A reverse auction is another common procurement method that is actually an opposite of traditional auction. Unlike where there are many buyers who bid for an item from a seller, it is where there are many sellers who compete in an auction in order to gain business from a buyer. Reverse auctions set a competitive stage where bidders offer lower prices so that the buyer can get the most from their money. At the same time, the proposed approach will not be flawed in terms of fairness and ethicality to the suppliers.
With more and more organizations looking to drive down procurement costs, reverse auction is becoming widespread in the manufacturing, retail, healthcare, transport, etc., sectors. Five crucial things Indian businesses need to know regarding reverse auctions to ensure that they achieve the best returns are presented in this article.
1. How Reverse Auctions Work
As for the type of reverse auctions, it contains a buyer-driven mechanism. Here, a buying organization sends a message on its procurement requirements to potential sellers. The suppliers then proceed to offer their best and most competitive prices for the buyer in a real-time, virtual auction. It is a type of auction where the bidding process commences from a price level specified by the buyer and continues decreasing until suppliers offer lower prices for the product. After the bidding is closed the supplier with the least bid will be awarded the contract.
In the case of the bidding event, the buying company gets the chance to determine the terms of the bidding event. This encompasses issues to do with price reductions, event duration, quantity of purchase, the time taken to deliver the products etc. The company also filters and selects credible suppliers for participation. An online reverse auction software assists in creating the platform from which suppliers can bid from a distance.
This feature ensures that both the buyers and the suppliers get an option of changing the bid data at real-time during the event as viewed on the dashboard. This leads to gradual lowering of prices to the gainer without completely wiping out the suppliers from the equation.
2. Cost Savings for Buyers
Among the numerous advantages that are directly associated with reverse auctions for buyers, the most significant one is the overall savings achieved through procurement. The bids go down as sellers bid low in order to secure the purchase order in a bid to minimize their costs.
Concentration during reverse auctions causes suppliers to reduce their profit margin due to competition. They want to secure contracts based on the lowest price possible supported by economies of scale. This bidding shows the actual market price for the buyers as it will be seen from the following points-. It eliminates situations where one ends up paying a lot of money for a contract that they otherwise could have negotiated at a cheaper fixed price.
They also reduce the cost of carrying out procurement processes since reverse auctions are cheaper than normal auctions. They substitute for extended quotation, supplier negotiations, and even bid analysis that was otherwise to be done manually. Contract, comparison and award of contract are made easy, fast and efficient through the use of online tools.
3. Fair Chance for Suppliers
Reverse auctions do however face criticism in that it puts pressure on the suppliers to keep on reducing the prices. However, the process stays ethical and fair if planned beforehand. The bidding event is further participated by all the seller participants where they share equal footing. A fare fee process, reasonable decrements and clear specs eliminate guess-work for suppliers.
This competitive landscape pressures firms with subpar capabilities to cut prices to unprofitable levels and exit over time. The efficient suppliers can keep good margins intact by quoting up to such desirable levels only. There exists a balance between survival and success through the auction. Small firms also get the level playing chance so that they can compete with the big firms for the large contracts.
As mentioned earlier, it is mandatory for buyers to accept the price that has been set by the winning supplier in a post-auction scenario. Both the marketer and the receiver need to have fair working relationships after the event. In essence, where the reverse auction process and results are ethical with best business practices in mind, remains fair for suppliers as well.
4. Choosing the Right Items
Consequently, reverse auctions are optimal in the procurement of specific products rather than all purchases of the certain item categories. There is a need for firms to carefully select items that would help them gain the biggest advantage in terms of savings from reverse auctions.
Usually, suppliers offering many numbers of products/services, commonly used items, and goods with easily identifiable features are most suited to reverse auctions. Goods that are categorized under the C or D grade such as raw materials, industrial components, etc. are actively bid on by pre-approved sellers. It is not applicable to custom/complex products as it is difficult to take bids from different contractors due to customized specs on the project.
Sourcing managers also include factors such as annual spend value, the variation in price, business importance, etc., when selecting which products or services should be auctioned. Huge value repetitive costs such as logistics and other contractual labours, facility management are perfect candidates for RA adoption.
5. Implementing Best Practices
However, it is wrong to only attribute the success of reverse auctions to proper planning and management. Sourcing teams should follow these steps:
- Pre-Event: Advanced auction tactics consistent with overall organizational goals; Self-organize the implementation teams; Conduct the supplier market analysis; Prepare all documents containing all purchase requirements, terms and conditions etc.
- During Event: Watch bidding behavior; Alert users if necessary; Promote no foul play and complete openness
- Post Event: Bid evaluation; Award contract with provision for cost-plus; Develop long-term performance management structures.
Application of such best practices ensures optimization of the benefits out of reverse auction for the buying company as well as participants on the supply side.
Conclusion
However, as the use of reverse auctions begins to expand among Indian industries, knowledge of the strategic implications becomes important. If done effectively, the reverse auction procurement tool process and innovation enable higher cost savings with factors of ethics and collaboration. For any first-time users of reverse auction, times have to be spent in mastering the lessons, seeking for the right products to retail or supply and selecting the right software. When applied properly, reverse auctions can deliver great improvements to an organisation’s procure-to-pay supply chain.
