| Reverse Auction |
Article Index for Reverse |
Website Links For Reverse |
Information AboutReverse Auction |
| CATEGORIES ABOUT REVERSE AUCTION | |
| supply chain management | |
| auctioneering | |
| auction theory | |
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Reverse auctions are a tool often used by purchasing organizations for Spend Management , as part of Strategic Sourcing and overall all supply management activities. In a typical auction, the seller puts up an item for sale. Multiple buyers bid for the item and depending on the nature of the auction (English or Dutch), and one or more of the highest bidders buy the goods at a price determined at the conclusion of the bidding. In a reverse auction, a buyer issues a request for quotations (RFQ) to purchase a particular item. Multiple suppliers (typically 7-20) quote the price at which they are willing to supply the requested item or service. The quoting is performed online using the Internet which results in dynamic real-time bidding. This helps achieve rapid downward pressure on prices that is not normally achieved using the traditional static 3-quote paper-based bidding process. The reverse auction prices that buyers obtain reflect the narrow market which it created at the moment in time when the auction is held. Contracts may be awarded to the supplier that bid the lowest price. Buyers could also award contracts to suppliers who bid higher prices, depending upon the buyer's specific needs with regards to quality, lead-time, capacity, or other value-adding capabilities. However, buyers frequently award contracts to incumbent (i.e. current) suppliers, even if prices are higher than the lowest bids, because the switching costs are nil. Reverse auctions are used to fill both large and small value contracts for public and private commercial organizations, and have even been used to source reverse auction providers. In addition to items traditionally thought of as commodities, reverse auctions are also used to source buyer-designed goods and services. The majority of purchasing spend subject to reverse auctions over the years has been in the latter category. Reverse auctions gained popularity in the late-1990's as a result of the emergence internet-based online auction tools. Early adopters of this online tool included General Electric and United Technologies. Later, employees from General Electric broke off to form the company FreeMarkets. Several start-ups rushed to fill the reverse auction marketspace due to FreeMarket's rapid growth, driven in part by the manufacturing down-turn in the late 1990's which compelled suppliers to reluctantly participate in the online reverse auctions. FreeMarkets was acquired by California-based Ariba, Inc., in 2003, which now markets the reverse auction as just one tool in their suite of electronic sourcing offerings. Buyers and sellers should carefully consider if reverse auctions are appropriate, as there are many issues and problems that can occur. Importantly, the issues and problems are not generally known to new users of reverse auctions - so be very careful. Buyers should not assume that reverse auctions will, in every case, deliver cost savings - either on a unit or total cost basis. Reverse auction savings can range from negative (i.e. it costs the buyer money) to neutral (i.e. no savings) to positive savings (typically a gross of 10-20%, but net savings can be half or less). A true representation of savings can not be achieved if unit price-focused purchasing metrics such as "purchase price variance," "purchase order variance," or "material price variance" are used. Instead, total cost savings must be calculated, inclusive of direct and indirect losses associated with using reverse actions, implementing reverse auction results, subsequent procurement activity, and related activities such as customer returns, defective goods or services, warranty expense, litigation, etc. Buyers are advised to carefully fact-check reverse auction market-maker claims, which in the past have been inflated. Suppliers are advised to determine if a value proposition exists for them that would warrant their participation. Historically, the value proposition for suppliers has been missing. This has led some users of reverse actions to characterize it as a technologically-assisted form of zero-sum power-based bargaining, or as "going in reverse" with respect to developing buyer-seller relationships, collaboration, and purchasing process improvement. Reverse auctions have also been criticized as "bid shopping" - when a buyer uses a supplier's bid to obtain lower prices from other suppliers. Suppliers seeking to avoid reverse auctions can create unique intellectual property or expand the value propositions for its customers by creating new products and services. EXTERNAL LINKS: REVERSE AUCTION RESEARCH {Link without Title} - Practical research on various aspects of reverse auctions by Profs. Emiliani and Stec at Central Connecticut State University {Link without Title} - A-to-Z bibliography of reverse auction papers from Louisiana State University INFORMATION ON BUYER-SELLER COLLABORATION • Bounds G., "Toyota Supplier Development", in Cases in Quality, G. Bounds, Editor, R.D. Irwin Co., Chicago, IL, 1996, pp. 3-25 • Bounds G., Shaw, A., and Gillard, J., "Partnering the Honda Way", in Cases in Quality, G. Bounds, Editor, R.D. Irwin Co., Chicago, IL, 1996, pp. 26-56 • Dyer, J. and Nobeoka, K., "Creating and Managing a High-Performance Knowledge Sharing Network: The Toyota Case," Strategic Management Journal, Vol. 21, 2000, pp. 345-367 • Liker, J. and Choi, T., “Building Deep Supplier Relationships,” Harvard Business Review, Vol. 82, No. 12, December 2004, pp. 104-113 • Womack, J., Jones, D., and Roos, D., The Machine that Changed the World, Rawson Associates, New York, NY, 1990, Chapter 6 SEE ALSO |
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