
The type of reverse bidding process you use depends on your needs for goods and services. Because different types of reverse auctions can be unfamiliar, running a mock auction before the actual auction benefits you and your suppliers by giving all participants a clear view of what to expect during the auction.
Reverse Bidding Process: When (and When Not) to Run a Reverse Auction
A reverse auction is an optimal choice for specific industries such as:
- Government contract bids. Many government entities use the reverse bidding process because it allows them to procure the goods and services they need at the best price available. It also gives them more transparency in their contracting process and reduces administrative costs associated with traditional bidding processes.
- Manufacturing. Manufacturing companies are great candidates for using the reverse bidding process because it helps them identify cost savings and reduce inefficiencies in their supply chains.
- Technology services. Companies that provide technology services are another great candidate for the reverse bidding process because these companies often receive many requests for different services on a regular basis and have excess capacity available for those services at certain times of the year. Also, they often provide services for short periods of time, such as for events, so they need to be flexible with their pricing and be able to scale up and down based on customer demand.
There are some instances when you should not use a reverse auction. This can include when a regular supplier is out of a needed product, the buyer makes a strategic decision and opts for a second source for some of their parts, or the buyer wants a group of parts at a volume discount.
A scenario of when not to use the reverse bidding process is if you want to practice more strategic sourcing and are looking for long-term relationships with suppliers. Reverse auctions are best used when the process is naturally transactional. It is a short-term procurement solution. However, having the right reverse auction software is integral to reverse auction success.
Reverse Bidding Process: Running a Reverse Auction
So, what is a reverse bidding model? A typical reverse auction looks like this:
- The buyer requests an RFP (request for proposal) or RFQ (request for quotation) and announces it to potential suppliers.
- Depending on the type of auction, suppliers then submit bids based on the buyer’s qualifications.
- The desired type of auction is run, and the buyer considers options and selects a winning bid.
- The contract is then awarded to the selected supplier.
The reverse bidding process is quite simple, but it’s imperative to keep in mind that you shouldn’t award the contract based on the lowest supplier bid—sourcing goods and services require that you consider many aspects of the contract and supplier, and there will be some situations where you will accept a higher price because of the added benefits involved.
Challenges facing buyers using reverse auctions can include a less informed choice and the cost of monitoring and managing the project. However, with solid reverse auction software, buyers can overcome these challenges by having a centralized supplier database and spend analytics features so they can mitigate risk.
Benefits for buyers include reduced manual labor costs and greater time efficiency. For suppliers, it levels the playing field and allows smaller businesses to compete against larger corporations.
Reverse Bidding Process: The Best Strategies to Use
Some key strategies to consider when using any reverse auction include:
- Be willing to walk away. You don’t have to choose a supplier if no one is qualified.
- Plan to win. Have a plan of action set to go before the commencement of the auction
- Remember that a reverse auction is a negotiation tool. And you are leading the negotiation.
Confidently conducting a reverse auction will help you get the best possible suppliers at the best possible price. Contact Simfoni eSourcing today to kick off your reverse auction strategy with intelligent eAuction software that is composable and individualized to your needs.