Why Do Reverse Auctions Fail?

Reverse auctions can play an important role in strategic sourcing, particularly because both buyers and suppliers have complete transparency using this approach.

However, even though they may be one of the primary strategic sourcing tools and techniques for some buyers and suppliers, they may fail for others. There are some specific reasons for this, and much of it has to do with being unfamiliar with the intricacies of how reverse auctions work. Read on to learn more about how reverse auctions can be part of the better strategic sourcing experience and why they don’t need to fail.

Strategic Sourcing Solutions: How Does a Reverse Auction Work?

To use reverse auctions as one of your strategic sourcing techniques, you should understand the general process and why they are one of the benefits of strategic sourcing. A reverse auction is exactly what it sounds like, the reverse of a regular auction. Instead of you bidding on goods and services from suppliers and vendors, the opposite is true, where vendors and suppliers compete against each other for your business.

First, your sourcing team should be familiar with eSourcing and strategic sourcing best practices, and they must have access to a platform where they can generate a reverse auction. Suppliers can usually see their position in the auction (where they stand against the competition ), and it is often up to you whether you want the specific bid amounts displayed or not. A reverse auction usually has a set amount of time in which suppliers can make bids, at which point you select the bid you prefer from the pool. There are several different types of reverse auctions used as strategic sourcing solutions (cherry-picking, list, and cherry lot), so it may not always be the lowest bid that wins. This is where some knowledge and strategy must come into play.

Strategic Sourcing Solutions: Why Do Reverse Auctions Not Work?

Many buyers would like to use reverse auctions as part of their strategic sourcing process, but perhaps they’ve tried one once, and it failed. There are a few clear reasons why reverse auctions fail, and understanding this can help you realize why they are one of the benefits of strategic sourcing when used properly. Some of the reasons that reverse auctions fail include:

• Inviting unknown or unqualified suppliers into the fold. This is why you and your sourcing team need to be on the same page. You don’t need to add random suppliers to make it more competitive; you can run a reverse auction with just two to four suppliers and still be successful. Adding suppliers you’re unfamiliar with or that aren’t qualified can cause chaos.
• Having a poor platform. Before you begin conducting reverse auctions, ensure that you’re well-versed with the platform you’re using and that it’s considered a highly rated strategic sourcing solution by others in the business. Online cloud-hosted reverse auction software is your best bet forwinning a reverse auction.
• Conducting an auction with little notice. Scheduling an auction with very little advance notice or without a pre-bid can wreak havoc on the results. This can be especially true if the item or category being sourced is highly complex. Another potential issue can occur if your suppliers are unfamiliar with how a reverse auction is conducted. You can always run a mock auction first to get everyone comfortable with the process.
• Not fully understanding reverse auctions. It may be a good idea to look at a strategic sourcing case study on reverse auctions before starting or ensure that your auction provider will conduct the auction with you. While the goal is to purchase the goods or services at the lowest price possible, you must always want to ensure other qualifiers are met. This is why there are different types of reverse auctions, and you should have a clear understanding of each.

Strategic Sourcing Solutions: When Should You Use Reverse Auctions?

Another reason why reverse auctions may be an ineffective strategic sourcing solution for buyers is that they’re using them for the wrong type of category or are unsure when to use a reverse auction. Reverse auctions are best used in fields where there is moderate to heavy competition among qualified suppliers and should also be used when there is a low level of procurement complexity. They also should not be used when you’re testing out a supplier for the first time, and doing so can be another reason your reverse auction failed. Some of the best categories for reverse auctions as strategic sourcing solutions include:

• Waste management
• Janitorial services
• Vehicles
• Raw materials
• Printing and copying services
• Capital purchases
• Broad technology categories

This isn’t to say you couldn’t use a reverse auction for categories outside this list, but these are some of the most widely used when it comes to reverse auctions.

To learn more about strategic sourcing solutions or see a demo for reverse auction software, contact EC Sourcing Group today at 973-936-9672. We want you to re-imagine the way you think about procurement.