Even those who don’t work in procurement or purchasing are familiar with auctions, whether they’ve used bidding sites, gone to a live auction, or seen one played out on TV. This standard type of auction is known as a forward auction. What is a reverse auction? In a reverse auction, instead of bidding on what a seller has to offer, buyers bid against one another for the contract.
eReverse auctions can be very beneficial to procurement. However, buyers and suppliers are sometimes wary of trying the process, often based on one solitary myth: reverse auctions do not benefit suppliers, but this isn’t true at all. While they benefit the buyer, there are crucial benefits for suppliers, too.
Read on to learn more about what to do before you begin your first auction, features to look for in reverse auction software, and how the overall process works.
Using the Right Software in a Reverse Auction
Before beginning a reverse auction, you want to ensure you have the right software to run it successfully. Not all software is created equal in a reverse auction, and some software has have more robust features than others. One thing to think about is that the software should be intuitive. There’s always some time to become acclimated to something new, but your software needs to be accessible for you, your team, and your suppliers. Some of the features you should look for in reverse auction software include:
- Ability to hold a test (mock) auction
- Abilityto see bids in real-time
- Pre-registration functionality
- Reference page creation
- Integration with enterprise platforms, such as a central repository or enterprise resource planning (ERP)
- Analytics features
- Post-bid analysis
- Ability to change bid strategy
These are highlights and not a comprehensive list; however, these are all very important features to have when conducting a reverse auction.
Preparing for Your Reverse Auction
Before announcing your event, some preparation has to take place. One major factor to keep in mind: do not announce your event and wait for suppliers’ offers. Instead, you should be doing the opposite: contacting (pre-qualifying) your suppliers first, then announcing your event. This is a hallmark mistake in a reverse auction. Here’s how to prep before announcing your event:
- Make sure all your suppliers’ contact details are correct.
- Have a brief discussion with your suppliers. Discuss start and end time, maximum bid, reserve price, and overtime rules if you plan to use them.
- Run a mock auction (remember, this is an important feature in software!) so that everyone feels comfortable when the auction goes live.
You must also decide which type of reverse auction you plan to use, as several types are available.
In a reverse auction, all types have different benefits and potential drawbacks, so choose the one that’s best for your needs. The most common types are:
- British reverse auction. This is the most common type of reverse auction used. Suppliers can see other suppliers’ positioning and bids and sometimes the best price offered. This type of transparency benefits both the buyer and supplier.
- Vickrey reverse auction. This is a type of British reverse auction where suppliers set a maximum bid. The supplier doesn’t necessarily pay their max bid when the auction ends. This type of auction can go for several rounds and offer the transparency of seeing another supplier’s rank.
- Reverse Dutch auction. In a reverse auction that uses the Dutch type, suppliers cannot see where they stand and only see a price and countdown timer. These are best utilized when there is a smaller supplier pool.
- Japanese reverse auction. These are similar to Dutch auctions, where the supplier only sees the countdown timer and price. These auctions start at a high price, lowering as the auction progresses. The auction is essentially won by the last supplier standing.
Once it is configured, you can begin to invite vendors. Just keep in mind it’s best to give your potential suppliers at least a week’s notice, as you do not want to ambush your strategic suppliers.
Running the Auction
Once you have a list of pre-qualified suppliers, and you’ve run a mock auction to ensure everyone is on the same page, it’s time to run the auction.
No matter what auction you intend to run, you should configure the following for a successful outcome. All of the following should be configured:
- Start and end time
- Maximum bid (your bid ceiling)
- Minimum bid decrement (amount a bid must be lowered to make it viable)
- Overtime rules(if they are pertinent to your auction)
Now you can begin to invite the vendors. Once the auction begins, there’s not much for you to do other than sit and watch the auction (and watch prices drop)! Make sure:
- Auction bidding is open when your suppliers are ready.
- Your rules are very clear to avoid confusion.
- An award decision is made.
Remember, it’s not always about price—you do not have to award the lowest bidder unless that was a rule in your eAuction.
Advantages and Disadvantages in a Reverse Auction
Like any process, there are advantages and disadvantages. However, this isn’t always the best option when suppliers’ offerings are different. It works best when everything has highly-defined specifications.
Advantages and disadvantages of a reverse auction for the supplier:
- New business opportunities
- The ability for smaller sellers/companies to get their foot in the door because of a more level playing field
- Risk of loss, if they are forced to bid lower than they wanted to
Advantages and disadvantages in a reverse auction for the buyer:
- New opportunities to connect with quality suppliers
- Speed and efficiency of the process
- You have a less informed choice—you won’t have much information if you have a large group of suppliers
- High monitoring costs (the cost of managing the project can increase after the bid award)
Remember that a well-run auction depends upon the software’s included features. At the end of the day, what buyers and suppliers want in a reverse auction is a positive outcome—the buyer gets a competitive price, and the supplier is able to put their best foot forward in a fair bidding environment.
One last note—while features are important in selecting your software, remember that the software you choose must be:
- Indicative of professionalism for buyers and suppliers
You always want to have these three tenets in your process for reverse auction optimization and a positive outcome—remember, if buyers and suppliers are happy, then so is your customer.
Learn more about selecting the right type of software for your auction needs. Schedule a consultation today.