Wikipedia on Reverse Auctions – A reverse auction is a type of auction in which the roles of buyer and seller are reversed. In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service by offering increasingly higher prices. In a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers undercut each other.
Reverse auctions take the supplier selection process a step further, enabling a buyer to collect and compare price and bid information of two or more suppliers in a real time, open bidding environment.
Reverse auctions are hosted by a single buyer and feature two or more suppliers competing for business. Such auctions are commonly used by organizations as a tactical way to achieve sourcing objectives.
When used appropriately, reverse auctions support the goal of strategic sourcing to significantly reduce the cost of purchases without sacrificing quality and service. Buying organizations can also realize the following benefits of auctions:
- Greater insight into current market pricing
- Superior savings as a result of the competitive dynamics
- Less time spent negotiating best-and-final pricing
There are virtually no limitations to what can be sourced via reverse auctions, including the following examples: 1) Raw materials (such as iron ore, crude oil, and natural gas) 2) Processed goods (such as steel, chemicals, and polymers) 3) Business services (such as travel, accounting, printing, and legal) 4) Components and subassemblies (such as molded or machined parts, electronic components, or finished products) 5) One-time capital buys (such as cell towers or laboratory equipment such as freezers or centrifuges)
In order to ensure a successful reverse auction event, the buyer also needs to sell the concept to and get buy-in from suppliers. Some selling points to suppliers are as follows:
- Auctions can reduce the sales cycle time, as award decisions can be made very quickly upon the completion of the bidding event.
- Auctions offer transparency and set an even playing field, since all suppliers follow the same rules of engagement.
- Participating in one auction event for an organization may create opportunities to sell to other divisions or business units.
- Awards are made on the basis of more factors than just price, including quality and service level.
- Auctions promote fair competition driven by market dynamics.
Procurement organizations have been running electronic reverse auctions for many years. However, the use of auctions has a long way to go to reach full potential. In fact, many organizations have yet to explore the benefits of auctions. Most others have yet to apply auctions to the full range of goods and services for which auctions can deliver value.