Reverse auctions can bring huge success to your business if they are executed correctly with a well-defined e-Sourcing process.
According to the U.S. Defense Logistics Agency, reverse auctions were able to save around $1.6 billion in a single year. Reverse auctions can therefore help you save money, as well as give you the opportunity to bargain on high-quality products at low costs while reducing the amount of time your business spends looking for suppliers.
Conducting a successful reverse auction will require you to understand the key differences between reverse auctions and bidding. To assist you, we have provided a breakdown below of some of the key differences we think you should take note of.
1. True Price-based Competition in Real-Time
In a standard bidding process, the seller is the host of the auction and the buyers bid higher and higher prices to win the item at auction until it is sold. Comparatively, the key difference between this model and a reverse auction is that in a reverse auction you are the host and suppliers who want to compete for your business bid lower and lower prices for the goods or services that you need.
A reverse auction is an online event, taking place within a controlled environment, which provides your business with true price-based competition among suppliers in real time. The key difference here between a reverse auction and bidding is that when the supplier submits a bid, they automatically know where they stand within the bidding process and are more than capable of changing their bid. This in turn adds to your savings.
According to Jason Busch, editor of spendmatters.com, it is the receipt of this “real-time feedback” which marks a key difference between a reverse auction and bidding as suppliers are aware that they could be outbid at any moment. In real-time, there is no awareness or hesitation to lower a price as the supplier cannot wait out the process to the end to see if you will accept their offer.
A reverse auction also greatly reduces the time you spend as the supplier ends up doing the bulk of the work. You also get to spend less time worrying if a bid will come in or if you could receive a lower offer at another date and time.
2. Responsibility is on the Seller
Reverse auctions work well as a procurement strategy in sectors which already have lots of competition where suppliers compete against each other for work. One of the key differences between a traditional bidding system and a reverse auction is that the process not only allows the host of the reverse auction to get the goods and services they need exactly as they had specified, but the onus is put on the seller to meet the specifications and not the other way around.
This also leads us to another major difference between reverse auctions and traditional bidding processes: you are not obligated to go with the lowest price. In a standard bidding process, the person who bids the best price will, subject to some requirements, likely take the victory. In a reverse auction, the cheapest quote will not necessarily win the auction. This means you can combine quality with price and award the contract to the supplier you see fit.
3. Alerting Suppliers
Another key factor in favor of using reverse auctions is that it provides other hidden benefits besides the actual running of the event: it alerts other potential suppliers to the existence of your business. The event itself will only work in the way you need it to when multiple competitors are bidding on the work. Because reverse auctions work on pre-qualified suppliers this entails that your reverse auction will see a healthy competition between high quality suppliers that fit all of the specifications you had going in to the process.
If you just have one supplier who does not meet the standards required to qualify, it can disrupt the entire process. Why? Because an under-qualified supplier could drive the price down unnecessarily and send the event into total disarray. This would also potentially put you in bad stead with your company’s supplier pool, and the last thing you would want is negative publicity affecting your business.
Conversely, according to Spend Matters, there are no major indications that reverse auctions harm buyer-supplier relationships.
4. Receiving Market Prices
We don’t need to tell you that the market is constantly changing. While the ideal outcome of a reverse auction is that it saves you money when compared to traditional bidding processes, this is not the only benefit you should be aware of. Reverse auctions can also ensure that you are getting true market pricing for the good or service you are holding the auction for, as your suppliers should be accommodating market changes into their pricing models.
However, you should be wary of using your reverse auction to test the market, as this can likely backfire.
Reducing Procurement Costs with Reverse Auctions
Reverse auctions can help you save money, time and stress. ProcurePort provides a user-friendly and affordable Reverse Auction Software solution which can help you lower your costs and add to the success of your business by saving you as much as 18 to 40 percent on addressable spend. Minimal training is required, and ProcurePort can also provide the reverse auction service which enables our expert team of consultants to conduct the auction on your behalf.To request a demo of ProcurePort’s e-Sourcing solution software, contact us today.