We are often asked this question as we consult with businesses about different sourcing solutions. To help them determine whether or not reverse auctions are right for their business, we first make sure they are clear on what they are and the types of goods and services that are suitable for this method of sourcing.
But first, what is a Reverse Auction? In simple terms, it is the exact opposite of a forward auction (e.g., eBay). In a reverse auction, the buyer initiates the auction as opposed to the seller (as is the case in a traditional forward auction). The end goal of the online auction is to purchase the goods or services at the lowest price (considering all other qualifying factors are also met).
Typically reverse auctions are conducted via an invitation-only process. Buyers and Suppliers engage via a live online auction website. A buyer or contracting officer creates detailed specifications of the items/services that they are looking to procure. Reverse auction companies (such as ProcurePort) provide a cloud-hosted auction software solution, which is used to publish these specifications to a select group of verified suppliers. The online bidding event is scheduled for a specific date/time during which the invited suppliers log into the secure web-based auction software and submit their bids in real time. The cloud-hosted sourcing software provides real-time bid feedback to the suppliers, which allows the suppliers to competitively improve their bids to win the business. Additional price components such as shipping, taxes, the cost of exchange, etc. are also used to determine the best supplier offer, and the lowest bid does not necessarily win.
Advantages of Reverse Auctions
There are benefits for both buyers and sellers:
- Cost Savings
- Significant time savings related to collection of bids from various suppliers
- Benefits of discovering true market pricing including discovery of new suppliers
- A more transparent auction bid process allowing suppliers to compete in real time to win the business
- Increased benefit of indirect cost savings for all goods and services, generated via process automation that accompany the implementation of a web-based reverse auction software
Conducting Reverse Auctions That Generate Maximum Cost Savings
If you are an organization considering procuring items or services through a reverse auction, it is important that you take the following factors into account
Product Specifications
Generally speaking, a reverse auction works well where specifications related to the goods or services being procured are clearly defined. It is important to ensure that all participating suppliers clearly understand the requirements. For highly engineered products, procuring a sample in advance based on defined specifications from each participating vendor can help ensure that the suppliers are bidding on the same requirements.
Sizable Supplier Base
It is important to have at least 3-5 Suppliers invited to participate in a Reverse Auction. More Suppliers result in higher competition generating maximum cost savings.
Value of Spend
In order to get the most benefit from conducting a Reverse Auction, it is important to select a category of items or services that have a significant spend amount. Suppliers tend to be more aggressive in their bidding strategy if the value of the business being offered is significant.
Contract Status
Reverse auctions are not suitable in situations where you have strategic suppliers with long term contracts. Items or Services that are single-sourced require a different negotiation tactic.
Savings Opportunity
Reverse auctions give buyers an opportunity to generate cost savings of up to 40%. Specifically in situations where you are purchasing indirect goods or services and have a large supply base available for those goods or services. The range of savings can vary from 8% to 40% based on the value of the procurement as well as the category of spend. In order to maximize savings, a good strategy is to combine your spend volume for single or multiple years and award a multi-year contract.
The Growth of Reverse Auctions
Reverse Auctions got popular when General Electric first used them as part of their strategic sourcing initiative. CIO Gary Reiner estimated that GE generated over $600 Million in cost savings using reverse auctions, which added directly to their bottom line in 2001. Ever since then, reverse auctions have continued to become more and more popular. Today, large corporations use Reverse Auction Software as part of their strategic sourcing process when procuring direct and indirect goods and services. Some example categories of spend on the indirect side include office suppliers, maintenance services, janitorial supplies, computer equipment, Telecom (wireline & wireless), consulting services, legal services, etc. Examples of categories on the direct side include raw materials, equipment, spare parts, energy, etc.
According to govloop.com, as of February 2015, reverse auctions made up 7% of government contracts which amounted to approximately US$31.2 billion. Also, a report by GAO indicated that these kinds of auctions had saved government buyers 23%. It has also improved transparency and data collection while significantly reducing the cost and time required for the purchasing process.
Cost Savings and More
Reverse auction sales increased from $737,000 to $10.8 million with a total auction award of $24 million going to small and large businesses. This is according to GSA’s statistics between July 1, 2013, and January 31, 2015. GSA is a platform for buying non-complex commodities and simple services.
Statistics from the same organization also indicated that 22 agencies across the government conducted more than 900 reverse auctions and generated a collective savings of over $6.8 million. 60% of the auctions were allocated for small businesses for a total award value of $22 million.
On the Rise
Going forward, reverse auctions will see dramatic growth. The GSA reported a 1000% increase in the first quarter of 2015 compared to 2014.
There is no doubt that reverse auctions are beneficial for both buyers and sellers and will continue to grow in popularity. Both parties enjoy real-time pricing and prices that are set and driven by competition. In addition, reverse auctions have made it easier for small businesses to compete because of their low barrier to entry and reduced time investment. They have thus departed from long bidding processes and tender application processes.
If they are used for the right products and when market conditions are optimal, reverse auctions can give both sellers and buyers a number of major advantages.
Wondering if reverse auctions are the right strategic sourcing solution for your business? Take a look at this list of the categories sourced and see if there is a particular category of spending that is currently eating up too much of your budget.
ProcurePort can help your organization generate cost savings through our digital procurement and e-sourcing technology. ProcurePort’s On Demand auction software is delivered via the cloud as a SAAS solution. Our state-of-the-art e-Sourcing Software can be used for conducting a reverse auction for any category of spend. Contact us for a consultation to see how we can help you generate cost savings through reverse auctions.