What is the Reverse Auction Process?
A reverse auction is the exact opposite of a traditional auction, in which a seller puts an item up for sale and buyers bid on it. Most people are familiar with online marketplaces, where an item is up for grabs, and there is competitive bidding at the deadline, with the highest bid winning the auction.
When looking at a reverse auction vs. regular auction, a reverse auction is a viable option in sourcing and procurement, particularly if you’re working with new suppliers. Because it is the exact opposite of a regular auction, if you’re wondering, “what is the reverse auction process?,” read on to learn more about it and why it’s useful in procurement and in the supply chain overall.
What Is the Reverse Auction Process? Reverse Auction in the Supply Chain
As you’re wondering, “what is the reverse auction process?,” you may also be wondering where it fits in the supply chain. Supply chain management is the overall infrastructure needed to get a product to a customer.
Procurement and procurement management involves getting the goods and services needed to ensure that the product gets in the customer’s hands. As a buyer, an auction or reverse auction is an integral part of your overall procurement process.
What Is the Reverse Auction Process? When to Use It
Because reverse auctions are a strategy, you don’t want to use them all the time, and want to make sure you use them at the right time. The role of reverse auctions in strategic sourcing is important, but you want more than one tool at your disposal. Generally speaking, reverse auctions should be a consideration if:
- Product specifications are simple and are not complicated
- A large and competitive supply base with at least three qualified suppliers
- There is plenty of supply, and prices are not fluctuating
- Lead times are not short
- There is an opportunity for savings
That said, it is possible to perform reverse auctions with only two suppliers and a highly competitive category when the situation warranted it. Reverse auctions also aren’t used with your strategic suppliers or if the cost of switching vendors could be too high. So these are factors to consider as you plan to run a reverse auction.
You should use reverse auction and sourcing software you’re familiar with to help ease you through the process. However, if you’re wondering, “what is the reverse auction process?,” from start to finish, it generally begins with a buyer publishing a request for a proposal (RFP) or quote (RFX).
Next, the sellers submit bids based on buyer qualifications. Lastly, the buyer thinks it over and selects the winning buyer. In a reverse auction, you can select several types. You can allow buyers to see each other’s monetary bids—which isn’t used regularly—or to see their rankings. In some situations, the buyer will perform a regular RFP and then use the bids received in the RFP to start the auction. Make sure that the software you select provides you with kind of flexibility
It’s better to allow bidders to see their ranking, which keeps things competitive than to have them bid completely blind. If it’s your first time running a reverse auction, your suppliers may want some practice as well. In this case, you can run a mock auction before running a real one so that everyone feels comfortable during the real auction.
If you are still wondering, “what is the reverse auction process?,” and would like more information, contact us today at EC Sourcing Group by calling 973-936-9672 to find out how we can help streamline and expedite your procurement management process.