Reverse auctions are an increasingly popular method of driving down costs and pushing for value from suppliers. But depending who you talk to, the practice can seem to carry a controversial reputation within the industry, with naysayers stating it can put unfair pressures on suppliers to reduce their margins and make them feel like they are part of a transaction where numbers are the only aspect of a deal that matters.
Here we explore how you can implement reverse auction software without negatively impacting your suppliers, and whether the process can actually benefit supplier and buyer alike.
Why do people believe that e-auctions can damage relationships?
Critics of the electronic reverse auctions believe that vendors can feel alienated by an eAuction process that puts the emphasis on putting downward pressure on prices. The practice can be seen as unfairly pressurizing the market to reduce their margins.
In addition, if the process is convoluted or there are a lack of training or instructions available about fulfilling the bid process suppliers can feel the potential client is asking them to jump through hoops to win business that isn’t necessarily essential to their survival.
Existing suppliers who are invited to compete in the bid process against newcomers can feel put out when they have invested years in building a strategic partnership with their client and are now expected to compete against other service providers in an anonymous process where the slate is wiped clean of history.
In a study analyzing the effect of the reverse auction process on the buyer-supplier relationship across 6 case studies, it was recognized that “there are potential benefits for both parties in a reverse auction, which can offer tendering and transactional cost advantages. For buyers, it offers a competitive procurement process. The effect on relationships will depend on the extent to which buyers employ the auction as a price weapon, or whether it is used primarily as a process improvement tool.” Smart, Alan & Harrison, Alan. (2003). Online Reverse Auctions and Their Role in Buyer-Supplier Relationships. 9. 257-268. 10.1016/j.pursup.2003.09.005
What can buyers do to ensure they don’t burn their bridges in trying to achieve competitive proposals through reverse auction?
The first advice would be to pick the correct commodities or services to take to the reverse auction process. The reverse auction process works for certain commodities and categories more than others.
The second advice point is to look at reverse auctions as an opportunity to ask suppliers to deliver value, not rock bottom prices. Setting a range of variables with different value points is essential to establishing what is important to your organization and guiding your suppliers in emphasizing their USPs and how they can set themselves apart from the competition without compromising their needs and limitations.
In a more recent study from 2016 it was found that the use of procedural fairness in eAuctions enhanced relationship quality. Procedural fairness, in this case, is explained as fairness in the way access to the auction is distributed, equal communication, training, and support of all suppliers. Transparency and objectivity were key, with the scoring structure and the value points openly explained to all parties in advance of their bid so they were aware of how the decision would be reached. The abstract of the study states “The results show that the use of procedural fairness by a buying organization is positively related to relationship quality and quality of the offering, without jeopardizing price savings. In addition, the positive association between procedural fairness and relationship quality is found to increase in the case of a repeat auction.” Muylle, Steve & Standaert, Willem. (2016). The Use of Procedural Fairness in Electronic Reverse Auctions to Enhance Relationship Quality. Psychology & Marketing. 33. 283-296. 10.1002/mar.20875.
Intent and objectivity is everything
The takeaway from these studies is that if buyers use reverse auctions as a tool to drive down costs indiscriminately, then not only will the end up harming the level of value they can extract from a deal in terms of quality or less advantageous terms like longer delivery times, but they could also end up alienating suppliers who feel devalued by a purely price-driven procedure.
If reverse auction technology is utilized as a tool that can simplify the sourcing process for both ends of the deal, and provide an open and transparent platform for all potential suppliers to know exactly what the expectations and goals are at the beginning of the process, time and resources can be saved for all concerned. This can only be a win-win situation for all parties.
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