When it comes to e-procurement processes, reverse auction technology is some of the most complex. Online bidding is not a simple process. Because of the complexity that it handles, it is also the kind of software platform that can simplify the procurement world by bringing auction buyers and sellers together in an easy-to-understand format. Now that cloud e-procurement is the norm, digitized reverse auction has taken about 7% of the government market share and the benefits that are hard to ignore. What are the best practices when it comes to the challenges of strategic sourcing and how best to organize it? Let’s take a look at the buyer’s side of things and consider some of the top benefits of digitized reverse auction.
Reverse auction has always been a part of the procurement world. Reverse auction simply means that instead of buyers bidding simultaneously on a product or service, that the roles are reversed and supplier are the bidders while the buyer is auctioning off their potential account as a client. As a result of this role reversal, reverse auction often results in decreased prices as sellers underbid each other until the auction is over. Because it is the opposite of a typical auction, reverse auctions come up in industries and situations where a large-scale project is likely to require long-term partnership commitment on a project. This includes government projects and large-scale globally-fragmented lines of production. Large projects or large service programs are complex and have multiple moving parts so this unique type of auction assists in making connections quickly and succinctly.
Suppliers Have Full Transparency
The benefit of holding a reverse auction in government and other large-scale projects is that suppliers have full transparency about the potential buyers. The specifications of the original contract are clearly understood, the need is fully detailed, the demand is precise, and they have a clear understanding of the scalability of the project. They also see other suppliers during bidding and can jockey for position based on what they feel is their strong suit as a supplier in the competitive process.
Lowest Unique Bid
The concept of reverse auction naturally drives suppliers towards the lowest bid, but that doesn’t mean the lowest bid always wins. Instead, what wins is the “lowest unique bid”. This refers to the supplier who provides the buyer with a decent price but also includes specific needs that the buyer is looking for, whether they communicated those needs or not. In an ideal world, the specifications of those needs have been detailed in the auction but there are times when a supplier offers explicitly what the buyer is looking for regardless. The buyer’s specific needs can refer to anything from quality to lead-time to other pertinent industry-specific standards that sway purchasing decisions.
When you are shopping for reverse auction solutions or larger procurement software platforms that have a reverse auction feature, make sure your digitized reverse auction includes the following:
- internal ability to watch bids in real-time via the internet and a viewer account
- multi-tiered structuring options for each bidding event
- areas for the supplier to offer information that may influence the “uniqueness” of a bid
- multiple sourcing functions (to improve bid performance)
- integration with other enterprise platforms (ERP, central repository, etc.)
- a function to assess your spend category and determine suitability
- the ability to alter bid strategy according to the category being sourced
- big data like post-bid analysis and reporting to assess your processes and consistently improve
These technology must-haves are all crucial elements in a dynamic process that leads to healthier competition between suppliers. The rapid downward pricing of reverse auctions makes it an easy situation to cut corners for lowest price and make a poor decision on the buyer’s side. The functionality above gives you the big-picture ability to maintain quality. Remember, the process of a reverse auction does not revolve entirely around low prices. For government and other buyers concerned with meeting strict budgets, record-keeping, and compliance requirements, you cannot function unless your technology generates cost savings and ensures high-quality final products and services. A reverse auction solution should have the ability to match suppliers with buyers that are a good fit in the most specific way possible. The important thing is to remember that procurement is about matching the right parties, not just hosting a price war.
To learn more about how to implement reverse auction technology, download a FREE white paper from ProcurePort on strategic sourcing solutions today.