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Reverse e-Auctions - A Recipe for Success
Author : Sudeep Ghosh, SrConsultant Business Platform, Infosys BPO
Thursday, October 27, 2016

Enterprises and organizations – whether small, medium or large – have used Reverse e-Auctions with varied degrees of success in the strategic sourcing cycle. While some buyers use it to drive substantial price reductions, others leverage it as a tool for price discovery and to gain knowledge of the supply market. At the other end of the spectrum, supplier organizations have conflicted views on Reverse e-Auctions – some find them fair and transparent while others believe only buyers stand to gain in Reverse e-Auctions by squeezing supplier margins. However, with the right approach, administration and execution, Reverse e-Auctions provide significant benefits to buyers and suppliers by delivering value and improving business outcomes.

Reverse e-Auction Overview

Businesses conduct Reverse e-Auctions as part of the strategic sourcing process mainly to drive down prices of products and services. Some companies leverage them as a tool for price discovery to ensure that their current prices are competitive in the market while others use Reverse e-Auctions to understand supply market dynamics and supplier behavior in a competitive environment. In all these cases, suppliers need to be clear about their expectations from the process at the beginning.

In its basic form, Reverse e-Auction is an online real-time dynamic negotiation process between a buying organization and a group of pre-qualified suppliers. The suppliers are competing against each other to win contracts to supply goods/ services with clearly defined specifications for design, quality, quantity, delivery, and related terms and conditions.

Suppliers compete by bidding against each other over the internet using specialized software. They submit successively lower priced bids during a scheduled time period, usually lasting about an hour. However, multiple and brief extensions are allowed when bidders are still active at the end of the initial time period.

It is important for organizations to understand that a Reverse e-Auction is a tool to facilitate online negotiation within the sourcing process while presenting a viable alternative to one-on-one negotiation with suppliers. As a proven technique for discovering the best commercial offer the supply market has to offer, this tool is most successful when coupled with rigorous research analysis, a robust sourcing strategy, clearly defined Requests for Proposal (RFP)/ tender documents, and a competitive supply market. However, it is not suitable for all types of spend categories and is not the only e-sourcing tool relevant to the sourcing process. More importantly, it is not a substitute for the strategic sourcing process and behaves as a complement to the negotiation process.

Select your e-Sourcing Strategy carefully

There are several factors to be considered before choosing an e-sourcing strategy such as spend segmentation, supply market competiveness, specifications, supplier switching risk, and associated cost. The table below presents an analysis of key factors as guidelines to choosing a strategy in three situations – RFP, Reverse e-Auction and a combination of both.

 

RFP

RFP & Reverse Auction

Reverse Auction

Spend characteristics

Complex

Custom

Generic/ Commodity

Product/ service specifications

Created by buyer

Created by buyer

Industry standard

Driver

Predominantly Value

Value and price

Mostly price/ volume

Supply market competitiveness

Monopolistic

Competitive

Very competitive

Supply base 

Single or few

Many

Large pool

Supplier relationship

Strategic

Limited

Transactional

Switching cost and risk

Very high

Medium

Low

Table 1: Guidelines for an e-sourcing strategy using an RFP, reverse e-auction or a combination of both

Where do Reverse e-Auctions fit in the Strategic Sourcing Process?

Assuming that strategic sourcing is a seven-step process, enterprises engage in Reverse e-Auctions at the fifth step after conducting supplier analysis and supplier short-listing. At this stage, enterprises want the shortlisted suppliers to state their prices. 

Approaches to Reverse e-Auctions

Companies need to carefully choose the stage at which they leverage Reverse e-Auctions in order to ensure a smooth process. Auctions can be conducted after the Request for Information (RFI) stage selects a final list of vendors or, in cases where there are a large number of potential suppliers, after an elaborate Request for Quotation (RFQ)/ RFP process.

While there are several approaches to conducting Reverse e-Auctions, they are all driven by the need for additional screening to choose the best supplier after considering non-price factors. In cases where the suppliers are already known, Reverse e-Auctions can be directly conducted. The recommended five approaches to conduct Reverse e-Auctions are shown below:

  1. RFI                               Reverse e-Auction
  2. RFI                               RFQ                       Reverse e-Auction
  3. RFI                               RFP                       Reverse e-Auction
  4. RFQ                             Reverse e-Auction
  5. RFP                              Reverse e-Auction

 

Figure 2: Recommended approaches to conducting a Reverse e-Auction

Key Phases in a Reverse e-Auction Event

A Reverse e-Auction event consists of six phases and can be a time-consuming and complex process depending on the product/ services being procured, number of suppliers and geographies involved, currencies, number of line items, etc. The six phases of the process are shown below:

Identifying an e-Auction Category Prospect

In a supply market driven by competition, commercially attractive spend value, and high availability of suppliers, Reverse e-Auctions help enterprises negotiate for the best prices. There are some key factors to be considered when planning such a prospect as shown below:

Key Considerations

Substantial spend value

Companies require considerable spend value for a given category to attract supplier participation. While the minimum requirement is USD 100,000, there are auctions where the spend value is as low as USD 30,000. In such situations, companies need to consolidate spend across business units, geographies, years, etc.

Supply market competitiveness

Reverse e-Auctions require a highly competitive environment with a high number of suppliers that can service the required category and are willing to partner with the company. Training can be provided to suppliers who are unfamiliar with online auctions to help them participate successfully. Further, companies can also provide positive scores to incumbents that have established a previous positive track record.

Compressible profit margins

Suppliers that operate on high margins tend to reflect these margins onto buyers owing to the competitive pressure of the auction.

Clearly defined requirements

Product/ service specifications and contractual terms and conditions must be clearly defined to the supplier to ensure a successful Reverse e-Auction.

Supplier switching cost and associated risk

Typically, Reverse e-Auctions are successful when the cost of switching suppliers ranges from low to medium and the associated risk is low. It is important to assess all cost elements of doing business with new suppliers to optimize Total Cost of Ownership (TCO).

 

Table 2: Key considerations when planning an e-Auction event

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