Why Are Reverse Auctions So Controversial?

Why Are Reverse Auctions So Controversial?

Like many things in life, a lot of controversy surrounds the practice of reverse auctions because they are often misunderstood. However, those who regularly use them as part of their strategic sourcing methodology understand the relationship between reverse auctions and success in strategic sourcing

Of course, a reverse auction will not always be the perfect solution for every transaction, but the correlation between the role of reverse auctions in strategic sourcing remains. Read on to learn more about reverse auctions, the importance of strategic sourcing, the difference between tactical buying vs. strategic sourcing, and what to look for in strategic sourcing software.

The Importance of Strategic Sourcing: Why Are People Scared to Use Reverse Auctions?

In essence, those in procurement management can be reluctant to use reverse auctions because they believe it will hurt their suppliers because suppliers have heard that reverse auctions may hurt them. However, the reality is that these are all just myths if reverse auctions are run correctly. It is important to remember that reverse auctions are not ideal for every category, but they do have a place in strategic sourcing. 

Some myths about reverse auctions debunked:

  • A reverse auction is a “power trip” over suppliers. Incorrect. Reverse auctions are a good way to work more collaboratively with your suppliers and could even help them understand when their competition is doing something more efficiently than they are. .
  • Reverse auctions will weaken the supply chain because it can cause tension with the suppliers. This is another myth. If you are working with suppliers who have never participated in a reverse auction, you can always run a mock one first. This way, no one supplier has the edge over the other. 
  • Reverse auctions will simply hurt suppliers. In contrast, reverse auctions allow you to build better and even strategic relationships with suppliers. Competitive bidding also gives suppliers a chance to have their A-game on—if they are consistently losing bids, perhaps it’s time to look at the quality of their goods and services or their own supply chain to make improvements. 

The Importance of Strategic Sourcing: Difference Between Tactical Buying and Strategic Sourcing 

People often get confused between tactical buying and strategic sourcing. The importance of strategic sourcing is that it takes a long look at the big overall picture and not just one transaction with a single supplier or vendor. However, tactical buying is very much concentrated on the here and now and wants to fulfill supplies or goods for only the demand needed right away. Tactical buying does not focus on long-term goals and does not have many strategies behind it. Image of a gavel for an article about Why Are Reverse Auctions So Controversial?

However, strategic sourcing would want to take a look at the overall picture, if using this supplier would be beneficial down the road, and other metrics as they would pertain to the company or category strategy.

The Importance of Strategic Sourcing: What Are the Benefits?

The benefits of strategic sourcing are simply laid out, but they are crucial benefits. Four key benefits include:

 

  • Reduces indirect and direct costs
  • Promotes long-term relationships with suppliers (particularly with reverse auctions)
  • Mitigates risk through strategic suppliers and incorporating risk into the buying process
  • Higher efficiency with transparency and a systemic approach

 

 

When you combine these benefits together, generally speaking, the boost in efficiency and collaboration leads to higher ROI. 

The Importance of Strategic Sourcing: What to Look for in Software

The best strategic sourcing software will have certain features, and these are all must-have features you can’t live without. Depending on the nature of the importance of strategic sourcing and the role it plays in your business, you may need more robust features, but these are the must-haves:

 

  • Spend analysis 
  • eRFx tools
  • Reverse auction capabilities
  • Contract management tools
  • Supplier management options
  • Automation and real-time capabilities
  • The ability to incorporate risk into award decisions 

 

 

You may also want to investigate a full procure-to-pay suite where you can get into accounting and other downstream activities you might need for business. 

To learn more about the importance of strategic sourcing, or request a demo, contact us today at EC Sourcing Group at 973-936-9672. We want you to re-imagine the way you think about procurement.