How Reverse Auctions Can Bolster Your Procurement Strategy
- Sourcing Optimizer
Reverse auctioning is recognized by most procurement professionals as a special event to hold only on occasion. As the name would indicate, a reverse auction is when the organization that wants to buy something holds an auction and vendors willing to provide it bid on supplying it.
This differs from the traditional auction, where the vendor auctions off what they have to offer and interested entities bid on it.
What most procurement managers don’t realize is that reverse auctions don’t have to be something just for special occasions. These events can actually become the mainstay of your procurement process, and if you have the right tools, it can make your processes easier to manage.
The primary difference between a reverse auction and ordinary eProcurement activity is that the legwork you usually do after you get a list of vendors to choose from happens before the bidding processes begins.
For example, if you are going to hire an HVAC contractor, you’ll usually take bids from different contractors and then compare the offers and prices to see which is agreeable. With a reverse auction, you decide exactly what you want first. Then you write up a detailed description, and qualify suppliers before the bidding begins on those products and/or services. The qualified suppliers are bidding on exactly what you specify instead of giving you an offer of goods and services that you have to either take or leave.
But to use reverse auctioning to its true potential, you will need the right software. Otherwise, the process becomes too time and labor-intensive to be viable.
For standard events, users can set up and execute auctions then evaluate the results in an eSourcing software. A Sourcing Optimizer is highly configurable, enabling extensive RFX and reverse Auction events that address sourcing events with hundreds, even thousands of individual items, collecting both price and non-price bid components, from a very large number of suppliers.
What Reverse Auctioning Is and Is Not
Reverse auctioning is ideal for anything that you can clearly define. It is a means for obtaining both goods and services and allows you to specify exactly what you want and allow vendors to come to you instead of searching endlessly for what you want and never quite being able to find a vendor offering exactly that.
Reverse auctions allow you to get the best possible price every time. When the market is hot, you can expect prices to go up, but you’ll always be paying the best you can hope to. When the market is slow, vendors will be knocking each other over to offer you low bids.
Kinds of Goods & Services You Can Consider for Reverse Auction
Obviously, you can reverse auction any kind of goods, including direct materials, printed materials, and others that you wouldn’t ordinarily associate with reverse auctions.
You can also use reverse auctions to obtain great deals on services, like language translation, copywriting and editing, HVAC maintenance, cleaning services, and more.
The key is that you have to be able to be thoroughly detailed when writing the descriptions of the goods or services you’re looking for, and to ensure that you pre-qualify all vendors that are invited to participate. An excellent way to assure that you aren’t forgetting anything when you place services up for auction is to use the line items from your old invoices. There you can see exactly what you purchased before, decide if that’s what you want again this time, and then only receive bids for what you have in mind.
Goods & Services You Can’t Consider for Reverse Auction
The only things you cannot submit for reverse auctions are things that you cannot, or do not wish to, clearly define.
For example, say you’re looking for a vendor to put your new product design into production. You don’t want to specify too much detail, because you want the vendors to propose different options like materials and processes. A reverse auction isn’t the right fit, because no one can accurately bid on something that isn’t narrowly defined. Plus, you don’t want to narrowly define it, because you want to hear all of the various options vendors can make available to you.
Similarly, it’s often best to ask for open bids when seeking things like technical consultants, when you know you need an expert but you aren’t sure what exact products and services best fit your situation. In these cases, it’s much better to open bidding the usual way.
Tips for Reverse Auction Success
Tip #1: To successfully leverage reverse auctions, you need the right eSourcing software.
Otherwise, the process will take up so much of your time and energy that you’ll never be able to stick with it. With the right software, holding regular and frequent reverse auctions is actually much easier than your other typical eSourcing methods.
Tip #2: Run auctions for the goods and services you use regularly.
This way, vendors become accustomed to your auctions and look for them. When their business is slow, they use this as a means to offer you great stuff for cheap. When business is booming, you might get fewer bids and higher prices, but you will know where the industry stands and can be prepared for the extra costs. Often, vendors will give you the most preferable bids because they know that you have recurring business to offer.
Tip #3: The most important tip is to be fair.
In many industries, these suppliers aren’t just competitors, they’re also good friends who pal it up at trade shows and toss each other customers when they’re too busy to take on a new one. Treating vendors unfairly can give you a bad reputation, leading to your inability to get good bids for those particular goods or services. As long as your reverse auction is viewed to have been executed fairly and ethically, even suppliers that did not win any business will not hesitate to participate in future reverse auctions.