Reverse Auctions when used for sourcing the right category can generate significant cost savings. The savings can range anywhere from 8% to 32% depending on the category and overall value.
What is a Reverse Auction? An online sourcing event where suppliers compete among themselves by continuously lowering the price they wish to charge for their goods or services. The benefit of a Reverse Auction to the buyer is two fold:
- Buyer gets the best negotiated price for goods or services in a very short period of time
- Buyer is able to purchase goods or services at the best available, and true market priceHow to Run a Successful Reverse Auction
There are two key requirements for running a successful e-auction
- A cloud hosted, easy to use Reverse Auction Software
- Selecting the appropriate product or service to source using a Reverse Auction. You can see a typical list here
The 5 Steps to a successful Reverse Auction
- Select a product or service with a significant spend amount and invite at least 2-3 suppliers to participate in the e-Auction
- Ensure that all invited suppliers are qualified to do business with your organization and provide detailed specifications of the product/service you are planning to procure via the online e-auction software
- Conduct a mock training reverse auction (setup exactly as the live version) so that the invited suppliers are comfortable with the entire process and place a few mock bids in the online reverse auction software. This ensures a smooth bidding process during the live event. Answer any questions posed by the suppliers prior to the live event.
- Conduct the live Reverse Auction and watch the suppliers compete in real time for your business.
- Award business. Be sure to communicate with all suppliers and notify them of your award decision and process.
HINT: Majority of the reverse auctions conducted in various categories of products and services are conducted using the “Rank Only” bid strategy. During this type of reverse auction, the bidding suppliers can only see their rank when they place a bid. Participants cannot see the current low bid nor can they tell how many people are bidding. All the participants see once they place their bid is their “Bid Rank” (eg: Rank 2). Participants can then adjust their bid downward to improve their ranking.
One of the major benefits of using the “Rank Only” bid strategy is; it protects the confidentiality of the lead participants bid. This allows the suppliers to be more aggressive with their pricing as they feel secure that their pricing will stay confidential.