Governments and large enterprises most often utilize reverse auctions to procure resources in volume or source costs and suppliers for standard services. They are useful for reducing costs and cycle times on large-scale projects when these things are a primary concern. Sometimes, these auctions are the only path toward cost control on enterprise projects.
The goal of a reverse auction is to procure the necessary materials or services at the best possible value. Implementing a reverse auction strategy carries several benefits and concerns for enterprise businesses.
Each organization will define value in different terms, but executives commonly look at price point. While performing an assessment of reverse auctions, identifying specific value propositions applicable to your project is recommended for determining what is right for your organization.
Why Reverse Auctions Work
There are a few reasons corporations might opt for a reverse auction, with the most obvious being competitive pricing, as they provide a great deal of value when used correctly. A reverse auction works exceptionally well for shorter term contracts that do not benefit from strategic relationships. Printing costs are a good example, where suppliers are easily interchangeable with little overall impact on the organization.
There are many short-term transactions involved in any construction project, such as a hospital or a lab. Raw materials procurement, equipment on site, travel for stakeholders, and other smaller concerns all benefit significantly from a reverse auction.
Product specifications are one of the most telling signs that an auction will work. Commodities are negotiable based on quality, location, and many other factors. A reverse auction would work when sourcing similar quality supplies because sellers can make a competitive bid that brings value to the buyer.
Pre-Bidding
Both buyers and sellers benefit significantly from a pre-bid phase. Pre-bid allows every seller to qualify a bid for the project, while simultaneously responding to technical concerns that arise naturally from the proposal process.
For example, if 90-day support were required for a particular medical device, then a pre-bid would catch 30-day bids submitted mistakenly. Without a pre-bid phase, those bids would undercut even the most competitive 90-day service yet lead to fulfillment challenges.
Pre-bids also allow suppliers to get necessary specifications, verify delivery requirements, and acquire other technical details needed to create a proposal more specific to the project’s needs. Pre-bid phases define lead times that suppliers can fulfill if they win the contract as well.
In short, pre-bidding creates a level playing field for buyers and sellers. Both parties get clarification on technical details and only the most competitive proposals move forward.
Pros and Cons
Reverse auctions only work when multiple businesses are willing to supply a material or service, and the market for those materials is stable. Timing can be crucial. Consider the costs of a hospital’s IT infrastructure, which can rise and fall alongside the cost of computer hardware. Reverse auctions might not yield value in a fluctuating market because suppliers see the opportunity for higher margins elsewhere.
Consider the strategic relationships at play as well. Reverse auctions force suppliers to lower their profit margins, which isn’t a reasonable basis for long-term partnerships. It might be best if management considers other pricing tools when trying to reduce costs with a more collaborative contractor.
Vetting the suppliers participating in an auction is essential. Buyers should run a Request For Information (RFI) to detail a supplier’s capability. RFIs help to avoid situations where sellers aggressively underbid on a contract they cannot possibly fulfill.
Suppliers may take the cynical stance that a reverse auction drives their prices down. The nature of an auction reduces overhead, but they also improve the time it takes to acquire a contract. Sellers have the incentive to participate because of the real-time feedback on job proposals as well.
If finding suppliers for a reverse auction proves to be difficult, assess market conditions. A market consisting of only a handful of suppliers isn’t going to respond favorably to competitive bidding. Therefore, an auction may help reduce costs for certain kinds of materials used in a project.
Reverse Auctions: Are They for You?
A reverse auction is best for major organizations and enterprises that require short-term contract fulfillment of services or materials. Buyers must carefully document requirements for a successful sale. They do not solve every budgeting challenge the organization will face, but reverse auctions can be a useful tool for controlling costs of commodities and other basic services.
It’s helpful to use these auctions for transactional relationships with little long-term consequences. However, it’s crucial that management quantify the value of a reverse auction. Overuse of auctions may sour the organization’s reputation and hurt long-term prospects in other ways. No one wants to work with buyers they don’t trust. Nurture the right suppliers and you may even find a competitive advantage.
With proper notice and a capable platform, reverse auctions are a convenient way to choose the best deal from many competitively priced Suppliers.
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To have an immediate impact on your procurement process, you need the right software platform. Procurement is complex, and your software solution should be able to account for its nuances. That’s where ProcurePort can help. Visit our website to learn more about ProcurePort’s e-sourcing software and how we’re helping companies like yours achieve their eProcurement objectives.